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In re Adoption of the 2003 Low Income Housing Tax Credit Qualified Allocation Plan

April 28, 2004


Before Judges Havey, Newman and Fall On appeal from the New Jersey Housing and Mortgage Finance Agency.

The opinion of the court was delivered by: Havey, P.J.A.D.


Argued March 15, 2004

In this appeal, four public interest organizations challenge the validity of the 2003 Qualified Allocation Plan (QAP) adopted by respondent New Jersey Housing Mortgage Finance Agency (HMFA). A QAP is the means by which a state housing credit agency administers the Low Income Housing Tax Credit (LIHTC) program created by federal law. 26 U.S.C.A. § 42. Appellants claim that, because the 2003 QAP funds affordable housing in urban areas with a high percentage of minority residents, it encourages racial segregation in violation of the Federal Fair Housing Act, 42 U.S.C.A. §§ 3601 to 3609 (Title VIII of the Civil Rights Act of 1968), attendant Title VIII and Internal Revenue Service (I.R.S.) regulations, and declared federal housing policy. Appellants also contend that the 2003 QAP violates the Mount Laurel*fn1 doctrine, New Jersey's Law Against Discrimination (LAD), N.J.S.A. 10:5-1 to -49, and sections of the New Jersey Constitution which prohibit segregation of public schools, and require that the Legislature provide a thorough and efficient education. Finally, appellants contend that the HMFA violated the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -14, in the manner by which it adopted the 2003 QAP.

We affirm. HMFA has a duty to administer its housing and financing programs in a manner affirmatively to further the policies of Title VIII. However, the agency's"affirmatively to further" duty must be defined congruent with its express statutory powers and far-reaching housing agenda as defined under federal and state law. See 26 U.S.C.A. § 42(m)(1)(B) and (C), and the New Jersey Housing and Mortgage Finance Agency Law of 1983, N.J.S.A. 55:14K-1 to -81. Considering those powers and goals, we hold that HMFA has satisfied its"affirmatively to further" duty in adopting the 2003 QAP. We also conclude that the 2003 QAP does not violate the New Jersey Constitution, the Mount Laurel doctrine or the LAD. Finally, we reject appellants' contention that HMFA violated the APA in the manner by which it adopted the 2003 QAP.

Although this is an appeal from the 2003 QAP, the relevant procedural history dates back to 2002, when appellants filed notices of appeal challenging the 2002 QAP and HMFA's award of tax credits to specific projects located primarily in urban areas. While those appeals were pending, HMFA proposed regulations for the 2003 QAP. 35 N.J.R. 913(a) (Feb. 18, 2003). The 2003 QAP was reproposed on April 21, 2003, following receipt of comments. 35 N.J.R. 1616(a).

On June 25, 2003, HMFA denied appellants' request for a trial-type hearing before the Office of Administrative Law (OAL). On June 19, 2003, HMFA adopted the 2003 QAP, including lengthy responses to appellants' comments and submissions. 35 N.J.R. 3298 to 3342. The regulations became effective July 21, 2003. 35 N.J.R. 3298.

Appellant Fair Share Housing Center thereupon filed a notice of appeal on September 4, 2003, challenging the 2003 QAP. By separate opinions, and with the consent of the parties, we dismissed the prior appeals from the 2002 QAP. However, the parties agreed that the prior appeals had raised questions"that are both important to the public and likely to recur." In our opinions dismissing the appeals, we held that"[t]he issues of statutory interpretation and of important public interest" may be decided in the challenge to the 2003 QAP. Thereafter, by separate orders, we granted Fair Share Housing Center's motion to add as additional appellants the Camden County N.A.A.C.P., the Burlington County N.A.A.C.P., and the Camden County Taxpayers Association.


