Disparate Impact Theory
Background and Objectives:
On February 8, 2013, the Department of Housing and Urban Development (HUD) issued a final rule to formalize its existing identification of discriminatory effects liability under the Fair Housing Act (“Act”). The new rule establishes a national standard for determining whether a particular housing practice violates the Act.
Within the rule, HUD implemented a burden shifting test that requires the charging party to first prove that a practice results in, or would predicable result in, a discriminatory effect on the basis of a protected class. If the charging party is successful proving their case, the burden then shifts to the defendant. The defendant must then prove that the practice taken into question is indeed necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. If satisfied, the charging party may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect.
The concern with the final rule is that a business reason, such as imposing a minimum economic standard, may fall into the category of creating an unintended disparate impact on a group of citizens. Another concern is the method of proving one’s case is inconsistent with traditional judicial processes. Historically, in the U.S. judicial system, the charging party, the plaintiff(s), has the burden of proving their lawsuit. It should not be different in this situation.
IREM members participated in an NAR working group to determine fair and reasonable policy statement language regarding disparate impact.
IREM position:
We believe in a housing market free from discrimination. We oppose policies and practices which are known to have a disparate impact on any demographic group defined by race, color, religion, national origin, sex, handicap, familial status, sexual orientation, or gender identity. We support the right to continue a policy or practice that has or could have a known disparate impact if there is a legitimate business purpose for the practice or policy and that purpose cannot be accomplished in a readily identifiable and not unduly burdensome means with a less discriminatory impact. We oppose actions by governments, groups or individuals which require unreasonable research by IREM members into whether policies or practices do indeed have such a disparate impact, or which inhibit the implementation of otherwise sound business practices.
Burden of Proof:
- We believe the burden for proving that a policy or practice has a discriminatory effect lies with the party alleging discrimination.
- We believe that once a policy or practice has been shown to have a disparate impact, or that it will likely have a disparate impact, the IREM member or other practitioner implementing the policy or practice need only demonstrate a legitimate business purpose for the policy or practice.
- We believe that the party alleging discrimination has the obligation to demonstrate that there is a readily achievable, less discriminatory alternative to achieving the legitimate business purpose of the policy or practice without being unduly burdensome to the IREM member or other practitioner.
Remedies for Policies or Practices which have a Disparate Impact:
- We believe that unless an IREM member or other practitioner knew or reasonably should have known of the discriminatory effect of a policy or practice, the only remedy for such a discriminatory practice should be correcting the action to remove the discriminatory effect unless there is no other readily achievable, less discriminatory alternative to achieving the legitimate business purpose of the policy or practice without being unduly burdensome to the IREM member or other practitioner.
- We believe that whether or not a housing market is free from discrimination should be measured by the impact of actions, policies and practices and not solely by the demographics of people living in particular neighborhoods or buildings.
(Adopted 10/13)
Certification Of Buildings Under The “Implementing Recommendations Of The 9/11 Commission Act of 2007”
Background and Objectives:
On August 16, 2007, President Bush signed into law the “Implementing Recommendations of 9/11 Commission Act of 2007” (H.R. 1), which includes a provision that requires the Department of Homeland Security (DHS) by spring, 2008, to set up a program for certifying private sector entities as meeting a “voluntary” national standard for emergency preparedness. The legislation was, in fact, the 9/11 Commission Report allowing it to move quickly through the Senate for final passage with no debate or hearings.
The law mandates the DHS to adopt a voluntary private sector accreditation and certification standard that promotes emergency preparedness, which may be customized to fit the unique characteristics of various industries within the private sector, including real estate. In order to carry out its certification program, the DHS is required to select a qualified nongovernmental entity to accredit qualified third parties who will actually perform the certification of real estate. DHS adopted the National Fire Protection Association (NFPA) 1600 and it has been endorsed by many different organizations including the U.S. Department of Homeland Security under their category of "Standards for Business Continuity and Emergency Preparedness."
The NFPA 1600 Standard on Disaster/Emergency Management and Business Continuity Programs, 2007 edition, as written, is of minimal impact to real estate owners and managers and lacks specifics. The 2010 edition of the NFPA 1600 was released and expanded to emphasize the importance of “leadership” and “commitment.” Composition of the 2013 edition of NFPA 1600, "Standard on Disaster/Emergency Management and Business Continuity Programs" is well underway with a projected drop date of January 2013.IREM is concerned that the third-party or parties selected to certify real estate will charge real estate owners and managers a fee to be certified.
Although the new law is voluntary, the law could lead to several end results. It may become the market and legal standard of care in the real estate industry. Most importantly for real estate practitioners, the standard may allow for the insurance and credit-rating industries to look closely at a company’s compliance with the NFPA 1600 standard or any other DHS selected standard in evaluating its insurability and creditworthiness.
IREM position:
In regards to the voluntary certification standard that the DHS is to adopt, IREM opposes mandatory certification for real estate owners and managers for a fee. IREM supports voluntary standards that are not onerous on real estate professionals.
(Adopted 10/07, 10/11)
Banks of Mailboxes
Background and Objective:
The U.S. Postal Service (USPS) provides standards governing mail receptacles, including those installed in apartments and other buildings. Apartments and other multiple-family dwelling must install and maintain mail receptacles that are approved by the USPS in the interest of promoting USPS efficiency, safety and mail security. Standard STD-4B, created in 1975, set forth the detailed requirements concerning the manufacture and testing levels for receptacles. In 2006, Standard 4C went into effect and replaced the previous standard.
In 2003, the USPS proposed a new mailbox standard to accommodate the growing volume and improve mail safety and security. The USPS used a consensus process to revise the federal apartment mailbox standard. IREM participated in the Consensus Committee convened by the USPS. IREM was very satisfied with the agreed-to recommendations that were incorporated into the proposed rule.
