January 2006

U.S. SUPREME COURT RULES FOR APARTMENT OWNER

On November 29, the U.S. Supreme Court ruled unanimously in favor of Lincoln Property Company in an important case that could have seriously undermined the value of limited partnerships to conduct business in multiple jurisdictions, manage liability and avoid frivolous litigation (Roche v. Lincoln Property Co. et al., 373 F.3d 619 (4th Cir. 2004), (Supreme Court No. 04-712). At issue is whether firms that are headquartered in one state and do business in another through affiliated entities, including partnerships, can continue to move cases to federal courts under federal “diversity of jurisdiction provisions” or whether they must defend themselves in state and local courts. Diversity jurisdiction exists when two parties to a legal dispute are from different states, and it allows a lawsuit to be moved from state court to federal court to protect against bias in the plaintiff’s home state.

The case involves a Virginia couple who filed a suit in Virginia state court alleging that they suffered personal injury and damage because of exposure to mold in their Virginia apartment, which was managed by an entity in which Texas-based Lincoln Property Company was a partner. Lincoln successfully moved the suit to federal court by arguing that the Texas company, and not a Virginia subsidiary, was the real party of interest to the suit. However, the Fourth Circuit Court of Appeals overturned the transfer and broke with legal precedent by determining citizenship on the basis of where the firm was doing business and not on the basis of the “citizenship” of its partners. This decision would have forced limited partnerships and other affiliated entities to litigate in state court every time a state court deemed its activities in the state to meet an amorphous test of “substantial nexus.” NAA/NMHC persuaded the real estate industry to support Lincoln Property’s efforts to seek Supreme Court review of the erroneously decided case (which was granted) and then, prior to oral arguments on October 11, we submitted an authoritative brief to the Supreme Court on the proper interpretation of “diversity jurisdiction” and the right of removal to federal court. The Supreme Court’s opinion protects and preserves access to federal courts through “removal”, prevents unnecessary and costly litigation in state courts, and allows multifamily housing and other real estate organizations to continue using limited partnerships and other affiliated organizations for sound and legitimate business reasons.

HOUSE PASSES TERRORISM INSURANCE EXTENSION

On Wednesday, the House of Representatives approved legislation to extend the Terrorism Risk Insurance Act (TRIA) for two years. This program is set to expire at the end of this year absent extension legislation. This action moves the process one step closer to enacting the much-needed extension. The Senate passed their version of TRIA reform, S. 467, on November 18. Since the two bills are not the same, a conference committee will have to iron out the differences. Both bills extend the program for two years, increase the deductibles, and raise the event size that triggers federal aid from the current TRIA's $5 million to $50 million in the first year of its extension and $100 million in the second year. They also call for a special commission to identify and make recommendations to increase the private insurance industry’s role and to reduce federal participation in this program over time. Both bills would include coverage for workers’ compensation, property and casualty, and general liability insurance. However, the Senate bill eliminates some lines of insurance coverage such as group auto and professional liability, while the House version would add group life, a step opposed by the Administration. The House bill also goes beyond the Senate bill in requiring coverage for nuclear, biological, chemical and radioactive attacks. While many Republicans, the Treasury Department and the White House have urged Congress to limit the federal government's role in any terrorism insurance program, the bills have achieved bipartisan support and the Bush Administration has said it could support

the Senate version. We are optimistic that a consensus bill can be reached and presented to the President for his signature before Congress’s targeted December 16 adjournment.

HURRICANE HOUSING RELIEF EFFORTS

As of December 2, there were approximately 42,000 hurricane evacuee households still living in hotels. On November 22, FEMA announced it would stop reimbursing hotel expenses on December 15, although the 10 states with the largest numbers of evacuees--Texas, Louisiana, Georgia, Florida, Mississippi, Alabama, California, Tennessee, Arkansas and Nevada--can request a further extension to January 7 if they present FEMA with a housing plan. NMHC is working with representatives from Louisiana and other affected areas to develop such a plan and secure the exemption. In our discussions, we have emphasized the need for a program that addresses apartment owners’ concerns. We stressed that, at a minimum, any housing program should include six-month leases, send rent payments directly to apartment owners and allow housing providers to run criminal background checks on evacuees. In addition, we remain in regular contact with FEMA officials seeking clarification on other issues raised by FEMA’s November 22 announcement that it would also stop reimbursing cities for hurricane voucher programs as of March 1, 2006. Unanswered is whether the Agency will honor prior commitments to 12-month voucher leases in Houston and six-month leases in Dallas. At this point, FEMA has indicated that no extensions of the March 1 deadline will be available; however, the Agency will reimburse the city for any fees incurred by breaking the leases early. NAA/NMHC and Texas officials continue to press for an extension to avoid a second housing crisis. Meanwhile, a Congressional subcommittee held a hearing yesterday regarding the federal government’s response to the Gulf Coast hurricanes. Representatives from FEMA testified, outlining actions they have taken to provide housing for the displaced families. NAA/NMHC worked with Congressional staff members to press FEMA for clarification of the industry’s many unanswered questions.

GAO RECOMMENDS NEW CONTROLS ON DOWNPAYMENT ASSISTANCE FOR FHA LOANS

Echoing NAA/NMHC’s concerns about aggressive homeownership practices, a new report by the Government Accountability Office (GAO) calls on HUD to place new controls on downpayment assistance programs used with FHA-insured loans. According to GAO, nearly half of all single-family home purchase loans the FHA insured included downpayment support, and almost one-third of those loans involve funds from the seller, often channeled through nonprofit organizations. The report noted the potential conflicts that may be associated with seller-funded assistance and called for more controls over such practices. The GAO also said its analysis showed that properties linked to this form of assistance sold for two to three percent more than similar homes sold without seller support. GAO cites a 2002 HUD analysis of 2,261 FHA loans in four cities that received downpayment assistance through the Nehemiah Corporation of America, a nonprofit housing group, which found that 19.39 percent of such loans defaulted, compared with 9.7 percent of all FHA mortgages in the same cities. Between 2000 and 2004 the share of FHA-insured loans involving downpayment assistance that was channeled through nonprofit organizations has increased from 5.8 percent to 30.5 percent. GAO says “the FHA Commissioner should consider additional controls for loans with down payment assistance from seller-funded nonprofits.” See www.gao.gov/new.items/d0624.pdf.

NAA/NMHC FILE WETLANDS BRIEF WITH THE SUPREME COURT

NAA/NMHC and several other real estate groups have filed a “friend of the court” brief in two cases before the Supreme Court questioning whether the federal government can regulate “isolated wetlands,” that are only connected to lakes and rivers via man-made ditches or drains (Rapanos v. United States, U.S., N. 04-134, 10/11/05; Carabell v. U.S. Army Corps of Engineers, U.S., No. 04-1384, 10/11/05.) A 2001 Supreme Court ruling held that the U.S. Army Corps of

Engineers (Corps) did not have jurisdiction over non-navigable, isolated wetlands, but lower courts have interpreted that decision inconsistently. In the cases currently before the Supreme Court, the U.S. Court of Appeals for the Sixth Circuit ruled against Michigan developers attempting to build an apartment property or a shopping center, allowing the Corps to apply the same permitting requirement to isolated wetlands as they do to navigable waters. The petitioners charge that the Corps has improperly extended its jurisdiction such that it now seeks to regulate any water-bearing topographic feature.

The real estate industry supports the intent of the Clean Water Act (CWA) to protect water quality but finds that the “illegitimate expansion of federal jurisdiction is wreaking havoc on legitimate land development.” Our brief holds that the Corps’ regulation of remote wetlands and ephemeral trenches is wrong as these intrastate features are far removed from any jurisdictional waters, and lack a significant nexus to navigable waterways. The very nature of these remote features renders them ecologically incapable of influencing distant navigable waters as the CWA intends. The brief asserts that there is simply no basis in science and law for extending federal jurisdiction to these features.

HOUSING BUBBLE CONCERNS AFFECT MORTGAGE BOND MARKET

According to a December 6 report by Bloomberg News, the housing bubble has already burst in the U.S. bond market. Bonds backed by home loans to the riskiest borrowers, the fastest growing segment of the mortgage market, have lost about 2.5 percent since September because of investor concerns that rising interest rates may force more than 150,000 consumers to default. The percent of mortgages going to high-risk borrowers has jumped to 13.4 percent from 2.4 percent in 1998, according to the Mortgage Bankers Association. As a result, the Bond Market Association says the amount of bonds backed by these high-risk loans has more than doubled since 2001. The news report says the slump in the bonds is one of the first signs the housing boom is ending after the Federal Reserve's 12 interest rate increases. 

