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July 2006

CHANGING RENTER DEMOGRAPHICS

According to Harvard University’s 2006 The State of the Nation’s Housing report, for the first time in years, the number of renter households rose. It also noted that as the echo boomers and same-age immigrants and second-generation Americans move into adulthood, demographic forces will favor rental housing over for-sale housing. According to the report, the number of renter households should increase by at least 1.8 million by 2015. Importantly, minorities will be responsible for the entire gain, eventually accounting for the majority of renter households. The report went on to say that although their numbers have barely increased in more than a decade, the characteristics of renter households have changed dramatically. With rapid growth of the nation’s Hispanic and Asian populations, the minority share of renter households swelled from 31 percent in 1990 to 43 percent in 2004.

Looking at the broader housing market, foreign-born and minority households will continue to be the fastest-growing segments. The minority share of all households should expand from 28 percent in 2005 to over 32 percent in 2015. In a special section on Hispanic households, the report says that even though Hispanics still represent less than 11 percent of all households, they accounted for 27 percent of net household growth in 1995–2005. Over the next 10 years, growth in the number of Hispanic households could exceed the 4.7 million projected increase among non-Hispanic whites. California, Texas and Florida continue to top the list of states with the largest shares of Hispanic immigrant households; however, Hispanics are becoming more geographically dispersed as they increasingly settle in distant metro areas and non-metropolitan areas. In fact, while the total number of Hispanic households increased 58 percent during the 1990s, the number living in non-metro areas rose by some 71 percent. The full report is available on Harvard’s web site at www.jchs.harvard.edu/publications/markets/son2006/.

Harvard’s report is the latest noting the growing importance of minorities in general, and Hispanics in particular, to future real estate and consumer demand. Wal-Mart, the nation’s largest retailer, announced this month that it will begin diversifying store design to target five shopper categories, one of which is Hispanic. The other categories are suburban affluent, rural, boomers and urban/multicultural.

NAA/NMHC-FAVORED ESTATE TAX REFORM MOVES FORWARD

The estate tax debate took an unexpected and promising turn this week as lawmakers abandoned efforts to pass full repeal and instead passed a compromise reform bill favored by NAA/NMHC. The move comes after the Senate earlier this month again failed to secure the 60 votes needed to overcome a filibuster and bring a full repeal bill to the floor. After that vote, Senate leaders persuaded the House, which has passed full repeal legislation several times, to cooperate and approve a reform bill. This is a noteworthy concession by Republican leaders that full repeal is unlikely to pass.

This new bicameral strategy effectively tracks NAA/NMHC’s position and elevates the prospects for final action this year by Congress. NAA/NMHC have long opposed repeal and have instead favored reform of the estate tax to preserve the step-up in basis for inherited property. Without stepped-up basis, heirs of commercial property owners would escape the estate tax, but would be subject to substantial capital gains taxes.

As part of the new reform strategy, on June 22, the House of Representatives passed a bill (H.R. 5638) that would increase the estate and gift tax exemption amount to $5 million per person effective January 1, 2010 and lower the tax rate on estates valued between $5 million and $25 million to the capital gains rate–currently 15 percent. Estates over $25 million would be taxed at twice the capital gains rate. Most significantly, H.R. 5638 would preserve the “stepped-up” basis for inherited property by repealing the modified carryover basis rules that are scheduled to go into effect in 2010. The Senate is scheduled to consider the bill before the July 4th recess, where a 60-vote super majority is still required to overcome an expected filibuster. While the Senate outcome is too close to call, if it does pass, President Bush is expected to sign it. NAA/NMHC members are reminded that unless Congress acts, the estate tax will be repealed in 2010, but in 2011 it will revert to pre-2001 levels—a $1 million exemption and a 55-percent rate.

SUPPLEMENTAL SPENDING BILL INCLUDES HURRICANE RELIEF PROVISIONS

OOn June 15, President Bush signed a compromise version of the $94.5 billion supplemental appropriations bill (H.R. 4939) for the wars in Iraq and Afghanistan and hurricane recovery for 2006. The final bill contains several provisions sought by NAA/NMHC that could benefit apartment firms. One would grant FEMA the authority to cover utility costs, solving the problem of evacuees losing utility assistance as FEMA transitions them from FEMA-funded city voucher programs (Section 403 assistance) to FEMA’s individual assistance program (Section 408). The measure also appropriates $5.2 billion in Community Development Block Grant funds and specifies that at least $1 billion be used to repair, rehabilitate and reconstruct affordable rental housing. Finally, $400 million is allocated to fund a FEMA pilot program to identify alternative sources of emergency housing. This provision will allow FEMA to expand beyond the exclusive use of trailers to include modular housing or the rehabilitation of rental housing.

PROPOSED EMPLOYMENT VERIFICATION REGULATIONS ISSUED

The Department of Homeland Security (DHS) has issued two proposed rules designed to improve compliance with federal immigration laws and reduce the employment of unauthorized aliens. The first proposal (71 FR 34510) would permit U.S. businesses to digitize their I-9 employment forms, which are used to verify eligibility to work in the United States. A law passed by Congress allows employers to digitally store I-9s as of April 28, 2005. The DHS proposal sets the performance standards required for employers to complete, sign and store I-9s electronically. (For a copy of the proposal, see http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6- 9283.pdf.)

TThe second proposal (71 FR 34281) concerns job applicants whose Social Security number (SSN) do not match government records. According to DHS, about 10 percent of SSNs submitted by employers result in a "no match" letter. The proposed regulation would help employers respond to a "no match" letter. Importantly, it would also be a safe harbor for employers acting in good faith to comply by codifying the steps that an employer should reasonably take in resolving a "no match" letter. (For a copy of the rule, see http://a257.g.akamaitech.net/7/257/2422/01jan20061800/edocket.access.gpo.gov/2006/pdf/E6- 9303.pdf.)

NEW WHITE PAPER EXPLORES EMERGING TECHNOLOGY LEGISLATIVE/REGULATORY ISSUES

Now that video and data can be transmitted over phone wires and voice can be carried over cable wires, telephone and cable companies are engaged in a titanic battle to be the sole provider of voice, video and data service. The all-out effort both industries are making to attract customers may leave apartment owners caught in the middle. To help apartment firms understand how this emerging issue could affect them, NAA/NMHC have published a new white paper titled The 2006-2007 Telecommunications Regulatory & Legislative Outlook. The paper reviews state-level mandatory access action in the first half of 2006 and discusses potential federal and state telecommunications-related activity in 2007. It can be downloaded at www.naahq.org/govern_affairs/Issues/. Of particular interest to apartment owners is the fact that telephone companies are asking Congress and the states to grant them the right to provide video service without having to obtain a local cable franchise. In mandatory access states such approvals may also give telephone companies the right to not only provide video services on properties, but also voice and data services. Another challenge for apartment firms is the possibility that state legislatures/regulators may limit exclusive or preferred marketing relationships between apartment owners and telecom providers. These agreements may also impact the obligations of “carriers of last resort” (COLR); apartment communities may be caught in a situation where a telephone company refuses to be the COLR if it is not granted access.

CONGRESSIONAL UPDATE AND OUTLOOK

Before adjourning on May 26 for a 10-day Memorial Day recess, Congress took action and teed up several bills of interest to apartment firms.

 Immigration Reform. After months of negotiations, the Senate passed a comprehensive immigration bill (S. 2611) on May 25 that differs significantly from the “enforcement only” approach taken in the House-passed bill (H.R. 4437). The Senate bill would create a new category of “H-2C” guest workers who would be allowed to apply for permanent status after four years if they are employed at the time of their application and the U.S. Department of Labor certifies that no U.S. workers would be displaced. A separate provision would allow undocumented workers who have been in the country for more than five years to begin the process toward citizenship. Those who have been in the country for two to five years could apply for deferred mandatory departure and petition for legal status after reporting to a point of entry. Undocumented workers in the country less than two years would have to return home.

Both the House and Senate bills would require employers to participate in a federally operated system to electronically verify an employee’s legal status. The House bill would require checks on both existing employees and new hires; the Senate version would only apply to new workers. The new program, which would replace the current I-9 process, would be based on the databases of the Social Security Administration and the Department of Homeland Security. Failure to do so could result in stiff fines. It is unclear whether the Senate-passed bill can survive a conference with the House. Conferees from both the House and the Senate will be named shortly and are expected to begin talks in June.

 Wetlands. NAA/NMHC and a coalition of organizations are opposing a provision included in the FY 2007 Interior Department appropriations bill (H.R. 5386) that passed the House on May 18. The provision would prohibit the Environmental Protection Agency (EPA) from enforcing a 2003 policy guidance that limited federal authority over isolated wetlands, ponds, and other nonnavigable waters. The 2003 guidance was developed in response to a 2001 decision by the U.S. Supreme Court that the U.S. Army Corps of Engineers (Corps) did not have jurisdiction over non-navigable, isolated wetlands. Without this guidance, jurisdictional decisions concerning these wetlands may become even more difficult and unpredictable. It is unclear whether the amendment will survive scrutiny by the Senate.

 Rural Housing. On May 23, the House Financial Services Subcommittee on Housing and Community Opportunity passed NAA/NMHC-supported legislation (H.R. 5039) that would preserve the 460,000 apartment units financed through the Section 515 Rural Housing program. Among other things, the bill would allow new financing for ailing properties; authorize vouchers for residents of properties that prepay; and remove prepayment restrictions on pre-1989 loans. NAA/NMHC’s Jim Arbury testified in support of the measure on April 25. The outlook for Senate action on this measure is unsure at this time.

 FHA Reform. On May 24, the House Financial Services Committee approved a bill to reform the Federal Housing Administration (FHA) (H.R. 5121). The legislation would allow risk-based pricing, eliminate the three-percent downpayment requirement and would also allow 40-year instead of 35-year loans. There is no companion bill in the Senate; however, one is expected to be introduced soon. NAA/NMHC oppose the measure as another costly and unnecessary homeownership incentive. That same day the Committee also approved a bill (H.R. 3043) to create federally insured, no-downpayment mortgages for low-income households. Thanks to NAA/NMHC advocacy, this is a scaled-back version of a proposal that failed to pass last year. It now calls for a five-year pilot program and limits the number of mortgages to 50,000.

