HUD Not Required to Advance Subsidy Payments

August 16, 2014

Facts: An owner’s site has had a history of “unsatisfactory” HUD audit reviews since 2005, and in 2009 and 2010 HUD refused to pay more than $700,000 in subsidies due to the site’s violations of HUD regulations. To satisfy HUD, the owner hired a HUD-approved managing agent in 2010, and subsidy payments to the owner resumed. According to HUD, during the approved management company’s tenure managing the site, the owner’s submissions fully complied with HUD requirements.

Facts: An owner’s site has had a history of “unsatisfactory” HUD audit reviews since 2005, and in 2009 and 2010 HUD refused to pay more than $700,000 in subsidies due to the site’s violations of HUD regulations. To satisfy HUD, the owner hired a HUD-approved managing agent in 2010, and subsidy payments to the owner resumed. According to HUD, during the approved management company’s tenure managing the site, the owner’s submissions fully complied with HUD requirements. However, the owner wasn’t satisfied with the management, and it allowed the management contract to expire after two years.

When the owner’s new managing agent entered the premises on Aug. 31, 2012, she allegedly found it in a state of disarray, with files scattered everywhere and computers wiped clean of all software and data. In the meantime, HUD notified the owner of its obligation to hire a HUD-approved managing agent and later noted that the current manager didn’t meet HUD’s requirements. Beginning with the current manager’s tenure as the owner’s managing agent, HUD claims that the owner returned to filing documents improperly and keeping poor records.

In June 2013, HUD conducted an inspection of the site and its files, finding noncompliance in 100 percent of the tenant files it reviewed. The owner attributed these failures to the disastrous state of records left behind by the HUD-approved management company and to HUD’s unwillingness to help the owner understand HUD’s requirements.

Starting in September 2012, the owner stopped receiving subsidies from HUD, allegedly leaving it in a precarious financial state because it refused to raise low-income tenants’ rents—an action that HUD points out the owner can’t take without prior HUD approval. Communications continued between the owner and HUD through the end of 2013 and into early 2014 without a resolution, especially regarding the dispute over whether the owner would hire a HUD-approved managing agent. The owner on several occasions told its low-income tenants that without action by HUD, the owner would be forced to raise rents to market rates, effectively evicting the low-income tenants.

As communications further broke down, the owner sued and asked the court for a preliminary injunction—that is, a court order early in a lawsuit that prohibits the parties from taking a disputed action until the court can decide the merits of the case. The owner asked the court to compel HUD to advance five months of subsidy payments and to allow the owner to hire a HUD-approved consultant rather than a HUD approved management company.

Ruling: A California district court denied the owner’s request.

Reasoning: The court concluded that the owner didn’t meet its burden of showing that it would suffer irreparable harm absent a preliminary injunction, and because the public interest weighs against a preliminary injunction, the court denied the owner’s request. Without making any statements as to the immediacy of the owner’s financial troubles, the current manager provided a budget spreadsheet showing that the owner suffered losses from July 2013 to January 2014. The court stated this evidence of past losses is insufficient to establish both that the owner is threatened with being driven out of business, and that the threat is sufficiently imminent to warrant preliminary injunctive relief.

With regard to public interest factors, the owner argued that it’s in the public interest to allow it to hire a HUD-approved consultant because it would allow the owner to ensure compliance with its contract and other HUD regulations. But according to communications between HUD and the owner, the HUD Management Agent Handbook requires sites to hire an approved management company or an individual with particular management experience. The court deferred to regulatory determinations that the HUD rules, rather than the owner’s alternative proposals, serve the public interest.

Also, the owner argued that the owner’s low-income housing program is in the public interest. The court agreed, but stated that this doesn’t give the owner a blank check to impose its own requirements on HUD or to ignore HUD regulations.

  • Seaside Civic League v. HUD, May 2014

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