First enacted in 1986 (Pub. L. No. 99-514, 100 Stat. 2189), 26 U.S.C.A. § 42 provides an incentive for the construction and rehabilitation of low income rental housing by lowering its overall cost through the use of tax credits to developers and owners of qualified rental projects. David Phillip Cohen, Improving the Supply of Affordable Housing: The Role of the Low-Income Housing Tax Credit, 6 J.L. & Pol'y 537, 541 (1998).*fn2 The program has since become the largest federal subsidy for the development and rehabilitation of affordable housing. Megan J. Ballard, Profiting From Poverty: The Competition Between For-Profit And Nonprofit Developers For Low-Income Housing Tax Credits, 55 Hastings L.J. 211, 212 (2003). To qualify, a project may set aside 20% or more of the building's residential units to renters whose income is 50% or less than the area's median growth income (the 20-50 test), or set aside at least 40% or more of its units to tenants whose incomes are no greater than 60% of the area's median gross income (the 40-60 test). Id. at 229-230; 26 U.S.C.A. § 42(g)(1). To be eligible for the credit, the building must be affordable to low-income tenants for an extended period of time, generally fifteen years. 26 U.S.C.A. § 42(h)(6)(D).

These tax credits are allocated to the various states according to their population. 26 U.S.C.A. § 42(h)(3)(C)."The program is popular and desirable for developers of low income housing and there is competition for the limited number of awards available." In re Tax Credit of Pennrose Props., supra, 346 N.J. Super. at 485. See also Ballard, supra, 55 Hastings L.J. at 213 (noting the"stiff competition" for tax credits). The tax credit program is administered by a state's housing credit agency, 26 U.S.C.A. § 42(m), which in New Jersey is the HMFA. The housing credit agency must adopt a"qualified allocation plan." 26 U.S.C.A. § 42(m)(1)(A). QAPs must include certain preferences and selection criteria. Notably, the projected racial composition of the project and surrounding neighborhood are not among those criteria. Specifically, a QAP means"any plan":

(i) which sets forth selection criteria to be used to determine housing priorities of the housing credit agency which are appropriate to local conditions,

(ii) which also gives preference in allocating housing credit dollar amounts among selected projects to--

(I) projects serving the lowest income tenants,

(II) projects obligated to serve qualified tenants for the longest periods, and

(III) projects which are located in qualified census tracts (as defined in subsection (d)(5)(C)) and the development of which contributes to a concerted community revitalization plan, and

(iii) which provides a procedure that the agency (or an agent or other private contractor of such agency) will follow in monitoring for noncompliance with the provisions of this section and in notifying the Internal Revenue Service of such noncompliance which such agency becomes aware of and in monitoring for noncompliance with habitability standards through regular site visits.

(C) Certain selection criteria must be used. The selection criteria set forth in a qualified allocation plan must include--

(i) project location,

(ii) housing needs characteristics,

(iii) project characteristics, including whether the project includes the use of existing housing as part of a community revitalization plan,

(iv) sponsor characteristics,

(v) tenant populations with special housing needs,

(vi) public housing waiting lists,

(vii) tenant populations of individuals with children, and

(viii) projects intended for eventual tenant ownership.

[26 U.S.C.A. § 42(m)(1)(B) and (C).]

Each year HMFA adopts a QAP in the form of regulations establishing funding cycles, and decides the amount of credits to be made available in each cycle. N.J.A.C. 5:80-33.3. Significant to this appeal, there are a number of differences between the 2002 QAP and the 2003 QAP. In 2002, these cycles were as follows: (1) the"Urban Cycle," N.J.A.C. 5:80-33.4 (2002); the"Suburban/Rural Cycle," N.J.A.C. 5:80-33.5 (2002); the"HOPE VI Cycle," which consists of projects located in municipalities on the Urban Cycle list which utilize"HOPE VI" funds, N.J.A.C. 5:80-33.6 (2002);*fn3 the"Special Needs Cycle," which refers to projects which address the housing needs of the homeless, people with developmental disabilities, or victims of domestic violence, N.J.A.C. 5:80-33.7 (2002); the"Final Cycle," which applies to all projects, with at least $1,000,000 allocated to a"HOPE VI" Project, N.J.A.C. 5:70-33.8 (2002), and a"Reserve Cycle" which applied to a project that might need additional credits because of technical errors and severe hardship, N.J.A.C. 5:80-33.9 (2002). See 34 N.J.R. 1583 to 1585.

