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Terrace v. New Jersey Housing and Mortgage Finance Agency

April 24, 2008


On appeal from a Final Administrative Decision of the New Jersey Housing and Mortgage Finance Agency, Docket No. HFA 07710-04.

Per curiam.


Argued April 7, 2008

Before Judges Graves, Sabatino and Alvarez.

This appeal involves the interpretation and application of a regulation of the New Jersey Housing and Mortgage Finance Agency ("HMFA" or "the agency"). The regulation in question, N.J.A.C. 5:80-9.13, governs a sponsor's optional conversion of certain privately-owned, HMFA-financed housing projects to mixed low-income and moderate-income projects. Such conversion enables a sponsor to take advantage of faster, streamlined procedures and less restrictive standards for implementing rent increases.

Pursuant to N.J.A.C. 5:80-9.13, appellant Overlook Terrace ("Overlook") sought to convert its HMFA-financed apartment buildings in West New York from a project designated as a moderate-income, market-rate facility to a mixed low-income and moderate-income facility. As it pursued that conversion, Overlook Terrace disagreed with the HMFA staff about the meaning and application of five discrete aspects of the regulation. The dispute was referred to an Administrative Law Judge ("ALJ") in the Office of Administrative Law ("OAL"), who presided over several days of trial.

In March 2006, before the OAL proceedings concluded, the HMFA amended N.J.A.C. 5:80-9.13, in a manner that buttressed the agency's position concerning the five issues contested in this case. Following the adoption of that revised regulation and the completion of the trial, the ALJ recommended that Overlook's position be rejected on all five issues. Thereafter, on September 21, 2006, the HMFA Board of Directors issued a final decision adopting the ALJ's determination.

Overlook now appeals the September 2006 final agency decision. Overlook argues that the HMFA's interpretation of N.J.A.C. 5:80-9.13, as it was worded in 2003 when Overlook submitted its conversion application to the agency, is incorrect, arbitrary and capricious. Overlook also contends that it would be manifestly unjust to apply the revised 2006 version of the regulation retroactively to its proposed conversion.

For the reasons explained herein, we affirm the HMFA's final decision, with one slight modification.


As we previously noted in another recent appeal involving these same parties,*fn1 Overlook Terrace consists of two high-rise buildings in West New York constructed in the late 1960s. The buildings contain six hundred apartment units that are fully or substantially occupied. Their construction was financed with a fifty-year mortgage by the New Jersey Housing Finance Agency ("HFA"), the predecessor to the HMFA, through the issuance of tax-exempt bonds. See N.J.S.A. 55:14J-34(f) (repealed 1984); see also Overlook Terrace Mgmt. v. Rent Control Bd. of W. New York, 71 N.J. 451 (1976) (tracing the history of Overlook Terrace and the State agency's role in financing and overseeing the project). The HFA was created to support the development and rehabilitation of moderate-income housing in New Jersey through the use of below-market financing.

As the HFA's successor, the HMFA continues to hold a mortgage on Overlook Terrace. See N.J.S.A. 55:14K-2(e). As a condition for receiving its original below-market mortgage, Overlook must seek any proposed rent increases from the HMFA, on notice to the affected tenants. See N.J.A.C. 5:80-9.3 to -9.7. The agency retains control over the selection criteria for tenants, including family income limitations. See N.J.A.C. 5:80-8.1 to -8.5. The HFMA also reviews and passes upon the project's annual budget, including the funds set aside and spent for capital improvements. See N.J.A.C. 5:80-9.1, -9.4(a)(7). Because Overlook is a so-called "limited dividend" housing project, its owners can receive no more than an 8% annual return on their investment in the property, subject to certain exceptions. See N.J.A.C. 5:80-3.2 and -3.3.

Overlook is one of several market-rate HMFA projects that do not receive rent subsidies from a federal or state agency.

The rents received from tenants are the sponsors' sole sources of income for such projects. Because the annual process of obtaining approval for higher rents can be cumbersome, the HMFA decided in 1993 to propose an alternative, more expeditious procedure for increasing rents in these older projects that may need additional funds for repairs and capital improvements. See 26 N.J.R. 1188 (March 7, 1994) (rule proposal).

The proposed regulation, N.J.A.C. 5:80-9.13,*fn2 attempted to tie rent increases for such converted projects to income standards promulgated by the United States Department of Housing and Urban Development ("HUD"). See 26 N.J.R. 1188-90. Under the regulation, an eligible sponsor that chose to convert its housing project to a mix of at least 10% low-income tenants and a remainder of moderate-income tenants, could take advantage of the streamlined procedures. Id. at 1188. The provisions allow rent increases capped at 10% annually for the low-income units and 20% annually for moderate-income units. N.J.A.C. 5:80-9.13(a)(1). The HMFA anticipated that this new option would "help address the shortage of low-income units needed in the State," while, at the same time, produce an overall increase in revenues for such projects, many of which were "at or approaching [twenty] years old and will be in need of funds for capital improvements and repairs." 26 N.J.R. 1189.