February 2006

NAA/NMHC WHITE PAPER ON COMPLYING WITH NEW AIR CONDITIONER EFFICIENCY STANDARDS

As we have reported earlier, as of January 23, 2006, central air conditioners and heat pumps manufactured or imported for use in residential buildings must meet a new, higher federal energy-efficiency standard. This is a major change for the air conditioning industry and will require a redesign of its offerings as the market makes the transition to the new 13 SEER standard. To help apartment firms understand their compliance obligations, we have published a new White Paper that identifies best practices and design considerations for new and existing construction. It also addresses apartment firm concerns about: (1) the continued availability of spare parts and refrigerants for SEER 10-rated equipment; (2) the size of the new SEER 13-rated equipment; and (3) the cost of the new SEER 13-rated equipment.

It concludes with Frequently Asked Questions on equipment issues, regulatory issues and business considerations. We recommend that you share this resource with your property managers, construction managers, acquisition managers and maintenance managers. The members only White Paper can be found online at www.naahq.org/govern_affairs/.

TERRORISM INSURANCE EXTENSION SIGNED INTO LAW

NAA/NMHC secured a tremendous victory on December 22 when President Bush signed into law compromise legislation (S. 467) that renews the federal terrorism risk insurance program for two years. The final bill responds to White House demands that the program be scaled back to reduce taxpayers’ potential liability and encourage private market development of such products. It increases the portion of losses insurers would have to pay and raises the amount of overall loss that triggers a federal payment from $5 million to $50 million in 2006 and then to $100 million in 2007. Agreement was reached only after several House provisions--including different triggers for different insurance types; adding group life insurance to the lines covered; and extending coverage for nuclear, biological, chemical and radioactive attacks--were dropped.

On December 30, the Treasury Department released interim guidance implementing the new law. It responds to a number of operational issues that arise under the TRIA extension, including which types of commercial property and casualty insurance are covered by the Act and the Act’s "make available" provision. Of particular interest to policyholders, the guidance says that insurers have until January 31 to offer terrorism insurance to policyholders who had accepted terrorism coverage for 2006, but whose coverage had lapsed on December 31, 2005, in anticipation of TRIA expiring. Firms should note, however, that insurers are not required to make new offers of terrorism insurance to policyholders who previously declined coverage that would have been in effect in 2006. Treasury will issue final regulations to administer the extension program in the future. The interim guidance can be found at www.naahq.org/govern_affairs/.

VIOLENCE AGAINST WOMEN ACT RENEWED WITH NEW HOUSING SECTION

On December 17, Congress passed legislation (H.R. 3402) reauthorizing the 1994 Violence Against Women Act (VAWA). The President is expected to sign the measure. Of interest to apartment firms is a new housing section that amends the Section 8 and public housing programs. While NAA/NMHC support the overall goal of the legislation, we worked with legislators to ensure that the final version resolved several troubling issues. For instance, the original version of the legislation would have created a new protected class under the Fair Housing Act for victims of domestic violence and granted these protections to people “perceived” to be such victims. The final law says that an incidence of abuse is not good cause for terminating a lease held by the victim, but it does allow rental providers to evict an abuser and leave the domestic violence victim in place. Additionally, an abuser’s criminal activity directly related to abuse and beyond control of the victim cannot be grounds for eviction of the victim. The language clarifies, however, that landlords or managers can terminate the tenancy of a domestic violence victim if the violence poses an “actual and imminent threat” to other tenants or property management staff. The new language also permits a manager or landlord to terminate the tenancy of a domestic violence victim for lease violations. A summary of the legislation and the other provisions we had changed is posted at www.naahq.org/govern_affairs/.

CONGRESS PASSES KATRINA TAX BILL WITH REAL ESTATE PROVISIONS

On December 21, President Bush signed into law a long-negotiated package of tax incentives to rebuild the Gulf Coast. The Gulf Opportunity (GO) Zone Act of 2005 (H.R. 4440) includes several provisions important to real estate. Among other things, the bill allows housing providers to rely on the representations of prospective tenants displaced by Hurricane Katrina to determine whether they satisfy the income limitations for qualified residential rental projects, such as tax-exempt bond properties. This important provision augments earlier waivers NAA/NMHC secured to allow owners of federally subsidized properties to make their units available to hurricane evacuees. The bill also provides emergency allocations of the Low-Income Housing Tax Credit to GO Zone communities. For more information, see this week’s Tax Update.

NMHC 50 SURVEY UNDERWAY

The 17th annual NMHC 50, the National Multi Housing Council’s authoritative ranking of the nation’s 50 largest apartment owners and 50 largest apartment managers, is now underway. Survey forms were sent to likely candidates on December 23; the deadline for participating is January 26. If you believe your firm should be included and you did not receive a survey, please contact Rich Levy at rlevy@nmhc.org. For the 2005 NMHC 50, a firm had to own at least 21,157 apartments or manage at least 23,457 to make the rankings. The final rankings will appear in a special supplement in the April issue of National Real Estate Investor.

DISCRIMINATION AGAINST HURRICANE VICTIMS

The U.S. Department of Housing and Urban Development (HUD) recently issued a notice cautioning the industry to be mindful of their fair housing obligations when working with hurricane evacuees. The Department also encourages evacuees who experience discrimination in their housing search to contact HUD to file a complaint. Following HUD’s notice, the National Fair Housing Alliance (NFHA) released a report documenting a significant incidence of housing discrimination against minorities displaced by Hurricane Katrina. The study involved the use of testers searching for housing in 17 cities. NFHA has filed discrimination complaints with HUD against five properties in TX, AL and FL and promises to file more. A HUD investigation will reveal the merits of the complaints and determine what, if any, further action will be taken. The NFHA report is available at www.nationalfairhousing.org.

HOUSE PASSES METH LAB LEGISLATION

On December 13, the U.S. House of Representatives passed legislation (H.R. 798) to deal with the alarming growth in illegal methamphetamine labs. In 2004, the Drug Enforcement Agency busted more than 17,000 domestic meth labs, which the House Science Committee noted are often located in rented apartments or motel rooms. The problem is complicated by inconsistent guidance from states as to the extent to which such laboratories must be remediated. The House-passed bill would require the U.S. Environmental Protection Agency (EPA) to establish voluntary cleanup guidelines that states could adopt. It also directs EPA to establish a research program to examine short- and long-term effects of environmental contamination from illegal methamphetamine laboratories. H.R. 798 also calls on the National Institute of Standards and Technology to help develop test kits that states and localities could use to identify illegal methamphetamine laboratories. NAA/NMHC testified in support of the measure on March 3, 2005. Identical legislation (S. 2019) was introduced on November 16, 2005, although no hearings have been scheduled on it.

SIERRA CLUB OUTLINES PLANS TO SUPPORT DEVELOPERS

The Sierra Club, more commonly known for trying to stop large real estate development projects, has launched an effort to actively support developers who are building the kind of higher-density, mixed use developments that produce healthy and livable communities. The effort is a continuation of a partnership formed in 2004 with NMHC and the Urban Land Institute to educate citizens and elected officials about the value of compact development. In December, Sierra Club issued its first Guide to America's Best New Development, including write-ups of a dozen projects that have positively transformed neighborhoods. Among the endorsements: a project to build housing on the site of a former Atlanta steel mill; the conversion of an Albuquerque high school into apartments and condos; and redeveloping a Portland factory into townhomes and apartments. In a November 30 Wall Street Journal article, Sierra Club officials noted, “...that you can't just be against things all the time. You have to be for things." The full Guide is at www.sierraclub.org/sprawl/report05/.

March 2006

Department of Justice: More testing!

On February 15, 2006, Attorney General Alberto R. Gonzales announced a new concentrated initiative--Operation Home Sweet Home--to eliminate housing discrimination.

Over the next two years, the U.S. Department of Justice (DOJ) will increase the number of paired test investigations, ensuring an all-time high in testing since the program was created in 1991.