The “Standards Governing the Design of Wall-Mounted Centralized Mail Receptacles” final rule was released on September 3, 2004. The new standard created a new form factor and increased the minimum size requirement by 50% to 12 x 15 x 3. Additionally, the standard requires parcel lockers at a ratio of 1:10. The standard also introduced suggested design types, while eliminating the vertical form. Security requirements for the entire receptacle were strengthened.
Most important, the standard applies only to new construction and substantial rehabilitation. Existing buildings are encouraged to replace existing boxes at the end of their useful life with the new mailbox standard, but there is no requirement. The standard went into effect on September 3, 2006.
IREM Position:
IREM urges caution in requiring retrofitting of mailboxes and modes of delivery in all property types where banks of mailboxes are required or will be required. There are many buildings which may not have space to comply with the new size and/or configuration of the mailboxes. All modifications to mailboxes and modes of delivery must comply with related federally mandated accessibility standards. IREM would like to be involved in any future discussions regarding proposals to modify the existing standard or create a new standard.
(4/03, updated 1/14)
Americans with Disabilities Act of 1990
In the summer of 1990, the ADA (Americans With Disabilities Act) was signed by President Bush. The regulations implementing this legislation were originally written in 1991. Standards on administrative and procedural requirements, and design and construction compliance, are expressed in the Americans with Disabilities Act Accessibility Guidelines (ADAAG). ADAAG covers Titles II and III of the ADA, which relate to accessibility guidelines for buildings and facilities and nondiscrimination by public accommodations and in commercial facilities.
July 26, 2010, marked the 20th anniversary of the signing of the Americans with Disability Act of 1991. In July, 2010, several changes were approved and published by the Department of Justice (“Department”) as a final rule to Title III. Amendments to this final rule were made in March, 2011. These final rules went into effect on March 15, 2011. Compliance with the 2010 Standards for Accessible Design does not go into effect until March 15, 2012. A summary of these changes include:
- Adoption of the 2010 ADA Standards for Accessible Design. The Department has adopted revised ADA design standards that include the relevant chapters of the Access Board's 2004 ADA/ABA Accessibility Guidelines as modified by specific provisions of this rule.
- Effective Date. The rule became effective March 15, 2011. On March 15, 2012, compliance with the 2010 Standards will be required for new construction and alterations and barrier removal. In the period between September 15, 2010 and March 15, 2012, covered entities may choose between the 1991 Standards and the 2010 Standards. Covered entities that should have complied with the 1991 Standards during any new construction or alteration of facilities or elements, but have not done so by March 15, 2012, must comply with the 2010 Standards.
- Element-by-Element Safe Harbor. The rule includes a general "safe harbor" under which elements in covered facilities would not be required to be brought into compliance with the 2010 Standards until the elements were subject to a planned alteration.
- Ticketing. The rule provides guidance on the sale of tickets for accessible seating.
- Service Animals. The rule defines "service animal" as a dog that has been individually trained to do work or perform tasks for the benefit of an individual with a disability. The rule states that other animals, whether wild or domestic, do not qualify as service animals.
- Wheelchairs and Other Power-Driven Mobility Devices. The rule adopts a two-tiered approach to mobility devices, drawing distinctions between wheelchairs and "other power-driven mobility devices."
- Effective Communication. The rule includes video remote interpreting (VRI) services as a kind of auxiliary aid that may be used to provide effective communication.
- Reservations Made by Places of Lodging. The rule establishes requirements for reservations made by places of lodging, including procedures that will allow individuals with disabilities to make reservations for accessible guest rooms during the same hours and in the same manner as other guests
- Timeshares, Condominium Hotels, and Other Places of Lodging. Theprovides that timeshare and condominium properties that operate like hotels are subject to Title III. The rule also provides guidance about the factors that must be present for a facility that is not an inn, motel, or hotel to qualify as a place of lodging.
Source: ADA.gov
In addition, the ADA does not t allow plaintiffs to collect damages for violations to the law. Only attorneys representing the plaintiff's suit are allowed to collect compensation from accessibility decisions to cover court costs. In some instances, this stipulation has been abused and individuals have used the ADA as a means to file frivolous lawsuits against commercial property owners to collect compensation for court costs.
Also, it is important to note that compliance to the new ADA regulations must be achieved unless doing so creates undue financial and/or administrative burden(s) or disturbs tenants.
IREM Position:
In continuing with its commitment to provide and encourage equal opportunity to all people, IREM heartily endorses an end to discrimination against individuals with disabilities, which is also the stated purpose of the Americans with Disabilities Act of 1990 and consequently the revisions in 2010. We encourage the regulatory agencies charged with the responsibility of enforcing the Act to adopt fair and workable regulations to ensure and facilitate timely compliance by public accommodations.
To this end, the Institute of Real Estate Management encourages further definition of the terms "undue hardship," "readily achievable," "maximum extent feasible," and “reasonable accommodation/modification” to better reflect the degree of responsibility of employers, property owners, and managers in complying with the ADA.
While market pressures and honorable initiatives have already resulted in expanded accessibility, we recognize the necessity to create a significant obligation for the private sector to join in on ending discrimination. However, we cannot deny that employers and businesses often exist and operate under precarious economic conditions, especially in current times. Congress realized this and included factors to consider in determining the extent of private sector obligation under the Act in order to protect businesses from overwhelming financial burdens. Currently the term "technically feasible" does not include a cost factor. Only under some circumstances will cost be considered as an exception to compliance with ADA requirements. This could place a prohibitive cost on the private sector, causing a financial hardship. We recommend including "financial burden" as a reasonable criteria when determining any obligation of compliance with ADAAG for existing facilities and alterations. IREM urges members to create a plan of future modifications that would include any major changes to comply with new ADA regulations.
