City of Boston v. Harris

• Decision Date: 17 March 1980
• Docket Number: No. 79-1122,79-1122
• Citation: 619 F.2d 87
• Parties: CITY OF BOSTON et al., Plaintiffs, Appellees, v. Patricia HARRIS, etc. et al., Defendants, Appellees, Marion Hart et al., Plaintiffs-Intervenors, Appellants.
• Court: U.S. Court of Appeals — First Circuit

Page 87

619 F.2d 87

CITY OF BOSTON et al., Plaintiffs, Appellees, v. Patricia HARRIS, etc. et al., Defendants, Appellees, Marion Hart et al., Plaintiffs-Intervenors, Appellants.

No. 79-1122.

United States Court of Appeals, First Circuit.

Argued Sept. 10, 1979.

Decided March 17, 1980.

Jeffrey M. Winik, Boston, Mass., with whom Hollis Young and Bruce Mohl, Boston Mass., were on brief, for appellants.

Anthony J. Steinmeyer, Washington, D.C., with whom Barbara Allen Babcock, Asst. Atty. Gen., Washington, D.C., Edward F. Harrington, U. S. Atty., Boston, Mass., Ronald Glancz and Barrie L. Goldstein, Attys., Civil Division, Dept. of Justice, Washington, D.C., were on brief, for appellees.

Before KUNZIG, ^* Judge, U. S. Court of Claims, CAMPBELL, Circuit Judge, and DOOLING, ^** Senior District Judge.

PER CURIAM.

This case presents for the first time the question of whether new Department of Housing and Urban Development (HUD)

regulations governing housing subsidized under the National Housing Act, 48 Stat. 1246, June 27, 1934 (now codified at 12 U.S.C. §§ 1701-1750g (1976)) validly preempt local rent control regulation. Unlike those considered in a long line of past cases, the newly promulgated HUD regulations which we must consider, 24 C.F.R. §§ 403.1, 403.8, et seq. (1979), specifically preempt all local rent control laws as applied to federally subsidized insured projects. ¹ We hold that the HUD regulations were validly promulgated and thus operate through the Supremacy Clause, U.S.Const. Art. VI, cl. 2, to preempt local rent control regulations in these instances. We also conclude that HUD procedures and regulations satisfied the tenants' due process rights.

BACKGROUND

The rental housing which both parties seek to regulate in this case is federally insured subsidized units developed under the National Housing Act (NHA), 12 U.S.C. §§ 1701 et seq. (1976). The general purpose of federal housing regulation has been to meet the national goal of a "decent home and a suitable living environment for every American family." 12 U.S.C. § 1701t (1976); 1968 U.S.Code Cong. & Admin.News, pp. 2873, 2877. In order to achieve its goal, Congress has elected to utilize the financial resources and expertise of the private sector rather than to develop projects itself. See S.Rep.No. 281, 87th Cong., 1st Sess. 3 (1961). The NHA programs administered by HUD are intended to stimulate the development of low and moderate income housing by providing subsidies or insured mortgages designed to lower the cost of building a project and thus lower the rent which owners must charge to make a fair return on their investments. The rental housing which the City of Boston purports to regulate involves four HUD programs combining insured mortgages and subsidized rents.

The first of these four programs, section 202 of the Housing Act of 1959, 12 U.S.C. § 1701q (1976), allows HUD to make 3% loans for 50 year terms ² to eligible developers ³ to provide housing facilities for elderly or handicapped families ⁴ with inadequate income to pay private market housing rentals. To start the program Congress set up a revolving fund, id. at § 1701q(a)(4), which depends upon repayment of mortgages or Congressional appropriations for its continued success. Section 202 makes money available for mortgages which is otherwise unavailable. Id. at section 1701q(a)(2)(A). In order to insure that section 202 objectives are met, HUD requires an applicant to enter into a regulatory agreement providing that the Secretary of HUD shall establish rental levels and tenant eligibility. ⁵

The second of these four programs, NHA sections 221(d)(3), 12 U.S.C. § 1715l (d)(3) (Supp. II 1978), and (5), 12 U.S.C. § 1715l (d)(5) (1976), establishes a subsidized mortgage program. Section 221(d)(3) assists "private industry in providing housing for low and moderate income families and displaced families." Id. at section 1715l (a). As Chief Judge Coffin explained in Hahn v. Gottlieb, 430 F.2d 1243, 1245 (1st Cir. 1970):

"This assistance to the private sector takes two forms. First, the FHA provides insurance on long-term mortgage loans covering up to 90 per cent of the project's cost, thus encouraging private investment in projects which would otherwise be too risky. Second, eligible borrowers can obtain below-market interest rates on FHA-insured loans, thus reducing the rentals necessary to service the landlord's debt obligations. 12 U.S.C. § 1715l (d)(5)."

Id. at 1245.