 Hurricane Recovery. Congress still must complete work on the supplemental spending bill (H.R. 4939) for hurricane recovery and the war against terrorism. The measure has passed both Houses, and a conference committee must now resolve differences between them. The bills contain several provisions that could benefit apartment owners. One would grant FEMA the authority to cover utility costs, solving the problem of evacuees who had their utilities paid for under a FEMA- funded city voucher program, but who risk losing that support as FEMA ends the voucher programs. The Senate version also includes $1.2 billion for FEMA to fund alternatives to trailers for housing evacuees. While public discussion of this provision has focused on modular housing, the bill would allow FEMA to design other alternative housing programs, such as a program rehabilitating moderately damaged rental housing. The measure also includes funding for Section 8 vouchers and Community Development Block Grant (CDBG) funds specifically dedicated to the repair, rehabilitation and reconstruction of affordable rental housing. Congress hopes to complete work on the bill by the July 4 recess.

 Section 8 Reform. On May 24, Congress passed legislation (H.R. 1999) that would convert the Section 8 voucher program into a flexible voucher program. The measure includes language long sought by NAA/NMHC reforming the burdensome inspection process for properties that want to accept vouchers. With just 40 legislative days left this year, however, it is unlikely that the Senate will act on the measure.

 Estate Tax. Estate tax repeal is a top priority for the Senate when it returns. The House passed its version of estate tax repeal (H.R. 8) in April 2005. NAA/NMHC oppose the House version because it eliminates “stepped-up basis.” Instead, we support a compromise that increases the size of estate exempt from the tax, lowers the tax rates and preserves the “step-up basis.” Recent press reports indicate that a bipartisan Senate compromise is developing along these principles. Significantly, before resigning, outgoing Treasury Secretary Snow publicly expressed the Administration’s willingness to accept reform rather than full repeal.

 Taxes. Taxes are also on the agenda when Congress returns. Legislators would like to craft a second tax bill to follow the $70 billion tax cut extension act signed into law on May 17. This follow-on bill would include many of the items removed from the first bill for parliamentary reasons, including an NAA/NMHC-supported provision extending the immediate expensing of brownfields remediation costs. NAA/NMHC will urge lawmakers to drop a provision that would permit certain taxpayers to deduct the cost of private mortgage insurance (PMI) premiums from their taxes for one year.

NEW LIHTC DATA STANDARD CREATED<>

Under the umbrella of the National Affordable Housing Management Association (NAHMA), state housing finance agencies, compliance reporting companies, property management software firms and apartment owners have created a new Low-Income Housing Tax Credit (LIHTC) Data Transfer Standard. The standard is designed to further automate and standardize the compliance reporting process for LIHTC properties. In a unique partnership, the standard will be hosted by the Multifamily Information and Transactions Standards (MITS) web site at www.mitsproject.org. MITS is sponsored by the National Multi Housing Council and its national outreach partner, NAA. As an open standard, any user will be able to go to the MITS web site and download the data dictionary or the extensible mark-up language (XML) file. The hosting arrangement is the first step in the MITS effort to create a comprehensive affordable housing data transfer standard that covers all LIHTC property operational issues, not just compliance reporting.

AFFORDABLE HOUSING PRIZE

The Center for Community Innovation at the University of California at Berkeley has created the I. Donald Terner Prize for leadership in affordable housing. The award will recognize outstanding affordable housing projects. Applications can be submitted by anyone involved in the planning, development or operation of a project. First prize is $25,000, plus a $5,000 Leadership Stipend to help the winner spread the message at conferences and seminars. Applications will be available later this summer at www- iurd.ced.berkeley.edu/cci and are due Sep SUPREME COURT VICTORY ON WETLANDS

Real estate owners secured a tremendous victory on June 19, when the U.S. Supreme Court ruled that the U.S. Army Corps of Engineers (Corps) exceeded its authority under the Clean Water Act when it denied two Michigan developers permits to build on isolated wetlands that are only linked to larger bodies of water through man-made drainage ditches. (Rapanos v. United States, U.S., No. 04-1034, 6/19/06, and Carabell v. U.S. Army Corps of Engineers, U.S., No. 04- 1034, 6/19/06.) By a 5-4 decision, the Court ruled that a simple hydrological connection between a wetland and navigable water does not justify federal jurisdiction. NMHC and a coalition filed a “friend of the court” brief in the case that asserted that there is simply no basis in science and law for extending federal jurisdiction to these isolated wetlands. Other signatories include NAREIT, the Real Estate Roundtable, Associated General Contractors, International Council of Shopping Centers, National Association of Industrial and Office Properties and American Resort Development Association.

The Council has long asserted that the current regulatory system is overly broad, unevenly applied and excessively burdensome with respect to the time and costs involved in the permitting process. Efforts over the past decade to obtain an administrative or legislative solution to the issues proved unsuccessful, forcing property owners to pursue cases through the courts. The Supreme Court decision referred to the Corps as “an enlightened despot” in its decisions about permitting activities, and stated ”the Corps has stretched the term ‘waters of the United States’ beyond parody.”

Although the Court reaffirmed the rights of property owners, it did not fully clarify the Corps’ authority under the Act, ruling instead that the Corps can regulate wetlands that have a “significant nexus” with water quality in adjoining wetlands. This case-by-case approach will likely force the Corps to revise its regulations and force Congress to clarify the ongoing ambiguities present in the Act. In May, the U.S. House of Representatives sent a message of support for a strengthened Clean Water Act when it approved an amendment to EPA's fiscal year 2007 spending bill that prohibited the agency from using funds to implement guidelines that had been developed by EPA and the Corps in response to a 2001 Supreme Court ruling that addressed non-navigable waters. August 2006

While Kentucky and Ohio have both been quiet with summer full upon us, only the City of Cincinnati has continued the legislative track with three public hearings on lead, mostly because the Cincinnati Enquirer threw a front page fit, when it finally received documents from the Health Department that the Enquirer actually sued the Health Department over for several years (the documents contained medical information regarding children). So far there has been far more heat than light with Council Members yearning for vacations rather than sitting in committee listening to consultants blathering on about hypothetical technicalities. As always, GCNKAA has provided the numerous documents regarding state and federal lead law, as well as our expertise in addressing the issue should council choose to enact new legislation.

LOCAL IMMIGRATION PROPOSALS TARGET APARTMENT OWNERS

Unwilling to wait for Congress to act on immigration reform, state and local governments are taking up the contentious issue. At the local level, a growing number of measures are specifically targeting rental housing providers. On July 13, the Hazleton, PA city council approved a new law prohibiting apartment owners from knowingly renting to undocumented individuals. The measure fines apartment owners $1,000 for each undocumented individual leasing an apartment and an additional $100 per resident per day for continued occupancy without a permit. Advocacy groups have threatened lawsuits in response to the new law. On July 19, Hazleton’s mayor announced that next month he expects the city council to approve a change to the town's landlord-tenant law that as of October 1 would require most renters to secure a city permit ($10 fee) proving they are legal residents of the city before occupying rental units. Housing providers would request the permit from current and prospective renters. All occupants of a rental unit would be required to have a separate permit, and permits would have to be renewed if an individual moves to a different unit. The Hazleton Area Landlords Organization, which helped craft the proposal, is pressing for this additional ordinance to take the burden of proof off of property owners and their employees. Some rental units would be exempt, including multi-unit buildings owned by “public authorities,” and those in which more than 75 percent of the residents are over the age of 65.

Meanwhile, in San Bernardino, CA, a citizen-driven initiative to crack down on illegal immigrants failed to collect enough signatures to be placed on a citywide ballot. Importantly, the proposal, which was denounced by the Mayor and City Council, called for stiff fines against apartment operators who rent to illegal immigrants. Motivated by the Hazleton and San Bernardino proposals, a city councilwoman in Escondido, CA has asked the city manager to draft a law banning apartment owners from renting to undocumented individuals. The local official, who has the support of two other council members, has called for fining apartment owners $1,000 per undocumented individual, and imposing criminal penalties for unpaid fines. The city manager, however, has expressed doubts about the legality of such an ordinance as well as the city’s ability to enforce a ban. In Florida, the Avon Park city council was expected to pass a similar proposal on July 24.

At the state level, more than 500 immigration-related pieces of legislation have been introduced in state legislatures this year. At least 57 bills in 27 states have been enacted, although none include provisions targeting housing providers. For additional information on the bills that have passed at the state level, visit www.ncsl.org/programs/immig/06ImmigEnacted Legis2.htm. NAA/NMHC will continue to monitor this situation.

NAA/NMHC PANDEMIC FLU WHITE PAPER

While most Avian flu cases are currently centered in Southeast Asia, the global nature of our society means that if the Avian flu becomes fully adapted to human-to-human transmission, it is expected to spread around the world within several weeks. Federal officials have indicated that in the event of a pandemic flu, they will not establish national public health and safety guidelines to manage and treat the outbreak. Instead, they will rely on local authorities to make these decisions, and they are urging private sector firms to develop, and to routinely review, individualized disaster and business continuity plans.

To help apartment firms plan for a possible pandemic flu, NAA/NMHC have published a new white paper, Pandemic Flu: Apartment Owner Considerations. The paper outlines steps apartment firms can take to prepare for a possible outbreak. It provides information on developing an emergency preparedness program, flu-specific elements of continuity plans, apartment- specific concerns, legal issues and a directory of additional resources on disaster planning, crisis communications and more. The document is available on NAA’s web site at www.naahq.org/govern_affairs/Issues/.

EXIT TAX RELIEF BILL INTRODUCED IN SENATE

On June 29, Senator Charles Schumer (D-NY) introduced a bill (S. 3616) to provide an incentive to preserve federally assisted, affordable housing stock by offering owners “exit tax” relief. The bill would address potential tax consequences that discourage affordable owners from selling their properties. Specifically, the bill would waive the depreciation recapture tax liability if investors sell their federally assisted property to a “qualified preservation entity” who agrees to invest new capital in the property and to preserve the property as affordable housing for another 30 years. Eligible properties include housing receiving assistance under the Section 8, Section 221(d)(3), Section 236 and rural housing Section 515 programs. Exit tax relief is a priority issue for NAA/NMHC. A similar bill (H.R. 3715) was introduced in the House last September. The outlook for the Senate bill is uncertain, however, given the limited amount of time left before Congress adjourns.

