09-000366 Vestcor Fund Xii, Ltd., D/B/A Madalyn Landing Apartments vs. Florida Housing Finance Corporation Status: Closed Recommended Order on Tuesday, June 2, 2009.

Summary: Respondent complied with the applicable requirements when approving credit underwriting report and committing funds to applicant's project.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

VESTCOR FUND XII, LTD., d/b/a )

MADALYN LANDING APARTMENTS, )

)

Petitioner, )

)

vs. ) Case No. 09-0366

)

FLORIDA HOUSING FINANCE CORPORATION, )

)

)

Respondent, )

)

and )

)

MALABAR COVE, L.L.L.P., AND )

MALABAR COVE, II, LTD., )

)

Intervenors. )

)

RECOMMENDED ORDER

On March 26 and 27, 2009, a formal administrative hearing

was conducted in Tallahassee, Florida, before William F.

Quattlebaum, Administrative Law Judge, Division of

Administrative Hearings.

APPEARANCES

For Petitioner: Donna E. Blanton, Esquire

Elizabeth McArthur, Esquire

Radey, Thomas, Yon & Clark, P.A.

301 South Bronough Street, Suite 200

Post Office Box 10967

Tallahassee, Florida 32301

For Respondent: Hugh R. Brown, Esquire

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32301-1329

For Intervenors: M. Christopher Bryant, Esquire

Oertel, Fernandez, Cole &

Bryant, P.A.

301 South Bronough Street, Fifth Floor

Post Office Box 1110

Tallahassee, Florida 32302-1110

STATEMENT OF THE ISSUE

The issue in this case is whether credit underwriting

reports associated with applications for funding submitted by

the developer of an apartment complex in Brevard County,

Florida, met applicable requirements, and whether acceptance and

approval of such reports by the Respondent, Florida Housing

Finance Corporation (FHFC), was appropriate.

PRELIMINARY STATEMENT

In 2007 and 2008, the developer of Malabar Cove, an

affordable housing apartment complex located in Brevard County,

Florida, applied to participate in loan programs operated by the

FHFC. On December 12, 2008, the FHFC Board of Directors (FHFC

Board or Board) approved the applications.

On December 24, 2008, the Petitioner, Vestcor Fund XII,

Ltd., the developer of Madalyn Landing Apartments (Madalyn

Landing), a competing apartment complex in Brevard County,

Florida, filed a Petition for Administrative Hearing with the

FHFC challenging the Board's decision. On January 22, 2009, the

FHFC forwarded the Petition for Administrative Hearing to the

Division of Administrative Hearings, which scheduled and

conducted the proceeding.

Also on January 22, 2009, the developer of Malabar Cove

(identified in the petition as Malabar Cove, L.L.L.P., and

Malabar Cove, II, Ltd., and hereinafter in this Recommended

Order as "Malabar Cove") filed a petition to intervene that was

granted by Order dated February 13, 2009.

At the hearing, the Petitioner presented the testimony of

three witnesses and had Exhibits 1 through 7, 9 through 25, 27,

28, 30, 31, 34, 35 (parts A and B), and 36 admitted into

evidence. The FHFC presented the testimony of one witness.

Malabar Cove presented the testimony of one witness. A Pre-

hearing Stipulation filed on March 17, 2009, was admitted into

evidence as Joint Exhibit 1. The Pre-hearing Stipulation set

forth relevant facts that have been incorporated as appropriate

into this Recommended Order.

The three-volume Transcript of the hearing was filed on

April 6, 2009. A Corrected Volume 3 of the Transcript was filed

on April 8, 2009. On April 15, 2009, the FHFC filed an

unopposed Motion for Extension of Time to File Proposed

Recommended Orders that was granted by an Order entered on

April 16, 2009. All parties filed Proposed Recommended Orders

on April 21, 2009, that have been considered in the preparation

of this Recommended Order.

FINDINGS OF FACT

1. The FHFC is a public corporation organized under

Chapter 420, Florida Statutes (2008), to administer a state

program through which, insofar as is relevant to this

proceeding, developers obtain funding for construction of rental

apartments to provide housing to persons of low, moderate, and

middle income. The funding is provided through various

mechanisms, including the State Apartment Incentive Loan (SAIL)

program.