The philosophy behind the ADA is to make places and opportunities accessible to those with disabilities. We support legislation and public policy that would provide a notice and cure provision in ADA regulations whereby those facing possible sanctions under the law would be entitled to written notice of the alleged violation in combination with a reasonable time to rebut and/or cure the alleged violation before facing economic sanctions and/or litigation, except in the most grievous of circumstances involving a repeat pattern and practice of actual violations. This would allow these properties to make necessary corrections if violations exist, without incurring substantial litigation costs, allowing available monies to be preserved and used for compliance, and not litigation costs. To be successful and to achieve its programmatic and legislative intent, the ADA needs to refocus from the litigation arena to barrier removal. Legislation providing ample notice and time for business owners to make necessary modifications prior to facing economic sanctions and litigation would allow businesses to correct violations of the ADA and provide the intended level of access to disabled persons required in the legislation.
(11/90, updated 07/00, 10/07, 10/11, 9/14)
Americans of Disabilities Act of 1990: Revised Standards
Comments on regulations for the Americans of Disabilities Act of 1990 (ADA) and the Architectural Barriers Act of 1968 (ABA) are due May 31, 2005. Published September 30, 2004, the ADA regulation document contains information on guidelines, implementation and revised standards.
The ADA requires the Department of Justice (Civil Rights Division) to adopt standards that are “consistent with the minimum guidelines and requirements issued by the Architectural and Transportation Barriers Compliance Board”. These regulations are not effective to the public until the Department of Justice adopts a final ruling on the revised ADA standards.
Question 1. Should the effective date of the proposed revised ADA Standards be modeled on the effective date used to implement the current ADA Standards – eighteen months after publication of the final rule – or a shorter period?
IREM Response: Neither. It is almost imperative that the effective date of the proposed new rule allow a minimum of eighteen months and possibly even more time depending upon the “triggering event” after the publication of the final rule. It is not uncommon for the project design time to span 18-24 months from inception to permit submittal, with additional time, 6-18 months, for the building permit process, and then an additional 24-36 months to complete the construction. Any time period set by DOJ needs to take into consideration the immense amount of time needed up front to get a project designed, permitted and then finally built. Any changes in the plans after the building permit has been applied for adds considerable to the project cost because of the need to go back, redesign and revise plans that have been completed. It is even more difficult to incorporate changes when the building is already under construction. IREM does realize that designers need to be aware of potential changes and IREM does provide notification to members so they can anticipate and be aware of upcoming changes. However even with that knowledge, it is very difficult to anticipate compliance for a final rule that takes years to develop and then has no specific schedule for when it will be published. DOJ needs to be reasonable in setting compliance time frames allowing sufficient time for the changes to be incorporated into the project during the design phase.
Effective Date: Triggering Event
Question 2: The Department is asking the public to identify any facilities for which the current triggering events might prove unworkable. Are there facilities covered by the revised ADA Standards that are subject to Title III for which first occupancy/physical alteration do not apply in the new construction/alteration context?
IREM Response - New Construction: The effective “triggering event” for current the Access Board’s revised ADA Accessibility Guidelines (ADAAG) is the major issue that created the problem in obtaining compliance with the current ADAAG and for that matter Fair Housing Accessibility Guidelines (FHAG). For new construction a “triggering event” based on “first occupancy” or even “first use” is quite unrealistic based on the time frame involved in getting a project to the point of “first occupancy” or “first use.” From project inception to “first occupancy” or “first use” may be four years or more with the minimum being as discussed in IREM’s response to Question 1. 18-24 months for the design phase, 6-18 months for the permitting stage, and then 2-3 years for the construction phase before the building is ready for “first occupancy” or “first use.” The 18 month time period proposed as the “time period” for compliance will require developers to redesign buildings that are already under construction. Mandating changes to buildings already approved for construction and already being built places a very unfair burden on developers. It is even more difficult to comply with a rule that can be published at anytime without constraints to meeting any schedule. At minimum the rule for new construction should be 18 months before the application for the building permit. Designers would then be on notice early in the design stage at a time when they can make changes while the plans are still being developed.
IREM Response – Existing Buildings: The “triggering activity” for existing buildings can be different than the “triggering activity” for new construction. However, it needs to take into consideration the issues being addressed in Question 3 concerning “safe harbor”, and it needs to be responsive to what has or has not been done to the existing building for compliance with current ADAAG.
Existing Buildings That Comply With Current ADA Standards: Building that have been designed and constructed to comply with current ADAAG or that have been modified to comply with current ADAAG should be grandfathered and not be required to update to the new ADAAG. The exception being any new work or changes in the portions of the building that comply with current ADDAG, must comply with the new updated ADAAG. The 18-month “triggering event” for buildings that comply with current ADAAG can be based, as it is now, on the commencement of the alteration or construction.
Existing Buildings That Do Not Comply With Current ADA Standards: Buildings that do not comply should be required to be updated to the new ADAAG requirements as they are currently required to be updated to ADAAG.
Safe Harbor
Question 3. Should the Department provide any type of safe harbor so that elements of facilities already in compliance with the current ADA Standards need not comply with the revised ADA Standards?