HMFA had approximately $15 million in tax credits to distribute in 2002, and it broke them down by cycle as follows: Urban Cycle, $6,000,000; Suburban/Rural Cycle, $3,150,000; HOPE VI Cycle, $2,105,000; Special Needs Cycle, $1,300,000; Reserve, $149,403; Final Cycle, $2,105,000. 34 N.J.R. 2417.

According to HMFA, the 2003 QAP attempts to provide incentives to deconcentrate poverty and to encourage affordable housing in suburban areas. 35 N.J.R. 3326. HMFA's 2003 QAP no longer places urban and suburban affordable housing projects in separate funding categories. Instead, HMFA allocated $5 million in tax credits to the"Family Cycle," which included an"[a]ffordability set-aside," such as a mixed-income project, a HOPE VI set-aside, and a nonprofit set-aside, which targets qualified nonprofit organizations that are community-based within a qualified census tract. N.J.A.C. 5:80-33.4. 35 N.J.R. 3326. $2,400,000 in tax credits are allocated to projects for senior citizens, N.J.A.C. 5:80-33.5, $1.2 million to the"Special Needs Cycle," N.J.A.C. 5:80-33.6, $1.8 million for the"Final Cycle" which was open to all projects, N.J.A.C. 5:80- 33.7, and finally an undetermined amount for the"Reserve Cycle," which was to be used to"fund supplemental awards or for unforeseen circumstances" such as where the project's financial feasibility was in jeopardy, N.J.A.C. 5:80-33.8.

Although the 2003 QAP carries over many tax-credit regulations made part of prior QAPs, it adds new credits and preferences which are significant. As noted, the 2003 QAP sets aside tax credits for mixed-income housing developments, N.J.A.C. 5:80-33.4(a)1, whereas in prior years, such credits were given to projects that were affordable to 100% of its tenants. 35 N.J.R. 3303. The 2003 QAP also includes a set aside of tax credits for HOPE VI projects, N.J.A.C. 5:80-33.4(a)2, and for projects sponsored by a community-based nonprofit organization that is located within a"qualified census tract[.]" N.J.A.C. 5:80-33.4(a)3. Another change is the awarding of"points" for affordable-housing projects made part of a court-ordered or Council On Affordable Housing (COAH) Mount Laurel compliance plan. N.J.A.C. 5:80-33.15(a)7.

In objecting to the proposed 2003 QAP, appellants relied in part on their comments to the 2002 QAP. Appellants had alleged that the implementation of the 2002 QAP would result in approximately 75% of the tax credits going to projects which would be built in"racially segregated neighborhoods." According to appellants, HMFA was under a constitutional, statutory and regulatory duty to promote racial and economic integration. They argued that the 2002 QAP violated federal housing law and regulations, the Mount Laurel doctrine, State constitutional provisions relevant to school segregation, and New Jersey statutes prohibiting racial discrimination.

In challenging the 2003 QAP, appellants also included comments, opinions, speeches and supporting data prepared by David Rusk, who described himself as"an independent consultant on urban policy." Rusk criticized regional contribution agreements (RCAs), see N.J.S.A. 52:27D-312, as resulting in affordable housing units not being built in suburban communities and more housing being built or rehabilitated in racially-segregated urban communities. According to Rusk,"the RCAs literally cemented 15,000 to 20,000 poor children into poverty-impacted neighborhoods and school [sic] where they are doomed to fail in overwhelming numbers!" Rusk believed that tax credits for projects in urban areas had the same effect as RCAs. Rusk understood"the motivation of many private, non-profit housing providers for whom LIHTC and RCA funds are vital for the inner-city neighborhood revitalization programs." However, these groups were striking a"devil's bargain" because"such actions perpetuate racial and economic segregation, above all, of children in public schools with very negative impact on their education and preparation for their adult lives."

