Tuttle v. Front St. Affordable Hous. Partners

• Decision Date: 12 August 2020
• Docket Number: CIVIL NO. 18-00218 JAO-KJM
• Citation: 478 F.Supp.3d 1030
• Parties: Michael TUTTLE, et al., Plaintiffs, v. FRONT STREET AFFORDABLE HOUSING PARTNERS, et al., Defendants.
• Court: U.S. District Court — District of Hawaii

478 F.Supp.3d 1030

Michael TUTTLE, et al., Plaintiffs,

v.FRONT STREET AFFORDABLE HOUSING PARTNERS, et al., Defendants.

CIVIL NO. 18-00218 JAO-KJM

United States District Court, D. Hawai‘i.

Signed August 12, 2020

Andrew C. Lillie, Pro Hac Vice, Cory Wroblewski, Pro Hac Vice, Andrew M. Nussbaum, Pro Hac Vice, Hogan Lovells US LLP, Denver, CO, Joseph L. Lambert, Pro Hac Vice, Hogan Lovells US LLP, Colorado Springs, CO, Lance David Collins, Makawao, HI, M. Victor Geminiani, Kailua, HI, Thomas A. Helper, Hawaii Lawyers for Equal Justice, Honolulu, HI, for Plaintiffs.

Julia Kimie Brotman, William G. Meyer, III, Settle Meyer Law, a Limited Liability Law Company, Honolulu, HI, for Defendant Front Street Affordable Housing Partners.

Craig Y. Iha, Diane K. Taira, Sandra A. Ching, Office of the Attorney General, Matthew S. Dvonch, Department of the Attorney General Public Safety, Hawaiian Home Lands & Housing, Honolulu, HI, for Defendant Hawaii Housing Finance and Development Corporation.

Craig Y. Iha, Office of the Attorney General, Matthew S. Dvonch, Department of the Attorney General Public Safety, Hawaiian Home Lands & Housing, Honolulu, HI, for Defendant Craig K. Hirai.

ORDER GRANTING PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT ON THEIR FIRST THROUGH THIRD CLAIMS FOR RELIEF AND DENYING ALL OTHER PENDING MOTIONS

Jill A. Otake, United States District Judge

This case centers around the Front Street Apartments, an apartment complex on Maui previously maintained as low-income housing pursuant to a federal tax program. The Court must determine whether the State of Hawai'i properly granted the owner's request to be released from its commitment to maintain the Front Street Apartments as low-income housing, or instead, whether that low-income commitment must be reinstated under federal and state law.

The Plaintiffs—Michael Tuttle, Chi Pilialoha Guyer, Joseph Vu, and Shazada Rayleen Yap ("Plaintiffs")—are current or prospective tenants of the Front Street Apartments. Defendant Front Street Affordable Housing Partners ("FSA") owns and operates Front Street Apartments. Defendant Hawai'i Housing Finance & Development Corporation ("HHFDC" or "the State") is the state agency that assists with implementing the federal low-income tax credit program in the State of Hawai'i, and Defendant Craig K. Hirai is sued in his official capacity as the Executive Director of that agency.

Before the Court are the parties’ various cross-motions for summary judgment—seven in total—all disputing whether the low-income commitment was properly terminated or must instead be reinstated. For the reasons discussed below, the Court GRANTS Plaintiffs’ motion as to their first three claims for relief, and otherwise DENIES the parties’ motions.

I. BACKGROUND

A. Background on the Low-Income Housing Tax Credit Program

The Low-Income Housing Tax Credit ("LIHTC") Program aims to encourage the development of affordable rental housing by providing federal tax credits to qualified project owners who agree to maintain all or a portion of a project's rental units for low-income individuals or families. See Tax Reform Act of 1986, Pub. L. No. 99–514, § 252, 100 Stat. 2085, 2189–208 (codified at 26 U.S.C. § 42 ). The regulations governing the LIHTC program are contained in Section 42 of the Internal Revenue Code. Congress apportions tax credits, based on population, to state housing credit agencies, which then allocate these credits to those who invest in affordable housing projects. See 26 U.S.C. § 42(g)(1), 42(h)(3). State housing credit agencies allocate the federal tax credits within their respective states pursuant to a Qualified Allocation Plan ("QAP"), which sets out that state's eligibility priorities and criteria for awarding federal tax credits, as well as the method of monitoring compliance with the provisions of the LIHTC program. See id. § 42(m)(1)(B) ; see also, e.g. , ECF No. 200-2 at 1.

Among other things, Section 42 requires project owners to enter into agreements (an "extended low-income housing commitment") with state housing credit agencies to receive tax credits under the LIHTC program during an "extended use period." 26 U.S.C. § 42(h)(6)(A)–(B). At a minimum, these agreements must: require a certain number of the units in the project be kept affordable during the extended use period; allow past, present, or prospective tenants who meet the income limitations to enforce these affordability requirements; prohibit certain conduct like piecemeal disposition of the project or discrimination against individuals with Section 8 housing vouchers; and require that the agreement be binding on any successors. See id. The agreement must also be "recorded pursuant to State law as a restrictive covenant." Id. § 42(h)(6)(B)(vi).