HUD PROPOSES FHA PREMIUM INCREASE

NAA/NMHC and a coalition of organizations are opposing a proposal by HUD to increase the FHA multifamily mortgage insurance premium (MIP) from 45 to 75 basis points. The proposal was first included in HUD’s proposed FY 2007 budget, which Congress has yet to finalize. However, since HUD has the authority to increase the proposal without Congressional approval, the Department published a proposed revised premium schedule in the June 28 Federal Register (71 FR 36968). Like the budget provision, the latest HUD proposal would not raise the MIP for FHA- insured properties with Low-Income Housing Tax Credits. Premiums would rise, however, for Section 221(d)(4) new construction and substantial rehab, Section 207/223(f) refinancing and purchasing existing apartments, and Section 223(a)(7). Premiums for risk-sharing loans with the GSEs and housing finance agencies would remain at 50 basis points. These changes affect multifamily housing commitments issued or reissued on or after October 1, 2006.

When it was introduced in the budget process, the proposal was justified as a revenue raiser. The Office of Management and Budget initially estimated that the proposal would generate $150 million annually; however, the Congressional Budget Office recently said higher premiums would decrease loan volume so the proposal would only produce $20 million in revenue. The move is particularly disturbing given the fact that after being pressured to tie the premiums to the actual cost of the program, HUD has actually dropped the MIP from 80 to 45 basis points over the past three years. NAA/NMHC and a coalition of organizations are working to oppose the proposals. We are also working with Congress to direct HUD to conduct a full rulemaking before implementing premium changes and to provide policymakers with an analysis of the financial impact such premium increases will have on the cost of affordable housing.

FANNIE, FREDDIE HOLDINGS UNDER REVIEW

The Bush Administration signaled a more aggressive stance against Fannie Mae and Freddie Mac as Congress continues to struggle to pass GSE reform legislation. On June 13, the U.S. Department of Housing and Urban Development (HUD) announced that it will review Fannie Mae’s and Freddie Mac's investment holdings to make sure they comply with their congressionally mandated mission. The same day, the Treasury Department said it will review its debt approval process for Fannie and Freddie. According to HUD Secretary Alphonso Jackson, the HUD review will examine whether Fannie and Freddie are handling their investments consistent with public policy goals and whether each is using the profits it derives as a government-sponsored enterprise for the purposes intended. The Treasury Department review, on the other hand, will evaluate what the appropriate timing should be for GSE requests for debt approval and whether additional information is needed, such as the amount of total debt outstanding, the estimated rate at which the debt will be offered and the maturity of the debt obligations. Meanwhile, GSE reform legislation (S. 190) remains stuck in the Senate.

September 2006

IRS Guidance:

Mold Removal Costs Ruled Deductible. In PLR 200607003 (released February 17, 2006), the IRS ruled that a taxpayer could deduct as ordinary and necessary business expenses under IRC Section 162 the costs of a mold remediation project in a building it owned and leased out. In the facts of this ruling, the mold was not present when the building was purchased and the removal did not improve the building structurally or adapt it to a new or different use. The IRS concluded that the mold remediation did not increase the value of the building or appreciably prolong its useful life.

WETLANDS

Following the recent Supreme Court decision that the federal government lacked authority to regulate as wetlands certain properties that are not connected to navigable waters (Rapanos et al. v. United States, 2006 WL 1667087 (U.S.)), the U.S. Army Corps of Engineers (Corps) and the U.S. Environmental Protection Agency (EPA) have issued revised directions to field staff. The question before the Court in the Rapanos/Carabell consolidated cases was whether the wetlands involved constituted “waters of the United States” under the Clean Water Act, and, if so, whether the Act is constitutional. Landowner Rapanos has sought to backfill a portion of a 54-acre parcel of land that was intermittently water saturated. Federal regulators claimed jurisdiction based on their assertion that the “wet” land was a “water of the United States” even though it was 11 miles away from a navigable body of water. The Carabells were unable to obtain a permit to fill a wetland on their property because the federal regulators held that the site was adjacent to “tributaries of navigable waters” and had a “significant nexus to ‘waters of the United States’.” The Supreme Court ruled against the government’s actions and remanded the cases back to the lower court. Beveridge & Diamond prepared a “friend of the court” brief supporting the property owners on behalf of NMHC and a coalition of organizations.

In response, the Corps called for a brief suspension of permits related to “navigable waters,” saying that it will not change its policies for issuing wetlands permits, but that if subsequent guidance is issued that affects the permits, they may be modified. The EPA has instructed its field offices to defer all jurisdictional determinations that require taking a position on the scope of “waters of the United States” until the Agency issues official guidance on the Court's ruling. The memo also instructs the offices to hold off on referring any new enforcement actions to the Justice Department until the guidelines are clarified. Later this summer, the Corps and the EPA anticipate releasing joint guidance on future administration of the Clean Water Act Section 404 permit program. The Senate has scheduled a hearing on the issues raised by the Court’s decision, but there is little chance of any meaningful congressional action this year.

EMINENT DOMAIN Last year’s Supreme Court ruling in Kelo v. New London continues to spark debate in legislatures and courthouses nationwide. The decision, which affirmed the government’s right to use eminent domain for economic development purposes, was condemned by property rights activists. Local authorities and smart growth advocates, however, supported the ruling for preserving an important community development and revitalization tool. While state legislatures have actively voiced disapproval over Kelo, state courts have not engaged in the fray.

The Ohio Supreme Court, however, recently decided the first major state eminent domain case since Kelo, and it may serve as an important indicator of how state courts will react to the issue. In Norwood v. Horney, the Ohio Supreme Court found that where eminent domain is used to provide an economic benefit to the government and community alone, it could not justify the taking of private property under the Ohio constitution. Of interest to the apartment industry, the ruling scuttled plans for a significant mixed-use project that included apartments, retail and office space. The project developers had already secured private sale agreements with 66 of 71 property owners, when city officials stepped in to acquire the “hold-out” properties. Ultimately, the lawsuit involved only two hold-out property owners.

Importantly, the ruling also invalidated part of the local eminent domain law based on the void-for- vagueness doctrine (used to strike down overly ambiguous statutes). Critics have long cautioned that a knee-jerk response to Kelo in the form of hastily drafted legislation could face enforcement hurdles and spur litigation. This would create uncertainty in the planning process and stymie development efforts even where the project passes constitutional muster. To that end, Governor Bill Richardson of New Mexico recently vetoed legislation restricting eminent domain, believing the bill’s “ambiguous language” would interfere with well-planned development projects.

At the federal level, the U.S. House of Representatives passed bipartisan legislation (H.R. 4128) in November 2005 limiting the use of eminent domain. The Senate, however, has not acted on the bill. In related news, last month the House Judiciary Committee approved a bill (H.R. 4772) that would allow property owners to bypass state courts and bring their federal takings claims directly to federal court. The bill faces strong opposition by groups representing state and local governments, including the National League of Cities, the National Association of Counties and the National Conference of State Legislatures.

NAA/NMHC continue to monitor these developments; however, with just 15 working days scheduled before Congress’s fall adjournment, it is increasingly unlikely that eminent domain legislation will pass this session.

ENERGY TAX CREDITS

NAA/NMHC continue to advocate for an extension of the tax incentives included in the Energy Policy Act of 2005 (P.L. 109-58). These provisions allow property owners to deduct the costs of certain energy-efficient improvements to their buildings. (See the February 17, 2006 NMHC Environmental Update.) To qualify, buildings must be certified that they will achieve a required level of energy savings and must be placed in service before January 1, 2008. The Treasury Department, however, just released interim guidance for the certification process in June 2006. Until final regulations are issued, the incentives are of limited use to owners and developers. Unfortunately, Congress has shown little interest in addressing building energy-efficiency issues.

This week, a coalition of utilities, regulatory agencies and consumer advocacy groups issued a National Action Plan for Energy Efficiency aimed at putting regulations in place to reward utilities for promoting conservation. Without such incentives, conservation typically reduces utilities’ earnings by reducing revenue. The action comes as this summer’s severe heat wave has resulted in widespread outages on lower-voltage distribution systems that were not built to withstand such heavy use. Both Congress and the Administration continue to favor supply-side solutions to rising energy costs. At a recent conference on national energy policy, U.S. Department of Energy and U.S. Department of Interior representatives expressed the Administration’s strong support for supply-side initiatives. On August 1, the Senate passed legislation (S. 3711) that would allow off shore oil and gas drilling in certain areas of the Gulf of Mexico, excluding the Florida panhandle. The House passed a much broader bill (H.R. 4761) on June 29 that would allow drilling on the Pacific and Atlantic coasts. Unless the House recedes to the Senate version, there is little chance that this measure will be enacted this year.

LEAD-BASED PAINT: WORKER TRAINING RULES

NAA/NMHC recently filed comments on a proposed EPA rule that affects operations and maintenance practices in pre-1978 constructed residential property (Lead; Renovation, Repair, and Painting Program (40 CFR, Part 745)). Among other things, the rule would require workers and firms to be certified on a renewal basis, and mandate extensive record keeping regarding activities undertaken during a repair or renovation event. The rule would apply to any repair activity that would disturb more than two square feet of a coated surface in a pre-1978 constructed residence that has not been found to be free of lead-based paint. The rule is part of the cascade of regulations contained in the 1993 Residential Lead-Based Paint Hazard Reduction Act.

Our comments cited the significant decreases in the number of children with health-threatening blood lead levels and relatively low actual incidence of lead-based paint in the housing stock. We support provisions of the rule that seek to improve worker skills to prevent lead hazards, but we conclude that the proposed rule is unnecessarily cumbersome and expensive. We also note that it would likely create a disincentive for reputable contractors to provide repair and renovation services to covered properties. The long overdue rulemaking has engendered considerable controversy within the regulated community. While apartment firms have been complying with various aspects of Title X for 10 years, the repair and remodeling industry have been largely beyond the regulation’s scope. EPA has reportedly decided not to release a final rule by year’s end, as originally planned, so it can conduct additional research to bolster its regulatory stance. Several prominent legislators, however, have called on the Agency to move forward with the final rule.