HMFA prepared a voluminous response to appellants' comments (35 N.J.R. 3298(b) to 3354), which included a statement of the agency's eighteen goals within three broad subheadings: (1) promoting affordable housing; (2) encouraging"[s]mart [g]rowth"; and (3) community revitalization. 35 N.J.R. 3321-3329.

HMFA acknowledged that"[o]ne of the largest impediments to revitalization is concentrated poverty." 35 N.J.R. 3326. It explained, however, that the 2003 QAP replaced the"urban" and"suburban" cycles with the"family" and"senior" cycles because it was"seeing a growing chasm forming between suburbs and cities and wanted to send a clear signal this year that affordable housing is to be viewed regionally." Ibid. Another way it sought to address the problem was by increasing the weight to be accorded to mixed-income housing developments.

HMFA also sought to promote mixed-income communities by setting aside funds for"HOPE VI public housing redevelopment projects which typically involve the demolition of high-rise poverty-concentrated family housing structures and their replacement with less concentrated rental and homeownership units marketed to families and individuals of varying incomes." Ibid. The 2003 QAP also sought to encourage the use of community revitalization plans by rewarding projects"that demonstrate comprehensive strategies for neighborhood revitalization." Ibid. Such a plan is one endorsed by a municipality to designate areas in need of redevelopment. Id. at 3327. In addition, HMFA altered its past practice of giving more weight to 100% affordable projects; now, the agency gives equal preference for mixed-income housing developments. Ibid.

Further, HMFA observed that more funding for projects in suburban areas may have a negative impact on the allocation of tax credits to urban areas. 35 N.J.R. 3304. It also expressed doubt that constructing additional affordable housing in suburban areas would in fact create housing opportunities for the inner city, citing studies that had shown that"suburban affordable residential units were often occupied by fully-eligible, low-income suburban residents." 35 N.J.R. 3305. Agreeing with appellants that concentrated poverty negatively impacts inner city residents, the agency nevertheless stated that the appropriate way to attack the problem was not necessarily to shift tax credits for urban to suburban locations. 35 N.J.R. 3311. It was its view that its responsibility was to engage and invest in the more troubled neighborhoods and communities in the State. It explained:

Revitalization of our cities can address the racial segregation Fair Share decries. Urban revitalization programs, including programs that replace dilapidated low-income housing with mixed-income housing, should promote integration in the long run and make our cities vibrant communities for people of all races and economic means. Attractive and safe new housing, combined with the demolition of old, high-rise public housing and the incorporation of commercial uses, is the first step. Upgrade of housing stock in cities, combined with commercial endeavors, should spark eventual gentrification and the return to the cities of higher-economic people of all races. Surely a moratorium on financial assistance to urban centers does not address white flight or encourage persons of greater means to return to the cities. [35 N.J.R. 3312.]


Appellants and amici argue that HMFA violates Title VIII by failing to administer its low-income housing tax-credit program in such a way as"affirmatively to further" the purposes of the act. 42 U.S.C.A. § 3608(e)(5) Specifically, they urge the invalidation of the 2003 QAP and a remand for the promulgation of rules that comply with federal law and HUD-site selection regulations in order to"promote integration by generally siting affordable housing in areas that are not already home primarily to people of color." Further, they contend that HMFA must develop a method of considering racial and other demographic information, and modify its"point system" in a manner that would foster racial integration and economic improvement for minorities.

A. Standard of Review

Administrative regulations are presumed to be valid. New Jersey State League of Municipalities v. Department of Cmty. Affairs., 158 N.J. 211, 222 (1999)."This presumption of validity attaches if the regulation is within the authority delegated to the agency and is not on its face beyond the agency's power." Medical Soc'y ...

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