It will also improve the targeting of its testing program, including concentrating testing in areas affected by Hurricane Katrina and in areas where Katrina victims have relocated. Property owners in cities such as Houston, Dallas and Memphis where many hurricane evacuees have settled should be aware that they may see increased scrutiny.

On March 1, DOJ will launch a new web site (www.usdoj.gov/fairhousing) devoted to fair housing enforcement with an online mechanism for citizens to submit tips and complaints. They are also creating a toll-free tip line for discrimination victims.

The DOJ program comes just one month after the U.S. Department of Housing and Urban Development announced that it has joined forces with the Ad Council to launch a campaign to fight housing discrimination against the hurricane evacuees. The campaign consists of television, radio, newspaper and magazine ads and directs audiences to call a toll-free number if they feel they may have been victims.

ENERGY TAX CREDIT

NAA/NMHC are seeking an extension of the tax credits included in the Energy Policy Act of 2005 (P.L. 109-58) because the U.S. Department of the Treasury has yet to issue rules implementing the regulation. The Act created a temporary tax credit to spur construction of energy efficient commercial spaces (including high-rise apartments). Specifically, it allows properties that (1) are placed in service after December 31, 2005 and before January 1, 2008 and (2) exceed the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1 by 50 percent, to take a $1.80 per square foot tax credit the year the property is placed into service. The law also allows firms that improve the energy efficiency of their building systems (i.e., lighting, HVAC, hot water systems and building envelope) to deduct 60 cents per square foot for each system improved, up to the $1.80 limit. Finally, it gives firms that purchase qualified photovoltaic and solar water heating equipment (used exclusively for purposes

other than heating swimming pools and hot tubs) as well as qualified fuel cell power plants a credit equal to 30 percent of the cost. NAA/NMHC advocated for the tax credits; however, without federal rules specifying the circumstances under which the credits can be claimed, the credits are of limited use to developers.

LEAD-BASED PAINT

Proposed Lead-Safe Regulations for Maintenance Workers/Renovators. On January 10, the U.S. Environmental Protection Agency (EPA) published a proposed rule (70 FR 1587) that would impose new requirements on anyone engaged in renovation, repair and painting activities, including apartment maintenance workers, that disturb lead-based paint in housing built before 1978. Specifically, EPA is proposing that contractors must be trained in the use of lead-safe work practices; renovators and firms be certified; providers of renovation training be accredited; and renovators follow protective work practice standards. These work practices include posting warning signs, restricting occupants from work areas, arranging work areas to prevent dust and debris from spreading, conducting a thorough cleanup, and verifying that cleanup was effective. EPA intends for the states to perform these certifications.

The proposed rules are the most recent in a series of federal regulations aimed at eliminating lead-based paint hazards, with this one coming 10 years after Congress called on EPA to promulgate it. In 2005, EPA’s failure to publish a proposed rule became an issue during confirmation hearings of Agency officials. The rules would go into effect two years after they are finalized for rental housing built before 1960. One year later, they would apply to rental housing constructed between 1960 and 1978. The rule exempts minor repair and maintenance activities that disrupt two square feet or less of painted surface per component and renovations where specified methods have been used to determine that the areas affected by the renovation are free of lead-based paint. NAA/NMHC will submit comments on the regulations by the April 10 due date. The proposed rule and additional EPA information on it are posted at www.epa.gov/lead/pubs/renovation.htm.

“Big Buy” Program. NAA/NMHC have joined forces with the National Leased Housing Association and the Institute for Real Estate Management to press the U.S. Department of Housing and Urban Development (HUD) to get its “Big Buy” program back on track. The program, which provides lead-based paint inspections for pre-1960 apartment properties that receive project-based assistance, has ceased to function. Even though resources are available to conduct the inspections, fewer than half of the 3,900 properties registered for the program have been scheduled for inspection since the program was created in 1999. Far fewer properties have actually been inspected, and owners of properties that have been inspected report that it can take up to 12 months to obtain the inspection reports attesting to the lead status of their property. Following meetings with HUD officials and Capitol Hill staff, we have sent a letter to Federal Housing Commissioner, Brian Montgomery, expressing our concerns and recommending steps to reinvigorate the program.

EMINENT DOMAIN

Reaction continues to reverberate from the Supreme Court’s recent Kelo v. New London ruling that eminent domain can be used to seize property for economic development purposes. The decision has fueled the ire of property rights activists and has led to the introduction of eminent domain-related legislation in some 40 state legislatures. The U.S. Conference of Mayors (USCOM) is the latest organization in policy makers’ rush to stake a claim on the issue’s moral high ground. At its annual winter meeting, USCOM passed a resolution recognizing “the use of eminent domain by state and local governments is fundamentally a state and local matter and should be addressed by state and local political processes that respond to distinctly local needs and conditions.” They further urged that the federal government resist taking any additional action to alter the rules governing the use of eminent domain until it has received a Congressionally-requested Government Accountability Office (GAO) report. That report is not expected to be completed before the end of this year, however, which would mean that any parsing of the federal role in local land use decisions would have to wait until the newly elected Congress convenes in 2007. The legislation calling for the GAO report (P.L. 109-115) also contained a provision blocking the use of any FY 2006 federal dollars for projects where local governments have exercised eminent domain for economic development reasons. The provision exempts projects such as roads and utilities. For more information on the Supreme Court decision, see the July 1, 2005 AIMS Environmental Update.

TERRORISM INSURANCE ACT EXTENSION HAS IMPLICATIONS FOR APARTMENT FIRMS

On December 22, 2005, President Bush signed into law the Terrorism Risk Insurance Extension Act (TRIEA) of 2005 (P.L. 109-144), extending the federal terrorism insurance backstop two years to December 31, 2007. Without this law, the federal terrorism insurance program would have expired on December 31, 2005. While the extension measure is not considered the perfect solution to the terrorism insurance issue, it is still welcome news to the multifamily industry, which depends on this line of coverage. The overall purpose of the 2005 TRIEA is the same as the original legislation—to provide a short-term insurance backstop for the insurance industry in the event of an act of terrorism. However, many of the program’s provisions have changed.

As in all public policy issues, there are two sides to the terrorism insurance debate. In this case, both sides have merit. One side argues that a public/private partnership is necessary to making this coverage available. The other side says that the insurance industry should assume a greater role in absorbing this risk and not rely on the federal government, and, ultimately, the taxpayers. The latter is the belief that was strongly advocated by the Bush Administration during negotiations for the extension bill. Although many observers agree with the goal of reducing taxpayer risk, it is questionable whether such a transition to the private market can take place so quickly. Analysts say that today’s private reinsurance capacity, defined as the maximum amount of risk that can be underwritten based on the sector’s financial strength, is approximately $6 billion. In contrast, a leading catastrophic modeling firm estimates that the possible insured losses from the detonation of a nuclear

device or the release of biological, chemical or radiological agents could exceed $250 billion. For these reasons, the insurance industry says it needs a shared risk arrangement with the federal government. While these policy debates are largely focused on the insurers, they indirectly affect the policyholders, including property owners, through increased exposure and pricing.

TRIEA 2005 may have given insurers and policyholders a short reprieve, but this debate will continue for many years until a long-term solution is developed. Given the complexity of pricing risk, especially for man-made events such as terrorist attacks, and the lack of reliable models, the insurance industry has much work to do if it is going to create a program Congress can accept beyond 2007. In addition, there are existing issues that were not included in TRIEA 2005 and will likely be vetted again in Congress. For example, lawmakers are expected to revisit the issue of whether “non-certified” acts, such as those caused by domestic terrorists, should be covered. They will also debate which lines of coverage should be included and whether the program should cover nuclear, biological, radiological and chemical (NBRC) attacks.

Additional information is available on the website http://www.gcnkaa.org/legislation_news.htm

RENTING DEFENDED IN WALL STREET JOURNAL

Wall Street Journal reporter Carlos Tejada justifies his decision to rent even though he could afford to own in a January 16 article titled “Confessions of a Proud Renter.” Tejada notes the cultural and social bias toward home ownership, saying: “Personal-finance magazines frown at people like us. Acquaintances scoff. As a former co-worker chided when I explained our lifestyle choice, ‘Oh, you're one of those people.’ But this renter is unabashed...for a variety of reasons, financial and personal, we now prefer to rent. And we're proud of it.”