2. The Petitioner owns and operates Madalyn Landing, a

304-unit, affordable housing complex in Palm Bay, Brevard

County, Florida, located approximately one-half mile from the

Malabar Cove apartment complex. Madalyn Landing was constructed

in 2000.

3. The Petitioner has consistently asserted that the

Malabar Cove apartment complex will negatively impact the

Petitioner’s ability to obtain and retain tenants for Madalyn

Landing and has objected to the receipt by Malabar Cove of

financial assistance available through local and state programs

for affordable rental housing construction developers.

4. To participate in the programs administered by the

FHFC, developers submit applications for project funding during

an annual process identified as the "universal cycle." Each

application is evaluated, scored, and competitively ranked

against other applications filed during the same cycle.

5. Applicants are provided with an opportunity to review

and comment on the evaluation and scoring of all proposals.

Defects in application may be cured during this initial review

process. After the period for comment ends, the FHFC issues a

revised competitive ranking of the proposals. Developers may

challenge the second ranking through an administrative hearing.

6. After the second ranking process is final, developers

achieving an acceptable score receive a preliminary funding

commitment and proceed through an evaluation process performed

by an independent credit underwriter. The underwriter reviews

each proposal according to the provisions of Florida

Administrative Code Rule 67-48.0072. The credit underwriting

reports are eventually submitted to the FHFC Board for approval.

7. The developer of Malabar Cove is Atlantic Housing

Partners (AHP), which develops and operates affordable housing

projects in Florida, including others within Brevard County.

8. Malabar Cove is a multifamily apartment complex located

in Palm Bay, Florida, which was proposed by AHP in two phases.

Phase I of the project included 76 three-bedroom, two-bath

apartment units. Phase II of the project included 72 additional

units designated as follows: eight three-bedroom, two-bath

units; 32 two-bedroom, one-bath units; and 32 four-bedroom,

three-bath units.

9. The Malabar Cove units are designated for tenants

earning 60 percent or less of the Area Median Income (AMI) as

determined by the U.S. Department of Housing and Urban

Development.

10. Madalyn Landing Apartments are likewise designated for

tenants earning 60 percent or less of the AMI.

11. AHP applied for approximately $4 million in SAIL funds

and $680,000 in supplemental loan funds for Malabar Cove Phase I

during the 2007 universal cycle. The project received a

preliminary funding commitment letter during the 2007 cycle and

proceeded into the credit underwriting process.

12. AHP applied for approximately $2 million in SAIL funds

and $680,000 in supplemental loan funds for Malabar Cove

Phase II during the 2008 universal cycle. The project received

a preliminary funding commitment letter during the 2008 cycle

and proceeded into the credit underwriting process.

13. Malabar Cove obtained tax-exempt bond financing from

the Brevard County Housing Authority (BCHA).

14. Madalyn Landing was constructed with $14 million in

tax-exempt bond financing from the FHFC.

15. Developers constructing affordable housing projects

with tax-exempt bond financing are eligible to receive low-

income housing tax credits. The credits are approximately

4 percent of the development costs for a period of ten years.

Such tax credits are typically sold to institutional investors

and generate equity for the developer. The tax credits obtained

by the Petitioner for Madalyn Landing and by AHP for Malabar

Cove were sold to generate equity for construction of the

properties.

16. Construction of the Malabar Cove project commenced

prior to this litigation and was projected to be complete as of

April 2009. The receipt of funding from the BCHA obligates

Malabar Cove to provide the affordable rental housing as

identified herein.

17. Because the Malabar Cove project includes supplemental

loan funds from the FHFC, 10 percent of the units must be held

for tenants making 33 percent or less of the AMI, assuming that

the FHFC ultimately approves the Malabar Cove request.

18. There is no evidence that Madalyn Landing or any other

competing affordable housing apartment complex is required to,

or has, set aside units for tenants making 33 percent or less of

the AMI.

19. The credit underwriting reports for both phases of

Malabar Cove were prepared by the Seltzer Management Group, Inc.

(SMG), and were submitted to the FHFC Board in December 2008.

SMG retained a certified public accounting firm, Novogradac &

Company, LLP (Novogradac), to prepare the market studies

referenced in the credit underwriting reports.