JUNK FAX LAW TAKES EFFECT

Apartment firms are reminded that new junk fax regulations went into effect on August 1. (See the May 19, 2006 Washington Update.) The regulations (71 FR 25967) implement the Junk Fax Prevention Act of 2005. The 2005 law overrides earlier regulations that were strenuously opposed by NMHC/NAA, which would have required written permission before sending any commercial fax, including to prospects who had requested the information. The new regulations allow organizations to send unsolicited commercial faxes as long as they have an "established business relationship" (EBR) with the recipient. There is no time limit on an EBR. Although fax senders are not required to maintain records of such relationships, they bear the burden of proving that the relationship is valid if a complaint is filed. In addition, for the first time, faxes must include a clear and conspicuous "opt out" notice on the first page of the fax that enables recipients to refuse future faxes at no cost. Importantly, the consumer must have shared his or her fax number voluntarily. The rule applies to interstate faxes. Existing state laws will apply to intrastate faxes. The FCC regulations are at www.fcc.gov/cgb/policy/.

PANDEMIC FLU WHITE PAPER

NAA/NMHC have prepared a new White Paper outlining steps that apartment firms can take to prepare for a possible pandemic flu outbreak. While most Avian flu cases are centered in Southeast Asia currently, if the Avian flu becomes fully adapted to human-to-human transmission, it is expected to spread around the world within several weeks. Federal officials have indicated that they will not establish national public health and safety guidelines to manage and treat such an outbreak, and are urging private sector firms to develop individualized disaster and business continuity plans. Pandemic Flu: Apartment Owner Preparations provides an update on the status of the Avian flu, information on developing an emergency preparedness program, flu-specific elements of continuity plans and site controls, apartment-specific concerns, and legal issues. It also includes a resource guide with links to valuable information on disaster planning, crisis communications and more. The Members Only document is available at www.naahq.org/govern_affairs/Issues/.

LIHTC UTILITY ADJUSTMENTS

NAA/NMHC continue to press the Treasury Department to expedite the review process of a proposal to change the way rents are adjusted on Low-Income Housing Tax Credit (LIHTC) properties when residents pay for their own utilities. IRS rules require tax credit rents to include a utility allowance for resident-paid utilities; however, the methods currently used to estimate the resident’s utility cost tend to overestimate them. This, in turn, reduces the gross rent received by owners. NAA/NMHC have been leading a coalition of groups have asked the Internal Revenue Service (IRS) allow owners to use more accurate modeling procedures, data from property utility billing and even data from comparable properties. The IRS has been receptive to our request and has drafted a proposed regulation to accomplish it. Unfortunately, the draft remains stalled in the Treasury Department due to competing priorities with tax legislation in Congress. NAA/NMHC staff has been in frequent contact with appropriate Treasury Department staff in order to keep the issue on their radar. For more information, contact NAA/NMHC’s David Cardwell at [email protected] or 202/974-2336.

FEMA OVERHAULS POST-DISASTER HOUSING PLANS

On July 24, the U.S. Department of Homeland Security announced changes in its housing assistance program in response to complaints by NAA/NMHC and others that FEMA’s confusing and often-changing rules delayed moving Katrina’s victims into apartments. According to a New York Times article ("US Government Plans Overhaul in Disaster Aid," July 24), in future disasters, FEMA officials say they will work with state and local officials to identify apartments in advance and then offer to pay housing providers directly. The change will eliminate the problem encountered last year when FEMA paid rent directly to evacuees, but many evacuees used the money for other needs and were then unable to pay their rent. It will also eliminate the need for cities to create their own complicated voucher programs and then seek federal reimbursement as many cities in Texas did. Direct payment was a top priority for NAA/NMHC during the Hurricane Katrina aftermath. The New York Times article quotes NAA/NMHC’s Jim Arbury praising the new approach as a "major improvement."

HOUSING BILLS PROGRESS IN CONGRESS

Before recessing for the summer on July 29, Congress took action on several housing-related bills. (Congressional action on the estate tax and other tax incentives is covered in today’s AIMS Tax Update.) Lawmakers return on September 5 for five weeks, before adjourning for the November elections, leaving little time to complete new legislation before a new Congress is convened next January.

 FHA Loan Limits. On July 26, the House Financial Services Committee approved a bill (H.R. 5503) that would increase the maximum multifamily loan limits from 140 percent to 170 percent in geographical areas where cost levels exceed the standard program maximum and from 170 percent to 215 percent in designated high-cost areas. NAA/NMHC and a coalition of organizations are advocating for the increases. In 2004, the coalition secured passage of legislation increasing the loan limits from 110 percent to 140 percent (170 percent in high-cost areas). That bill also gave the U.S. Department of Housing and Urban Development (HUD) the authority to adjust the limits annually for inflation; before that the levels were set by Congress. It is unknown if this new measure will be voted on by the full House this year, however.

 HUD Appropriations/Section 8. On July 20, the Senate Appropriations Committee passed the FY 2007 HUD Appropriations bill (H.R. 5647), making significant NAA/NMHC- supported changes to the Administration’s proposed budget. Specifically, the Senate changed the Section 8 funding formula to a "budget-based " system that would consider a local housing authority’s leasing rates and costs for the most recent 12-month period. Since 2004, HUD has used a flawed formula, which the House version perpetuates, looking only at local costs from May-July 2004 (with an index for inflation). NAA/NMHC have long opposed this three-month formula as inaccurate and unpredictable. The bill also extends for five years the Mark-to-Market program, which is otherwise set to expire on September 30. The measure now heads to the Senate for a floor vote. Given the short legislative calendar, the unfinished appropriations bills, including this one, may be rolled up into a single omnibus bill.

 FHA Reform/Homeownership Incentive. On July 25, the House passed a bill (H.R. 5121) reforming the FHA single-family loan program. The legislation would allow risk-based pricing, eliminate the three-percent downpayment requirement and would also allow 40- year instead of 35-year loans. NAA/NMHC oppose the measure as another costly and unnecessary home ownership incentive. The Senate held a hearing on a companion proposal (S. 3535) in June.

ADMINISTRATION’S FOCUS ON IMMIGRATION LAW COMPLIANCE CONTINUES The Department of Homeland Security (DHS) announced its latest initiative designed to assist employers with immigration law compliance through voluntary partnerships with the federal government. (See the June 23, 2006 NMHC Washington Update for information on two other DHS initiatives on immigration law compliance.) According to DHS, the program is a comprehensive approach to educating employers in order to reduce the unlawful employment of undocumented workers. The federal government will partner with companies that represent a wide range of industries to serve as charter members. These firms will act as liaisons to the business community as a whole. Members will adhere to certain best practices, including participation in the Basic Pilot Employment Verification Program and an audit of the firm’s I-9 forms (the documents all employers must use to verify an employee’s legal status to work in this country). Among other things, DHS will provide training on proper hiring procedures, fraudulent document identification, and anti-discrimination laws. More information about the program https://www.vis-dhs.com/index.htm.

TAX LEGISLATION

Estate Tax/Expiring Tax Provisions. Republican lawmakers made one last attempt to secure estate tax relief before adjourning for the summer. After the Senate failed twice to pass some form of estate tax reform, House Republicans crafted what became known as the “trifecta” bill (H.R. 5970). The measure combined Republican-supported estate tax provisions with a two-year extension of several expired or expiring tax provisions and the Democrat’s top priority, a minimum wage increase. To make the package even more attractive, several “sweeteners” were added to win the support of specific Senators, including an NAA/NMHC-opposed provision allowing certain taxpayers for one year to deduct the cost of private mortgage insurance premiums (PMI). The House passed the bill on July 29, but even with the minimum wage and other sweeteners, during an August 3 vote, the Senate was unable to secure the 60 votes necessary to overcome a filibuster, causing the measure to fail. Before the vote, Senate Majority Leader Bill Frist (R-TN) indicated that this would be the last time this Congress considered either the estate tax or the tax extenders. Other than the PMI provision, the bill was largely favorable to apartment firms. Perhaps most importantly, the estate tax provisions would have retained stepped-up basis, NAA/NMHC’s top priority on this issue. In addition, the bill would have retroactively extended a provision allowing the immediate expensing of brownfields cleanup cost that expired at the end of 2005. (The brownfields tax provision would have also expanded the current program by making petroleum cleanup costs deductible.)

The estate tax issue will undoubtedly return with the next Congress since unless Congress acts, in 2011 the estate tax exemption will drop to $1 million per person, and the maximum estate tax rate will increase to 55 percent. This most recent failed compromise bill would have phased in a $5 million per person exemption from the tax (indexed for inflation) from 2010 to 2015. Estates worth up to $25 million would have been taxed at the capital gains rate; estates above $25 million would have been taxed at 30 percent. The $25 million limitation would also have been indexed to inflation. The most immediate impact on apartment firms of the Senate’s failure to pass H.R. 5970 is the loss of the brownfields expensing provision. Despite Senator Frist’s statements to the contrary, many Members of Congress believe that the extenders package will be acted on later this year.

IRS GUIDANCE

 Energy-Efficiency Tax Incentives. On June 2, the Internal Revenue Service (IRS) issued interim guidance (Notice 2006-52) on how commercial building owners or leaseholders can qualify for the tax deductions authorized under Internal Revenue Code (IRC) Section 179 for making their buildings more energy efficient. The Notice establishes a process to certify the energy savings required to claim the deduction. It also notes that the Department of Energy will create and maintain a public list of software that may be used to calculate energy and power consumption and costs for purposes of Section 179D. This list will appear at www.eere.energy.gov/buildings/info/tax_credit_2006.html. The commercial building deduction, which was enacted in the Energy Policy Act of 2005, allows taxpayers to deduct the cost of specific energy conservation features installed in commercial buildings placed in service from January 1, 2006 through December 31, 2007. Additional information is at www.nmhc.org/Content/ServeContent.cfm?ContentItemID=3895.