He goes on to provide the financial details why renting is not only a lifestyle preference, but a smarter financial decision, even in the booming housing market. The article is a valuable addition to resident retention materials. The full article is posted on the newspaper’s web site at http://online.wsj.com/article/SB113708174706744915.html?mod=2_1203_2 (subscription required) along with information on ordering electronic and hard copy reprints.

HURRICANE HOUSING UPDATE: POLICIES CHANGE AGAIN

New HUD Voucher Program Announced. In a January 20 letter, HUD officials announced that the Department’s Katrina Disaster Housing Assistance Program (KDHAP) will expire on January 31 and will be replaced by a new housing voucher program. (KDHAP provides rental assistance for up to 18 months to previously HUD-assisted families.) No further details have been made available yet, including who will be eligible for the new Disaster Supplemental Voucher Program, whether it will be expanded to include victims of Hurricanes Rita and

Wilma, or how KDHAP voucher recipients will be transferred to the new program. The HUD letter comes three weeks after a FEMA announcement that the deadline to apply to FEMA for housing assistance, including through the KDHAP program, has been extended to March 1, 2006.  

City Voucher Programs Extended. On January 20, FEMA reversed its position and said it would continue to reimburse cities for voucher programs past the previously announced deadline of February 28. The Agency announced the original deadline in November, even though it had previously approved 12-month leases in some cities. FEMA now says it will continue to fund vouchers until eligible households can be transitioned into the individual assistance program. (Under individual assistance, evacuees assume responsibility for the lease and receive rental assistance directly from FEMA.) If evacuees do not qualify for individual assistance, FEMA will provide 30 day’s notice to the state and evacuee before ending voucher funding. FEMA also extended the deadline for cities to enter into apartment leases to February 7; however, new leases cannot be longer than three months and must be for individuals verified by FEMA as eligible for individual assistance. 

New Deadline to End Hotel Program. FEMA is moving one step closer to relocating the remaining hurricane evacuees from hotels into more appropriate long-term housing. On January 9, FEMA announced what it calls the final extension of the hotel program for Katrina and Rita victims. Under the latest deadline, evacuees must call FEMA for an authorization code by January 30 or else FEMA will stop paying for hotels on February 7. The Agency will continue to pay for hotels for evacuees with an authorization code at least through February 13 (or March 1 for those in New Orleans or Jefferson Parish). Assistance may be available beyond February 13 on a case-by-case basis.

FEMA continues to urge evacuees in areas without sufficient housing to consider moving out of state, at least temporarily. FEMA has so far provided rental assistance to more than 750,000 families affected by Hurricanes Rita and Katrina, and it says that fewer than 27,000 families still remain in hotels. The Agency has spent more than $400 million to provide free hotel and motel rooms for nearly four months.  

MANDATORY ACCESS RULINGOn January 12, the North Carolina Utilities Commission ((NCUC) issued an order and rule in its inside wire proceeding. This is the third order issued by the Commission, and like the first two, it does not mandate access to private property in favor of telecommunications providers. Still, the order could potentially negatively impact the ability of commercial real estate owners and managers to recover fees from carriers accessing their property. Worse, some carriers may seek to use the order as a means to escape previously executed access agreements that contain financial terms favorable to the property owner. More information is available at www.naahq.org/govern_affairs/.

REGULATORS ISSUE GUIDANCE ON COMMERCIAL REAL ESTATE LENDING

On January 6, the Federal Reserve, Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision announced that they are taking a closer look at real estate lending. Concerned that some institutions have high and increasing concentrations of commercial real estate loans on their balance sheets that may make them more vulnerable to cyclical commercial real estate (CRE) markets and that risk management practices and capital levels of some institutions are not keeping pace with their increasing CRE concentrations, the agencies issued proposed guidelines to reinforce existing guidelines on sound risk management practices. Areas of concern include commercial real estate loans where repayment primarily depends on rental income or from the proceeds of the sale, refinancing or permanent financing of a property. The proposed guidance would cover real estate investment trust loans and unsecured loans. Among other things, the guidance calls for ”robust” risk management practices and capital levels ”higher than regulatory minimums.” For more information, see www.fdic.gov/news/news/press/2006/pr06005a.html.

CLEAN WATER ACT/WETLANDS REGULATIONS

On February 21, the U.S. Supreme Court will have heard oral arguments in two cases (now consolidated) that will determine whether the federal government has the authority to regulate “isolated wetlands” that are only connected to lakes and rivers via man-made ditches or drains. (Rapanos v. United States, U.S., N. 04-134, 10/11/05; Carabell v. U.S. Army Corps of Engineers, U.S., No. 04-1384, 10/11/05.) At issue in these matters is the government's use of the Clean Water Act and the Interstate Commerce Clause of the U.S. Constitution, which references "navigable waters." Rapanos and Carabell engaged in the development activities on their land, which the government claims was prohibited because of the nexus to regulated wetlands. The plaintiffs assert that federal regulatory agencies improperly assert jurisdiction over waterways such as manmade ditches, storm drains, gutters, and curbside runoff. The hearing is the culmination of 20 years of protracted legal wrangling, and the Court’s decision is viewed on both sides of the issue as critically important to future land-use policy. Thirty-nine "friend of the court" briefs have been filed on behalf of both sides. The Attorneys General for 33 states and the District of Columbia supported the government, with only two states favoring the plaintiffs’ position. NMHC has joined with a coalition representing real estate interests in filing an amicus brief on this matter that asserts that there is simply no basis in science and law for extending federal jurisdiction to these isolated wetlands.

FEDERAL BUDGET HIGHLIGHTS

President Bush’s proposed FY 2007 budget, submitted to Congress on February 6, calls for changes to environmental and energy programs that would affect the apartment sector. Despite the Administration’s resolve to advance alternative fuel technologies and energy conservation efforts, the proposed budget cuts funding to EPA and Department of Energy (DOE) programs devoted to energy efficiency and renewable energy research.

Specifically, the proposal cuts funding for the Energy Star program by 12 percent. It also cuts DOE’s “Building Technologies” program seven percent, including a 34 percent cut to the Rebuild America program and at least a 23 percent cut to a variety of building materials programs.

These cuts are not going unnoticed by members of Congress or the public. Senator Jeff Bingaman (D-NM) ranking member of the Senate Energy and Natural Resources Committee, called the President’s budget a “flawed plan” and explained that “this budget is taking us backwards in important programs in energy efficiency, clean coal, oil and gas, electricity reliability and distributed energy.” A large coalition representing a broad range of business, industry, government and environmental interests is also urging Congress to reject the DOE budget proposal. The group acknowledges budget increases for photovoltaic, biofuel, fuel cell and hydrogen research, but criticizes severe cuts or elimination to geothermal, hydropower, weatherization and numerous energy efficiency programs. Many experts believe that the President’s plan offers little comfort to property owners seeking relief from tight energy supplies and high utility costs because the budget emphasizes long-term energy projects.

In another area of interest to developers, the President’s budget proposal reinforces its commitment to “no net loss of wetlands.” Specifically, it would increase funding for the Army Corps of Engineers wetlands permitting program and other programs designed to mitigate wetlands loss as well as additional funding for stepped up oversight and enforcement of activities that are required to obtain permits.

April 2006

Ok, things have been a little crazy here. Frankfort has seen a myriad of bad bills this season, and to date most of them have been stopped. Some like the Lead paint bill are moving forward, propelled by the administration and only curtailed to something tolerable (so far) after a Herculean effort by KAA.

The bill on HVAC permits has been slowed and should be dieing shortly. On the other hand, the very spectre of HB 752 – Statewide legislation for landlord registration and inspection should have all the southern property owners ready to hang one of their own neighbors, Rep. Keene of Campbell County (D). And of course the monumental battles over tweaks in the tax code and the compromise eminent domain legislation have left everyone unhappy so far. On a positive note, the Storm Water Authorization Bill failed miserably and KAA’s bill to eliminate sales taxes on utilities was heard in committee for the first time ever! This will lay the ground work for what promises to be an ongoing battle, but a

battle in the right direction none the less. But hey, there’s a few more days left in this cycle of session in which almost anything could happen! …and probably will.

The Ohio side, while fairing better at the state level, is having difficulty with local legislators. OAA has filed the lawsuit against the state in an effort to win reclassification (or at least a break from the repeal of the commercial rollback) and the Auditor Registration bill is being supported by the State Auditors Association. This bill will require county auditors to be the proper repository for “registration” type information, thereby precluding local municipalities from instituting registration efforts.