IREM Response: A very definite YES. A “safe harbor” should be granted to any and all buildings, facilities, or elements that comply with current ADAAG as long as they are not modified or changed. Modifications and changes should be done in accordance with the new ADAAG. The concept of grandfather or “safe harboring” for existing buildings is well established and is the basis for determining if building complies with the appropriate building, fire or other construction code. Building, Fire, and other codes specifically apply to new construction, alterations, or modifications made after the effective adoption date of the code. Buildings in existence at the time of the adoption of the new code are grandfathered as long as they comply with the code in existence at the time they were construction. The enforcement date for a new building, fire and other code is published well in advance by the adopting governmental agency, and it is not uncommon for the actual enforcement date to be 6, 12 or even, in the case of places like California, 3 years later.
Buildings under construction with a valid building permit are allowed to be constructed to the code being enforced at the time the building permit was issued. Buildings under construction are not required to be redesigned or required to meet the requirements of the newly adopted code. The same should be true for ADAAG compliance and thus the reason for the comments under “triggering event” in response to Question 2 and that the “trigger event” should be based on the application for the building permit.
((Adopted 4/05, updated 1/14)
Federal Ownership and Leasing of Public Buildings
Background and Objective:
In the past, the Institute of Real Estate Management expressed its concern regarding legislative attempts to reduce the amount of space the federal government leases, through the General Services Administration (GSA), from the private sector. The majority of the growth in GSA’s inventory has been in leased space. Since 1964, the leased square footage has more than tripled, growing from under 50 million square feet to over 164 million square feet in 2004. According to the most recent Federal Real Property Report, for FY 2008, the Federal Government leased over 2.83 million square feet of building space from private entities. This number represents a decrease in leasing over the past few years but is expected to grow as the number of federal employees has increased significantly since 2008.
GSA operates under legislative authority, as granted by the Public Buildings Act, to house Federal tenants in appropriate space and provide related services to allow those tenant agencies to conduct business and achieve their missions. GSA frequently evaluates its inventory, to ensure that it contains the right types of properties to house the agencies that come to GSA for space solutions.
In addition, the GSA works closely with stakeholders, including the Office of Management and Budget, and Congress through the annual appropriation process and authorization of funds to operate, lease and build Federal structures.
The GSA Public Buildings Service has thoroughly reviewed its building inventory and is working to align its real estate portfolio with its mission and customer needs. This initiative is part of an overall strategy to restructure this portfolio so that limited resources are more efficiently and effectively utilized.
On October 5, 2009, President Obama signed the “Federal Leadership in Environment, Energy, and Economic Performance.” This statute requires all federal agencies to analyze their needs and make performance goals, practice energy conservation, and practice environmental conservancy. The GSA requires its lessors to be LEED rated and be committed to energy conservation practices.
IREM Position:
Members of the Institute of Real Estate Management continue to support the maintenance of the existing check and balance system, which is the cornerstone of our nation's democratic form of government. It is important that our elected officials retain authority over the Executive Branch infrastructure. While GSA has a fiduciary responsibility to manage and maintain building assets under their custody and control on behalf of the American people, GSA cannot spend any significant funds on construction or rehabilitation without Congressional approval.
We would encourage the GSA to continue to function in a manner more characteristic of private sector business, to be both accountable for expenditures and to maintain a level of cost-consciousness.
The Institute supports GSA’s efforts to meet Federal office space needs using commercial leased space from the private sector to the maximum extent practicable. Further, the Institute supports GSA’s efforts to construct new buildings using lease construction to meet much of the Federal government’s need for general-purpose space requirements not available in the commercial real estate market. When GSA does construct new buildings, those are predominantly special purpose buildings such as courthouses or in markets where available space insufficient or not practical for meeting the government’s needs. In recent years, GSA has only occasionally built general-purpose office buildings. GSA’s annual new construction program is made up of almost entirely of special purpose space, courthouses and border stations, with requirements that are not readily available in the market place.
The Institute supports GSA’s portfolio strategy approach to managing Federal real property that should lead the agency to a lean and profitable inventory of property from which to meet the needs of Federal tenants.
We are also pleased to see that GSA is not expanding out-leasing efforts in vacant space. In the past, we were also concerned about whether the GSA might expand this program. However, out-leasing remains a minor part of GSA’s program. As of September 2004, less than 1% (3.0 million RSF) of its total RSF (344.3 million RSF) was out-leased to the private sector and GSA’s largest out-leases are driven by Federal legislation.
We applaud GSA’s efforts to utilize space available from the commercial market and support their efforts to construct Federal space only when the type and quantity of space needed is not commercially available.
(11/87, updated 4/05, 10/08, 3/12)
Government Intervention, Regulation and Control
We support broad regulatory reform such as that pursued by Congress and the concept of greater accountability of agency rule-makers to elected officials and support a viable substitute to the legislative veto, which was considered unconstitutional by the 1983 Supreme Court case, INS v. Chadha. Further, we endorse the need to shift the burden of proof in justifying agency regulations toward the agency.
(6/86, updated 11/04, 10/09, 9/12)
Financial Entities' Involvement in Real Estate
IREM opposes changes or interpretations in present federal regulations which would permit any banks or bank holding companies or subsidiaries to enter the field of property management beyond properties owned by these institutions. In principal, IREM supports the elimination of unnecessary or counter-productive government regulations.
However, in the case of banks, bank holding companies or subsidiaries and thrift institutions which hold a unique position in the business and financial world, we are opposed to changes or interpretations in the present federal regulations which would, for example, permit their entry into certain activities.
We further urge the appropriate regulators to use their authority to restrain the expansion of real estate activity by state financial entities and their federal counterparts. The Institute continues to support and encourage the omission of the following from any list of governmental or regulatory-approved financial institution real estate activities:
- Providing residential, commercial (and facility) property management services for third parties;
- management of owners' associations for condominiums, cooperatives, planned unit developments and commercial projects;
- acquiring improved commercial real estate to be held for rental; and
- acquiring improved commercial real estate for remodeling, renovating or demolishing and rebuilding for sale or rental.
