Preventing Fraud in Affordable Housing

Q: The building I own receives tax benefits through the 421-a Affordable Housing Program. In exchange for these benefits, I must rent 20 percent of the apartments to low- to middle-income families and these units are subject to Rent Stabilization. To qualify for one of these coveted apartments, an applicant must meet strict household and income qualifications. If an applicant does qualify and becomes a tenant, he must certify household composition and income on an annual basis as a condition of his continued tenancy. I just discovered that a tenant in one of these affordable apartments has been concealing income for years, and had he disclosed this information, he wouldn’t have qualified for the apartment he’s been living in. Should I try to evict him now, or have I waived my right to do so? How is a court likely to rule?

A: “You should absolutely seek to evict this tenant right away,” says Jeff Seiden, partner at Borah, Goldstein, Altschuler, Nahins & Goidel, P.C. The scarcity of affordable housing in New York City combined with the strict income requirements to obtain one of these units has led many applicants to withhold and conceal information about members of their household and their assets in an effort to qualify—and continue to qualify—for these affordable apartments, he says.

The good news, says Seiden, is that in a recent decision, an appeals court has made a strong statement that the failure of a tenant to fully disclose his assets and income, no matter when it’s discovered, constitutes material noncompliance with the Affordable Housing Program and will be grounds for eviction. This decision is a positive step in enabling owners to enforce the Affordable Housing Program rules and regulations and to protect their receipt of tax credits, he says.

In its strongly worded recent decision, the Appellate Term upheld a trial court’s finding that the failure of a tenant to fully disclose his assets and income is a noncurable ground for eviction as it constitutes a material noncompliance with the Affordable Housing Program, Seiden explains. In this case, the trial court found that in a tenant’s initial 2002 application and in his subsequent annual income certifications through 2006, the tenant failed to disclose hundreds of thousands of dollars in funds held in joint accounts with his mother in a New Jersey bank.

The tenant’s fraud wasn’t discovered until after he completed his 2007 recertification, when the owner discovered that he was reporting interest income on his taxes from a savings account in a New Jersey bank. Upon this discovery, the owner verified with the bank that the tenant was a joint holder of multiple accounts, which contained funds in excess of $200,000.

The tenant tried to convince the court that he didn’t intentionally fail to disclose his assets on his application and annual recertifications—he claimed that the jointly held funds were his mother’s assets and not his.

However, the tenant had signed signature cards for two of these accounts, giving him full access to the funds. The court determined that these accounts were assets that should have been disclosed on his initial application and annual recertifications. Despite the fact that the tenant had been residing in an affordable apartment for five years when these accounts were discovered, the court ruled it still constituted grounds for termination and eviction.

This is extremely important, because if the court were to permit a tenant to use the lack of intent as an excuse for noncompliance, it would create a loophole that would certainly encourage fraud, making the tax credit rules almost impossible to enforce, says Seiden.

The tenant also argued that since the accounts were located in a New Jersey bank, New Jersey banking laws should apply in determining ownership of the funds in the accounts. But the court rejected that argument and properly interpreted the HUD Handbook as not requiring an owner to adopt a particular state’s banking laws when determining eligibility for an affordable apartment in New York. To do so would permit an applicant to place his money in a joint account in another state or country and then claim that the money isn’t an asset for purposes of determining eligibility for low-income housing. That interpretation, notes Seiden, would permit unqualified persons to obtain low-income apartments by concealing their true wealth, and withhold these low-income units from the people the program was designed to help.

“The biggest challenge for owners who manage apartments in the 421-a Affordable Housing Program is to ensure that the information they receive from applicants and tenants is truthful and complete. This ruling should aid owners in enforcing the rules of the Affordable Housing Program, as the court has made a strong statement that it is irrelevant how long the tenant has been living in the low-income apartment when the fraud is discovered,” says Seiden [501 West 41st St. Associates v. Annunziata, November 2013].

Insider Source

Jeffrey H. Seiden, Esq: Partner, Borah, Goldstein, Altschuler, Nahins & Goidel, P.C.; (212) 965-2569; jseiden@borahgoldstein.com; www.borahgoldstein.com.