While that bill does little to address inspections programs, the Mariemont lawsuit being funded by GCNKAA is having a chilling effect on many municipalities. Forest Park has gone to some lengths to avoid a dispute with us by limiting its recently passed (March 6th) inspection program to 1 and 2 unit buildings. The law, along with other oddities, such as the requests for extensive personal information by Mason and Green Hills is all becoming a focus of the Legislative Committees efforts.

Additionally, the City of Cincinnati, in an effort to appease a group of activists (surprise) on the Westside of Cincinnati, has put forward a motion to create a Milwaukee Wisconsin-style program to charge landlords for the behavioral problems of tenants. The short version: if police are called to an apartment more than 3 times in 30 days the landlord must submit a remediation program to the Police, and if it is either not implemented or accepted, then the landlord must start paying for the police runs. Ever wonder what you pay property taxes for? Ever wonder what the police are supposed to do? …if you can get them to actually come to your property in the first place.

Needless to say, GCNKAA has voiced strong objections to this bill and its sponsor, Jeff Berding has committed to working with us on this effort – and tried to reach us the day before announcing the bill. Council Member Cecil Thomas a retired police officer and Chairman of the Law and Safety Committee has already expressed serious concerns that landlords should not being doing police work, and that this bill runs dangerously close to requiring that. Sadly, four Council Members also signed on: Bortz, Ghiz, Monzel and Cranley. While the latter three have expressed their willingness to work with our concerns, please remember, when it comes election time, that not one of them bothered calling.

Finally, Jeff Goldstein and I attended the NAA Capitol conference in Washington DC and met with our federal representatives – Two met with us personally: Rep. Chabot and Rep. Davis. KAA met with Sens. Bunning and McConnell. Sen. Voinovich’s aid was expressly interested and spent a good deal of time make sure each of our issues were understood and covered. However, the two Ohio candidates in the tightest races didn’t even contact us on our requests for

meetings were Sen. DeWine and Rep. Schmidt – again, please remember this when receiving donation requests and voting.

PRESIDENT SIGNS COMPREHENSIVE METH LEGISLATION

In a significant victory for apartment firms, President Bush signed into law comprehensive legislation dealing with methamphetamine labs on March 9. The Combat Meth Act (S. 103) was actually attached to the USA-Patriot Act Reauthorization bill (H.R. 3199), which passed on March 8. Among other things, the legislation attacks meth manufacture by restricting public access to certain precursor chemicals, like the common over-the-counter cold medication pseudoephedrine. The federal bill was modeled after an Oklahoma state law that led to an 80 percent drop in meth busts; however, the Combat Meth Act is far broader. It also addresses international meth precursor sales and smuggling and provides $99 million over five years for increased law enforcement efforts, prosecution and environmental cleanup. This is the most comprehensive anti-meth legislation ever passed by Congress. The measure does not address the cleanup of clandestine meth labs, though, beyond designating by-products of meth production as hazardous materials. Late last year, the U.S. House of Representatives passed a bill(H.R. 798) calling for federal research to determine effective meth remediation strategies; the Senate has yet to act, however. (See the January 6, 2006 Washington Update.) According to the New York Times (January 23, “Potent Mexican Meth Floods In As States Curb Domestic Variety”), meth is becoming an even greater public health concern as meth production shifts away from small, clandestine labs producing an impure powder form of meth toward foreign drug cartels offering a potent crystalline form of the drug. As a result, meth addiction (and related crime) continues to rise.

2006 LEGISLATIVE PRIORITIES

The NAA/NMHC Joint Legislative Program will release its annual public policy agenda on March 13 during NAA’s Capitol Conference. Top on the 2006 agenda are:

Promoting a smarter, more balanced housing policy.  

Expanding the nation's supply of affordable housing through exit tax reform. 

Strongly supporting full funding for all existing Section 8 housing choice vouchers, as well as continued federal administration of the program. Opposing any efforts to turn the program into a block grant program with reduced long-term funding. 

Urging Congress to pass comprehensive immigration reform that would improve the effectiveness of employee screening processes without increasing employer burdens when verifying an individual's legal status to work. 

Supporting extension of the federal estate tax laws that will be in effect in 2009 to the year 2010 and beyond. 

Urging Congress and the U.S. Treasury to allow the immediate expensing of environmental remediation clean-up costs for tax purposes. 

Supporting reform that establishes a strong independent regulator of the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, who can establish parameters for safety and soundness as needed.

A brochure offering a detailed explanation of all our priority issues, including background and current status, is available at www.naahq.org/govern_affairs/.

HOMEOWNERSHIP: FORECLOSURES UP, TAX REFORM STALLS Foreclosures Nearly Double. As further evidence that the U.S. is pushing the

homeownership envelope too far, RealtyTrac, an online marketplace for foreclosure properties, announced that foreclosures jumped 45 percent between January 2005 and January 2006. The report shows an upward trend in which the national foreclosure rate rose in every quarter of 2005. Georgia documented the highest foreclosure rate--one new foreclosure for every 422 households--followed by Nevada (one for every 483 households) and Colorado, where foreclosures tripled from December to January and now account for one out of every 488 households.

  Tax Reform Stalls, Bush Vows to Protect Mortgage Interest Deduction. On February

17, President Bush said he will not support the recommendations made by the President’s Advisory Panel on Federal Tax Reform to repeal the mortgage interest deduction. The Panel’s final report, issued November 1, 2005, suggested replacing the deduction with a tax credit equal to 15 percent of mortgage interest paid during the tax year and capping the credit at $412,000 depending on where a taxpayer lived. Currently, the deduction is available for interest on up to $1.1 million of mortgage debt. The Panel said the proposal would help pay for Alternative Minimum Tax repeal. The Panel’s recommendations were widely criticized, and tax reform was notably absent from the President’s State of the Union address as well as his budget submissions to Congress. Although Congressional hearings on the general subject of tax reform are likely this year, no legislative action is forecast, and the subject appears to be relegated to general discussion without the full support of the Administration.

LEAD-BASED PAINT RULING AGAINST PAINT MANUFACTURERSIn a first-of-its-kind ruling, on February 22, a Rhode Island jury found three former lead paint manufacturers guilty of creating a public nuisance by continuing to market and sell lead-based paint until it was banned in 1978, despite the knowledge that it was toxic. (Rhode Island v. Lead Industries Association, R.I. Super. Ct., No. 99-5226, 2/22/06). In a subsequent hearing, the presiding judge declined to award punitive damages, but the earlier ruling does hold Sherwin-Williams Co., NL Industries Inc., and Millennium Holdings liable for the cost of abating lead paint in an estimated 240,000 homes in the state. Analysts estimate that could cost billions. A ruling on the details of the abatement program is expected later. Rhode Island was the first state to file a suit against the lead paint industry in 1999; the first trial ended in a mistrial in 2002. Similar lawsuits are pending in the state of New Jersey and in Milwaukee, WI. NAA/NMHC are following these developments to determine how they will affect housing providers.

HARVARD UNIVERSITY RELEASES NEW ANALYSIS OF RENTAL SECTOR On Wednesday March 8th, Harvard University issued valuable new research analyzing the dynamics of the rental housing sector. The report, America’s Rental Housing: Homes for a Diverse Nation, reviews current conditions and the outlook for rental housing demand, renter demographics, rental housing production, the spatial patterns of rental housing and affordability challenges. A March 8 press conference to release the report focused on the declining stock of affordable housing. According to the report, some 200,000 rental housing units are demolished or otherwise removed from the housing stock every year, nearly twice as many as are produced annually by the Low-Income Housing Tax Credit program and other initiatives.

NAA/NMHC’s Senior Vice President of Government Affairs, Jim Arbury, participated in the media briefing and used the opportunity to urge policymakers to adopt a more balanced housing policy that more explicitly values rental housing. He also highlighted the need for exit tax relief to encourage owners of older properties to sell those communities to new owners who can modernize them and preserve them as part of the nation’s affordable housing stock. The report,

which is the cornerstone of a new research agenda on rental housing at Harvard’s Joint Center on Housing Studies, is available at www.jchs.harvard.edu.