Practices of this nature will remove the "safe haven" character of the institutions and compromise their fiduciary position, having a traumatic effect on the business of third-party independent property management by depriving this industry of its rights to compete in the marketplace without undue influence by banking and/or financial service entities.
(6/86, updated 11/04, 4/09, 4/15)
Civil Asset Forfeiture
Background and Objective:
Civil Asset Forfeiture laws are being used to combat drug dealing and in the past these laws have been revised. The old laws allowed the government to take your property without indictment, hearing or trial. They needed only show that there was 'probable cause' to think that an illegal activity occurred on the property, or the property was gained from the proceeds of an illegal act. To contest a seizure, a property owner had only 10-20 days to file a claim, and was required to pay $5000 or 10% of the value of the property as bond. Further, if you could not afford an attorney, one was not being provided for you. These laws required a property owner to prove his/her innocence, while our country is founded on the principal of "innocent until proven guilty".
The Civil Asset Forfeiture Reform Act of 2000, introduced by Congressman Henry Hyde (R-IL), and signed into law by President Bill Clinton was designed to reform the aforementioned laws and enacted the following changes:
- Places the burden of proof on the government by requiring them to show a "preponderance of the evidence";
- Allows for the appointment of counsel to indigents;
- Allows for the recovery of attorney’s fees
- Ensures that property owners who took reasonable steps to prevent illegal activities on or with their property cannot be subject to forfeiture;
- Eliminates the cost bond requirement from owners;
- Gives a property owner up to 30 days to contest a forfeiture;
- Allows innocent property owners the right to sue for negligence or loss of property due to forfeiture; and
- Allows the property to be returned to the owner pending final disposition, if hardship would otherwise result.
Civil Asset Forfeiture has come under significant scrutiny recently as a result of several high-profile cases involving the law. Stipulations regarding where the assets end up, and how they can be recovered vary in different states. Recently, Texas placed tight restrictions on the law after abused were uncovered. However, Utah recently rolled back previous reforms.
IREM Position:
Illegal drugs are a most serious national problem. The Institute of Real Estate Management supports the swift, timely eviction of drug dealers. However, seizure of rental property where there may be an innocent owner constitutes a taking of private property without just compensation. IREM urges that the federal government, when enacting seizure procedures, require proof of owner complicity in the illegal drug activity before authorization for seizure of real property can be granted. The government should not be allowed to seize property without clear and convincing proof of that property owner's involvement in the crime. Further, those owners whose property is seized must be given time to contest the forfeiture and access to legal counsel. If found innocent, a property owner must have the ability to receive compensation for negligence or loss of property due to seizure.
(Adopted 11/01, confirmed 4/09, 2/14)
HUD Reforms: Civil Money Penalties
Background and Objective:
The Secretary of HUD has the authority through federal court to impose civil money penalties against general partners and certain managing agents of multifamily mortgagors in addition to the current language (Section 537) of imposing civil money penalties on multifamily mortgagors. The current law in Section 537 authorizes the imposition of civil money penalties for certain violations of (A) an agreement entered into as a condition of a transfer of physical assets, a flexible subsidy loan, a capital improvement loan, a modification of the mortgage terms, or a work-out agreement; or (B) the regulatory agreement executed by the mortgagor. The penalties can even occur when the general partner of a mortgagor does not provide “management for the project that is acceptable to the Secretary” such as failing to maintain the property, and failing to provide access to accounting records of a property.
HUD regulation 24 CFR Part 30.45 provides guidance on procedures for civil money penalties. The regulation states that a mortgagor may respond to a notice from HUD of possible penalty and, subsequent to the response, a review of the notice by the Housing Civil Penalties Panel may occur. A hearing process before an administrative law judge would occur next if a penalty was suggested by a majority vote of the Housing Civil Penalties Panel. A mortgagor may appeal the administrative law judge's decision to the Secretary. After the Secretary's final decision, judicial review is possible.
Prior to the penalty, the mortgagor may request an administrative hearing which is appealable to the U.S. Court of Appeals. Under the existing law, a civil money penalty may not exceed $25,000.
IREM Position:
The Institute of Real Estate Management is aware that there are cases of "recalcitrant owners and managing agents" that HUD must address. However, the Institute believes that adding managing agents to the proposed civil penalties authority represents overkill on the part of HUD and is an inappropriate response to these problems for the following reasons:
A. General Comments:
Present remedies available to HUD adequately address these cases. Such remedies include HUD's current ability to initiate receivership hearings on a property. The Institute believes that placing a property in receivership is an extreme measure and a sufficient tool for HUD to use in extreme cases. Addressing managing agents, administrative sanctions such as suspension, termination, and debarment are current available options.
Use of this authority could be arbitrary. Adequate proof standards for administrative review must be assured. Due process should be afforded before civil money penalties are enforced on general partners or managing agents. During due process it must be determined which party is actually in control of making a specific decision. In most cases, managing agents take direction from general partners or mortgagors.
The application of civil penalties as proposed is open to abuse. The possibility exists that a difference of opinion could be deemed a "violation" by HUD and penalized. What constitutes a reasonable, proper, or necessary expense may be subject to interpretation or conflict between HUD and managing agents or owners, and may even vary from one HUD region to another. At a minimum, there should be ample notice to those deemed to be in violation to give them an opportunity to correct problems. Also, the Institute believes that it is difficult for HUD to keep informed of the current professional management practices needed for sophisticated decision-making given the shortage of staff.
