Compliance and enforcement: with ramped up ADA and Fair Housing enforcement, increasing interest rates and "green" building trends, it is vital for apartment owners to take appropriate measures to ward off litigation.

A combination of factors has resulted in many changes to the apartment industry during the past year, and these factors included increased government oversight on federal and state regulatory issues, a slow upswing in interest rates and increased litigation regarding construction related issues.

Those trends will continue into the coming year, and apartment owners, managers and developers who confront and manage the risks and benefits of these items will continue to thrive in 2007.

ADA, FHA and HUD 

During the past year, government regulatory bodies have taken a newfound interest in compliance with the Americans with Disabilities Act (ADA), the Fair Housing Act (FHA) and certain other state-enforced guidelines. While there undeniably has always been an interest in enforcement of ADA and FHA by private bounty hunter groups, the Department of Housing and Urban Development (HUD) and other enforcement groups, such as state attorneys general, have been more lax by allowing claims to come to them rather than pursuing claims.

The FHA specifies basic design features that are essential for equal access and to avoid future de facto exclusion of persons with disabilities. The design requirements apply to buildings built for first occupancy after March 13, 1991. The ADA, however, is the short title of the civil rights law that prohibits discrimination based on disability. The U.S. Department of Justice enforces this law. It is important to note that the ADA is much broader in scope than the FHA. HUD acts as the public enforcement agency for violations of the FHA and ADA.

Prior to the 21st century, property owners did not often encounter actions brought by private parties and HUD for ADA or FHA violations. In more recent years, however, there has been a significant increase in enforcement by private parties through litigation as well as by HUD, which is mandated to act when it is notified of violations.

There is no question that new development must comply with these standards. However, the outstanding issue does not involve new starts, but asks what level of redevelopment will trigger compliance requirements with the FHA and ADA. And, unfortunately, the answer is not entirely clear.

ADA: If the property was occupied before Jan. 26, 1993, the property is not subject to compliance with ADA requirements. Accordingly, if the property is altered after Jan. 26, 1992, the alteration must be ADA compliant. The ADA requirements are substantially more stringent than that of the FHA. Accessibility requirements for alterations are specifically covered under the ADA. (See 42 U.S.C. [section] 12183(a)(2).)

Unfortunately, the statute and legal authority does not delineate the level of alteration that would trigger ADA compliance. After a diligent search, results indicate that there is no brightline rule. To be safe, any level of alteration should be ADA compliant to prevent violations. Furthermore, property owners should take special care to avoid altering the property in a manner that would cause ADA compliant areas to become non-ADA compliant. This type of alteration will be considered an ADA violation.

FHA: If the property was occupied before March 13, 1991, the property is not subject to compliance with FHA requirements. Pursuant to the language of the statute, alterations or additions after that date also do not have to meet FHA requirements. However, if the renovation or alteration requires a permit, the alteration will be subject to the FHA. Unfortunately, the FHA does not offer guidance as to which specific permits are subject to the requirements. Again, erring on the safe side is the much better option. Thus, any alteration requiring a permit should be FHA compliant and accessible.

A prime example of the potential ramifications of non-compliant redevelopment came to light in June 2005, when several consumer advocacy groups announced the largest settlement of a lawsuit that challenged defects in the design and construction of multifamily housing under the FHA and ADA.

As part of the settlement, Archstone-Smith Trust was hit with remediation costs expected to exceed $20 million, which includes mandated surveys of 71 apartment communities throughout the country. In addition, Archstone-Smith will face $1.4 million in damages, costs and attorneys' fees. The lawsuit, originally filed in December 2004, resulted from testing at Archstone-Smith's communities, which revealed, among other problems, noncompliant entryways, doorways and turning spaces.

These advocacy groups will not be satisfied with Archstone-Smith, alone. Rather, they are turning their focus toward similarly situated apartment developers.