NEW YORK TIMES MAGAZINE QUESTIONS HOUSING POLICY, HYPERACTIVE LENDING INDUSTRY

On Sunday, March 5, the New York Times devoted its magazine to the issue of real estate and published a number of articles of interest to apartment owners and advocates of a more balanced housing policy. In one, titled "Who Needs the Mortgage Interest Deduction," Roger Lowenstein argues that the mortgage interest deduction does more to boost housing prices than it does to help more Americans buy houses. He concludes that the "deduction is overrated as an icon, and as tax policy it is misdirected and unfair" and that America would have the same number of homeowners if the deduction was eliminated tomorrow; they would just cost less.

Another article, "Home Sweet Debt," by Walter Kirn, discusses the economic risk that homeownership has become. He describes houses as "our sleep-in piggy banks and even our slot machines" because "we're spending more and risking more in order to acquire them and hang on to them." He also criticizes the "hyperactive lending industry" for inducing people to buy more house than they can handle, casting doubt on whether the word "homeowner" is even widely suitable anymore. "Home-hoper" or merely "occupier" might be better.

“Home Economics” by Jon Gertner focuses on Harvard’s prolific economist Ed Glaeser, whose recent work has focused on housing supply and his desire to provide a “persuasive, data-driven explanation for elevated home prices.” Glaeser’s conclusion is that the housing crisis in many areas is man-made, a result of zoning and other regulations that are inflating prices across the country. Finally, “The Suburban Solution,” by Andrew Rice examines the growing role of state and local governments in affordable housing. For a limited time, the articles can be viewed at www.nytimes.com/pages/magazine/index.htm.

DIVERSITY SPREADS OUTThe Brookings Institution has released a new study with implications for housing providers that documents the expansion of minorities into new destinations. According to Diversity Spreads Out, Minorities contributed the majority of population gains in the nation's fastest-growing metropolitan areas and central metropolitan counties from 2000 to 2004. While they remain the demographic lifeblood of inner counties in older metropolitan areas, they are increasingly fueling growth in fast-growing outer suburban and "exurban" counties as well. As a result, 111 of the nation's 361 metropolitan areas registered declines in white population from 2000 to 2004. Declines were greatest in coastal metropolitan areas and economically stagnant parts of the country. The full study is available at www.brookings.edu/metro/pubs/20060307_frey.htm.

HURRICANE HOUSING White House/Congressional Reports: HUD Should Lead Housing Response. On

February 23, the White House released its report evaluating the federal response to Hurricane Katrina and identifying 125 suggested changes. Among other things, the report echoes NAA/NMHC’s frustrations, noting that "the Federal government's capability to provide housing solutions to the displaced Gulf Coast population has proved to be far too slow, bureaucratic and inefficient." The Federal Response to Hurricane Katrina: Lessons Learned, criticizes the administration for not engaging the U.S. Department of Housing and Urban Development (HUD) in the housing response early enough and recommends that HUD be designated the lead agency for the provision of temporary housing. It also recommends that the Stafford Act be revised to allow FEMA to pay the costs of security deposits or utility fees.

The White House report follows one issued by a special House of Representatives’ Committee on February 15. The 520-page report, titled A Failure of Initiative, did not make recommendations, but did issue findings in 14 areas, including housing. The Committee said housing plans were haphazard and inadequate and that FEMA "failed to take advantage of HUD's expertise in large scale housing challenges." The report criticized FEMA’s rental assistance program for failing to give guidance on how money should be used for days, and sometimes weeks, after the checks were issued. It

concludes that "use of a voucher system similar to the one administered by HUD could have prevented this mistake.”

  Disaster Relief Funding Request/Utility Provision. On February 16, President Bush

sent Congress his third disaster supplemental funding request. The $19.8 billion request includes $202 million to fund HUD's Disaster Voucher Program (DVP) and corrects an error in the program’s statutory language that inadvertently made some households previously eligible for the Katrina Disaster Housing Assistance Program (KDHAP) ineligible for the DVP. According to HUD, as of February 15, an estimated 23,000 are eligible for KDHAP, although the supplemental request says that 44,000 households are eligible for either KDHAP or the DVP. NAA/NMHC are urging approval of the request, including one provision that would allow FEMA to pay for utility costs for apartment units leased under FEMA-funded city voucher programs “if the government has previously arranged to pay for such utilities” for the term of any leases.

FEMA ended funding for city voucher programs as of March 1 (April 1 in Texas), even though the agency had previously approved six- and 12-month leases. On February 24, the Agency signed an agreement in principle with Houston Mayor Bill White to continue funding for that city's 12-month voucher leases. However, the agreement says FEMA will not cover utilities that are billed separately from the rent after March 31, 2006 even though the Houston voucher leases include utility payments for all units. FEMA says it will reconsider that decision if the supplemental budget request is approved. NAA/NMHC will urge Congress to approve funding for continued utility payments.

  LIHTC GO Zone Designations. On February 24, HUD published a revised list of the

“difficult development areas” (DDA) for 2006 for the Low-Income Housing Tax Credit (LIHTC) program, adding additional areas affected by hurricanes Katrina, Rita and Wilma. DDAs are eligible for up to 30 percent more LIHTC subsidy. The hurricane-affected DDAs will remain in effect through the end of 2008 and are exempt from the 20 percent population cap on regular DDAs. The notice is available at www.huduser.org/Datasets/QCT/DDA2006_go_zone_Notice.pdf.

  Fair Market Rents. As a result of the loss of housing and tighter rental markets, HUD

has increased the FMRs in New Orleans by 35 percent, from $696 to $940 for a two-bedroom and in Baton Rouge by 25 percent, from $576 to $720. The Department says it believes the new FMRs are sufficient to cover current rent levels and at least part of the increases expected to result from higher insurance costs in the coming year. HUD says it will continue to monitor the situation in other Gulf Coast markets and is currently conducting rent surveys in Dallas, Houston, San Antonio, Little Rock, Jackson MS and Shreveport LA to determine if FMR increases are needed.

NEW REAL ESTATE BENCHMARKMIT's Center for Real Estate just released a new tool designed to provide a performance benchmark for real estate investors. Called the Transactions-Based Index of Institutional Commercial Property Investment Performance (TBI), it is based on data supplied by institutional investors to the National Council of Real Estate Investment Fiduciaries (NCREIF). Although NCREIF already produces a series of widely-used indexes, the underlying real estate values are a mixture of transactions and appraisals, dominated by the latter. There are a variety of technical problems with an appraisal-based index (in particular, it tends to lag actual market values and to diminish the swings in value that characterize market transactions). Last year, the TBI showed a 34 percent return for institutional real estate, the highest in the history of the series. (Although the index is new, it incorporates data going back to 1984.) The total return on apartments was 40

percent. By contrast, the NCREIF index (the current industry standard) showed apartments producing a total return of 20 percent in 2005. For more information on the index (including charts and data) see http://web.mit.edu/cre/research/credl/tbi.html.

IMMIGRATION REFORM Immigration reform, an issue with serious implications for apartment firms, has quickly become a hot topic in Congress and a priority issue for NAA/NMHC. Not only do immigration rules greatly influence the industry’s ability to hire qualified people to construct, maintain and operate properties, they also feed a diverse consumer pool that creates demand for apartments. The controversial issue requires lawmakers to balance border security with the nation’s economic growth and to come to a consensus on how to handle the approximately 11 million undocumented workers already in the country.

The first of March, the Senate Judiciary Committee began to consider Committee Chairman Arlen Specter’s (R-PA) proposal. Specter’s draft bill would give legal status to undocumented individuals that have continuously resided and worked in the U.S. since January 4, 2004. It would also create a new category of “H-2C” guest workers who would be permitted to work in this country for up to six years and then require them to return home for at least one year before reapplying. Meanwhile, another Senate bill (S. 1003) introduced last year would allow undocumented workers to stay in the U.S. under a guest worker program, pay a fine and wait six years before applying for permanent legal status.

The U.S. House of Representatives passed its version of immigration reform (H.R. 4437) last December. That bill does not include a guest worker program, and it includes an NAA/NMHC-opposed provision that would require all employers to verify the legal status of all new and existing employees using a federal electronic employment verification system. It would also raise the fines on employers for hiring undocumented workers from the current range of $250-$2,000 to $40,000. Specter’s bill would only require employers to check the legal status of new hires, but it would also double existing fines to range between $500 and $4,000 for first-time violations, and going as high as $20,000 for subsequent offenses. NAA/NMHC will continue to follow this issue and will strongly urge Congress to approve legislation that includes border security and a phased-in, cost-effective employment verification system as part of a comprehensive package that may also include a guest worker program.

