STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

SANDY PINES, LTD. and )

BELLA GRANDE, LTD., )

)

Petitioners, )

)

vs. ) CASE NOS. 96-0326RU

) 96-0327RU

FLORIDA HOUSING FINANCE ) AGENCY, )

)

Respondent. )

)

FINAL ORDER

Robert E. Meale, Hearing Officer of the Division of Administrative Hearings, conducted the final hearing in Tallahassee, Florida, on March 11-13, 1996.

APPEARANCES

For Petitioners: Thomas A. Sheehan, III

Jon C. Moyle, Jr. Moyle Flanigan

210 South Monroe Street Tallahassee, Florida 32301

For Respondent: Alfred O. Bragg, III

Stephen M. Donelan Assistant General Counsel

Department of Community Affairs 2740 Centerview Drive

Tallahassee, Florida 32399-2100 STATEMENT OF THE ISSUE

The issue is whether Respondent has adopted without rulemaking, in violation of Section 120.535, Florida Statutes, a guideline to limit to 14 percent of project hard costs the amount of contractor's fees that Respondent will take into consideration in allocating federal low-income housing tax credits.

PRELIMINARY STATEMENT

By Petition for Formal Administrative Hearing filed December 29, 1995, Petitioner Sandy Pines, Ltd. commenced DOAH Case No. 96-0328. The Petition alleges that Petitioner has undertaken the construction of housing eligible for federal income tax credits. The Petition alleges that Respondent determined that Petitioner's general contractor, Heritage Construction Company, did not perform the role of general contractor on the project and reduced Petitioner's

allocation of tax credits pursuant to a cost recalculation based on payments from Heritage Construction Company to a prime subcontractor.

The allegations are identical in DOAH Case No. 96-0329, except for the amount of the tax-credit allocation and the owner, which is Petitioner Bella Grande, Ltd.

Citing Section 120.535, Florida Statutes, the two petitions challenge Respondent's reliance on unpromulgated rules in reducing Petitioners' allocations of tax credits. These petitions commenced DOAH Case Nos. 96-0326RU and 96-0327RU.

The petition challenged Respondent's alleged reliance, in administering its low-income housing tax credit programs, on unpromulgated rules defining a "general contractor" and limiting general contractor's fees to 14 percent of the hard costs of a project. Respondent later promulgated a rule defining a "general contractor," and the parties agreed that the challenge to that unpromulgated rule is now moot. The remaining issue involves the alleged 14 percent rule.

The hearing officer consolidated all four cases for final hearing. The hearing officer is issuing two orders: a recommended order in DOAH Case Nos.

96-0328 and 96-0329 and a final order in DOAH Case Nos. 96-0326RU and 96-0327RU. The recommended order issued this date in DOAH Case Nos. 96-0328 and 96-0329 is incorporated by reference in this final order.

At the hearing, Petitioners called six witnesses and offered into evidence

81 exhibits. Respondent called four witnesses and offered into evidence 25 exhibits. All exhibits were admitted.

The court reporter filed the transcript April 10, 1996. The parties filed their proposed orders on April 30, 1996. All of the proposed findings of fact are adopted or adopted in substance.

FINDINGS OF FACT

1. Section 420.5099, Florida Statutes, designates Respondent as the "housing credit agency" responsible for allocating Florida's share of federal income tax credits for low- income housing.

   
   

2. Section 42 of the Internal Revenue Code provides federal income tax credits for qualifying low-income housing expenditures. The amount of the tax credit is nine percent of the qualifying basis, and this nine percent credit is available annually for ten years.

   
   

3. Calculation of the qualifying basis starts with the project cost, less the cost of land acquisition. The difference is then multiplied by a ratio of affordable units (or floor space, if a smaller ratio results) over total units (or floor space) in the proposed project.

   
   

4. The amount of federal income tax credit is based on the population of each state. In Florida, the demand exceeds the supply of these credits, so Florida's allocation plan includes procedures for the allocation of these limited credits.

   
   

5. Section 42(m)(2)(A), Internal Revenue Code, limits the credit allocation for any project to the amount Respondent "determines is necessary for

   the financial feasibility of the project and its viability as a qualified low- income housing project throughout the credit period."

   
   

6. Section 42(m)(2)(B)(iv), Internal Revenue Code, requires Respondent, in determining the feasibility and viability of the project, to consider "the reasonableness of the developmental and operational costs of the project."

   
   

7. Certain guidelines have evolved in the low-income housing tax credit (LIHTC) program to limit the fees payable to developers and contractors, on which credits may be calculated. The portion of an allocation based on developer's fees is limited to fees constituting no more than 20 percent of a project's hard costs plus land acquisition. The 20 percent developer's limitation, which is not a promulgated rule, is not directly involved in any of the four cases.

   
   

8. Another guideline, which is contingently involved in these cases, is that the portion of an allocation based on contractor's fees is limited to fees constituting no more than 14 percent of a project's hard costs. The so-called "626 rule" breaks the contractor's maximum fees into 6 percent general requirements, 2 percent overhead, and 6 percent profit.

