Free Memorandum of Contentions of Fact and Law - District Court of Federal Claims - federal

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Nos. 04-805C, 04-806C (consolidated) (Judge Lettow) ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS STATESMAN II APARTMENTS, INC., Plaintiffs, v. THE UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW ______________________________________________________________________________

PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: C. ALLEN VILLAFUERTE Trial Attorney Office of General Counsel Department of Housing and Urban Development Washington, DC JOHN E. KOSLOSKE Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 1100 L Street, N.W., Room 8012 Washington, D.C. 20530 Tele: (202) 307-0282 (FAX)(202) 514-8624 Attorneys for Defendant MARCH 31, 2006

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TABLE OF CONTENTS TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW . . . . . . . . . . . 1 I. II. Nature Of The Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Section Housing Assistance Payments Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A. B. The Section 8 Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Section 8 HAP Programs For New Construction And Substantial Rehabilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Fair Market Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Initial HAP Contract Rents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (1) (2) HUD Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 HUD Handbooks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (a) HUD Handbook 7420.1 CHG (May 1978) (Section 8 HAP Program New Construction Processing Handbook) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (i) (ii) (iii) Fair Market Rent Limitation . . . . . . . . . . . . . . . . . . . . . . . 8 Reasonableness Of Rents . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Special Additional Adjustments to the Comparable Rent For A Unit Type . . . . . . . . . . . . . . . . . 11 File Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Correlation of Rental Values . . . . . . . . . . . . . . . . . . . . . . 12 Comparison of Proposed Rents and Market Rental Values . . . . . . . . . . . . . . . . . . . . . . . . 13

C. D.

(iv) (v) (vi)

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TABLE OF CONTENTS (CONT'D) (b) HUD Handbook 7420.2 CHG (May 1978) (Section 8 HAP Program Substantial Rehabilitation Processing Handbook) . . . . . . . . . . . . . . . . . . . . . 13 (i) (ii) (iii) Fair Market Rent Limitation . . . . . . . . . . . . . . . . . . . . . . 13 Reasonableness Of Rents . . . . . . . . . . . . . . . . . . . . . . . . . 14 Special Additional Adjustments to the Comparable Rent For A Unit Type . . . . . . . . . . . . . . . . . 15 File Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Correlation of Rental Values . . . . . . . . . . . . . . . . . . . . . . 17 Comparison of Proposed Rents and Market Rental Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

(iv) (v) (vi)

E. F. G.

Rent Subsidy Payments Under The Section 8 HAP Program . . . . . . . . . . . . . . . 18 Annual Rent Adjustments Under The Owners' HAP Contracts . . . . . . . . . . . . . 18 The Initial Differences To Be Preserved In Applying The Rent Comparability Limitation To Rent Adjustments . . . . . . . . . . . . . . . . . 20 The 1994 Amendments To The Section 8 Statute . . . . . . . . . . . . . . . . . . . . . . . . 23 HUD's Implementation Of The 1994 Amendments To The Section 8 Statute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

H. I.

III.

Contentions Of Fact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 A. Fair Market Rents ­ Newly-Constructed Rental Housing (1979-1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Fair Market Rents ­ Existing Rental Housing (1998-2001) . . . . . . . . . . . . . . . . 27 Contract Rent Annual Rent Adjustment Factors . . . . . . . . . . . . . . . . . . . . . . . . . 27 Statesman Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 -ii-

B. C. D.

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TABLE OF CONTENTS (CONT'D) E. IV. V. Lakeshore Village . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

The Court's Decision Upon The Parties' Cross Motions for Summary Judgment . . . . . 36 Contentions Of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 A. B. C. D. E. Initial Difference To Be Preserved In Contract Rent Adjustments . . . . . . . . . . . 37 Initial Differences For The Statesman II HAP Contract . . . . . . . . . . . . . . . . . . . 42 Initial Differences For The Beach House HAP Contract . . . . . . . . . . . . . . . . . . . 42 Expiration Of The Beach House HAP Contract . . . . . . . . . . . . . . . . . . . . . . . . . 44 Owners' Claim Pertaining To Contract Years 1995, 1996, And 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Response To Owners' Contention That There Is No Need For A Trial In This Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 The Cost Of Rent Comparability Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

F.

G.

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TABLE OF AUTHORITIES CASES Asociacion Colombiana de Exportadores v. United States, 903 F.2d 1555 (Fed. Cir. 1990) ....................................................................................... 41 Barrington Manor Apartments Corp. v. United States, 198 Ct. Cl. 298, 459 F.2d 499 (1972) ............................................................................. 41 Bluebonnet Savings Bank v. United States, 339 F.3d 1341 (Fed. Cir. 2003) ....................................................................................... 46 Bowles v. Seminole Rock & Sand Co., 325 U.S. (l945) ............................................................................................................... 41 Chris Berg, Inc. v. United States, 192 Ct. Cl. 176, 426 F.2d 314 (1970) ............................................................................. 50 Cisneros v. Alpine Ridge Group, 508 U.S. 10 (1993) .............................................................................................. 47, 48, 49 Cuyahoga Metropolitan Housing Authority v. United States, 57 Fed. Cl. 751 (2003) .................................................................................................... 53 Cuyahoga Metropolitan Housing Authority v. United States, 65 Fed. Cl. 534 (2005) .................................................................................................... 53 Federal Housing Administration v. The Darlington, Inc., 358 U.S. 84 (1958) .......................................................................................................... 52 Federal Housing Partners IV v. Cisneros, 55 F.3d 362 (8th Cir. 1995) ....................................................................................... 48,49 Graham Oil Co. v. ARCO Products, Inc., 43 F.3d 1244 (9th Cir. 1994) .................................................................................... 49, 50 Hart v. United States, 218 Ct. Cl. 212, 585 F.2d 1025 (1978) ........................................................................... 52 Hills Transportation Co. v. United States, 204 Ct. Cl. 51, 492 F.2d 1394 (1974) ............................................................................. 50