20. References herein to the Novogradac market study are

as reported by SMG in the credit underwriting report.

21. The Novogradac market study determined that

construction of the Malabar Cove development would have a

negative impact on Madalyn Landing, as well as on a second

affordable housing rental complex not at issue in this

proceeding.

22. According to the SMG report, Novogradac determined

that "there are ample eligible renters in the sub-market," but

noted that Malabar Cove, a newer housing complex, would have "a

competitive advantage as it relates to age, condition,

amenities, and unit size." The report stated that Malabar

Cove's competitive advantage could result in occupancy at

competing apartment complexes "at below break even levels once

the market stabilizes."

23. As reflected in the SMG report, the Novogradac study

included a projection of affordable housing demand in the market

area through analysis of a "capture rate,” a projection of the

percentage of tenants an affordable housing project must achieve

from the pool of appropriately-qualified tenants in order to be

financially feasible.

24. A capture rate of 10 percent or less is regarded as a

positive indicator of financial feasibility. The Malabar Cove

capture rate was projected to be between about 3 and 6 percent,

depending on the type of rental unit. Accordingly, the Malabar

Cove project is regarded as financially feasible.

25. According to the SMG report, Novogradac noted that the

relevant housing market had experienced declining occupancy

rates in the last few years, while the number of available

affordable rental units had remained stable. Novogradac

attributed the situation to the general economic downturn and

"to the decline in the single family home market specifically"

as unoccupied single-family residences have become available at

rental rates competitive with affordable housing units.

26. The SMG credit underwriting report states as follows:

Novogradac believes the current situation to

be temporary and that single family home

values will recover in the future. As home

values recover, single family homes will

revert to home ownership and no longer be

available to the rental market or rents for

the single family homes will rise to

historical levels and no longer directly

compete with the traditional affordable

housing apartment units. Novogradac

concludes that when the supply of competing

single family homes is reduced to normal

levels, affordable housing occupancy levels

will increase to levels just below . . .

those experienced between 2004 and 2006.

27. Neither the credit underwriting report nor the market

study established a time frame during which single-family

housing values were expected to improve. Although testimony was

offered at the hearing as to what the phrase "in the future" was

intended to signify, the testimony on this point reflected

little more than speculation (albeit informed), and none of the

testimony was persuasive.

28. The credit underwriting report included a substantive

review of the Malabar Cove financing package and the ability of

the developer to proceed through the construction process to the

point of project completion and unit occupancy. The referenced

information in the credit underwriting report on this issue was

not credibly contradicted. The credit underwriting report

adequately and accurately determined that the developer could

proceed with the project through completion.

29. The credit underwriting report recommended that the

FHFC Board approve the Malabar Cove applications for funding.

30. On December 12, 2008, the FHFC Board unanimously voted

to accept the credit underwriting reports for the relevant

phases of Malabar Cove and to approve the applications for

funding.

31. It is unnecessary to include herein a detailed

recitation of the discussion during the Board's meeting on

December 12, 2008.

32. Review of the meeting transcript establishes that the

Board's decision followed discussions with representatives of

the Malabar Cove project and the Madalyn Landing apartment

complex as well as the credit underwriter.

33. The Board was aware of the affordable housing market

conditions in Brevard County and elsewhere in the state. The

Board was clearly aware that the construction of the Malabar

Cove project would likely have an impact on competing affordable

housing providers, specifically Madalyn Landing, and there was

reference to the fact that such competition could potentially

reduce housing costs for the populations being served by the

FHFC programs. The Board additionally considered the present

and future availability of state funds.

34. There is no evidence that the Board acted

inappropriately or unreasonably in approving the credit

underwriting reports for the Malabar Cove project and proceeding

to commit the funds at issue in this proceeding, or that the

decision was an abuse of the Board’s discretion.

35. The Petitioner has asserted that the Board's recent

to follow the credit underwriter's recommendation for approval

of an affordable housing project located in Duval County)

requires that the Petitioner's project be denied, particularly

because the perceived viability of the Pine Grove project was

regarded as superior to that of Malabar Cove.