 Like-Kind Exchanges. On June 6, the IRS held a hearing on a proposed regulation (REG-113365-04, IRB-2006-10, March 6, 2006) concerning funds held by qualified intermediaries under IRC Section 468B that substantially revises the 1999 proposed regulations on the treatment of income earned on escrow accounts, trusts and other funds used during deferred exchanges of like-kind property under IRC Section 1031 as well as another proposal

(REG-209619-63, IRB-2006-10, March 6, 2006) under IRC Section 7872 concerning the treatment of below-market loans associated with like-kind exchanges. In related news, on April 21, the IRS issued a private letter ruling (PLR 200616005) in which it ruled that a trust and its related S corporation will not be required to recognize gain under IRC Section 1031(f) on: (1) the trust's exchange of a building for a like-kind building; or (2) the related S Corporation's exchange of a building for a replacement building, provided the parties do not dispose of the properties within two years of their receipt. The IRS further ruled that the trust will recognize gain on its portion of the exchange to the extent, if any, it receives cash from an unrelated Qualified Intermediary, rather than acquiring additional like-kind property, but the amount of gain would not exceed the amount of cash received.

 Subchapter K and Partnerships. In Notice 2006-14 (February 21, 2006), the IRS and the Treasury Department announced a study of the 50-year old guidance embodied in current regulations concerning the taxation of disproportionate partnership distributions under IRC Section 751(b) for certain current and liquidating partnership distributions that alter a partner’s share of unrealized receivables and substantially appreciated inventory items (so-called disproportionate distributions). Section 751 was enacted to prevent the conversion of ordinary income into capital gain and the shifting of ordinary income among partners. The IRS requested comments on two specific alternative approaches set forth in the notice as well as other possible approaches to determining a partner's share of “hot” assets and to prescribing the tax consequences of a disproportionate distribution.

 Low-Income Housing Tax Credit (LIHTC). On April 25, the IRS published an internal memorandum prepared by the Tax Exempt and Government Entities Division intended to resolve longstanding concerns on qualifying housing organizations for tax-exempt status and establishing clear guidance about how the IRS will review an application by an exempt organization that will serve as a general partner in an IRC Section 42 LIHTC partnership. The memorandum, entitled Low-Income Housing Tax Credit Limited Partnerships, provides criteria for processing applications for recognition of exemption under IRC Section 501 (3) or (4) for housing organizations that plan to form LIHTC partnerships with for-profit investors. The publication of the internal memorandum is widely believed to relax the previous IRS reluctance to review applications from organizations planning to serve as general partners in LIHTC partnerships. The full document is available at www.irs.gov/pub/irs-tege/urbanmemo42406.pdf.

 Real Estate Investment Trusts (REIT). The IRS issued several noteworthy private letter rulings (PLR). In PLR 200614002 (released April 4, 2006), the IRS ruled that compensation paid by a partnership to highly compensated employees who also worked for its general partner, a REIT, was not subject to the IRC Section 162(m) $1 million deduction limit. In PLR 200611007 (released March 3, 2006), the IRS ruled that the merger of two real estate investment trusts in which a third-party buyer acquires an interest for cash will be treated as a taxable asset sale followed by liquidation under IRC Section 331. In PLR 200615024 (released April 14, 2006), the IRS ruled that all of the cash and stock distributed in connection with a corporation's election to be taxed as a real estate investment trust will be treated as a distribution of property with respect to its stock to which IRC Section 301 applies.

 Sale-In, Lease Out. In Notice 2006-2 (January 9, 2006), the IRS extended by one year the transition relief provided in Notice 2005-29 (released in March 2005) under IRC Section 470 to partnerships and other pass-thru entities that are treated as holding tax- exempt use property as a result of the application of IRC Section 168(h)(6). Section 470, enacted in 2004, imposed new limitations on the deductibility of losses relating to tax exempt use property and generally applies to leases entered into after March 12, 2004. Notice 2006-2 extends this transition relief to taxable years beginning before January 1, 2006. In granting the extension, the IRS and Treasury Department noted that Congress is considering legislation that would affect the application of IRC Section 470 to certain transactions involving partnerships and other pass-thru entities.

 Mold Removal Costs Ruled Deductible. In PLR 200607003 (released February 17, 2006), the IRS ruled that a taxpayer could deduct as ordinary and necessary business expenses under IRC Section 162 the costs of a mold remediation project in a building it owned and leased out. In the facts of this ruling, the mold was not present when the building was purchased and the removal did not improve the building structurally or adapt it to a new or different use. The IRS concluded that the mold remediation did not increase the value of the building or appreciably prolong its useful life.

October 2006

The City of Cincinnati has been working with GCNKAA on the much ballyhooed lead paint regulation changes. Council Member Chris Monzel will be providing an article on the changes, most of which dealt with how the City addressed properties cited for lead poisoned children. In a separate issue, we are still awaiting the nuisance law draft from the City Administration that was brought forward by Council Members Berding and Bortz. Expect a variety of communications and updates when that finally breaks.

The Mayor of the Village of Golf Manor has decided that while some rental units in Golf Manor are in serious states of deterioration, they would be a good source for an annual $100 per unit registration fee! Luckily we have in working with OAA passed HB294 which restricts municipalities from this specific kind of money grab. (Information on how to register with County Auditor, per HB294, will be forthcoming shortly.) In the meantime, we are trying to work with the more reasonable members and administration.

‘Ol Kentucky home:

Some members have been dealing with this ongoing issue of the Northern Kentucky Water District’s requirement to install backflow preventers on all multi- family residential communities, and the resulting lawsuit. After the Appeals Court ruled that the Public Service Commission (PSC) has the authority to set the standards on the Water District’s Tariff (backflow preventer regulations), and the Water District was told to go back to the drawing board several times, since they wouldn’t change their Tariff, the Water District in an odd and freakish law suit has filed against their very overseer, the PSC, claiming the PSC doesn’t have authority over the Water District! It just doesn’t get much better than this! We are now waiting to see what happens next: Sanctions? Heads to roll? Maybe the Judge-Executives will even look into the board that has oversight of the Water District…

FAIR DEBT COLLECTION PRACTICES ACT: NEW DEVELOPMENTS

When Congress enacted the Fair Debt Collection Practices Act (FDCPA) in 1977, its goal was to eliminate abusive, deceptive and unfair practices of debt collectors. On the surface, the FDCPA requirements seem fairly simple, and, for the most part, unrelated to rental housing operations. Over time, though, case law and Federal Trade Commission (FTC) opinions have created ambiguities that mean apartment owners and their attorneys pursuing past due rent or an eviction may trigger the law’s requirements. Recent court activity underscores the challenges to apartment owners and the need for vigilance. NAA/NMHC-supported legislation currently pending in Congress (H.R. 3505), however, would go a long way to clarify some of the provisions that remain a source of confusion in the industry.

So, what does the FDCPA require and when does it apply to apartment owners? At its most basic level, the law requires debt collectors to send debtors (i.e., renters) specific written communications regarding the debt on a prescribed timetable. At issue is whether rent is a “debt,” whether the apartment firm is a “debt collector” and whether a rent demand or a legal proceeding notice is an initial “communication.” The courts’ answers to these questions have forced apartment owners to rethink their collections and evictions processes.

According to current case law and the FTC, the FDCPA does not apply to owners acting on their own behalf to collect unpaid rent or initiate an eviction lawsuit. However, if an owner uses a third- party property management company or an attorney to submit notices or prepare court documents, the FDCPA may be triggered. All of these uncertainties arise from Section 809(a) of the Act, which says:

Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing:

1. the amount of the debt; 2. the name of the creditor to whom the debt is owed; 3. a statement that unless the consumer, within 30 days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector; 4. a statement that unless the consumer notifies the debt collector in writing within the 30- day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of the judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; 5. a statement that, upon the consumer’s written request within the 30-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

Key Court Rulings Attorneys and Property Management Companies as “debt collectors” In 1995, the Supreme Court ruled that attorneys who regularly engage in consumer-debt- collection activity, even when that activity consists of litigation, are considered “debt collectors” under the FDCPA (Heinz v. Jenkins, 514, U.S. 291, 299, 1995). This contradicted earlier FTC opinions that said that unless a lawyer regularly engaged in traditional debt collection activities, he or she is not covered by FDCPA. As a result, NAA/NMHC advise members not to have third- party attorneys issue collection notices, and instead to issue them in the name of the property owner unless you also send FDCPA-required debt validation notice.

Whether property management companies are “debt collectors” is less clear. In 1995, the FTC issued an opinion letter stating that in most circumstances property managers are not “debt collectors.” However, it went on to say that a property manager who is an agent of an owner becomes a “debt collector” if the firm uses any name other than its own in the process of collecting a rental payment. Members should note that this letter reflects the opinion of the FTC staff at the time and is not binding on the FTC.

The position that property managers are not “debt collectors” was strengthened when a federal court ruled that since a property management company had a fiduciary duty to the apartment company and was performing the collection function as a manager, the firm was not a “debt collector.” (Reynolds v. Gables Residential Services, 428 F. Supp. 2d 1260, D. Fla. 2006.)

Demand Notices and Legal Pleadings are “Communications” In most states, landlord-tenant laws require rental property owners to provide residents with a notice to quit if the resident does not pay rent. These notices typically give residents three to 14 days to pay rent or vacate an apartment before the owner moves for an eviction. If the FDCPA applies to rental collections, however, residents have 30 days to dispute the amount demanded instead of the typical three to 14 days to respond to a notice to quit. NAA/NMHC have long argued that adding the FDCPA notification requirements on top of existing landlord-tenant laws imposes unfair delays for the owner seeking payment and/or possession of their property. Unfortunately, the courts have issued contradicting opinions on whether the FDCPA’s 30-day requirement applies.