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TABLE OF AUTHORITIES (CONT'D) CASES (CONT'D) Home Building & Loan Ass'n v. Blaisdell, 290 U.S. 398 (1934) ........................................................................................................ 50 Honeywell, Inc. v. United States, 228 Ct. Cl. 591, 661 F.2d 182 (1981) ....................................................................... 41, 42 ITT Industries, Inc. v. Rayonier, Inc., 2005 WL 1744988 (S.D.N.Y.) .................................................................................. 50, 51 Indiana Michigan Power Co. v. United States, 422 F.3d 1369 (Fed. Cir. 2005) ....................................................................................... 46 LaSalle Tallman Bank v. United States, 317 F.3d 1363 (Fed. Cir. 2003) ....................................................................................... 47 Mayflower Transit Co. v. United States, 162 Ct. Cl. 233 (1963) ..................................................................................................... 38 National Leased Housing Ass'n v. United States, 105 F.3d 1423 (Fed. Cir. 1997) ....................................................................................... 20 National Leased Housing Ass'n v. United States, 22 Cl. Ct. 649 (1991) ......................................................................................................... 6 Park Village Apartments v. United States, 32 Fed. Cl. 441 (1994), aff'd, 152 F.3d 943 (Fed. Cir.) (Table), cert. denied, 525 U.S. 962 (1998) ....................................................................... 20, 43, 44 Port Authority of St. Paul v. United States, 193 Ct. Cl. 108, 432 F.2d 455 (1970) .............................................................................. 41 Rainier View Associates v. United States, 848 F.2d 988 (9th Cir. 1988), cert. denied, 490 U.S. 1066 (1989) ................................. 48 Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 (1969) ........................................................................................................ 52 Robertson v. Methow Valley Citizens Council, 490 U.S. 332 (1989) ........................................................................................................ 41 -v-

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TABLE OF AUTHORITIES (CONT'D) CASES (CONT'D) Santa Fe Engineers, Inc. v. United States, 80l F.2d 379 (Fed. Cir. l986) .......................................................................................... 42 Seaboard Lumber Co. v. United States, 19 Cl. Ct. 310 (1990) ....................................................................................................... 42 S.J. Amoroso Construction Co., Inc. v. United States, 26 Cl. Ct. 759 (1992), aff'd, 12 F.3d 1072 (Fed. Cir. 1993) ........................................... 41 Statesman II Apartments, Inc. v. United States, 66 Fed. Cl. 608 (2005) ..................................................................................... 36,37,39,46 Torrance v. AAMES Funding Corp., 242 F.Supp.2d 862 (D. Or. 2002) ............................................................................. 49, 50 Udall v. Tallman, 380 U.S. 1 (1965) ............................................................................................................ 41 United States v. Price, 361 U.S. 304 (1960) ........................................................................................................ 53 Von Hoffman v. City of Quincy, 71 U.S. (4 Wall.) 535 (1866) .......................................................................................... 50 Winston Bros. Co. v. United States, 198 Ct. C l. 37, 458 F.2d 49 (1972) ................................................................................ 50 STATUTES United States Code: 12 U.S.C. § 1715l(d)(4)) ....................................................................................................... 30, 33 42 U.S.C. § 1437a(a) (1994) .........................................................................................................18 42 U.S.C. § 1437a(b)(6)(A) (2000) ............................................................................................... 4 42 U.S.C. § 1437f ................................................................................................................... 2, 46 42 U.S.C. § 1437f(a) (Supp. IV 1974) .......................................................................................... 2 -vi-

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TABLE OF AUTHORITIES (CONT'D) STATUTES (CONT'D) United States Code (cont'd): 42 U.S.C. § 1437f(a) (Supp. IV 1974) .......................................................................................... 2 42 U.S.C. § 1437f(c)(1) (Supp. IV 1974) ............................................................................. 3, 5, 6 42 U.S.C. § 1437f(c)(1) (Supp. IV 1974) ..................................................................................... 3 42 U.S.C. § 1437f(c)(2)(A) (2000) ...............................................................................................36 42 U.S.C. § 1437f(c)(2)(A) (2000) ...............................................................................................23 42 U.S.C. § 1437f(c)(2)(A) (1994) .........................................................................................23, 24 42 U.S.C. § 1437f(c)(3)(A) (1994) ............................................................................................. 18 42 U.S.C. § 1437f(c)(2)(C) .....................................................................................................36, 46 42 U.S.C. § 1437f(c)(2)(C) (Supp. IV 1974) ................................................................................50 Public Laws: Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1995, Pub. L. No. 103-327, 108 Stat. 2298 ................................................................................23 Housing and Community Development Act of 1974, § 201(a), Pub. L. No. 93-383, 88 Stat. 633, 653-67 (1974) .............................................................. 2 Housing and Community Development Act of 1987, § 142(c)(2)(B), Pub. L. No. 100-242, 101 Stat. 1850 (1988) ............................................................. 51, 52 Housing and Urban-Rural Recovery Act of 1983, § 209(a)(1), Pub. L. No. 98-181, 97 Stat. 1155, 1183 (1983) ............................................................... 2 Petroleum Marketing Practices Act, 15 U.S.C. §§ 2801-2806 .................................................... 50

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TABLE OF AUTHORITIES (CONT'D) REGULATIONS Code of Federal Regulations: 24 C.F.R. § 813.102 (1994) ........................................................................................................ 25 24 C.F.R. Part 880 (1979) ............................................................................................................. 3 24 C.F.R. § 880.102 (1979) ................................................................................................. passim 24 C.F.R. § 880.108 (1979) ................................................................................................ 7, 8, 38 24 C.F.R. § 880.108(a) (1979) .................................................................................................... 14 24 C.F.R. § 880.108(b) (1979) .................................................................................................... 38 24 C.F.R. § 880.109(b) (1979) .................................................................................................... 45 24 C.F.R. § 880.109(c) (1979) .................................................................................................... 44 24 C.F.R. § 880.110(d) (1979) .............................................................................................. 20, 50 24 C.F.R. § 880.201 (1994) ........................................................................................................ 18 24 C.F.R. § 880.203(a) .................................................................................................................. 4 24 C.F.R. § 880.203(c)(4) ............................................................................................................. 4 24 C.F.R. § 880.208(h) (1979) ...................................................................................................... 4 24 C.F.R. § 880.210(c)(1) (1979) ................................................................................................. 4 24 C.F.R. § 880.211(a) (1979) ...................................................................................................... 4 24 C.F.R. § 880.211(b) (1979) ...................................................................................................... 4 24 C.F.R. § 880.216(d) (1979) ...................................................................................................... 4 24 C.F.R. § 880.217(a) (1979) ...................................................................................................... 5 24 C.F.R. § 880.501(d)(1) (1994) .................................................................................................18