TERRORISM INSURANCEThe Treasury Department, as chair of the President's Working Group on Financial Markets, is seeking comments on the long-term availability and affordability of terrorism risk insurance, including terrorism risk insurance coverage for group life and for chemical, nuclear, biological, and radiological events. The Terrorism Risk Insurance Extension Act (TRIEA) of 2005 (P.L. 109-144 ), enacted last December, requires the Working Group to develop recommendations for a long-term solution to this issue and report its findings to Congress by September 30, 2006. Enacting TRIEA, which extended for two years a scaled-back version of the federal terrorism backstop, was a top priority for NAA/NMHC last year to avoid the marketplace disruptions that occurred when terrorism insurance became largely unavailable or unaffordable after the 9/11 attacks. As members of the Coalition to Insure Against Terrorism, NAA/NMHC will submit comments to the Working Group urging them to maintain a federal role in terrorism insurance. More information is available at www.treasury.gov/press/releases/js4077.htm. 

May 2006

FHA PROPOSES MULTIFAMILY MORTGAGE INSURANCE PREMIUM INCREASE

The Bush Administration's FY 2007 budget proposes to increase the FHA multifamily mortgage insurance premium (MIP) by 32 basis points for most multifamily risk categories, except mortgages for projects with low-income housing tax credits and for risk-sharing programs for GSEs and housing finance agencies. In no case would the resulting premium exceed 80 basis points. NAA/NMHC and others have strenuously objected to the increase because it is not justified by added portfolio or program losses, but rather is designed solely to generate revenue for other programs.

Since FHA began basing the MIP on actual program losses three years ago, the premium has actually been reduced from 1 percent to 45 basis points. The proposed premium increase is particularly disturbing given the rocky history of the FHA program. For the past 10 years, the FHA multifamily (221(d)(3) and 221(d)(4)) insured loan programs have been self-sufficient. Until legislation was passed eliminating the need for Congressional appropriations of credit subsidy each year, the program was plagued by insufficient capacity that caused repeated and abrupt shutdowns, leaving many borrowers in limbo while FHA sought additional Congressionally-approved mortgage insurance authority. NAA/NMHC are working with members of the appropriations committees to eliminate the proposed MIP increase from the final budget.

CONGRESS AGAIN CONSIDERS FHA NO-DOWNPAYMENT MORTGAGES

On April 5, the House Financial Services Subcommittee on Housing and Community Opportunity held a hearing on a proposal by the U.S. Department of Housing and Urban Development (HUD) to revitalize the Federal Housing Administration (FHA). Among other things, the bill would eliminate the current three-percent downpayment requirement and allow FHA to use a risk-based approach to charge borrowers higher or lower premium rates, depending on their credit profiles. It would also significantly increase FHA loan limits and allow FHA to insure condominiums under its standard single-family product. NAA/NMHC sent a letter to Committee members objecting to the proposal, pointing out that FHA foreclosures at the end of 2004 were at their highest level ever, more than double the average for the past 21 years. Eliminating the downpayment requirement will only drive foreclosure rates higher.

We cautioned legislators to be careful not to oversell homeownership by turning the FHA into a subprime lender. Many families just assume that buying a house is a path to financial security, particularly when the federal government says that it is. But for too many households, the joys of homeownership have turned into an agony of onerous and unsustainable debt that harms their financial future. We do hard-working families a grave disservice when we encourage them to buy homes that they are not likely to be able to maintain or keep. The low- and moderate-income families targeted by this initiative are more likely to buy older houses that are more expensive to maintain and are located in struggling neighborhoods where price appreciation can be elusive. With no equity and little cash reserves, these households are often one paycheck away from financial disaster.

SUPPLEMENTAL SPENDING BILL INCLUDES HURRICANE RECOVERY FUNDING

The Senate is expected to vote on legislation (H.R. 4939) that would provide supplemental funding for hurricane recovery and the cost of the wars in Iraq and Afghanistan when it returns from its spring recess next week. The bill contains several provisions that could benefit apartment owners, and NAA/NMHC are urging our members to send a letter to their Senators supporting it. (A sample letter is posted at www.naahq.org/govern_affairs.) The measure passed the House of Representatives on March 16. Among other things, the bill would solve the problem of evacuees who had their utilities paid for under a FEMA-funded city voucher program, but who risk losing that support as FEMA ends the voucher programs and replaces them with individual rental assistance. The Stafford Act prevents FEMA from covering utility costs in its individual assistance programs. The Senate version of the bill also includes $1.2 billion for FEMA to fund alternatives to trailers for providing housing to evacuees. While public discussion of this provision has focused

on modular housing, the bill would provide FEMA with the flexibility to design other alternative housing programs, such as a program funding the rehabilitation of moderately damaged rental housing. (NAA/NMHC are working with a coalition of organizations to develop proposals to focus more FEMA funding on apartment rehabilitation activities.) The measure also provides $202 million for Section 8 vouchers, including at least $100 million for “project-based” vouchers, and $5.2 billion for the Community Development Block Grant (CDBG) program, with instructions that not less than $1 billion should be used for the repair, rehabilitation and reconstruction of the affordable rental housing stock.

ECONOMIC DEVELOPMENT BILL TARGETS HOUSING

Illinois is set to become the first state to intentionally link its economic development subsidies to jobs that are accessible by public transportation and/or are close to affordable housing. A "location-efficient" incentives law (SB 2885) passed by the state legislature has been sent to the governor for his signature. The bill allows the Department of Commerce and Economic Opportunity (DCEO) to slightly increase corporate income tax credits offered under Illinois's Economic Development for a Growing Economy (EDGE) program to companies that can prove a proposed project site is within easy reach of affordable workforce housing and/or public transportation. For such location-efficient sites, companies can receive up to 10 percent more EDGE tax credits than they would be otherwise eligible for (either a larger annual credit or a longer period). The measure is designed to encourage companies to make siting decisions that reduce sprawl and promote more affordable housing.

BROADBAND CONNECTIONS INCREASE

In a study with implications for apartment providers, the Federal Communications Commission’s latest semiannual report shows the that the number of high-speed Internet access lines in the U.S. increased 13 percent in the first half of 2005 and 32 percent for the full year ending June 30, 2005. With 42.9 million subscribers, the United States has more people connected to broadband than any other country. Of the 42.9 million total high-speed lines reported as of June 30, 2005, 38.5 million served primarily residential end users. Cable modem service represented 61 percent of lines, while 37.2 percent were DSL connections. The remainder of connections were delivered via traditional wireline connections, fiber to the premises or other technologies including satellite, wireless and electric power line. The FCC's report, High-Speed Services for Internet Access: Status as of June 30, 2005 is at http://hraunfoss.fcc.gov/edocs_public/attachmatch/DOC-264744A1.pdf.

FAIR HOUSING ANNUAL REPORT

In its annual fair housing report to Congress, the U.S. Department of Housing and Urban Development reports that disability discrimination passed race discrimination for the first time in 2005. HUD and the state and local agencies funded by HUD's Fair Housing Assistance Program (FHAP) report an eight percent rise in the number of complaints alleging housing discrimination against persons with disabilities. Complaints alleging disability discrimination made up 40 percent of the cases filed with HUD and its state and local partners. Allegations of discrimination based on race made up 38 percent of the cases and 22 percent of cases alleging that a housing provider refused to make a reasonable accommodation to their rules or procedures in order to assist a person with a disability. The full report, which can help housing providers understand HUD’s fair housing enforcement programs, is at www.hud.gov/offices/fheo/library/FY2005_Annual_Report.pdf.

June 2006Landlord Registration comes to Ohio, by invitation!

Due to the unrelenting pressure of various municipalities developing their own registration and inspection plans, and as a method to help address the problem landlords who hide behind contrived anonymity, the Ohio Apartment Association worked with several state Representatives and Senators to draft a bill based upon Arizona law that clearly delegates the authority of registration to County Auditors. With the House and Senate passing HB 294, we are waiting for the Governor to sign the bill (with no indication that he won’t). The result will be that local governments will be pre-empted from requiring registration and that the auditors will develop a database of this information. The Auditor’s agreed that the law makes sense as it will merely require another line or two in each multi-family properties’ computer file.

