Last November, I expressed skepticism that the tenants had a viable legal claim. Back then, according to published reports, the tenants (then represented by Legal Aid) seemed to be arguing only that 3CDC was engaging in race (and perhaps disability) discrimination. At the time, I wrote:
Ultimately, the question comes down to this: once a landlord accepts federal housing money, does that act as some sort of covenant that runs forever against the building, regardless of ownership? Certainly, that cannot be the case. Property owners must be free, assuming they follow the law, to opt out of Section 8.
I've reviewed the tenants' 50-page complaint, and there's more to the story than simply a landlord accepting rent subsidies. According to the complaint, back in 1988, the owner of the Metropole--609 Walnut Ltd. (which, in turn, is owned by Showe Builders Inc.)--executed a mortgage with the Department of Housing and Urban Development. A HUD mortgage--in this context--is a federally-insured loan that gives the building owner an extremely low (1%) interest rate in exchange for using the building subject to the mortgage for multi-unit, low-income housing.
While the lawsuit doesn't go into the history of Showe's acquisition of the Metropole, this decision from the Sixth Circuit does. Showe bought the property back in the late '80's when the previous owner, Mid-Towne Associates, was in bankruptcy. Showe paid $675,000 and assumed a $2.9 million HUD mortgage. I'm guessing that was quite a deal: according to the Auditor, Azeotropic (a creation of 3CDC) bought the building for $6.25 million last year.
When Showe took over the mortgage, it signed a "regulatory agreement" with HUD. According to the complaint, one of the provisions of this agreement was that Showe could not, without the prior approval of HUD, prepay the mortgage. Prepayment is a big deal. As long as the mortgage exists, the property must be used for low-income housing. If the note is paid off, though, the building owner is subject only to the ordinary requirements of Section 8, which means that the owner can cancel its participation in the federal rent subsidy program one year after giving notice to its tenants.
Congress hasn't given HUD unfettered discretion in deciding whether to approve prepayment of a mortgage. Instead, when a HUD mortgage prepayment is subject to HUD approval (not all HUD mortgages require such approval), acceptance of an offer to prepay may only be given where the HUD Secretary decided that the building no longer meets a need for rental housing for lower income families in the area; the Secretary agrees that the tenants have been notified of the request for approval of prepayment; and the Secretary ensures that a plan exists to provide relocation assistance to displaced tenants.
Back to the lawsuit: the tenants say that HUD didn't do its due diligence before approving the mortgage prepayment, and have challenged the decision under the Administrative Procedures Act. (In some respects, this case is analogous to those where an environmental group challenges an EPA decision permitting the construction of an allegedly polluting factory.) It's hard to see how one could conclude that the Metropole doesn't meet a need for rental housing for lower income families in the area. In fact, with the closure of the Metropole, no low-income housing will exist in the central business district. (And the only other low-income housing downtown I can think of is Page Tower--and that may technically be in the West End, since it's on the west side of Central.)
I'm no expert in HUD mortgage regulations. But on its face, the lawsuit raises serious, non-frivolous claims that will not go away quickly. Stay tuned, folks: this promises to be an interesting legal battle.