In 1998, the U.S. Court of Appeals for the Second Circuit issued a long-awaited ruling on the matter (Romera v. Heiberger & Associates; 163 F.3d 111 (U.S. Ct App. 2nd Cir. 1998). This case involved a resident in a Manhattan apartment property who was four months behind in rent. When she was notified by the law firm retained by the property owner to pay the back rent or vacate in three days, as allowed under New York law, she filed a lawsuit alleging violation of the FDCPA. She contended that the law firm was a “debt collector,” and that the notice was a “communication” for purposes of the Act. The court agreed and said the back rent was considered a “debt” under FDCPA and that the demand notice was a “communication” that triggered compliance with the Act.

Adding to the confusion, however, a judge in a similar case ruled that the FDCPA did not apply. In this case, the property owner’s attorneys commenced eviction proceedings over non-payment of maintenance fees (Barstow Road Owners, Inc Landlord v. Billing Tenant, 687 NYS 2d 845 Dis Ct. 1998). The resident was served a three-day notice for rent as required by New York state law and a 10-day notice as stipulated in the lease by an attorney and not the owners. The resident claimed a violation of the FDCPA, demanded $10,000 in damages and an end to eviction proceedings. In determining that the FDCPA did not apply, the judge looked to the purpose of the FDCPA and found that no harassment or unconscionable practices were at issue.

He also found that the FDCPA’s 30-day timeline creates a conflict with the state’s landlord-tenant law and determined that Congress did not intend the FDCPA to be used as a device to dismiss legal summary proceedings by a landlord to reclaim his property. Finally, he ruled that the three- day demand letter is not an “initial communication” but merely a legal requirement under the state law. The judge further stated that even if a violation of FDCPA was found, it would have no bearing on the landlord’s effort to evict the tenant. Legislative Relief In March, the U.S. House of Representatives passed a bill (H.R. 3505) that would bring much- needed relief to the industry. Specifically, it would amend the FDCPA to clarify that communications in the form of a formal legal proceeding do not trigger the FDCPA notifications. Thus, attorneys retained by the property owner to initiate a lawsuit for non-payment issues or eviction would not have to send a debt validation notice also. The legislation also offers relief from FDCPA notification if the “initial communication” is a notice required by any other federal or state law, such as the three-day demand required under state landlord-tenant law.

This “safe harbor” would apply as long as there is no request for payment of a debt. Finally, the legislation makes it clear that collection activities may continue during the debtor’s 30-day right to review period. The Senate passed a narrower bill (S. 2856) in May without the NAA/NMHC- desired clarifications; however, the provisions are expected to be retained in the compromise bill currently being negotiated. The measure is expected to be voted on before Congress adjourns for the year. Guidance Until desired changes are made to the law through legislation or favorable court rulings, apartment firms are advised to take one of the following two approaches to collect rent or initiate eviction proceedings:

(1) Issue all notices in the name of the creditor-signatory to the lease agreement. Do not include the name of the attorney on the letterhead or elsewhere in the letter. Taking this approach relieves the owner of providing the additional layer of notifications as required under the FDCPA.

(2) When using an attorney to prepare payment notices, or to initiate legal proceedings, make sure they are also providing the required FDCPA notifications at the point of initial communication or within five days. If the renter writes to dispute the debt, then take the necessary steps to respond with verification to the renter.

CONGRESSIONAL OUTLOOK FOR HOUSING-RELATED BILLS

Congress returned on September 5 from its summer recess with several housing-related bills awaiting action, including the HUD appropriations bill, Section 8 reform, FHA modernization, tax legislation and a new regulator for Fannie Mae and Freddie Mac. With only 15 working days before the lawmakers depart in October to campaign for the fall elections, the housing measures have varying chances of getting enacted. With tough re-election campaigns facing many members of Congress, both chambers are expected to address only a few priority issues this month and delay most major policy and spending decisions until a post-election lame duck session in November or next year depending upon election results.

A top priority for lawmakers, however, will be finishing the must-pass annual appropriations bills, although final passage may be delayed until after the election, when all the remaining bills would be wrapped into an omnibus spending measure. The HUD bill is one of the incomplete measures. It has passed the House and the Senate Appropriations committees, but is awaiting a vote by the full Senate. NAA/NMHC favor the Senate version, which makes an important change in the way the Section 8 voucher program is funded. Specifically, it would replace HUD’s flawed system of basing costs on a May-July 2004 snapshot (indexed for inflation) and instead would allocate funding based on each local housing authority’s costs for the most recent 12-month period.

An FHA reform measure (H.R. 5121) designed to increase home ownership for low-income households has a good chance of being passed because of its widespread bipartisan support and the popularity of home ownership incentives in an election year. The measure would eliminate the three-percent downpayment requirement from the FHA single-family loan program and allow 40- year loans. It has passed the House and is awaiting action in the Senate. With FHA foreclosures near historical highs, NAA/NMHC will continue to oppose it as a risky and unnecessary program that would further unbalance our housing policy. Another measure to increase FHA loan limits for multifamily mortgages in high-cost areas (H.R. 5503) has passed a House committee, but is not expected to secure full Senate passage before Congress adjourns.

Section 8 reform (H.R. 1999), on the other hand, is unlikely to see final action in this Congress. The NAA/NMHC-supported bill would convert the Section 8 voucher program into a flexible voucher program and would reform the burdensome inspection process. The measure is pending before a House subcommittee and may be voted on by the full House this month, but the Senate is not expected to consider it. It is possible, however, that some elements of the bill could be attached to the HUD appropriations bill. Final passage of Government Sponsored Enterprise (GSE) reform remains uncertain given the fundamental differences between the version the House passed last October (H.R. 1416) and the version that remains stalled in the Senate (S. 190). Most significantly, the Senate bill sets strict limits on the GSE’s portfolio holdings, while the House bill would allow the new regulator to set portfolio limits. After indications that the White House is willing to compromise on portfolio limits earlier this summer, House Financial Services Committee Chair Michael Oxley (R-OH) sent a letter to Henry Paulson, the new Treasury Secretary urging him to make GSE reform a priority and to help pass it this year.

Congressional plans on taxes remain unclear. Earlier this summer the Senate failed to pass a package marrying estate tax reform, a minimum wage increase and several popular tax extenders. Senate Republican leaders say they may bring the package to a vote one more time before they adjourn for the November election, although they do not expect it to gain the 60 votes necessary to overcome Democratic opposition. Of interest to apartment owners, the measure would have retroactively extended and expanded a provision allowing the immediate expensing of brownfields cleanup cost that expired at the end of 2005. NAA/NMHC will continue to seek opportunities to attach this provision to legislation this year.

SMART GROWTH/LAND USE RESOURCES

 The Brookings Institution has published a comprehensive study examining land-use regulations in the nation’s 50 largest metropolitan areas. A useful reference for apartment developers, the report identifies those cities with exclusionary and restrictive regulatory regimes as well as those with more innovative and accommodating policies. The report specifically examines the impact of zoning on multifamily development by investigating whether each jurisdiction’s zoning ordinance would allow either "by right" or "by special permit" construction of a prototype apartment development with 40 units of two-story apartments on a five-acre lot.

The report finds that 38 percent of local governments in the 50 largest metro areas are "low-density only" and restrict the maximum allowable to 8 per acre or less. Fully 30 percent of the local governments would also bar the hypothetical apartment development. In almost every Western jurisdiction surveyed, the prototypical apartment complex would be allowed either by right or by permit. Almost half of the jurisdictions in the Northeast would ban it entirely. The survey results also suggest that the maximum permitted density has generally remained the same over the last ten years. From Traditional to Reformed: A Review of the Land Use Regulations in the Nation's 50 largest Metropolitan Areas is posted at www.brookings.edu/metro/pubs/ 2006 0810_LandUse.htm. An appendix, posted online at www.brookings.edu/metro/pubs/20060810_50metros.htm, provides detailed information on the governance framework, growth trends and regulatory environment in each of the 50 largest metro areas.

 This last month, NMHC joined the Smart Growth Network and ICMA in releasing This Is Smart Growth, another tool apartment firms can use to help overcome opposition to higher-density development. This new publication describes how Smart Growth techniques can improve the quality of development, create more economic opportunities, protect environmental resources and build great places where people want to live and visit. It profiles 40 places around the country, from cities to rural communities, where good growth policies have expanded housing choices, invested taxpayer money wisely and improved residents’ quality of life. This is Smart Growth was funded by the U.S. Environmental Protection Agency (EPA) as well as other partners. Free copies are available at www.smartgrowth.org.

IMMIGRATION LAW TARGETING APARTMENT FIRMS DELAYED The Pennsylvania town of Hazleton has agreed to temporarily delay enforcement of its local immigration law that would fine rental housing providers $1,000 for each day they rent to illegal immigrants. The measure, which was supposed to go into effect on September 11, would also deny business permits to employers who hire illegal immigrants. After civil liberties groups challenged the ordinance in court, the town agreed to not implement the law. Instead, Hazleton’s mayor says they will consult with attorneys to write a new ordinance that will be easier to defend in court. The agreement also calls for the city to give 20 days' notice before enacting the existing law or any revised version, allowing challengers time to go back to court to stop it. According to one of the plaintiffs in the lawsuit, the Puerto Rican Legal Defense and Education Fund, six other towns nationwide have adopted similarly tough ordinances: four in Pennsylvania, plus Riverside, NJ, and Valley Park, MO. Four additional towns have passed preliminary votes, and at least 26 towns are considering them. Four towns have rejected similar ordinances. Meanwhile, comprehensive federal immigration reform appears dead for the year. On the first day back, GOP leaders in both chambers said they intend to pass border security legislation, but both hedged on the prospects for a broader bill with a guest worker program or legalization for undocumented aliens. After a summer of field hearings on the issue, House Republicans appear to have stiffened their opposition to the Senate bill, which includes both a guest worker program and a path to citizenship.

November 2006

IMMIGRATION EMPLOYMENT ENFORCEMENT UNITS BEING CREATED

NAA/NMHC have learned that the Immigration and Customs Enforcement (ICE) agency (formerly the Immigration and Naturalization Service) is in the process of creating “employer enforcement units” as part of an aggressive new plan to increase workplace raids and criminal investigations of suspected immigration law violations. Although the apartment industry has historically not been a target for immigration enforcement, all employers must be vigilant in their compliance efforts in light of this latest news.