If the managing agent identifies a problem that is under the control of the owner or general partner and, the managing agent documents that problem and informs HUD of that potential problem, the managing agent should be held harmless and civil money penalties should not be imposed on that managing agent. The managing agent shall only be liable for his or her own gross acts of unlawful misconduct or negligence.
The "identification of problem" action will build ill-will between the owner and agent and will provide for a negative working relationship and possible lawsuits against the managing agent.
When actions occur that may be questionable, the managing agent shall get written approval from HUD before the action is pursued. However, it’s unclear as to when and under what situations this procedure needs to be followed.
Any civil money penalties imposed should stay with the property and be used for the benefit of the property. When civil money penalties are imposed, where do the funds go?
When civil money penalties are imposed, they should not be punitive. The penalties should be only compensatory to recoup the cost of damages and, as stated above, should be used for the benefit of the property. In the case of the managing agent, punitive damages are, in essence, applied to the managing agents by potential loss of the management contract.
IREM believes that objectivity is of primary importance at each stage of the civil money penalties process including the deliberations of the Housing Civil Penalties Panel (HCPP). According to 24 CFR Part 30, the panel is composed of four individuals at the Assistant Secretary or Deputy Assistant Secretary level or their designees. With the composition of the panel only coming from this level of HUD employees, where is the objectivity? Is this a "preaching to the choir" situation? IREM feels that this panel will lack objectivity and that, under the current selection process, there is no way to make the panel objective.
The following comments refer to SS 30.325, "Under this subsection, the HCPP also may propose civil money penalties on any project mortgagor who knowingly and materially violates its regulatory agreement by:"
"Paying out any funds except for reasonable operating expenses and necessary repairs, without the prior written approval of the Secretary."
Under this part, who determines reasonable and necessary? These terms are unclear, are too broad, and interpretation by HUD tends to be extremely subjective.
"The interest of any general partner in any right to manage or receive the rents and profits from the mortgaged property, without the prior written approval of the Secretary."
Some general partner interests in a property are extremely small and, consequently, insignificant. Under current operating procedures at HUD, the Department is not a consenting party to the contract between the owner and the managing agent. Under this section, the verbiage implies that HUD is a consenting party. With this said, the right to manage now starts to get clouded. IREM's viewpoint is that HUD should be concerned in situations where the general partner has majority interests in the property.
"Remodeling, adding to, reconstructing, or demolishing any part of the mortgaged property or subtracting from any real or personal property of the project, without the prior written approval of the Secretary."
IREM does not understand the intent of this section because general remodeling and, to some extent, reconstruction are normal processes in operating a property and are done on a weekly or even daily basis. Will a new process be required by HUD to provide written approval for every remodeling or reconstruction done to the property?
"Paying for services, supplies, or materials which exceed $500 and substantially exceed the amount ordinarily paid for such services, supplies, or materials in the area where the services are rendered or the supplies or materials furnished."
The key words here are "ordinarily paid." Who at HUD will determine what is ordinarily paid?
"Failing to maintain at any time the mortgaged property, equipment, buildings, plans, offices, apparatus, devices, books, contracts, records, documents, and other related papers (including failure to keep copies of all written contracts or other instruments) in reasonable condition for proper audit and for examination and inspection at any reasonable time by the Secretary or any duly authorized agents of the Secretary."
Many managing agents could be in violation of one or more of these items.
For example, it is nearly impossible to find a set of "as-built plans" for a given property. With the number of mechanical equipment or apparatus requirements on a given property, someone could find one or more that aren't properly maintained. This item appears to be a "catch all" category to provide a greater degree of subjective discrimination for HUD.
"Failing to furnish the Secretary, by the expiration of the 60-day period beginning on the first day after the completion of each fiscal year, with a complete annual financial report based upon an examination of the books and records of the mortgagor prepared and certified to by an independent public accountant or a certified public accountant and certified by an officer of the mortgagor unless the Secretary has approved an extension of the 60-day period in writing which extension shall be granted the mortgagor demonstrates that failure to comply is due to events beyond its control."
The managing agent has influence but no control over the auditor. Where it is clear that the audit will be late, a managing agent can ask for an extension, however, HUD could still rule that the managing agent is in violation. Again, this is a situation where a managing agent has responsibility but no control.
(Adopted 11/93, updated 4/05, 8/12)
HUD Reforms: Excess Income
Background and Objective:
HUD's current system for reporting and filing excess income allows the excess income to be used to offset uncollectible rents in Section 236 Projects. This has been very beneficial to operators of the 236 projects who are particularly affected by uncollectible rents. The problem of uncollectible rents is compounded by HUD regulations which require an additional ten days to be given to a tenant before evicting the tenant for unpaid rent.
During this time, expenses for the operator continue but there is still no rent being collected. Higher basic rents also add to the problem. On September 1, 2008 it became mandatory that owners and management agents of Section 236 projects must submit form HUD-93104, “Monthly Report of Excess Income,” to HUD on a monthly basis. All owners and agents must file this form regardless of actual excess income collected.
IREM Position:
The Institute recommends that HUD make no changes to the existing policy dealing with Section 236 "Excess Income." At the same time, the Institute further recommends that all existing statutes and regulations continue to be enforced to see that all excess income is remitted to HUD in a timely fashion.
(Adopted 11/90, updated 4/05, 8/12)
HUD Reforms: Bankruptcy
Background and Objective:
Past proposals to amend Section 105 and 362 of the Bankruptcy Code (Title 11 of the United States Code, as recodified by the Bankruptcy Reform Act of 1978) have attempted to exempt from the automatic stay provisions of the Bankruptcy Code those acts taken by the Secretary of HUD or Agriculture toward foreclosure (including acts to obtain possession or for the appointment of the receiver) on multifamily projects with liens that are insured or held by the Secretary of Housing and Urban Development, or by the Secretary of Agriculture pursuant to title V of the Housing Act of 1949. Past proposals also would have excluded other acts to protect the Secretaries' financial position or interest in bankruptcy situations relating to these projects from the automatic stay where a right (for example, to offset funding otherwise due to a debtor) is provided for under contract, regulatory agreement, regulation, or statute.
