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Lower Main Street Associates v. New Jersey Housing and Mortgage Finance Agency

Decided: July 8, 1987.


On appeal from Regulations of New Jersey Housing and Mortgage Finance Agency.

King,*fn1 Havey and Muir, Jr. The opinion of the court was delivered by Havey, J.A.D.


[219 NJSuper Page 266] Plaintiffs, Lower Main Street Associates (LMSA) and Union Plaza Associates (UPA), are the owners of moderate-income apartment projects financed by mortgage loans held by respondent New Jersey Housing and Mortgage Finance Agency (HMFA). At issue on appeal is the validity of regulations adopted in 1985 governing the prepayment of HMFA mortgages and the charging of fees upon the sale of HMFA-financed projects. Specifically, the regulations prohibit prepayment of the HMFA mortgage without the agency's approval, limit return on investment upon sale of a project involving the prepayment of the HMFA mortgage to 8 per cent, and charge various closing fees upon the sale of an agency-financed project. Plaintiffs contend the regulations: (1) contravene the mortgage documents; (2) are not authorized by statute; (3) violate the contract clauses of the federal and state constitutions, and (4) constitute a taking of property without due process. We conclude that the prepayment regulations do not violate the terms of the HMFA mortgages, are statutorily authorized, and do not violate plaintiffs' constitutional rights. We hold, however, that

the regulation imposing closing fees is unreasonable and not authorized by statute and therefore invalid.

HMFA was created under the New Jersey Housing and Mortgage Finance Agency Law of 1983, L. 1983, c. 530, codified N.J.S.A. 55:14K-1, et seq. HMFA is a consolidation of the prior New Jersey Housing Finance Agency (HFA) and the New Jersey Mortgage Finance Agency. N.J.S.A. 55:14K-4. Prior to the merger, the HFA financed the construction or rehabilitation of moderate-income housing by the issuance of finance bonds. N.J.S.A. 55:14J-1, et seq., (repealed by N.J.S.A. 55:14K-1, et seq.). The 1967 act creating the HFA recognized a need for ". . . adequate, safe and sanitary dwelling units for many families of moderate income in this State . . ." and that cooperation between private enterprise and the state was essential to meet this need. N.J.S.A. 55:14J-2 (now repealed). The 1983 act creating the HMFA continued this purpose, adding as a goal the desire to provide low as well as moderate-income housing. N.J.S.A. 55:14K-2e(2). HMFA assumed the obligations of the HFA bonds under N.J.S.A. 55:14K-4d and was granted its own tax-exempt bonding authority. See N.J.S.A. 55:14K-20.

Both LMSA and UPA are limited partnerships organized as limited-dividend housing associations under N.J.S.A. 55:16-1, et seq. UPA was created in June 1969; LMSA in May 1970. HFA granted construction loans to both UPA and LMSA for the construction of moderate-income housing. In 1969 UPA borrowed $5,835,000 to construct 240 units in Union City. In 1971, LMSA borrowed $7,665,000 to construct 288 units in Rahway. Both loans were for 90 per cent of the project cost, had 50-year terms and interest rates fixed by the interest payable by HFA on finance bonds to be issued by it for the purpose of obtaining funds necessary to make the mortgage

loans.*fn1 HFA used the proceeds of bond-anticipation notes to advance the construction financing to UPA and LMSA.

Upon execution of the construction mortgages, each appellant executed regulatory agreements under which they agreed to HFA control over the fixing of rents to be charged and management of the projects. They also agreed that the projects would be open only to families of moderate income as determined by the HFA. Both regulatory agreements provided that distributions to the partners on their equity investment would be limited to 8 percent per annum.

In April 1972, LMSA and UPA executed conforming mortgages to HFA. Paragraph 6 of both mortgages contained the following clause as to prepayment:

[T]he Mortgagor shall not make any advance principal payment prior to the date on which all of the Bonds issued by the Mortgagee for the purpose of obtaining funds with which to make this Mortgage Loan are redeemable. With respect to any advance principal payment so permitted thereafter, the Mortgagor shall pay an amount equal to the aggregate of (i) the principal amount of the Mortgagor's Mortgage Loan Obligations . . . remaining unpaid, (ii) the Mortgagor's Housing Finance Fund Obligations . . . remaining unpaid, (iii) the interest to accrue on all Bonds of the Mortgagee to be redeemed . . . to the next call date thereof not previously paid by Mortgagor, (iv) the call premium, if any, on the Bonds so to be redeemed, and (v) the cost and expenses of the Mortgagee in effecting the redemption. . . .

By resolution adopted May 16, 1972, HFA authorized the issuance of the 1972 Series A General Housing Loan Bonds in the amount of $58,915,000. The bond resolution provided that Series A bonds "maturing on and after November 1, 1983" would be subject to redemption on or after November 1, 1982 at the option of HFA. The resolution prohibited prepayment of the mortgages until the bonds were redeemable. Both UPA and LMSA were recipients of the bond-sale proceeds.

Effective May 20, 1985, HMFA adopted the regulations which are the subject of the present dispute. The three challenged

regulations are part of an overall regulatory scheme adopted by the agency controlling the transfer of ownership rights to agency-financed projects.

The first regulation in dispute is N.J.A.C. 5:80-5.10, which prohibits prepayment of HMFA mortgages without written agency approval. The second challenged regulation, N.J.A.C. 5:80-5.8(b), provides that a prepaying mortgagor is limited to a cumulative return on its investment of 8 percent per annum. N.J.A.C. 5:80-5.8(b). Upon the sale of a prepaying mortgagor's project, ". . . any amounts realized by the seller in excess of 8 percent shall be paid to the Agency as an additional fee for approving the transfer." N.J.A.C. 5:80-5.8(b)1. If a project is sold without prepayment of the mortgage, the limit applies only to revenues received from operations; no limit on return of equity applies to money earned from the sale of a project. N.J.A.C. 5:80-5.8(b)2. The third regulation challenged, N.J.A.C. 5:80-5.9(a) provides that at the closing of any sale, whether the mortgage is prepaid or not, a "processing fee" of one-half of one percent of the purchase price is to be paid to HMFA. N.J.A.C. 5:80-5.9(a)1. A seller must prepay $5,000 which is applied toward the "processing fee" at closing. N.J.A.C. 5:80-5.9(a)2. Further, sellers of projects with direct federal subsidies are required to pay 10 percent of the cash proceeds of sale into the agency's "portfolio reserve" account; the fee is 15 percent of the proceeds when there is no federal subsidy. N.J.A.C. 5:80-5.9(a)3.

Plaintiffs have appealed directly to the Appellate Division challenging the regulations. See R. 2:2-3(a)(2). They seek a declaration that the regulations are invalid and an order permanently enjoining their enforcement.


Plaintiffs contend that N.J.A.C. 5:80-5.10 which prohibits prepayment without agency approval abrogates their right to prepay the mortgage loans ...

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