While we expect the initial uptake to be time consuming, the long term implications will be minor as the information will relayed to the Auditor upon the purchase of the property as part of the transaction. If you have a question on the language, which requires the name address and phone number of a specific contact, please see the GCNKAA website under legislation and articles, titled: “Ohio Landlord Registration Law.”

The City of Cincinnati:We are working with the City of Cincinnati, specifically Council Members Berding and Bortz regarding the development of a nuisance law to address problem properties – not just problem rental properties. Additionally, Council Members Crowley, Monzel, and Tarbell, as well as Mayor Mallory are working with GCNKAA on various aspects of industry concerns.

NEW NAA/NMHC WHITE PAPERS ON ACCESSIBILITY COMPLIANCE & OVERCOMING NIMBYISM

Accessibility White Paper. As civil rights groups continue to target large apartment firms with lawsuits alleging failure to comply with federal accessibility requirements, now more than ever, housing providers need to fully understand their obligations under the Fair Housing Act and the Americans with Disabilities Act. To help apartment firms understand their obligations, NAA/NMHC have published a new members-only white paper to guide the industry through the maze of federal rules, guidance and standards. Understanding Your Obligations: Accessibility Under The Fair Housing And Americans With Disabilities Acts reviews the most common misconceptions and violations; identifies existing safe harbor design standards; offers best practices for compliance; and reviews other federal accessibility laws. An appendix discusses the applicability of insurance coverage for accessibility-related claims. The white paper is posted at

www.naahq.org/govern_affairs/.  

From NIMBY to Good Neighbors. NAA/NMHC have published an updated version of their free white paper From NIMBY to Good Neighbors. The document is designed to help apartment firms overcome not-in-my-backyard (NIMBY) opposition to rental housing. The 10-page paper identifies various advocacy tools firms can employ to win approval for new communities. It also summarizes the growing body of academic research that refutes many of the common myths associated with rental housing, focusing primarily on the misconception that apartments cause nearby property values to decline. NAA/NMHC’s white paper, which includes links to all of the original research summarized in the report, is available at www.naahq.org/govern_affairs/.

APARTMENT MAILBOX STANDARDS CHANGEApartment firms are reminded that as of October 5, 2006, they must comply with new rules governing the size of wall-mounted mailboxes. The new rules were published on September 3, 2004 (69 FR 171) and were the result of nearly two years of negotiations between NAA/NMHC and the U.S. Postal Service. The regulations, which were widely disseminated by NAA/NMHC after they were finalized, represented a significant victory for the apartment industry. Thanks to our involvement, the USPS abandoned plans to require existing properties to retrofit to the new standard. It also extended the phase-in period from its initial proposal of six months to more than two years, giving developers sufficient time to design to the new standard.

The new standard, referred to as USPS Standard 4C, only applies to properties with building permits issued on or after October 5, 2006 and existing buildings that undergo a "substantial renovation" including structural alterations to the mailbox area. Standard 4C requires horizontally-oriented mailboxes that are at least 12" (width) x 15" (depth) x 3" (height). It also requires new properties with more than 10 units to install one parcel locker for every 10 mailboxes for packages and other oversized mail. Communities that offer concierge or other means of accepting packages may apply for a waiver.

After October 5, 2006, owners of existing buildings who replace mailboxes without undergoing a substantial renovation to the mailbox area must comply with Standard 4B+, which maintains the current size requirements but includes security enhancements. Current indications suggest that there will be an adequate supply of this type of mailbox. The regulations are available at www.naahq.org/govern_affairs/, and NAA/NMHC will issue a guidance memorandum with more information shortly.

TAX LEGISLATIONPresident Bush signed into law this past week a $70 billion tax reconciliation bill (H.R. 4297) supported by NAA/NMHC. (See http://waysandmeans.house.gov/MoreInfo.asp?section=4 for the full bill.) Among other things, the bill extends the reduced 15-percent top rates on capital gains and dividend income for two years through 2010, and extends for one year recent changes to the alternative minimum tax to prevent it from affecting more middle-income households. A provision permitting certain taxpayers to deduct the cost of Private Mortgage Insurance (PMI) premiums from their taxes for one year, which NAA/NMHC oppose as a costly and unnecessary new subsidy for homeownership, was not included in the final bill. However, this provision and many others removed from the original House and Senate bills, including a provision extending the immediate expensing of brownfields remediation costs, will be appraised in a second tax bill now under consideration.

NAA/NMHC TESTIFY TO PRESERVE RURAL RENTAL HOUSINGOn April 25, NAA/NMHC’s Jim Arbury testified before Congress on legislation (H.R. 5039) to preserve the 15,000 rural apartment properties and 460,000 apartment units financed through Section 515 of the Rural Housing Act. Among other things, the bill would: allow new financing for ailing properties; authorize a voucher program for residents of properties that prepay; and require owners to provide residents with detailed notices of prepayment. In his testimony, Arbury emphasized the need to preserve and improve as much of this housing as practical without overly

restricting an owner's right to sell an aging property to a third party. Of particular interest to NAA/NMHC members is a provision that would allow rental housing owners with loans originated before December 15, 1989 to prepay. Currently, regulations prohibit such owners from prepaying, forcing them instead to sue the government for damages. NAA/NMHC also urged for broader flexibility in second loans, grants and first mortgage payment provisions that would allow property owners to put much needed capital into these properties to make necessary repairs and renovations.

IRS RULES AGAINST NON-PROFIT DOWNPAYMENT ASSISTANCE GROUPSOn May 4, the IRS dealt a severe blow to organizations that provide downpayment assistance to home buyers (Revenue Ruling 2006-27). At issue is whether large non-profit groups, such as Nehemiah Corp. and AmeriDream, that provide cash assistance to home buyers who cannot afford minimum downpayments or closing costs should qualify as tax-exempt charities. In its ruling, the IRS said that if the groups are funded largely by home builders and other sellers, they will no longer qualify for tax-exempt status because the benefits of the programs go to profit-making entities. NAA/NMHC have long criticized the programs, arguing that they push families into unsustainable home ownership and increase the risk of foreclosure. According to a November 2005 report on the programs by the U.S. Government Accountability Office, homes bought with seller-funded non-profit assistance are twice as likely to go into default. In 2004, approximately 31 percent of FHA borrowers used downpayment assistance from a non-profit group, compared to 5.8 percent in 2000. (FHA rules state that borrowers can get assistance for a downpayment from a relative, employer or charity, but not directly from the seller.) NAA/NMHC see the ruling as another step toward establishing a more balanced housing policy.

FINAL DO-NOT-FAX RULES ADOPTEDOn April 5, the Federal Communications Commission (FCC) adopted final regulations implementing the Junk Fax Prevention Act of 2005. (See http://hraunfoss.fcc.gov/edocs_public/attachmatch/FCC-06-42A1.pdf.) They will become final 90 days after being published in the Federal Register. The law overrides earlier FCC regulations strenuously opposed by NAA/NMHC that would have required written permission before sending any commercial fax, including to prospects who had requested the information. The new law allows organizations to send unsolicited commercial faxes as long as they have an "established business relationship" (EBR) with the recipient. The FCC’s final rules codify the EBR exemption, but the FCC press release announcing them does not mention any plans to limit the duration of an established business relationship. The law authorizes the Commission, after a period of three months from the date of enactment of the statute, to consider such limits.

Even in the case of an EBR, a person sending a fax advertisement must obtain the fax number directly from the recipient or ensure that the recipient voluntarily agreed to make the number available for public distribution. The law, and the implementing regulation, require that faxes include an "opt-out" notice that gives recipients a cost-free way to decline future faxes. According to the rules, opt-out requests must be honored within the shortest reasonable period of time, not to exceed 30 days. NAA/NMHC will issued an updated guidance on the federal Do-Not-Fax regulations in the near future.

LIHTC RULINGOn April 25, the Internal Revenue Service (IRS) published an internal memorandum establishing criteria for granting tax-exempt status to organizations that want to serve as general partners in Low-Income Housing Tax Credit (LIHTC) partnerships. The memo resolves long-standing concerns and questions involving housing organizations participating in partnerships that provide tax credits. The full document is available at www.irs.gov/pub/irs-tege/urbanmemo42406.pdf.