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TABLE OF AUTHORITIES (CONT'D) REGULATIONS (CONT'D) Code of Federal Regulations (cont'd): 24 C.F.R. Part 881 (1979) .............................................................................................................. 7 24 C.F.R. § 881.102 (1979) .......................................................................................... 3, 4, 14, 25 24 C.F.R. § 881.108(a) (1979) .............................................................................................. 14, 29 24 C.F.R. § 881.108(b) (1979) .................................................................................................... 38 24 C.F.R. § 881.110(d) (1979) .............................................................................................. 20, 50 24 C.F.R. § 881.201 (1994) ........................................................................................................ 18 24 C.F.R. § 881.203(a) (1979) ...................................................................................................... 4 24 C.F.R. § 881.203(c)(4) (1979) ................................................................................................. 4 24 C.F.R. § 881.208(h) (1979) ........................................................................................................4 24 C.F.R. § 881.210(c)(1) (1979) ................................................................................................. 4 24 C.F.R. § 881.211(a) (1979) ...................................................................................................... 4 24 C.F.R. § 881.211(b) (1979) ...................................................................................................... 4 24 C.F.R. § 881.216(d) (1979) ...................................................................................................... 4 24 C.F.R. § 881.217(a) (1979) ...................................................................................................... 5 24 C.F.R. § 888.203(b) (1994) .................................................................................................... 19 Federal Register: 42 Fed. Reg. 60508 (11/25/77) ................................................................................................... 19 44 Fed. Reg. 21769 (4/12/79) ..................................................................................................... 19 45 Fed. Reg. 2560 (1/11/80) ....................................................................................................... 27

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TABLE OF AUTHORITIES (CONT'D) REGULATIONS Federal Register (cont'd): 45 Fed. Reg. 58064 (8/29/80) ..................................................................................................... 27 46 Fed. Reg. 57860 (11/25/81) ................................................................................................... 27 46 Fed. Reg. 63256 (12/31/81) ................................................................................................... 27 63 Fed. Reg. 51224-51247 (9/24/98) ........................................................................................... 28 63 Fed. Reg. 52898 (10/1/98) ..................................................................................................... 27 64 Fed. Reg. 53490 (10/1/99) ..................................................................................................... 27 64 Fed. Reg. 72730-72754 (12/28/99) ......................................................................................... 28 65 Fed. Reg. 57698 (9/25/00) ..................................................................................................... 27 65 Fed. Reg. 66888-66912 (11/7/00) ........................................................................................... 28 66 Fed. Reg. 50065 (10/1/99) ..................................................................................................... 27 66 Fed. Reg. 59052-59078 (11/26/01) ......................................................................................... 28 68 Fed. Reg. 3116-3140 (1/22/03) ............................................................................................... 28 MISCELLANEOUS HUD Handbook 7420.1 CHG (May 1978) ........................................................................... passim HUD Handbook 7420.1 REV-1 (Feb. 1981) ............................................................................. 7, 8 HUD Handbook 7420.2 CHG (May 1978) ........................................................................... passim Notice H 95-12 (HUD) (3/7/95) ........................................................................................... passim Notice H 97-14 (HUD) (3/17/97) ................................................................................................ 24 Notice H 998-3 (HUD) (1/23/98) ................................................................................................ 24

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TABLE OF AUTHORITIES (CONT'D) MISCELLANEOUS (CONT'D) Notice H 99-17 (HUD) (7/8/99) ................................................................................................ 24 Notice H 00-14 (HUD) (8/9/00) ................................................................................................ 24 Notice H 2002-10 (HUD) (5/17/02) ........................................................................................... 24

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IN THE UNITED STATES COURT OF FEDERAL CLAIMS STATESMAN II APARTMENTS, INC., et al., Plaintiffs, v. THE UNITED STATES, Defendant. ) ) ) ) Nos. 04-805C, 04-806C (consolidated) ) ) (Judge Lettow) ) ) )

DEFENDANT'S MEMORANDUM OF CONTENTIONS OF FACT AND LAW Pursuant to ¶ 14(b) of Appendix A to the Rules of the Court of Federal Claims and ¶ 3 of the Court's September 2, 2005 Scheduling Order, defendant, the United States, respectfully submits the following contentions of fact and law:1/ I. Nature Of The Case

In this consolidated proceeding, plaintiffs, Statesman II Apartments, Inc. (Statesman II) and Beach House Development Company (Beach House) (collectively "the Owners"), own lowincome rental housing projects in the Cleveland, Ohio area. The rents of the low-income tenants in these housing projects were subsidized by the Government through rent subsidy agreements between the Owners and the Government known as "Housing Assistance Payments Contracts" (HAP contracts). The Owners seek damages for alleged breaches of these contracts based upon the failure of HUD to adjust the contract rents annually on the contract anniversary dates ­ for the years 1995-2000, in the case of Statesman II, and for the years 1995-2002, in the case of Beach

In this memorandum of contentions of fact and law, "Stip. ¶ ____" refers to the referenced paragraph(s) of the "Joint Stipulations of Fact ­ Corrected Copy" deemed by the Court's March 21, 2006 Order to have been filed on March 24, 2006; "Pl. Mem. ____" refers to the referenced page(s) of "Plaintiffs' Memorandum of Contentions of Fact and Law" dated March 10, 2006.

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House. Statesman II seeks $63,000 in damages and Beach House seeks $384,000 in damages. Statesman II Compl., at 6; Beach House Compl., at 6. II. A. The Section Housing Assistance Payments Program The Section 8 Statute

Section 8 of the United States Housing Act of 1937, as amended (42 U.S.C. § 1437f) (the Section 8 statute),2/ creates a statutory scheme pursuant to which the United States, through the Department of Housing and Urban Development (HUD), directly or indirectly subsidizes the rents of low-income individuals and families living in privately-owned buildings. This litigation concerns claims by owners of "newly constructed" or "substantially rehabilitated" housing with respect to which, at all relevant times, the Section 8 statute provided that "assistance payments" "may be made . . . in accordance with the provisions" of that statute for "the purpose of aiding lower-income families in obtaining a decent place to live and of promoting economically mixed housing." 42 U.S.C. § 1437f(a) (Supp. IV 1974).3/ As originally enacted and at the time the Owners' HAP contracts were executed, the Section 8 statute specified that "[a]n assistance contract entered into pursuant to this section shall establish the maximum monthly rent (including utilities and all maintenance and management charges) which the owner is entitled to receive for each dwelling unit to which such assis2

Section 8 was enacted as part of section 201(a) of the Housing and Community Development Act of 1974, Pub. L. No. 93-383, 88 Stat. 633, 653-67 (1974), which amended the United States Housing Act of 1937 in this and other respects. In 1983, Congress amended 42 U.S.C. § 1437f(a) by repealing the Section 8 "newly constructed, and substantially rehabilitated" programs, but grandfathering existing Section 8 New Construction and Substantial Rehabilitation HAP projects, such as the Owners' projects in this case, as being subject to the Section 8 laws. See section 209(a)(1) of the Housing and UrbanRural Recovery Act of 1983, Pub. L. No. 98-181, 97 Stat. 1155, 1183 (1983). -23