36. The FHFC Board's denial of the Pine Grove application

is the subject of a separate administrative proceeding, and this

Recommended Order sets forth no findings of fact applicable to

the Pine Grove project or the Board’s decisions related to the

Pine grove application.

37. The evidence establishes that the Board discussed the

Pine Grove decision during their consideration of the Malabar

Cove applications.

38. Prior to the Board's denial of the Pine Grove

application, the FHFC Board had apparently never rejected a

credit underwriter's recommendation for approval. However,

there was uncontradicted testimony that, because the Board's

rules provides an opportunity for both the FHFC and an applicant

to review a draft credit underwriting report prior to the

issuance of the final report, underwriting problems are

routinely resolved prior to the issuance of the report and that,

where a problem cannot be sufficiently resolved for the credit

underwriter to recommend approval, developers routinely withdraw

applications rather than attempt to seek Board approval for

projects over the negative evaluation by the credit underwriter.

39. There was consideration at the December 12 Board

meeting about the relevance of the Pine Grove application denial

(over the credit underwriter’s recommendation) to the Board’s

presumable intention to approve the Malabar Cove applications;

however, the evidence fails to establish that the Board’s

decision on the Pine Grove application has any relevance to the

instant case.

40. The Board was advised that the affordable housing

markets in Duval County and Brevard County, although currently

troubled, are not similar, with the Duval County market for

affordable housing being described as historically weak and the

Brevard County market weakness attributed to the recent economic

downturn.

41. Additionally, the Board was aware that, in the Pine

Grove application, the FHFC has obligated itself to satisfy the

mortgage of an affordable housing development competing with

Pine Grove through a "Guarantee Fund" program. Simply stated,

if the developer of the FHFC-guaranteed project defaults on

payment, the FHFC is essentially “on the hook” for the debt, and

the Board was apparently sufficiently concerned of the default

prospect to include such consideration in rendering a decision

on the Pine Grove application. The FHFC has no similar

obligation to any competitor of the Malabar Cove apartment

complex.

42. Not insignificantly, the Board’s consideration of the

Malabar Cove project included the fact that construction of the

Malabar Cove apartment complex had commenced and was projected

to be complete by April 2009, while construction of the Pine

Grove project had not commenced.

43. There is no credible evidence that the Board's

decision to accept the credit underwriter's recommendation to

approve the Malabar Cove applications was improper or

inappropriate for any reason related to the Pine Grove decision.

CONCLUSIONS OF LAW

44. The Division of Administrative Hearings has

jurisdiction over the parties to and subject matter of this

proceeding. §§ 120.569 and 120.57(1), Fla. Stat. (2008).

45. All parties identified herein have standing to

participate in this proceeding.

46. The applicant for the funding at issue in this

proceeding has the burden of establishing that the proposed

award of funding by the FHFC complies with the requirements for

approval by the FHFC Board. Florida Dept of Transportation v.

J.W.C. Co., Inc. , 396 So. 2d 778 (Fla. 1st DCA 1981).

47. The issue in this case is whether the credit

underwriter and the FHFC Board complied with the applicable rule

requirements when the Board approved the Malabar Cove

applications for funding. The evidence establishes that both

the credit underwriter and the Board complied with all

applicable requirements.

48. Florida Administrative Code Rule 67-48.0072 provides

in relevant part as follows:

67-48.0072 Credit Underwriting and Loan

Procedures.

The credit underwriting review shall include

a comprehensive analysis of the Applicant,

the real estate, the economics of the

Development, the ability of the Applicant

and the Development team to proceed, the

evidence of need for affordable housing in

order to determine that the Development

meets the program requirements and determine

a recommended SAIL or HOME loan amount,

Housing Credit allocation amount or a

combined SAIL loan amount and Housing Credit

Allocation amount, if any. Corporation

funding will be based on appraisals of

comparable developments, cost benefit

analysis, and other documents evidencing

justification of costs. As part of the

credit underwriting review, the Credit

Underwriter will consider the applicable

provisions of Rule Chapter 67-48, F.A.C.

(1) After the final rankings are approved

by the Board, the Corporation shall offer

all Applicants within the funding range an

invitation to enter credit underwriting.

The Corporation shall select the Credit

Underwriter for each Development.