Such amendments to Section 105 would make clear that the acts covered by these changes to Section 362 are not subject to a bankruptcy court's discretion to issue stay orders.
IREM Position:
IREM finds such proposals to amend section 105 and 362 of the Bankruptcy Code (Title 11 of the United States Code as recodified by the Bankruptcy Reform Act of 1978) unacceptable for several reasons as follows:
- The proposal could in fact be unconstitutional because it does not provide for due process.
- The existing bankruptcy law has withstood the test of time and has in the past allowed for the due process of law; therefore, it should remain intact.
The Institute believes that the examples that HUD gives to support its proposed reform are isolated incidents and represent aberrations rather than the norm.
(11/89, updated 1/91, 4/05, 8/12)
OSHA Reform Legislation
Background and Objective:
The Occupational Safety and Health Act was enacted in 1970 as the centerpiece of a national commitment to end the human and economic toll caused by workplace injuries and illnesses and "to assure so far as possible every working man and woman in the nation safe and healthful working conditions." OSHA was created during an atmosphere of work place accidents and fatalities caused, in many instances, by unscrupulous employers. Since the passage of this legislation, much progress has been made in providing Americans with safer and healthier jobs. The occupational fatality rate has decreased by one-half of what it was in 1970, even as the number of workers has increased by one-half.
In the 111th Congress, (2009-2010) OSHA reform legislation, the “Protecting America’s Workers Act,” was introduced in the U.S. House of Representatives. It would have expanded OSHA coverage to federal, state, and local government employees among other provisions. It died in committee in 2010, but may come up again in the future.
Improved workplace safety and health is an important aspect of the government’s commitment to better jobs for all Americans resulting in a more productive and profitable economy. Some believe that tougher OSHA standards will achieve such results. OSHA reform legislation threatens harsh new penalties, both civil and criminal.
Critics maintain that existing OSHA standards are enforced unevenly due to a lack of adequate agency resources. Thus, companies with good safety records are regularly inspected while poorly performing companies are never visited. Critics also contend that OSHA's regulations, when they are completed at all, are lengthy, complicated, and nitpicky. Enforcement of OSHA regulations is sometimes more concerned with the number of citations and the amount of penalties than with injury rates. A recent survey of medium to small businessmen by the National Association of Manufacturers cited OSHA regulations, along with product liability reform, at the top of the list in terms of government actions that were impeding economic growth and job creation.
IREM Position:
IREM believes employers have a responsibility to provide workers with a safe and healthy work environment, and to eliminate hazards and prevent injuries and illnesses due to employment to the best degree practicable. Workers, in turn, also have a responsibility to provide a safe and healthy working environment for themselves and their co-workers. While the Institute recognizes that safe and healthful working conditions and practices are in the best interest of both employers and employees, we are opposed to certain specific aspects of OSHA Reform legislation due to their negative effect on the real estate industry.
In many instances, OSHA has served as an enforcement tool to ensure that employee health and safety is not ignored. But for the vast majority of employers, existing government resources can be better utilized by providing expertise, consultation services, and training and by encouraging employers and employees to make safety and health a priority in the work place. Marketplace business incentives already exist to ensure proper working conditions. Skyrocketing insurance premiums for workers' compensation insurance, the expense of training new workers, and the fact that risky jobs demand higher pay ensures worker safety and health issues are paramount in the minds of all employers.
IREM opposes any legislation that will unduly add, without a corollary benefit, to the regulatory burden that is already choking businesses, especially small- and medium-sized businesses, and will be onerous to property managers and owners.
(11/93, revised 4/03, 10/08, Updated 3/12)
International Building Codes
Background and Objective:
In 1994, the International Code Council (ICC) was formed to draft a comprehensive and coordinated set of model new construction codes to replace the three regional codes used by most jurisdictions - the National Codes developed by the Building Officials and Code Administrators International (BOCA), the Standard Codes developed by the Southern Building Code Congress International (SBCCI) and the Uniform Codes, developed by the International Conference of Building Officials (ICBO). These codes are generally developed on a regional basis, resulting in widely varying guidelines and an inconsistent set of regulations.
Representatives of these three organizations came together to form the ICC with a goal of replacing the three regional codes with a single set of International Codes. Released in 2000, the International Codes include new editions of the International Building Code (IBC), International Fire Code, International Residential Code (IRC), International Mechanical Code, International Fuel Gas Code, International Energy Conservation Code, International Property Maintenance Code, International Plumbing Code, International Private Sewage Disposal Code, ICC Electrical Code and the International Zoning Code.
To date, the International Building Code has been adopted at the state or local level in all 50 states and the District of Columbia. The International Residential Code (IRC) has been adopted in 48 states, plus the District of Columbia. New editions of the IBC are published every three years.
In March 2006, HUD issued a final report identifying the variances between the design and construction standards for handicapped accessibility required by the Fair Housing Act and the new International Codes. In its report, HUD said the model building codes reflect the majority of the technical requirements of the Fair Housing Act.
The ICC International Codes are maintained yearly through a public hearing and review process.
IREM Position:
IREM supports the concept of one uniform model building code to establish consistency and uniformity across the nation.