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tance payments are to be made." 42 U.S.C. § 1437f(c)(1) (Supp. IV 1974). In addition, section 8(c)(2) provided, in part, with respect to the adjustment of contract rents: (A) The assistance contract shall provide for adjustment annually or more frequently in the maximum monthly rents for units covered by the contract to reflect changes in the fair market rentals established in the housing area for similar types and sizes of dwelling units or, if the Secretary determines, on the basis of a reasonable formula. * * * * *

(C) Adjustments in the maximum rents as hereinbefore provided shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Secretary. 42 U.S.C. § 1437f(c)(2) (Supp. IV 1974). B. The Section 8 HAP Programs For New Construction And Substantial Rehabilitation

HUD implemented the Section 8 statute through several housing assistance programs established by regulations, including project-based rent subsidy programs addressed to "newly constructed" and "substantially rehabilitated" rental housing projects, such as Lakeshore Village ("newly constructed") and Statesman Apartments ("substantially rehabilitated") in the this case. See 24 C.F.R. Part 880 (1979) ("Section 8 Housing Assistance Payments Program for New Construction"); 24 C.F.R. Part 881 (1979) ("Section 8 Housing Assistance Payments Program for Substantial Rehabilitation"4/). Under each program, proposals were solicited for the construction

"Substantial Rehabilitation" is defined as "[t]he improvement of a property to Decent, Safe, and Sanitary condition and in accord with HUD requirements from a condition requiring more than routine or minor repairs or improvements of such extent as to necessitate execution of an [Agreement to Enter a HAP Contract] prior to the performance of the work" and it "may vary in degree from gutting and extensive reconstruction to cosmetic improvements coupled with cure of substantial accumulation of deferred maintenance." 24 C.F.R. § 881.102 (1979). -3-

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or rehabilitation of housing the rents for which would be subsidized under agreements entered into pursuant to the Section 8 statute.5/ Upon HUD's selection and approval of a proposal,6/ the owner (developer) and HUD or a "public housing agency,"7/ as the case may be, would execute an "Agreement to Enter into a Housing Assistance Payments Contract" (AHAP), "a written agreement between the Owner and HUD that, upon satisfactory completion of the housing in accordance with the HUD-approved Final Proposal, HUD will enter into a [HAP contract] with the Owner." 24 C.F.R. §§ 880.102, 881.102 (1979) ("Agreement" defined); see also 24 C.F.R. §§ 880.214, 881.214 (1979). Upon the owner's completion and HUD's acceptance of the project,8/ the owner (developer) and HUD

HUD would issue a Notification of Fund Availability (NOFA), inviting proposals from developers. 24 C.F.R. §§ 880.203(a),(c)(4), 881.203(a),(c)(4) (1979). In response to a NOFA, a developer would submit a Preliminary Proposal containing basic information about the proposed project, including, among other things, a description of the proposed housing, contract rent by unit type, equipment to be included in the contract rent, and utilities and services to be included in the contract rent. Id., §§ 880.205(c)-(f), 881.205(c)-(f). HUD would send a Notification of Selection to a developer whose Preliminary Proposal HUD selected, requesting that the developer submit a Final Proposal. 24 C.F.R. §§ 880.208(h), 881.208(h) (1979). Upon HUD's notification to the developer of its approval that the Final Proposal and the developer's acceptance of such notification, id., §§ 880.210(c)(1), 880.211(a); 881.210(c)(1), 881.211(a), the developer would provide HUD with an architect's certification that the working drawings and specifications for the project were consistent with the Final Proposal and permissible under applicable local regulations, along with a certified copy of the working drawings and specifications. Id., §§ 880.211(b), 881.211(b). A "public housing agency" is defined as "any State, county, municipality, or other governmental entity or public body (or agency or instrumentality thereof) which is authorized to engage in or assist in the development or operation of public housing." 42 U.S.C. § 1437a(b)(6)(A) (2000). "If HUD determines from the review and inspection that the project has been completed in accordance with the [AHAP], the project shall be accepted." 24 C.F.R. §§ 880.216(d), 881.216(d) (1979). -48 7 6

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would enter a HAP contract. Id., §§ 880.217(a), 881.217(a). C. Fair Market Rents

The Section 8 statute required that HUD publish periodically but not less than annually in the Federal Register "fair market rentals" established by HUD for "existing or newly constructed rental dwelling units" of "various sizes and types in the market area suitable for occupancy by persons assisted under this section." See 42 U.S.C. § 1437f(c)(1) (Supp. IV 1974). The Section 8 New Construction HAP Program regulations defined "fair market rent" as follows: The rent, including utilities (except telephone), ranges, refrigerators, parking, and all maintenance, management, and other services, which, as determined at least annually by HUD, would be required to be paid in order to obtain privately developed and owned, newly constructed rental housing of modest (non-luxury) nature with suitable amenities and sound architectural design meeting the objectives of the HUD Minimum Property Standards. 24 C.F.R. § 880.102 (1979). The regulations further provided: Separate Fair Market Rents will be established for dwelling units by various sizes (number of bedrooms) and types (e.g., elevator, row, detached, mobile homes; housing designed for the elderly or handicapped shall be a separate type for this purpose). The Fair Market Rents will be published in the FEDERAL REGISTER, and, in order to allow for the period of construction, computation of the published Fair Market Rents will include HUD's estimate of anticipated rent increases during an appropriate future period as stated in the publication. Accordingly, for any given project for which the scheduled construction time will be less than such future period, an appropriate reduction will be made in determining the approvable Contract Rent. Id. The fair market rents published by HUD periodically in the Federal Register are not to be confused with comparable unassisted rents for dwelling units covered by HAP contracts. As

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the court in National Leased Housing Ass'n v. United States, 22 Cl. Ct. 649 (1991), observed: The market survey HUD uses to establish [fair market rents] . . . differs from the survey its uses when performing a comparability study. Inter alia, the comparability study involves substantially fewer units and a smaller geographic area and is not limited to the use of recently constructed or substantially rehabilitated buildings. In addition, the comparability study sets rents based upon actual as opposed to "trended" rents. Id. at 657-58. D. (1) Initial HAP Contract Rents HUD Regulations