The length of time a project must be maintained as low-income housing and comply with these requirements consists of a "compliance period" within the "extended use period." The compliance period is the first fifteen years. Id. § 42(i)(1). The extended use period begins on the first day of that compliance period and ends thirty years later, unless a later date is specified in the project owner's agreement with the housing agency, in which case that later date controls. See id. § 42(h)(6)(D).

Section 42 provides two "exceptions" to the requirement that a project be maintained as low-income housing throughout the duration of the extended use period.

Id. § 42(h)(6)(E)(i). First, the extended use period "shall terminate" on the date the building is acquired by foreclosure or instrument in lieu of foreclosure. Id. § 42(h)(6)(E)(i)(I) (sometimes referred to as "Subclause I"). Second, the extended use period may terminate if the building owner exercises a "qualified contract" option. Id. § 42(h)(6)(E)(i)(II) (sometimes referred to as "Subclause II").

Under the qualified contract exception, the project owner submits a written request to the state housing credit agency to find a buyer who will continue operating the building as low-income housing. See id. ; see also id. § 42(h)(6)(I). State housing agencies must offer or advertise qualified contract requests "to the general public, based on reasonable efforts." 26 C.F.R. § 1.42-18(d)(2). The State has not promulgated rules regarding the reasonable efforts it will use to offer or advertise qualified contracts during the one-year period. See ECF No. 178 ¶ 10. If the state housing credit agency is unable to find a qualified buyer within one year, the extended use period is terminated, i.e., the affordability limitations are lifted. See 26 U.S.C. § 42(h)(6)(E)(i)(II), 42(h)(6)(I).

The qualified contract exception only becomes available after the fourteenth year of the compliance period, which ensures that even if the state housing credit agency is unable to find a qualified buyer within the one-year search period, the project is maintained as low-income housing for at least fifteen years. See id. § 42(h)(6)(I). In addition—and crucial to the dispute before the Court—the qualified contract option "shall not apply to the extent more stringent requirements are provided in the agreement or in State law." Id. § 42(h)(6)(E)(i)(II).

B. Facts¹

With that regulatory background in mind, the Court turns to the specific dispute over the LIHTC program on Maui. Plaintiffs Guyer, Tuttle, and Vu are tenants of Front Street Apartments, located in Lahaina. See ECF No. 42 ¶ 1.² Defendant FSA owns and operates the Front Street Apartments housing project (the "Project"), and has done so since the Project's first occupancy in 2001; FSA is also the ground lessee of the property on which the Project is situated. See id. ¶¶ 3, 5.³ Defendant HHFDC is the state housing credit agency designated to administer and allocate the LIHTC program in Hawai'i pursuant to 26 U.S.C. § 42. See id. ¶¶ 2, 6.⁴

In 1999, FSA applied for tax credits for the Project through the State's LIHTC program. See id. ¶ 7. In that application, FSA indicated it would maintain the Project as affordable housing for 30 years. See ECF No. 42-1 at 13. In subsequent discussions, FSA indicated that the affordability period would be increased from 30 years to 51 years and so the 51-year affordability period was added as a project-specific condition.⁵ See ECF No. 190-1 at 7, 10–11, 14–15, 22.

In 2002, FSA, the State, and the then-current owner of the property entered into a "Declaration of Restrictive Covenants" (the "Declaration"), which was duly recorded with the Bureau of Conveyances of the State of Hawai'i. ECF No. 42 ¶ 8. The Declaration contains the necessary covenants described above as required under 26 U.S.C. § 42(h)(6). See generally ECF No. 42-2. Relevant here, FSA agreed that in consideration for receiving tax credits, beneficiaries, i.e., those who meet the income requirements (whether former, present, or prospective tenants) may enforce FSA's obligations under the Declaration. See id. at 7–8. The Declaration is governed by Hawai'i law, except where federal law is applicable. See id. at 9. And the Declaration sets forth an "Extended Use Period" of 51 years, and provides that FSA must comply with the requirements of Section 42 regarding the Extended Use Period unless it terminates through acquisition of the Property through foreclosure or instrument in lieu of foreclosure. Id. at 7.

There has been no foreclosure and no instrument in lieu of foreclosure exists. See ECF No. 42 ¶ 9. FSA did, however, seek to terminate the extended use period through the qualified contract exception provided under Section 42. In or around October 2014, FSA asked the State whether it was eligible to apply for a qualified contract under Section 42 and the QAP then in effect. See id. ¶ 10. In January 2015, FSA again requested that the State confirm the Project's compliance and FSA's eligibility to submit a qualified contract application. See id. ¶ 11. The State responded that FSA was eligible to request a qualified contract. See id. ¶ 12; see also ECF No. 42-4. On August 5, 2015, FSA submitted a...