Lawsuit: Midwest Landlord Of Complexes Built & Financed With Affordable Housing Tax Credits Is Using 'Friendly Foreclosures' To Foreclose On Himself To Weasel Out Of 30-Year Gov't Commitments To Offer Reduced Rents To Low-Income Tenants; Concerns Raised That Legal Maneuver May Be Growing Business Model To Improperly Jack Up Rents

In Grand Rapids, Michigan, The Grand Rapids Press reports:

• A prominent and influential West Michigan landlord is dodging its commitments to provide low-income housing for its tenants, housing advocates say.
  
  Eenhoorn LLC has arranged foreclosures for least seven of its low-income housing developments in Michigan and other Midwest states, said John Smith, a lawyer with Legal Aid of West Michigan.(1)
  
  Those foreclosures allow Eenhoorn to get out of 30-year commitments to offer reduced rents to low-income tenants at their properties. The commitments were made by the original developers when they used government-issued tax credits to build the housing projects.
  
  The Michigan Housing Development Authority has asked the Internal Revenue Service to rule on whether Eenhoorn should be denied the ability to convert their subsidized apartments into market rate units.
  
  "We seek guidance from the IRS to protect the residents of affordable housing in this state from planned foreclosure schemes," then-MSHDA director Kevin Elsenheimer wrote to the IRS on Sept. 19, 2016.
  
  ***
  the foreclosures do mean Eenhoorn can now charge higher market rate rents when its low-income units open up, Smith said.
  
  "This process could eliminate more than 540 units of subsidized housing that would have been offered to low-income tenants for another 30 years," Smith said in an April 7, 2016 letter alerting MSHDA to the foreclosures.
  
  'A growing business model'
  
  Smith and other housing advocates said they fear the foreclosures will become a trend unless the federal government steps in to stop the practice.
  
  "We are concerned that these are not isolated incidents, but rather what might be a growing business model," Smith said. "I don't think anyone has seen anything this extensive before."
  
  ***
  Mark Schwartz, executive director of Regional Housing Legal Services in Philadelphia, said he has been watching similar foreclosures develop in Virginia, Texas and New Jersey in recent years.
  
  "The trouble is that in the 30-year history of the program, the Treasury Department has never provided any guidance as to what that provision means," said Schwartz, who has become an informal clearinghouse on planned foreclosures for housing advocates.
  
  Low income housing projects funded by tax credits have been successful, but the IRS has done little to stop the foreclosures that have siphoned off the number of available low income housing units, he said.
  
  "I think this is something that caught the local agencies by surprise. They weren't looking for it," Schwartz said.
  
  Eenhoorn's foreclosures
  
  According to a paper trail unearthed by Smith and other Legal Aid lawyers, Eenhoorn bought ownership control of the properties and loaned them money backed by mortgages. The entities that held the mortgages took the properties back through a legal process called "deed in lieu of foreclosure" when the properties fell behind on the mortgages.
  
  The foreclosures allowed Eenhoorn to get out of the final 15 years of its 30-year obligation to provide low-income housing at the properties, said Smith, who discovered the foreclosures while representing a low-income and disabled resident of The Lofts, a downtown Grand Rapids apartment project at 26 Sheldon Blvd. SE.
  
  [Eenhoorn attorney Nyal] Deems said the mortgages were extended to revive unprofitable housing developments. Eenhoorn owned the properties for between nine and 12 years before foreclosing on them, he said.
  
  ***
  At the apartments Smith has identified, Eenhoorn purchased properties that were financed with low-income housing tax credits, a federal program in which developers are given tax credits that offer their investors full tax write-offs for 10 years.
  
  Although the tax write-offs disappear after 10 years, the developers are required by the IRS to subsidize rents to low-income residents for up to 30 years.
  
  A foreclosure cancels those requirements and allows landlords to charge higher rents for the final 15 years, provided they give their low-income tenants a three-year grace period to find new housing after the foreclosure.
  
  In a 2014 newsletter, the IRS asked state housing agencies to notify them of "planned foreclosures" that appeared to intentionally shorten the period in which low income rents are supposed to be available.
  
  Little appears to have been done since then, according to Schwartz.

For the story, see Is prominent landlord using foreclosure loophole to ditch low income tenants?

For story update, see:

• Agency files RICO case against GR firm over scheme to strip low-income rent restrictions,
• Lawsuit alleges racketeering by prominent landlord.

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(1) Legal Aid of Western Michigan provides free legal assistance to low income persons and Seniors in non-criminal, non-fee generating matters. It currently serves people in 17 counties in the lower Western part of Michigan with offices in Grand Rapids, Holland, Kalamazoo, Muskegon, Niles and St. Joseph. section 8