The raids, which will use wired information and video, are focused primarily on criminal prosecution to deport illegal immigrants, deter others from entering and incarcerate “bad actor” employers. ICE is also recruiting subcontractors to bear witness against prime contractors for compensation. With this development, it appears that complying with federal I-9 procedures no longer provides employers the same level of protection it used to. Instead, ICE is relying on the “reckless disregard” provision in the Immigration and Nationality Act, Section 274(a)(1)(A)(iv), to support their efforts. ICE believes, for instance, that if an employer observes a vehicle containing foreign workers arriving at a job site, federal law requires the employer to inquire as to the subcontractor's employees’ status. NAA/NMHC continue to follow immigration issues as they relate to apartment industry employment and operational practices.

CONGRESS PASSES DEBT COLLECTION RELIEF MEASURE

Before adjourning, both Houses of Congress approved a Financial Regulatory Relief bill (S. 2856) that amends the Fair Debt Collection Practices Act (FDCPA) to the benefit of apartment firms and their attorneys when pursuing legal action to evict a resident or to collect back rent. Generally, the FDCPA requires those seeking to collect a debt to notify the debtor that they have 30 days to dispute the debt. Under current law, owners acting on their own behalf to collect past-due rents or to evict are not subject to the notification requirements, and this does not change. However, without this change, when an apartment owner or manager retains an attorney to communicate with the resident about collection efforts or to initiate a lawsuit for non-payment issues or eviction, the FDCPA notice requirements are triggered. This has added a layer of confusion and delay to the eviction process. The new legislation clarifies that if the communication is a formal legal pleading, such as an eviction lawsuit, no FDCPA notification is required. NAA/NMHC supported broader relief to address conflicts between the FDCPA and state landlord-tenant laws that result in unnecessary delays. However, Congress decided to advance a much narrower bill to resolve several controversial provisions unrelated to the FDCPA portion. NAA/NMHC will continue to press for broad relief. In the meantime, owners and managers are encouraged to issue rent demand notices in their own name and not in an attorney’s name. For more information on complying with the FDCPA, see the September 15 AIMS Property Management Update.

CAPITOL HILL UPDATE: TAX AND GSE BILLS STALL, HOUSING, DISASTER AND PROPERTY RIGHTS BILLS MOVE FORWARD

Congress began a six-week recess on September 30 to campaign for the midterm elections without finalizing many priority bills, raising doubts about what can be accomplished in the post- election lame duck session scheduled for mid-November. Despite pressure from Senate Finance Committee Chairman Charles Grassley (R-IA) to pass a package of popular tax extenders (including brownfield expensing) that were dropped out of a tax bill passed in May, Senate leaders stuck to their strategy of combining the extenders with a minimum wage increase and estate tax reform. The fate of the package, which would among other things retroactively extend and expand brownfield expensing provisions, is unclear.

Legislators also failed to take action on a measure (S. 190) to create a new regulator for Fannie Mae and Freddie Mac, despite the Treasury Department’s announcement last month that the Administration was no longer demanding that the legislation include strict limits on the government sponsored enterprises’ (GSE) portfolios. This requirement had been a stumbling block in bringing the bill to the Senate floor for a vote.

Two housing-related bills did pass the House in the final week before the recess. They include an NAA/NMHC-supported bill (H.R. 6115) to extend the Section 8 mark-to-market program through fiscal 2011 and make programmatic changes sought by apartment owners. Another bill (H.R. 5503) would raise the maximum high-cost area wide adjustment to 170 percent of the basic mortgage limit and raise the maximum project-by-project adjustment to 215 percent in high-cost areas and 170 percent in other areas. Prospects for Senate passage of both bills in November are favorable.

Both houses of Congress did manage to pass substantial changes urged by NAA/NMHC and others to federal disaster relief law. The revisions were incorporated in the FY07 Homeland Security Appropriations bill (H.R. 5441), which President Bush is expected to sign. Specifically, the bill requires the creation of a National Disaster Housing Strategy (NDHS) that is developed in conjunction with HUD, state and local governments and other federal agencies. The bill also amends current law to explicitly allow disaster victims to use their cash assistance for security deposits and utility bills. It also directs the FEMA Administrator to create a pilot program to make better use of existing rental housing located in disaster areas. As part of the pilot program, FEMA will enter into lease agreements directly with property owners and will make repairs to the properties.

The House also passed the Private Property Rights Implementation Act (H.R. 4772) expanding the jurisdiction of federal courts over state-based eminent domain claims. H.R. 4772 is one of the many bills introduced in response to last year’s Kelo decision. Opponents of the measure, including the U.S. Conference of Mayors, are concerned that this will handcuff local land use decisions by elevating judicial review to the federal level. There is no Senate companion measure. Another House-passed bill (H.R. 4128) designed to limit the use of eminent domain has been languishing in the Senate since November 2005. For more information, see the August 4 AIMS Environmental Update. FHA PREMIUM INCREASE RESCINDED

NAA/NMHC secured a substantial victory on September 22, when the U.S. Department of Housing and Urban Development (HUD) withdrew a proposal to increase the FHA multifamily mortgage insurance premium (MIP) from 45 to 77 basis points for FY 2007. HUD announced the proposed increases at the end of June, but now says that as a result of the negative reaction from NAA/NMHC and others, it will not implement them. Instead, the Department will use the FY 2006 premiums for all commitments to be issued or reissued in fiscal year 2007, which began October 1. A draft Federal Register notice announcing the withdrawal has been posted at www.hudclips.org.

When it was introduced in the budget process, the proposal was justified as a revenue raiser. The Office of Management and Budget initially estimated that the proposal would generate $150 million annually; however, the Congressional Budget Office recently said higher premiums would decrease loan volume so the proposal would only produce $70 million in revenue.

HUD’s proposal was particularly disturbing given the fact that after being pressured to tie the premiums to the actual cost of the program, HUD has actually dropped the MIP from 80 to 45 basis points over the past three years. In its withdrawal notice, however, HUD notes that “FHA will continue to evaluate alternative pricing strategies to maintain the integrity of the fund and achieve policy goals.” NAA/NMHC will continue to oppose premium increases in the FHA fund not justified by program costs. We are also asking the Congress to direct HUD to conduct a full rulemaking before implementing premium changes and to provide policymakers with an analysis of the financial impact such premium increases will have on the cost of affordable housing. December 2006

POST-ELECTION REVIEW/OUTLOOK The 2006 elections dramatically changed the power structure in Congress. For the first time in 12 years, the Democratic Party will control both the House of Representatives and the Senate. This switch in the balance of power will have a significant effect on the apartment industry’s legislative agenda, but its ultimate impact will be tempered by the operational differences between the House and Senate.

In the House, the majority rules. This means Democrats will have complete control over how legislation moves through that body. In the Senate, however, filibuster and unanimous consent rules give individual senators, regardless of party affiliation, much more power and essentially require a 60-vote margin to pass major legislation. Since Democrats only hold 51 seats, individual Republican senators will still have the power to block aggressive legislation passed by the Democratic House. And, of course, President Bush may increase the use of his until now rarely-exercised veto power.

In the short term, the most immediate repercussion of the election will be on the post-election lame duck Congressional session that began this week. The election results almost guarantee that nothing significant will happen as both parties focus on reorganizing committees for the new Congress and on funding the federal government. Although only two of the 12 FY 2007 appropriations have been completed, Congress is expected to pass another temporary continuing funding resolution and postpone final action until next year. The only items of interest to apartment firms that were left pending when Congress adjourned for the elections are (1) tax extender legislation and (2) possible revisions to how the Section 8 program is funded and distributed. Both of these items may be carried over to the 110th Congress.

The biggest issues facing the next Congress will be funding the Iraq war and the war on terrorism in general. The power shift also greatly increases the chance of enacting broad immigration law since the Democrats generally support the Bush- endorsed and Senate-passed bill (S. 2611) that would boost immigration enforcement, create a new guest-worker program, and provide a path to citizenship for millions of undocumented aliens. Democrats also will put their stamp on the federal budget, crafting a budget that meets their priorities. This may result in proposals to increase taxes on higher-income individuals, change Section 8 rules, revise the nation’s energy priorities and a host of other issues.

Affordable housing is set to take on much more importance in the Democratic- controlled Congress. In the Senate, Senator Christopher Dodd (D-CT) will be the likely new chairman of the Senate Banking Committee. Dodd is expected to focus on improving affordable housing and to expedite consideration of GSE (Fannie Mae and Freddie Mac) reform, which includes an affordable housing provision. Dodd also has a “significant interest” in extending the NAA/NMHC- supported federal terrorism risk insurance program set to expire in 2008. In the House, Representative Barney Frank (D-MA) is expected to take over the House Financial Services Committee. Frank has indicated that affordable housing is a top priority, and he, too, is expected to urge passage of GSE reform.

On the tax front, Representative Charles Rangel (D-NY) will chair the House Ways and Means Committee, and Senator Max Baucus (D-MT) will head the Senate Finance Committee. Both are strong supporters of the tax extenders package that failed to pass earlier this year. The measure includes an NAA/NMHC-supported provision that would retroactively extend and expand a tax provision allowing the immediate expensing of brownfields cleanup costs. Compromise on estate tax reform may be possible in 2007, now that the election is over and the issue has been depoliticized to some extent. There is strong bipartisan support to compromise and eliminate the uncertainty of the estate tax after 2010.

On the energy front, Representative John Dingell (D-MI), who is in line to chair the House Committee on Energy and Commerce next year, has already announced his plans to exercise more oversight over President Bush’s energy policy. Republicans have been criticized for focusing on energy supply issues, such as offshore drilling, instead of paying attention to demand-side management. In contrast, Dingell says he wants to move faster on developing alternative fuels and energy conservation. Being from an automobile producing state, however, Dingell has voted in the past against toughening auto fuel mileage requirements. FCC RULING ON BROADBAND VIA POWER LINES On November 3, the Federal Communications Commission (FCC) issued a ruling designed to encourage electric power utilities to expand the availability of high- speed Internet service over the power grid. (See www.fcc.gov. ) Specifically, the FCC ruled that broadband over power line service (BPL) is an “information service” and not a traditional telecom service. The classification means that BPL providers do not have to comply with costly regulation and oversight. The FCC has previously classified high-speed via cable modem and digital subscriber-line (DSL) as information services.