We encourage the International Code Council to continue an open dialog with the real estate community and other interested organizations through the annual review process, insuring the most up to date and timely codes and issues are addressed and adopted. IREM also encourages HUD to continue to maintain an open dialog and monitor future updates of the Codes to ensure they are consistent with the Fair Housing Act and ADA’s accessibility requirements. Building officials’ incorporation of Fair Housing accessibility standards into local building codes and equal enforcement of those standards will reduce the risk of introduction of non-accessible housing into the market and the dislocation that non-accessibility creates.
(11/00, updated 11/01, 10/07, 10/11, 1/14)
Credit Risk Retention
Background and Objective:
The Dodd-Frank Act of 2010 mandates changes to the financial regulatory system in the United States. Of the many rules and regulations falling under Dodd-Frank, a Final Rule for a credit risk retention requirement was published in December of 2014. The full text of the rule can be found here. Section 941 requirements were adopted to ensure a certain level of “skin in the game”
The rule applies to all forms of assets that can be securitized, including commercial real estate (CRE) and commercial loans. The rule requires a five percent risk retention requirement, unless asset-backed securities (ABS) backed exclusively by loans meet specific standards to qualify for the proposed zero percent rate.
The rule defines CRE loans as those secured by five or more residential units or by non-residential real property, with the primary source of repayment to be derived from rental income, from the proceeds of the sale, refinancing, or permanent financing of the property. Land development and construction loans, loans on raw or unimproved land, loans to real estate investments trusts (REITs) and unsecured loans are excluded.
A qualifying commercial real estate (QCRE) loan must meet five requirements for assurance of repayment. Property value and risk management are to be exempt from the risk retention requirements.
- Ability to Repay—the originator must conduct an analysis of the borrower’s ability to repay all outstanding debt by looking back two years at the borrower’s credit history.
- Loan Terms—Debt Service Coverage (DSC) of at least 1.7 is required, although 1.5 is permitted for properties with a demonstrated history of stable net operating income (NOI).
- Loan-to-Value (LTV) Requirement—the combined LTV cannot be more than 65 percent.
- Valuation of the Collateral—the originator of a QCRE must determine that the purchase price for the property secures the loan and reflects the current market value of the property. The agencies want to ensure that the collateral is sufficient to recover any unpaid principal in the event of default and the borrower has sufficient equity in the property.
- Risk Management and Monitoring Requirements—there are certain covenants to be included in the loan documents, which are intended to facilitate the ability of the originator to monitor and manage credit risk over the full term of the loan.
There are exemptions in the rule for any residential, multifamily, or health care facility mortgage loan asset, or securitization based directly or indirectly on such asset, that is insured or guaranteed by the United States Government or an Agency of the United States.
The rule provides that Fannie Mae and Freddie Mac will not have to meet the risk retention requirements. Any temporary successor to Fannie Mae or Freddie Mac would also be exempt from the risk retention requirements.
IREM Position:
IREM supports fiscally responsible lending practices for all financial institutions. However, the Final Rule on credit risk retention requirements is not a viable solution to curb overzealous and past lending practices. In fact, we believe the Final Rule significantly hinders CRE transactions.
More specifically, the DSC of 1.5 to 1.7 is too high. Historically, a DSC of 1.2 to 1.3 has worked and will continue to do so. Furthermore, the combined LTV of not more than 65 percent is too tight for most transactions.
There is also a prohibition on pledging the retained risk as collateral. This forces a buyer to make a much larger down payment.
The credit problems stem from careless underwriting. The lending rates should not change. The Final Rule on risk retention requirements punishes responsible and honest borrowers with increased paperwork and overly tight lending requirements. The rules also have administrative setbacks as they lack flexibility. Instead, they increase staffing and personnel expenses. These excessive guidelines create a burdensome amount of paperwork that further complicates an already complex process.
Overall, the risk retention requirement slows the process of CRE loan transactions and adds to the uncertainty currently stalling the market. If these transactions lose momentum, the United States will not regain its healthy economic flow toward a full recovery mode.
(Adopted: 9/11. Updated: 10/16)
Unmanned Aerial Vehicles (Drones)
Background and Objective:
Unmanned aerial system (UAS), sometimes called an unmanned aerial vehicle (UAV) or drone, is defined by the Federal Aviation Agency (FAA) as “the unmanned aircraft (UA) and all of the associated support equipment, control station, data links, telemetry, communications and navigation equipment, etc., necessary to operate the unmanned aircraft. The UA is the flying portion of the system, flown by a pilot via a ground control system, or autonomously through use of an on-board computer, communication links and any additional equipment that is necessary for the UA to operate safely.”
Drones have been used more frequently in recent years for various reasons. For the purpose of real estate and property management, professionals use drones to inspect large buildings, obtain aerial views and photographs of commercial and large multifamily properties, among other uses.
In February, 2015, the FAA published proposed rules pertaining to the commercial use of drones. In summary, the proposed rule includes language that would:
- Limit the weight of an unmanned aircraft to be no more than 55lbs (25kg);
- Require the unmanned aircraft remain within the visual line-of-sight (VLOS) of the operator or visual observer;
- Limit the use of the unmanned aircraft to daylight-only (official sunrise to official sunset, local time).
IREM will comment on these proposed rules and be active during the rulemaking process to ensure regulations are fair and reasonable to the real estate community.
Policy Position:
IREM applauds the FAA for their timely release of proposed rules to govern the commercial use of drones. Although IREM is generally pleased with the proposed rule language, IREM encourages the FAA to adopt rules that would allow limited commercial drone use during nighttime hours. Real estate managers and owners often use drones for Infrared Thermographic imaging and this can best be done in the dark nighttime hours.
IREM respects the need for the safe use of unmanned aircraft, and encourages IREM Members to take measures to use drones safely, responsibly, and within the confines of the law.
Adopted 4/12/15