Again, Congress provided the Secretary with broad discretion to manage and control the rental housing. Id. at 1246. HUD is authorized to control rents and operation through a regulatory agreement, although the Secretary may defer to other federal or local law. 12 U.S.C. § 1715l (d)(3) (Supp.1978). ⁶ While a project owner may apply for rent increases, the Secretary controls the determination and strict limitations are placed on the permissible return on investment. ⁷ Once more, defaults on mortgages directly cause the mortgagee to draw upon the insurance fund. 12 U.S.C. § 1715l (g).

A third program, section 236 of the NHA, 12 U.S.C. § 1715z-1 (1976), is designed to encourage private enterprise to develop rental and cooperative housing for lower income families and provide periodic subsidy payments to the mortgagee which effectively reduced the interest payments on the mortgage to 1% on qualified rental housing. 12 U.S.C. § 1715z-1(c) (1976). The Secretary is expressly directed by Congress to establish rental charges. ⁸ The Secretary may also enter into regulatory agreements and establish necessary rules and procedures. Id. at section 1715z-1(h) (1976).

The final program here involved is a Rent Supplement Program (RSP), 12 U.S.C. § 1701s (1976), which empowers the Secretary to make annual payments on behalf of eligible low income families or individuals unable to afford section 221(d) (3) rents. ⁹ The maximum payment which the Secretary can make for an eligible tenant is that amount by which the rent approved by the Secretary exceeds 25 percent of the tenant's income. Id. at section 1701s(d).

In examining these four programs it becomes apparent that their success "requires a flexible exercise of administrative discretion." Hahn v. Gottlieb, 430 F.2d 1243, 1246 (1st Cir. 1970). Moreover, Congress has granted the Secretary broad general rule making authority for the NHA ¹⁰ and again in each specific section. ¹¹ For project sponsors, the rent received from tenants provides the major source of income from which to maintain the housing and meet the debt service requirements. Although the Secretary originally permitted local governments to operate their rent control programs freely, the Secretary nonetheless engaged extensively in the regulation of rent in HUD insured and subsidized projects through leases and regulatory agreements. In order to increase the rents for units in the project, a landlord must submit a request and justification to HUD. ¹² Rental increases are only permissible for justifiable increased costs and, in general, HUD allows a landlord to receive a six percent return on equity. Kargman v. Sullivan, 552 F.2d 2, 4 (1st Cir. 1977).

While Congress was coping with rental housing problems through the NHA, local government concerned with spiraling rents began imposing direct limits on the amount of rent which a landlord could charge. One of the earliest programs of local rent control was that instituted by the City of Boston in 1970, ch. 797, 1969 Mass.Acts, as amended, ch. 863, 1970 Mass.Acts. Originally initiated under statewide local option rent control legislation, the city itself adopted a comprehensive regulatory scheme upon the expiration of the statewide legislation in 1975. Ch. 15, City of Boston Ordinances (1975). Since 1972, privately owned, federally insured and subsidized sections 202, 221(d)(3) and (5) and 236 housing had been covered by Boston's rent control. See City of Boston v. Hills, 420 F.Supp. 1291 (D.Mass.1976), reconsidered and reversed by district court, 461 F.Supp. 1201 (D.Mass.1978). Under the local legislation, the City of Boston's rent control legislation sets maximum rents for covered projects. The basic rent established under the 1975 ordinance is that which was previously established in 1970 or 1972. ¹³ Generally, those base rents were the 1968 rent of the unit or first rent in effect thereafter. ¹⁴ The Board is authorized to adjust the established maximum rent upon the petition of either the tenant or landlord. ¹⁵ Adjustments are allowable to remove hardships or correct inequities. The governing principle is to maintain maximum rents at levels which will yield landlords a fair net return on operating income from the rental unit. In determining whether a landlord is receiving a fair yield on net operating income, the Board is directed to consider the effect of property taxes, operating and maintenance expenses, capital improvements, depreciation, and increases or decreases in living space or housing services. ¹⁶ Finally, the Board may deny an increase to the landlord if the housing does not satisfy local codes. ¹⁷

While Boston's procedure for setting maximum rents has similarities to HUD's rent setting formula, we have previously noted that differences exist. Kargman v. Sullivan, 552 F.2d 2, 5 (1st Cir. 1977). Nevertheless, this circuit decided that no such actual, impermissible conflict existed between local regulation and the NHA provisions as effected preemption. Id. at 6, 13-14. Kargman, however, specifically left open the question we face here: whether a HUD regulation could preempt local rent control. Id. at 6.

As noted, HUD originally left the field open for local rent control of its subsidized insured projects. In 1975, however, HUD promulgated an interim rule, 40 Fed.Reg. 8189 (1975), to deal with the problems it found local rent control was causing. HUD's reasoning was set forth as follows:

"(HUD) has received numerous inquiries relating to the...