The impact of this new BPL ruling on the apartment industry is unclear, but it is potentially positive as a growing number of apartment firms are exploring the use of BPL technologies. One notable example in the apartment industry is The Bozzuto Group, which has been experimenting with BPL technology as a “last mile” option for apartment residents for the past few years. The firm recently announced that it will join forces with equipment provider Telkonet, Inc. and Earthlink for an expanded pilot program. At a minimum, the FCC ruling will mean added competition for broadband service providers. Unless current service contracts prohibit such competition, access to a building’s electrical service network could open up a range of broadband services to residents, making the service accessible to virtually all residents. NAA/NMHC will continue to monitor the impact of this ruling upon our industry. IDENTITY THEFT: PROPOSED RULES AFFECT APARTMENT OWNERS NAA/NMHC have submitted comments to the Federal Trade Commission (FTC) on a proposed rule to reduce identity theft. The rule, known as the Identity Theft Red Flags and Address Discrepancy, is required to implement some provisions of the 2003 Fair and Accurate Credit Transactions Act (FACT Act). While most of the provisions are directed toward financial institutions and other traditional creditors, the apartment industry has some compliance obligations, especially when accessing an individual’s credit report. This proposed rule seeks to define what reasonable policies firms should have to follow if a firm uses a consumer report to verify a consumer’s identity and are notified by a consumer reporting agency of a serious address discrepancy. NAA/NMHC’s comments encouraged the FTC to recognize as reasonable policies the resident screening practices currently employed by the apartment industry and discouraged the adoption of more strict standards. EMINENT DOMAIN Nine out of 12 state ballot measures restricting the right of governments to use eminent domain to seize private property passed overwhelmingly, signaling continued voter dissatisfaction with the U.S. Supreme Court's controversial 2005 Kelo decision that said government can seize private land and sell it to private developers. Four of the proposed measures went far beyond Kelo and would have required governments to compensate owners where any law or regulation restricts the use of private property (known as regulatory takings); all but one of these (in Arizona) failed. If they had passed, many of these regulatory takings initiatives would have forced state and local governments to roll back all land-use and environmental laws because they lack funding to compensate landowners. Opponents, which included local and state officials, budget watchdog groups and smart-growth and environmental advocates, argued these measures would trigger tax increases, slow growth and stymie smart growth efforts. NAA/NMHC continue to analyze the role of eminent domain in private development projects and the possible unintended consequences of restrictions on its use. SUBMETERING RULING On October 25, the U.S. Court of Appeals for the Fourth Circuit denied a request from the Manufactured Housing Institute (MHI) to review a 2003 directive from the Environmental Protection Agency (EPA) exempting from the 1974 Safe Drinking Water Act (SDWA) apartment properties that bill residents for water using full capture water metering (MHI v. EPA, No. 04-1157 (4th Cir. 2006). Under the SDWA, a property that “sells” water, even water that is treated by a regulated water supplier, is considered a “consecutive water supplier” and is subject to the SDWA.

In the case, MHI claimed that EPA’s interpretation of the phrase “sell water” in this directive was arbitrary because it only applied to properties that use full capture metering and not to properties that use allocation or partial capture metering. It left it to the states to determine how to regulate these latter properties. EPA’s directive explained that it was exempting full capture metered apartments because such a practice results in water conservation. The Agency also opined that allocation and partial capture metering had not been shown to conserve water and therefore would be left to state jurisdiction. In affirming the EPA’s position, the court found that the Agency's position “was supported by a rational basis.” The decision does not alter EPA's directive that states may choose to impose water testing/quality assurance standards on properties that offer water for “sale” regardless of whether the property relies on meters or allocation formulae to calculate individual bills.

BUILDING HEIGHT, AREA LIMITATIONS AND SPRINKLER AREA INCREASES The International Code Council (ICC) met in Orlando, FL September 20-30 to consider changes to the 2009 International Building Code (IBC). (See below for apartment-related victories.) One of the most newsworthy items coming out of these preliminary hearings was the ICC’s decision to create a special “Height and Area Study Group.” The group was created to review controversial proposals to change the current IBC standards that determine allowable building heights and areas for various types of construction. The study group, which includes NAA/NMHC’s Ron Nickson as one of its 16 members, will also examine various code provisions that allow increased area and height based on building setbacks and the installation of building sprinkler systems (NFPA 13 and 13R). The current IBC provisions for height, area, building setback and sprinkler tradeoffs were developed when the three model code groups agreed to merge in 2000 to form the ICC. During the consolidation process the committees developing the IBC decided to take the least stringent height and area provision from each code. They based this decision on their belief that there was no evidence that any of the pre-existing building height and area requirements had much impact on overall building safety. What was clear cut for the committee members, however, has been anything but for the membership; the IBC height and area requirements have been disputed (but not changed) at every ICC code development hearing. NAA/NMHC actively supported the creation of the study group to resolve these contentious issues once and for all. We are optimistic that apartments will not be adversely affected by the likely compromises proposed by the group, but several changes being considered could have a major impact on the kind of apartments the industry has been building for more than 20 years. One set of proposals would increase the firewall ratings for all properties. Another would require more, and larger, firewalls for smaller properties. A third would require four-story apartments and townhouses to use the more expensive NFPA 13 sprinkler system instead of the NFPA 13R system commonly used now. The sprinkler change alone would add at least $2/square foot to the cost of construction of four-story apartments and townhouses across the country. In the past, every time these and other proposed changes were considered, the ICC code development committees rejected them. They were able to do that, in part, because there were only two groups advocating them—the masonry industry and the Alliance for Fire and Smoke Containment and Control. This year, however, the issue took on new urgency when several other groups joined in the call for changing the height and area provisions. They include the California and Florida code officials representing local ICC chapters, the Building Officials Association of Florida (BOAF), the California State Fire Marshals Office (SFM), and the National Association of State Fire Marshals (NASFM). With a broader base of members now calling for changes, the ICC felt obligated to create the study group and undertake a more in-depth detailed study of the issues at stake. The study group will meet four times between now and January 2007 with the goal of finalizing its recommendations in time for the ICC’s January 24, 2007 deadline for public comments. The recommendations will then be sent to the new ICC Code Technology Committee (CTC). The CTC was created by the ICC Board of Directors to address difficult issues that cannot be resolved during the normal code development process. (NAA/NMHC also hold the only construction industry membership on the CTC.) Final action on all the proposals will take place at the ICC’s May 21-25, 2007 meeting in Rochester, NY. The involvement of the California State Fire Marshals Office and the National Association of State Fire Marshals will have a major impact at the final action hearings because of the size of these two organizations. Currently, California building and fire officials make up one-third of the ICC’s membership. California’s involvement is also significant because many of the same proposals considered during the ICC hearings will also be used by the state of California for its height and area requirements. In fact, the ICC study group plans to complete its recommendations in early January so they can also be considered by the California Building Standards Commission at its final action meeting on January 16-17, 2007. 2006/2007 CODE DEVELOPMENT HEARINGS NAA/NMHC secured several preliminary victories during the ICC’s September hearings to consider changes to the 2009 IBC. If approved by the full membership in May 2007, these changes would allow apartment developers new flexibility inhow they design their individual units. One change, for instance, increases the occupant load for apartments from 10 to 24. That proposal was approved after NAA/NMHC provided data confirming that the size of an apartment is not related to the building’s occupant load; larger apartments simply have larger rooms and more bedrooms, not more people. That change will allow apartment units up to 4,000 square feet to have a single exit; current code requires two exits for units greater than 2,000 square feet. There were three sprinkler-related changes that are beneficial to apartments. One increases the dead-end corridor limit from 20 feet to 50 feet in buildings protected with an NFPA 13 sprinkler system. Another would increase the common travel distance inside of the apartment unit from 50 feet to 125 feet if the dwelling unit has an NFPA 13 or 13R sprinkler system. A third would eliminate the requirement that elevators be accessible from an area of refuge or horizontal exit if the building is protected with an NFPA 13 or 13R sprinkler system. (Another approved change further clarified this by stating that an area of refuge is not required in apartment buildings.) These changes were also supported by NAA/NMHC-provided data on sprinkler performance. Specifically, we demonstrated that apartments have a 96 percent sprinkler activation performance reliability compared to an overall 89 percent average for all occupancies. New NFPA data covering fire losses for the past 12 years support an older Operation Life Safety report that there have been no civilian or firefighter deaths in buildings protected with an NFPA 13R sprinkler system. Other changes recommended for approval include: (1) Section 509 Special Provision concerning mixed occupancies to allow R (residential) occupancies in the lower levels where the code now only permits assembly with less than 300 occupants, office or mercantile; (2) a revised definition of “Level of Exit Discharge” to clarify that it is the lowest story, not the lowest horizontal plane at which an exit terminates; and (3) only requiring handrails in dwelling units when there are more than three risers instead of the current code provision requiring handrails when only one riser is present. All of these victories are preliminary, however, since they must still be approved by the full membership next May. COUNTERFEIT SPRINKLER NOTIFICATION Apartment firms should be aware of the latest in a number of counterfeit sprinkler issues. The most recent news concerns sprinkler heads designed to resemble Globe Fire Sprinkler Corporation sprinklers. The counterfeit heads have “Globe” and the Underwriters Laboratories (UL) mark on them. They are pendent-type heads identified with a product model number of GL 5651. The deflector is marked with: SSP, cULus in a circle, GL 5651, 2005, 1550F/680C. The only visible difference between the authentic and counterfeit sprinklers is the screw head; the counterfeit sprinklers have a slot-head screw and the legitimate sprinklers have a hex-head screw. UL is recommending that the counterfeit sprinklers be replaced by qualified service personnel and returned to the place of purchase. For more information, contact Joe Hirschmugl at UL at 847/664-1508. Property owners are advised to be sure they are dealing with reputable product distributors when purchasing sprinklers.

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