Under the regulations governing the Section 8 New Construction and Substantial Rehabilitation HAP Programs, the initial HAP contract rents were subject to the Fair Market Rent limitation established by the Section 8 statute9/ and a "rent reasonableness" test: (a) Fair Market Rent Limitation. The sum of the Initial Contract Rent[10/] and any Allowance for Utilities and Other Services[11/] for

The Section 8 statute provided that a HAP contract "establish the maximum monthly rent (including utilities and all maintenance and management charges) which the owner is entitled to receive for each dwelling unit with respect to which such assistance payments are to be made" and it imposed the following limitation upon that rent: "The maximum monthly rent shall not exceed by more that 10 per centum the fair market rental established by the Secretary periodically but not less than annually for existing or newly constructed rental dwelling units of various sizes and types in the market area suitable for occupancy by persons assisted under this section, except that the maximum monthly rent may exceed the fair market rental (A) by more than 10 but not more than 20 per centum where the Secretary determines that special circumstances warrant such higher maximum rent or that such higher rent is necessary to the implementation of a local housing assistance plan as defined in section 213(a)(5) of the Housing and Community Development Act of 1974." 42 U.S.C. § 1437f(c)(1) (Supp. IV 1974). "Contract Rent" is "[t]he rent payable to the Owner under [the HAP contract] including the portion of the rent payable by the Family." 24 C.F.R. § 880.102 (1979).
11 10

9

The "Allowance for utilities and other services" is "[a]n amount determined by HUD as (continued...) -6-

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any unit shall not exceed the Fair Market Rent for newly constructed rental housing, except that it may be exceeded (1) by up to 10 percent if the field office director determines that special circumstances warrant such higher rent and the higher rent meets the test of reasonableness in paragraph (b) of this section, or (2) by up to 20 percent, where the Regional Administrator determines that special circumstances warrant such higher rent or determines that such higher rent is necessary to the implementation of a Local Housing Assistance Plan, and that such higher rent meets the test of reasonableness in paragraph (b) of this section. (b) Reasonableness of Rents. In any case, the Contract Rent as proposed must be determined by HUD to be reasonable in relation to the quality, location, amenities, and management and maintenance services of the project, and any proposed rent shall be subject to reduction if it is found to be higher than such reasonable rent. Appropriate reductions to reflect any savings where tax-exempt financing is involved may be made. 24 C.F.R. § 880.108 (1979). The initial HAP contract rents under the Section 8 Substantial Rehabilitation HAP Program were subject to the same restrictions. See id., § 881.108. (2) (a) HUD Handbooks HUD Handbook 7420.1 CHG (May 1978) (Section 8 HAP Program New Construction Processing Handbook)

Chapter 9 of the Section 8 HAP Program New Construction Processing Handbook contained valuation processing instructions for proposals submitted by developers for Section 8 New Construction HAP projects. The May 1978 version of this handbook applied to the proposal for Lakeshore Village submitted by Beach House. See HUD Handbook 7420.1 CHG (May 1978).12/

(...continued) an allowance for the cost of utilities (except telephone) and charges for other services payable directly by the Family." 24 C.F.R. § 880.102 (1979). In February 1981, HUD issued Handbook 7420.1 REV-1 ("Section 8 Housing Assistance Payments Program ­ New Construction Processing"). This handbook also contained a chapter 9 (continued...) -712

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(i)

Fair Market Rent Limitation

The Section 8 HAP Program New Construction Processing Handbook required that the HUD appraiser determine whether the gross rents proposed for a project were "within the bounds permitted by the applicable Fair Market Rents (FMR)." HUD Handbook 7420.1 CHG, ¶ 9-2b.13/ In the case of "non-elderly dwelling units," the Gross Rents may not exceed the published FMR, "except that the Gross Rents may in some circumstances be permitted to exceed FMR by up to 10% (prerogative of the Field Office Director) or by up to 20% (prerogative of the Regional Administrator) as provided in [24 C.F.R. § 880.108(a)]." Id. In the case of 0-, 1-, and 2-bedroom dwelling units designed for occupancy by the elderly/handicapped, the Gross Rents may not exceed 1.05 times the published FMR. For such units, exercise of the 10% or 20% prerogatives would allow the Gross Rents to exceed the published FMR by as much as 15.5% (1.05 x 1.10 1.00) or by as much as 26% (1.05 x 1.20 - 1.00). Id.

(...continued) that was addressed to "Valuation Processing Instructions for Review of Proposals." But HUD Handbook 7420.1 REV-1 only applied to the processing of proposals for projects that were subject to the revised regulations for the Section 8 New Construction Program effective on November 5, 1979, codified at 24 C.F.R. Part 880 (1980). As for projects for which HUD issued Notifications of Selection (NOS) prior to November 5, 1979, such as the NOS for Lakeshore Village issued by HUD on September 12, 1977, HUD Handbook 7420.1 REV-1 provided that "[t]he development provisions of the revised regulation do not apply to projects for which Notifications of Selection were issued prior to November 5, 1979," and that, "[a]ccordingly, the previous edition of the Section 8 New Construction Processing handbook will continue to apply to the processing of such projects." HUD Handbook 7420.1 REV-1, chapter 1, ¶ 1-2. "Gross Rent" was defined as "[t]he Contract Rent plus any Allowance for Utilities and Other Services." 24 C.F.R. § 880.102 (1979). -813

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(ii)

Reasonableness Of Rents

The Section 8 HAP Program New Construction Processing Handbook provided that "Contract Rents approved for new dwelling units assisted under Section 8, must, in addition to compliance with the FMRLs, be determined by HUD to be reasonable in relation to the quality, location, amenities, and management and maintenance services of the project." HUD Handbook 7420.1 CHG, ¶ 9-2c(4). "Regardless of the level of the FMRs, rents shall not be increased beyond the lower of the rents determined to be reasonable by HUD or the rents proposed to be charged by the developer in his/her initial proposal; except, as otherwise provided in [24 C.F.R. § 880.209(b)14/] or when repatterning of the rents is required (see paragraph 9-3n(2))." Id., ¶ 92c(5). The HUD field office's Valuation Staff was to "assess the reasonableness of rents" for a proposed Section 8 project and that this entailed "the comparison of the proposed unit rents with the rents obtainable in the market for comparable units, which provide equivalent living accommodations and services, without benefit of public housing assistance or other subsidy." Id., ¶ 93a. The Handbook required that "[a]n estimate of the market rental value of each proposed Section 8 dwelling unit must be made by the appraiser" and further provided: Section 880.209(b) provided, in pertinent part, that "the Owner may request, with the submission of his Final Proposal or architect's certification, an increase in Contract Rents over those approved in the Preliminary Proposal; and HUD, in its discretion, may approve such an increase if HUD determines" that: (1) the need for increased rents is due to factors beyond the Owner's control which the Owner reasonably could not have foreseen or an erroneous finding by HUD as to reasonableness of rents because of increases in construction costs, real property taxes, utility rates, or similar costs that exceed the costs taken into account by HUD in determining the reasonableness of the Contract Rents proposed in the Preliminary Proposal; (2) the requested rents are reasonable; (3) the contract authority for the allocation area was sufficient to select all approvable Preliminary Proposals or HUD determines that "the Preliminary Proposal clearly would have been selected even without regard to any weight being given by reason of its rents;" and (4) the requested rents do not exceed the Fair Market Rent Limitations in effect at the time of HUD's decision upon the request for rent increases. -914