   
   

9. Each Petitioner is a limited partnership that constructed, owns, and leases low-income houses. Each Petitioner has applied for and received an allocation of LIHTCs for the construction and leasing of these low-income houses.

   
   

10. In the related cases, Respondent tried to reduce Petitioners' LIHTCs for the two projects. Respondent claimed that the apparent general contractor, Heritage Construction Co. Inc. (Heritage), was not the real general contractor because Heritage had entered into prime subcontracts on both projects with Picerne Construction Corp. (Picerne) assuming nearly all of the work described in the contracts for lower costs. Respondent proposed instead to allocate LIHTCs based on the lower costs of the prime subcontracts.

    
    

11. If Respondent failed to prevail in disregarding the contract costs in the contract between each Petitioner and Heritage, the 14 percent limitation would not limit the allocations of LIHTCs to Petitioners. These transactions were structured so that the total contractor's fees payable to Heritage did not exceed the 14 percent limitation or the individual components of the 14 percent limitation.

    
    

12. However, if Respondent prevailed in disregarding the contract costs in the contract between each Petitioner and Heritage, and instead succeeded in using the lower contract amounts in the two Picerne prime subcontracts, then the

    14 percent limitation would limit the allocation of LIHTCs. In this event, Petitioners challenge the 14 percent limitation in order to try to recover some of the lost tax credits.

    
    

13. The 14 percent limitation, which is not promulgated as a rule, is recorded in two documents: the Best Practices Manual for the LIHTC program and the Underwriting Guidebook. It is undisclosed when the Best Practices Manual first included the 14 percent limitation, but this limitation has been in effect for about three years.

    
    

14. The reference to the 14 percent limitation was included in the Underwriting Guidebook after March 1995, or else the Underwriting Guidebook itself was not in existence until after March 1995. The Underwriting Guidebook,

    which was prepared jointly by Respondent and underwriters, prohibits the allowance of general contracting fees in excess of 14 percent of hard costs.

    
    

15. Respondent is not engaged in rulemaking as to the 14 percent limitation. Respondent presented no evidence that rulemaking as to this limitation was not feasible. To the contrary, rulemaking as to the 14 percent limitation is both feasible and practicable.

    
    

    CONCLUSIONS OF LAW

    
    

16. The Division of Administrative Hearings has jurisdiction over the subject matter. Sections 120.57(1) and

    
    

    120.535(2), Florida Statutes. (All references to Sections are to Florida Statutes.)

    
    

17. The 14 percent limitation is a rule of general, unconditional applicability. Respondent has not adopted the rule pursuant to the provisions of Chapter 120.

    
    

18. Rulemaking with respect to the 14 percent limitation is feasible under Section 120.535(1)(a). Rulemaking with respect to the 14 percent limitation is practicable under Section 120.535(1)(b).

    
    

19. Petitioners are substantially affected by the 14 percent limitation. Although Petitioners have prevailed in the recommended order, Respondent has not yet issued a final order. Thus, at present, Petitioners' allocations of LIHTCs, as tentatively still based on the lower prime subcontract amounts in the two Picerne subcontracts, are limited by Respondent's enforcement of the 14 percent limitation.

ORDER

It is

ORDERED that, pursuant to Section 120.535(4), Florida Statutes, the Florida Housing Finance Agency shall immediately discontinue all reliance upon the 14 percent limitation on contractor's fees in calculating allocations of low-income tax credits.

ENTERED on May 13, 1996, in Tallahassee, Florida.

ROBERT E. MEALE

Hearing Officer

Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings on May 13, 1996.

COPIES FURNISHED:

Susan J. Leigh, Executive Director Florida Housing Finance Agency

227 North Bronough Street, Suite 500 Tallahassee, Florida 32301-1329

James F. Murley, Secretary Department of Community Affairs 2740 Centerview Drive

Tallahassee, Florida 32399-2100

Stephanie M. Gehres, General Counsel Department of Community Affairs

2740 Centerview Drive

Tallahassee, Florida 32399-2100

Alfred O. Bragg, III Assistant General Counsel

Department of Community Affairs 2740 Centerview Drive

Tallahassee, Florida 32399-2100

Thomas A. Sheehan, III Jon C. Moyle, Jr.

Moyle Flanagan

210 South Monroe Street Tallahassee, Florida 32301

Hon. Sandra B. Mortham Secretary of State

The Capitol

Tallahassee, Florida 32399-0250

Don Bell, General Counsel Department of State

The Capitol, Plaza Level 02 Tallahassee, Florida 32399-0250

Carroll Webb, Executive Director Administrative Procedures Committee

120 Holland Bldg.

Tallahassee, Florida 32399-1300

Liz Cloud, Chief

Bureau of Administrative Code Department of State

The Elliott Building Tallahassee, Florida 32399-0250

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this final order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate Procedure. Such proceedings are commenced by filing one copy of a notice of appeal with the agency clerk of the Division of Administrative Hearings and a second copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the District Court of Appeal of the appellate district where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.

Docket for Case No: 96-000326RU

Orders for Case No: 96-000326RU