At the time N.J.A.C. 5:80-9.13 was first was proposed in 1994, fourteen HMFA-financed projects, including Overlook, did not receive any governmental rental subsidies and thus would have been covered by the new regulation. 26 N.J.R. 1188. The proposal generated public comments and questions from nine persons, six of whom did not live in projects that would have been affected by the new rule. See 26 N.J.R. 2570 (June 20, 1994) (rule adoption). It does not appear from the New Jersey Register that Overlook's owners submitted any public comment on the proposed rule, although an attorney representing an unidentified project raised several questions about the proposal in his written submission. Id. at 2570-71.

The HMFA adopted the new conversion rule on May 20, 1994,*fn3 with an effective date of June 20, 1994. Id. at 2570. The regulation, which was entitled, "Rent increases for low and/or moderate income projects without Federal project-based rent subsidies," began as follows:

(a) Sponsors of housing projects without project-based Federal rent subsidies may elect to implement rent increases in accordance with rules in this section rather than those in N.J.A.C. 5:80-9.1 through 9.12. The rules within this section may be used only after the owner demonstrates that at least 10 percent of the units are rented to low[-]income families and the balance rented to moderate[-]income families. [N.J.A.C. 5:80-9.13(a) (amended 2006).]

Subsection (a) went on to cross-reference HUD's income standards:

HUD's definition of low[-] and moderate[-] income families shall be used for the purposes of the following:

1. Sponsors shall submit a written request to the [a]gency, accompanied by the most recent HUD median[-]income figures and the maximum rents corresponding to the median[-]income figures. The agency will review and verify the information contained therein and, if accurate, approve the rent increase, up to a maximum of 10 percent for low[-]income units and 20 percent for moderate[-]income units. The [a]gency will provide written notice of the approval to the Sponsor.

2. Upon approval from the [a]gency, the Sponsor shall notify tenants in writing. Notice shall be by mail or hand delivery to each tenant's unit or by personal service. The notice shall include the calculation of how the increase was determined pursuant to HUD's increase in median income.

3. The new rents shall be effective on the first day of the month following one calendar month's written notice to the tenants. [Ibid.]

The next portion of the regulation, subsection (b), addressed projects that do not currently meet the low-income and moderate-income tenant distributions required in subsection (a), but whose sponsors wish to convert to such a tenant mix:

(b) Sponsors of projects without project-based Federal rent subsidies, which do not meet the low[-] and moderate[-]income unit distribution set forth in (a) above, may elect to convert their project to that unit distribution and thereby be subject to (a)1 through 3 above.

1. Sponsors who elect to convert shall get credit toward the 10 percent low[-] income, 90 percent moderate[-]income unit distribution for any existing tenants meeting such standard. As vacancies occur, the units shall first be rented to fulfill the 10 percent low[-]income requirement and then 90 percent to moderate[-]income families.

2. In the event that any of the 90 percent moderate[-]income units have current rents at less than the maximum moderate[-] income rent, rent increases for the first five years following conversion shall be permitted up to 20 percent per year (without regard to HUD increases in median income) until HUD's maximum moderate[-]income rent is reached. Thereafter, rents shall be implemented pursuant to (a)1 through 3 above. [N.J.A.C. 5:80-9.13(b) (amended 2006).]

The regulation envisioned that low-income units in such converted projects would revert to moderate-income status within fifteen years:

(c) Low[-]income units shall revert to moderate[-]income units 15 years after the conversion. At such time, rent increases for the next five years shall be permitted up to 10 percent per year (without regard to HUD increases in median income) until HUD's maximum moderate[-]income rent is reached. Thereafter, rents shall be implemented pursuant to (a)1 through 3 above. [N.J.A.C. 5:80-9.13(c) (amended 2006).]

In subsection (d), the regulation prescribed a formula specifying the applicable family size to be used in determining maximum rents, depending upon whether the rented unit is an efficiency or a larger apartment. N.J.A.C. 5:80-9.13(d). The regulation also established a procedure for a sponsor of converted units to seek rent increases from the HMFA above the authorized levels. N.J.A.C. 5:50-9.13(e).

Almost a decade after N.J.A.C. 5:80-9.13 was enacted, Overlook submitted a request to the HMFA in May 2003 to convert its project from a moderate-income, market-rate facility to a mixed low-income and moderate-income housing project, and to obtain associated rent increases. After that request was filed, the agency and Overlook exchanged a series of communications, with differing interpretations of N.J.A.C. 5:80-9.13. In light of those persisting disagreements, the agency formally denied Overlook's conversion ...

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