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Where differences between units of the same size by bedroom count are minimal, an estimate of the rental value of one of the units may serve as a benchmark for the purpose of estimating the rental value of the other units of that size by bedroom count. In estimating market rental values, the appraiser should not be influenced by the currently applicable Schedules of Fair Market Rents. The appraiser shall respond separately to the question concerning reasonableness of rents and the question of compliance with Fair Market Rent limits. Whereas Fair Market Rents are gross rents which include utilities, ranges and refrigerators, parking, and all maintenance and management services, the estimates of market rental values will reflect only the utilities, equipment, and services which are expected to be furnished at the owner's expense. Id., ¶ 9-3d (emphasis in original). HUD Handbook 7420.1 CHG provided that, for the purpose of evaluating the reasonableness of proposed rents, the HUD appraiser could obtain rent comparables by unit type "from recently constructed rental housing, either conventionally financed or insured by HUD under the non-subsidized [housing programs]." Id., ¶ 9-3e. The "estimate of rental value" for a unit size and type was "preferably [to] be based on five market rent comparables, but in no event shall an estimate be based on fewer than three market rent comparables." Id. The HUD appraiser was to make adjustments to the rents charged for rent comparables to reflect "significant differences between each comparable unit and the subject unit, taking into consideration such things as location, age, condition, size of units (overall square feet), number and furnishability of rooms, equipment, amenities (including special design features for the elderly/handicapped), utilities and services included in the rent, quality, management and maintenance services, and all other significant differences the appraiser notes." Id., ¶ 9-3f.15/
15

The HUD appraiser also was required to make a "time and trend adjustment" to the market rent "to reflect anticipated changes, if any, from the effective date of each comparable rent to the (continued...) -10-

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(iii)

Special Additional Adjustments to the Comparable Rent For A Unit Type

HUD Handbook 7420.1 CHG mandated special additional adjustments to the market rental value for a proposed Section 8 project unit type in certain enumerated circumstances to compensate an owner for "the increased security services and higher costs of owning and maintaining assisted family housing, and for both the additional management costs and costs for additional amenities and design features, such as ramps and grab bars, which are required in units planned for elderly/handicapped occupancy." HUD Handbook 7420.1 CHG, ¶ 9-3i(1)(i) (emphases in original). A 10% adjustment was to be made for all assisted units in HUD-insured projects in which 100% of the revenue producing units were assisted (Lakeshore Village). Id. A 10% adjustment was to be made for all assisted units in projects that were not HUD-insured. Id. A 5% adjustment was to be made for all units in HUD-insured projects in which fewer than 100% of the revenue producing units were assisted. Id. The effect of this adjustment was "to permit . . . Contract Rents . . . for a Section 8 assisted project to exceed normal comparability . . . by 5% or 10%, as appropriate." Id., ¶ 9-3i(1)(ii). HUD Handbook 7420.1 CHG also required an additional "upward adjustment of 5%" "to compensate for the payment of mortgage discounts when HUD-insured financing is used or to compensate for the higher debt service payments that generally must be paid to obtain conventional mortgage loans when conventional mortgage loan financing is used." HUD Handbook 7420.1 CHG, ¶ 9-3i(2).

(...continued) anticipated date of execution of the Housing Assistance Payments Contract (i.e., after completion and acceptance of the project)." HUD Handbook 7420.1 CHG, ¶ 9-3g. -11-

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In addition to the mandatory special adjustments discussed above, HUD Handbook 7420.1 CHG permitted "an additional discretionary 5% adjustment . . . under exceptional circumstances, when properly authorized by the Field Office Director" and stated that, "[w]hen this occurs, the composite effect will be to increase all of the rents illustrated in subparagraph (3) above by an additional 5%." HUD Handbook 7420.1 CHG, ¶ 9-3i(4). (iv) File Documentation

HUD Handbook 7420.1 CHG required that the HUD field office document in its file for the Section 8 new construction proposal "the comparables used, adjustments made, and the market rental value assigned to each unit type" and that this was to be "accomplished" by use of the "Form FHA-2273, Estimates of Market Rent by Comparison[16/], for each unit type[.]" HUD Handbook 7420.1 CHG, ¶ 9-3j. (v) Correlation of Rental Values

HUD Handbook 7420.1 CHG provided that "[t]he adjusted rent of each of the comparables used to estimate the rental value of a dwelling unit is an indicator of rental value" and that "[c]orrelation is the term which describes the analytical and reasoning process employed by an appraiser to derive a single estimate of value from various value indicators." HUD Handbook 7420.1 CHG, ¶ 9-3m. "Correlations of acceptable quality are based on comprehensive analysis and sound reasoning, not on purely mechanical or mathematical processes." Id. "[I]dentification of the most defensible single value estimate is a subjective judgment based on the Appraiser's total store of knowledge." Id.

