Multifamily projects are under scrutiny for compliance with the Fair Housing Act

Tom Bernaciak, chief FHA underwriter, First Housing Development Corp.

As published in Scotsman Guide's Commercial Edition, June 2012.

The Fair Housing Act, initially established to prevent discrimination in the sale or leasing of housing, has been amended several times to encompass a variety of protected classes. Since 1991, the act has required developers to make sure properties are accessible to physically disabled and physically challenged individuals. Its non-mandatory accessibility guidelines occasionally have been disregarded by developers, however, despite their benefit in providing a framework for compliance with the law.

This past year, the U.S. Department of Housing and Urban Development (HUD) used its Fair Housing Initiatives Program to award substantial funds to fair-housing organizations to investigate allegations of housing discrimination. These investigations triggered a slew of legal battles with developers found to be noncompliant by advocacy groups. In addition, HUD has tied eligibility for refinancing through Federal Housing Administration (FHA) programs to compliance with the act.

Commercial mortgage brokers who work with multifamily developers must understand the Fair Housing Act’s accessibility guidelines as many lenders include a review of a project’s compliance as part of their due diligence. In addition, with the anticipation of a surge in multifamily project starts in the next few years — the National Association of Home Builders forecasts starts to increase from 177,000 this past year to 208,000 and 235,000 in 2012 and ’13, respectively — it is critical that new projects are in compliance not only to avoid costly legal issues but also to make them easier to finance — and refinance — down the road.

To start, it is essential for commercial mortgage brokers and developers alike to have a good grasp of the Fair Housing Act’s mandate. The 1991 amendment explains that its purpose is to “provide technical guidance on designing dwelling units as required by the Fair Housing Amendments Act of 1988.” It sets accessibility guidelines that are not mandatory and do not prescribe specific requirements that must be met. They are intended, however, to provide a safe harbor for compliance within the requirements of the act.

These requirements generally apply to all properties constructed after 1991, which fall under the definition of “covered multifamily dwellings.” The act defines a covered multifamily dwelling as all dwelling units in buildings containing four units or more if the buildings have one elevator or more; or all ground-floor dwelling units in buildings containing four units or more.

An expensive refinance

To determine a project’s prospects in receiving refinancing through a federal program, commercial mortgage brokers must know whether a multifamily property is compliant with the act. For example, assume that a 100-unit multifamily project developed after 1991 used low-income housing tax credits and a small federal loan from the HOME Investment Partnerships Program (HOME) in its original financing plan.

The design incorporated at least 5 percent of the units as wheelchair-accessible, and 2 percent of the units included the required unit modifications for hearing and visually impaired residents. The owner now wishes to refinance the property to allow for a negotiated exit of the limited partner and to satisfy the HOME loan. The owner decides that the ideal execution for the loan is FHA mortgage insurance with a maximum 80 percent loan-to-value ratio, 35-year term, nonrecourse financing and fixed rates less than 3.5 percent.

The plan worked fine until the lender received the HUD-required Physical Capital Needs Assessment Report, which determined that many of the elements of the Fair Housing Act were not in the original design, including:

• Bathroom doors measured 28 inches where 34 inches are required
• Bedroom closet doors measured 28 inches where 34 inches are required
• Insufficient clear floor space less than the required 30 inches by 48 inches when centered on the sink in the ground-floor restrooms
• Electrical outlets and thermostats at a height greater than 48 inches
• Lack of wood blocking at water closets and tubs
• Space of less than 40 inches between refrigerator and the opposing countertop
• Noncompliant thresholds at unit entry doors
• Lack of an accessible route from the parking lot to the units because of a lack of ramps, or the present ramp does not comply with the Americans with Disabilities Act standards

After researching the scope of work necessary to correct these issues and the receipt of three bids to confirm costs, the price tag equaled in excess of $400,000, plus a 20 percent contingency reserve required by the HUD 223(f) mortgage insurance program.

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