(2) For SAIL and HOME Applicants and

Applicants eligible for a supplemental loan,

the invitation to enter credit underwriting

constitutes a preliminary commitment.

* * *

(5) The Credit Underwriter shall verify all

information in the Application, including

information relative to the Applicant,

Developer, Housing Credit Syndicator,

General Contractor, and, if an ALF, the

service provider(s), as well as other

members of the Development team.

* * *

(10) A full or self-contained appraisal as

defined by the Uniform Standards of

Professional Appraisal Practice and a

separate market study shall be ordered by

the Credit Underwriter, at the Applicant’s

expense, from an appraiser qualified for the

geographic area and product type not later

than completion of credit underwriting. The

Credit Underwriter shall review the

appraisal to properly evaluate the proposed

property’s financial feasibility.

Appraisals which have been ordered and

submitted by third party credit enhancers,

first mortgagors or Housing Credit

Syndicators and which meet the above

requirements and are acceptable to the

Credit Underwriter may be used instead of

the appraisal referenced above. The market

study must be completed by a disinterested

party who is approved by the Credit

Underwriter. The Credit Underwriter shall

consider the market study, the Development’s

financial impact on Developments in the area

previously funded by the Corporation, and

other documentation when making its

recommendation of whether to approve or

disapprove a loan, a Housing Credit

Allocation, a combined SAIL loan and Housing

Credit Allocation, or a Housing Credit

Allocation and supplemental loan. The

Credit Underwriter shall also review the

appraisal and other market documentation to

determine if the market exists to support

both the demographic and income restriction

set-asides committed to within the

Application.

* * *

(24) For SAIL and HOME Applications and HC

Applications eligible for a supplemental

loan, the Credit Underwriter’s loan

recommendations will be sent to the Board

for approval.

(25) After approval of the Credit

Underwriter’s recommendation for funding by

the Board, the Corporation shall issue a

firm loan commitment.

49. The rule requires that the credit underwriter’s review

include a comprehensive analysis of the applicant, the real

estate, the economics of the project, the ability of the

applicant and developer to proceed, and the evidence of need for

affordable housing. The evidence establishes that the credit

underwriter met these requirements.

50. The rule requires that the credit underwriter consider

the market study, the development's financial impact on other

developments in the area that received FHFC funding, and "other

documentation." The evidence establishes that the credit

underwriter met these requirements.

51. There is apparently little question that the Malabar

Cove apartments will impact the ability of Madalyn Landing to

obtain and retain tenants. The rule does not require that an

underwriter recommend against funding a project on the basis of

an adverse impact to a competing project, or that the FHFC Board

deny an application to fund a project based on an adverse impact

to a competitor.

52. The FHFC Board was clearly aware of all material

aspects of the relevant housing market and of the Malabar Cove

project. The Board was clearly aware of the Petitioner's

objections to the project and considered them prior to rendering

their decision.

53. There is no evidence that the FHFC Board acted

arbitrarily, capriciously, inappropriately or unreasonably, or

otherwise abused its discretion on December 12, 2008, when the

Board accepted the recommendations set forth in the credit

underwriting reports that applications for funding filed by the

developer of the Malabar Cove project be approved.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Respondent enter a final order

dismissing the petition for hearing filed in this case.

DONE AND ENTERED this 2nd day of June, 2009, in

Tallahassee, Leon County, Florida.

S

WILLIAM F. QUATTLEBAUM

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-3060

[phone]

Fax Filing [phone]

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 2nd day of June, 2009.

COPIES FURNISHED :

Hugh R. Brown, Esquire

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32301-1329

M. Christopher Bryant, Esquire

Oertel, Fernandez, Cole &

Bryant, P.A.

301 South Bronough Street, Fifth Floor

Post Office Box 1110

Tallahassee, Florida 32302-1110

Donna E. Blanton, Esquire

Elizabeth McArthur, Esquire

Radey, Thomas, Yon & Clark, P.A.

301 South Bronough Street, Suite 200

Post Office Box 10967

Tallahassee, Florida 32301

Wellington Meffert, General Counsel

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32301-1329

Sherry Green, Corporation Clerk

Florida Housing Finance Corporation

227 North Bronough Street, Suite 5000

Tallahassee, Florida 32301-1329

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.