A copy of FHA Form 2273 (3/75) ("Estimates of Market Rent by Comparison") is Exhibit A to Chapter 9 of HUD Handbook 7420.1. -12-

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(vi)

Comparison of Proposed Rents and Market Rental Values

HUD Handbook 7420.1 CHG provided that, "[i]f the Contract Rents proposed are in reasonable conformity with the level and pattern of market rental values assigned by the Appraiser, giving due consideration to the degree and range of accuracy expected of appraisers in the estimation of rental values, the Appraiser shall find the proposed Contract Rents reasonable and they shall become the HUD estimates." HUD Handbook 7420.1 CHG, ¶ 9-3n(1). However, if, in the appraiser's judgment, the proposed rents "materially" exceed market rents plus any special adjustments, the Handbook provided that "the Appraiser shall find the proposed rents not reasonable and the Appraiser's estimates shall be the rents determined by HUD to be reasonable . . . ." Id., ¶ 9-3n(3). (b) HUD Handbook 7420.2 CHG (May 1978) (Section 8 HAP Program Substantial Rehabilitation Processing Handbook)

The valuation instructions contained in chapter 9 of the May 1978 version of the Section 8 HAP Program Substantial Rehabilitation Processing Handbook applicable to Statesman Apartments are substantially the same as the valuation processing instructions contained in the Section 8 HAP Program New Construction Processing Handbook for new construction project proposals discussed above. (i) Fair Market Rent Limitation

The Section 8 HAP Program Substantial Rehabilitation Processing Handbook required that the HUD appraiser determine whether the gross rents proposed for a project were "within the bounds permitted by the applicable Fair Market Rents (FMRs)." HUD Handbook 7420.2 CHG,

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¶ 9-2b.17/ The handbook provided that "the Gross Rents may not exceed the FMRs, except that the Gross rents may in some circumstances be permitted to exceed the FMRs by up to 10% (prerogative of the Field Office Director) or by up to 20% (prerogative of the Regional Administrator) as provided in [24 C.F.R. § 881.108(a)]." Id., ¶ 9-2b(1)(i). (ii) Reasonableness Of Rents

The Section 8 HAP Program Substantial Rehabilitation Processing Handbook provided that "[t]he Valuation Staff shall assess the reasonableness of rents" for each proposed Section 8 substantial rehabilitation project and that this entailed "the comparison of the proposed unit rents after rehabilitation with the rents obtainable in the market for comparable units, which provide equivalent living accommodations and services, without benefit of public housing assistance or other subsidy." HUD Handbook 7420.2 CHG, ¶ 9-3a. The handbook required that "[a]n estimate of the market rental value of each rehabilitated Section 8 dwelling unit must be made by the Appraiser" and further provided: Where differences between units of the same size by bedroom count are minimal, an estimate of the rental value of one of the units may serve as a benchmark for the purpose of estimating the rental value of the other units of that size by bedroom count. In estimating market rental values, the appraiser should not be influenced by the currently applicable Schedules of Fair Market Rents. The appraiser shall respond separately to the question concerning reasonableness of rents and the question of compliance with Fair Market Rent limits. Whereas Fair Market Rents are gross rents which include utilities, ranges and refrigerators, parking, and all maintenance and management services, the estimates of market rental values will reflect only the utilities, equipment, and services which are expected to be furnished at the Owner's expense.

"Gross Rent" was defined as "[t]he Contract Rent plus any Allowance for Utilities and Other Services." 24 C.F.R. § 881.102 (1979). -14-

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Id., ¶ 9-3d (emphasis in original). HUD Handbook 7420.2 CHG provided that, for the purpose of evaluating the reasonableness of proposed rents, the HUD appraiser could obtain rent comparables by unit type "from existing rental housing which will compete with the subject housing after its rehabilitation, either conventionally financed or insured by HUD under the non-subsidized [HUD housing programs]." Id., ¶ 9-3e. The "estimate of rental value" for a unit size and type was "preferably [to] be based on five market rent comparables, but in no event shall an estimate be based on fewer than three market rent comparables." Id. The HUD appraiser was to make adjustments to the rents charged for rent comparables to reflect "significant differences between each comparable unit and the subject unit, taking into consideration such things as location, age, condition, size of units (overall square feet), number and furnishability of rooms, equipment, amenities (including special design features for the elderly/handicapped), utilities and services included in the rent, quality, management and maintenance services, and all other significant differences the Appraiser notes." HUD Handbook 7420.2 CHG, ¶ 9-3f.18/ (iii) Special Additional Adjustments to the Comparable Rent For A Unit Type

HUD Handbook 7420.2 CHG mandated special additional adjustments to the market rental value for a proposed Section 8 project unit type in certain enumerated circumstances to compensate an owner for "the increased security services and higher costs of owning and main-

The HUD appraiser also was required to make a "time and trend adjustment" to the market rent "to reflect anticipated changes, if any, from the effective date of each comparable rent to the anticipated date of execution of the Housing Assistance Payments Contract (i.e., after completion and acceptance of the project)." HUD Handbook 7420.1 CHG, ¶ 9-3g. -15-

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taining assisted family housing; and for both the additional management costs and costs for additional amenities and design features, such as ramps and grab bars, which are required in units planned for elderly/handicapped occupancy." HUD Handbook 7420.2 CHG, ¶ 9-3i(1)(i) (emphases in original). A 10% adjustment was to be made for all assisted units in HUD-insured projects in which 100% of the revenue producing units were assisted (Statesman Apartments). Id. A 10% adjustment was to be made for all assisted units in projects that were not HUD-insured. Id. A 5% adjustment was to be made for all units in HUD-insured projects in which fewer than 100% of the revenue producing units were assisted. Id. The effect of this adjustment was "to permit both Contract Rents and rents used in processing a mortgage insurance application for a Section 8 assisted project to exceed normal comparability . . . by 5% or 10%, as appropriate." Id.,¶ 93i(1)(ii). HUD Handbook 7420.2 CHG also required an additional "upward adjustment of 5%" "to compensate for the payment of mortgage discounts when HUD-insured financing is used or to compensate for the higher debt service payments that generally must be paid to obtain conventional mortgage loans when conventional mortgage loan financing is used." HUD Handbook 7420.2 CHG, ¶ 9-3i(2). In addition to the mandatory special adjustments discussed above, HUD Handbook 7420.2 CHG permitted "an additional discretionary 5% adjustment . . . under exceptional circumstances, when properly authorized by the Field Office Director" and stated that, "[w]hen this occurs, the composite effect will be to increase all of the rents illustrated in subparagraph (3) above by an additional 5%." HUD Handbook 7420.2 CHG, ¶ 9-3i(4).

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(iv)

File Documentation

HUD Handbook 7420.2 CHG required that the HUD field office document in its file for the Section 8 substantial rehabilitation proposal "the comparables used, adjustments made, and the market rental value assigned to each unit type" and that this was to be "accomplished by use of Form FHA-2273, Estimates of Market Rent by Comparison, for each unit type[.]" Id., ¶ 9-3j. (v) Correlation of Rental Values

HUD Handbook 7420.2 CHG provided that "[t]he adjusted rent of each of the comparables used to estimate the rental value of a dwelling unit is an indicator of rental value" and that "[c]orrelation is the term which describes the analytical and reasoning process employed by an Appraiser to derive a single estimate of value from various value indicators." HUD Handbook 7420.2 CHG, ¶ 9-3m. "Correlations of acceptable quality are based on comprehensive analysis and sound reasoning, not on purely mechanical or mathematical processes." Id. "[I]dentification of the most defensible single value estimate is a subjective judgment based on the Appraiser's total store of knowledge." Id. (vi) Comparison of Proposed Rents and Market Rental Values

HUD Handbook 7420.2 CHG provided that, "[i]f the Contract Rents proposed are in reasonable conformity with the level and pattern of market rental values assigned by the Appraiser, giving due consideration to the degree and range of accuracy expected of appraisers in the estimation of rental values, the Appraiser shall find the proposed Contract Rents reasonable and they shall become the HUD estimates." HUD Handbook 7420.1 CHG, ¶ 9-3n(1). However, if, in the appraiser's judgment, the proposed rents "materially" exceed market rents plus any special adjustments, the handbook provided that "the Appraiser shall find the proposed rents not reason-17-

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able and the Appraiser's estimate shall be the rents determined by HUD to be reasonable . . . ." Id., ¶ 9-3n(3). E. Rent Subsidy Payments Under The Section 8 HAP Program

The rent subsidy is provided in one of two ways. HUD enters a HAP contract directly with the owner of a housing project, or it enters into an "annual contributions contract" with a "public housing agency" (PHA) which, in turn, enters into a HAP contract with a project owner. In either case, the HAP contract is the vehicle for payment of the Section 8 rent subsidy ("housing assistance payment") to the project owner. The HAP contract specifies the monthly rent for each of the different sizes of dwelling units covered by the agreement, i.e., the "contract rent." The tenant pays the owner a portion of the contract rent, which is based upon the tenant's income. 42 U.S.C. § 1437a(a) (1994); 24 C.F.R. §§ 880.201 & 881.201 (1994) ("tenant rent" defined). The governmental entity with which the owner contracts (either HUD or a PHA) pays a rent subsidy to the owner equal to the difference between the tenant rent and the contract rent. 42 U.S.C. § 1437f(c)(3)(A) (1994); 24 C.F.R. §§ 880.501(d)(1) & 881.501(d)(1) (1994). F. Annual Rent Adjustments Under The Owners' HAP Contracts

The rent adjustment provisions contained in the Owners' HAP contracts are virtually identical. The HAP contracts provided: b. Automatic Annual Adjustments (1) Automatic Annual Adjustment Factors will be determined by the Government at least annually; interim revisions may be made as market conditions warrant. Such Factors and the basis for their determination will be published in the Federal Register. These published Factors will be reduced -18-

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appropriately by the Government where utilities are paid directly by the Families. (2) On each anniversary date of the Contract, the Contract Rents shall be adjusted by applying the applicable Automatic Annual Adjustment Factor most recently published by the Government. Contract Rents may be adjusted upward or downward, as may be appropriate; however, in no case shall the adjusted Contract Rents be less than the Contract Rents on the effective date of the Contract.

HAP Contracts, Part I, § 1.8b. This formula-based method of adjusting contract rents is subject to the following "Overall Limitation" provision contained in the Owners' HAP contracts: Notwithstanding any other provisions of this Contract, adjustments as provided in this Section shall not result in material differences between the rents charged for assisted and comparable unassisted units, as determined by the Government; provided, that this limitation shall not be construed to prohibit differences in rents between assisted and comparable unassisted units to the extent that such differences may have existed with respect to the initial Contract Rents. HAP Contracts, Part I, § 1.8d. HUD regulations specify how annual rent adjustments pursuant to section 1.8b(2) of the Owners' HAP contracts were to be made: The adjusted monthly amount of the Contract Rent of a dwelling unit shall be determined by multiplying the Contract Rent in Effect on the anniversary date of the contract by the applicable Automatic Annual Adjustment Factor . . . and rounding the result to the next higher whole dollar amount. See 24 C.F.R. § 888.203(b) (1994).19/ For example, if the monthly contract rent for a dwelling unit in effect on the HAP contract anniversary date is $100 per unit and the applicable AAF is This regulation was initially issued on November 25, 1977, and amended on April 12, 1979. See 42 Fed. Reg. 60508 (11/25/77); 44 Fed. Reg. 21769 (4/12/79). -1919

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1.05, the new monthly contract rent adjusted in accordance with the AAF would be $105 (1.05 x $100). G. The Initial Differences To Be Preserved In Applying The Rent Comparability Limitation To Rent Adjustments

As noted above, the Owners' HAP contracts provided that the overall limitation upon rent adjustments "shall not be construed to prohibit differences in rents between assisted and comparable unassisted units to the extent that such differences may have existed with respect to the initial Contract Rents." See HAP Contracts, Part I, § 1.8d.20/ The "initial difference" is the mathematical difference, expressed in dollars, between the initial HAP contract rents and the rents charged for comparable, unassisted units when HUD established the initial HAP contract rents. National Leased Housing Ass'n v. United States, 105 F.3d 1423, 1435 (Fed. Cir. 1997); Park Village Apartments v. United States, 32 Fed. Cl. 441, 446-47 (1994), aff'd, 152 F.3d 943 (Fed. Cir.) (Table), cert. denied, 525 U.S. 962 (1998). HUD consistently has construed the initial differences proviso to refer to the difference between the initial HAP contract rent for a unit and the comparable, unassisted rent for that unit type determined by HUD in establishing the initial HAP contract rent for the unit. In a January 1986 memorandum from Silvio J. DeBartolomeis, HUD Deputy Assistant Secretary for Multifamily Housing Programs, to HUD field offices concerning "Questions and Answers on Section 8 Annual Rent Adjustments," the Deputy Assistant Secretary provided the following guidance for determining the initial difference to be preserved in rent adjustments under HAP contracts The "initial differences" proviso contained in the overall limitation in the Owners' HAP contracts mirrors the "initial differences" proviso in the overall limitation contained in the Section 8 regulations applicable to Beach House and Statesman II. See 24 C.F.R. §§ 880.110(d), 881.110(d) (1979). -2020

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such as the Owners' HAP contracts in the present case: QUESTION #1. What is initial difference? What documents do we use to make the calculation? What should we do if the needed documents are lost or incomplete? ANSWER. Initial difference is any dollar amount by which a Section 8 contract rent initially exceeded the correlated rent of the comparable unassisted unit. The initial difference is computed separately for each unit type. NOTE: Since Section 8 rents at Property Disposition Resale projects were usually set at the comparables' rents, most PD resales will not have an initial difference. For other projects, the initial difference will generally