Advocacy groups are not the only enforcing players. As a direct result of the massive Archstone-Smith settlement, ADA and FHA compliance issues have caught the attention of public entities. For instance, the California Attorney General has only recently presented letters of non-compliance to various multifamily developers and owners, seeking assurance that these properties will be altered accordingly. Other public enforcement agencies are likely to catch on within the upcoming year, and apartment developers and owners can expect actions similar to that of the California Attorney General.

Caution is the answer. This is not a black-and-white issue wherein ADA and FHA redevelopment compliance requirements lay on one side while no such standards lay on the other. On the contrary, other than the specific occupancy dates, the result is a hazy grey landscape. In such haze, managers, developers and owners need to take the cautious route in redevelopment and comply whenever in doubt.

Proposition 65 Losing Its Bite

Although Proposition 65 is a California-specific initiative, similar standards and resulting ramifications may apply nationwide. Passed in 1986 by California voters, Prop 65 became the Safe Drinking Water and Toxic Enforcement Act, created to address growing concerns about exposure to toxic chemicals. Among other specific requirements, Prop 65 requires businesses to notify Californians about significant amounts of chemicals in the products they purchase and in their homes and workplaces.

In the context of multifamily housing ownership, development and management, Prop 65 requires notification to individuals about exposures to carcinogens and reproductive toxins. Residential rental properties may contain several substances at levels that require a warning, such as secondhand tobacco smoke, automobile exhaust and common construction materials.

In accordance with Prop 65, the best compliance methodology has been to post warning signs on the property and provide a brochure to new and existing residents. The brochure should contain information regarding specific exposure sources that may be present on the property. However, specific warning requirements vary depending on the size and layout of the property. Prop 65 also allows for private enforcement of its requirements, so long as the private party brings the action in the "public interest."

By permitting private actions, the passing of Prop 65 spurred a seemingly never-ending wave of lawsuits brought by "bounty hunter" type plaintiffs' firms throughout California. Those suits often targeted apartment owners and managers. So, for years, defense firms have been battling these bounty hunters on their behalf. In essence, until recently, most apartment housing managers and owners have been at the mercy of the initiative.

For owners and managers, however, there is a light at the end of the litigation tunnel. The recent trend, encompassing court decisions and pending local and national legislation, indicates a public outcry against frivolous lawsuits. This shift shows general public disfavoring of these "bounty hunter" plaintiffs firms, as private actions seem to only incidentally benefit the public while simultaneously overflowing the pockets of these plaintiffs' attorneys.

A highly publicized California court decision, Consumer Advocacy Group Inc. v. Kintetsu Enterprises of America, et al. [129 Cal. App. 4th 540 (2005)] serves as an example of such recent disfavor. In Kintetsu, the California Court of Appeals dismissed the Consumer Advocacy Group's claims against numerous hotels and retail establishments brought under Prop 65. The court epitomizes this trend by protecting the interests of these property owners by highlighting due process requirements of the initiative.

Even more telling is pending legislation that stands to "reform" Prop 65. According to Prop 65 News, Online Edition, three bills are in the works that would refine the initiative's effect, including AB 1176 that would require a court to make the additional finding that a proposed settlement is "fair, reasonable and in the public interest." With such legislation, courts would have much more control over these aggressive settlements sought by plaintiffs' firms and consumer advocacy groups.

In essence, courts and legislators alike are much more hesitant to reward bounty hunter firms and groups unless the claim is truly brought in the public's interest.

Managers and owners outside of California might be wondering how this all affects them. Clearly, Prop 65 is an initiative specifically enforced in California. However, protection of consumers and customers is a concern for both federal and state legislatures. With that being the case, similar initiatives or regulations may exist in another state, which may include similar private enforcement provisions.

But, the trend remains the same throughout the country: The public and legislators are more aware of frivolous lawsuits, as is evident by various nationwide tort reform measures. The general public is fed up with unwarranted claims. Therefore, more and more local courts and governments will follow suit in disfavoring lawsuits by private plaintiffs attorneys who are attempting to step into the shoes of the attorney general.

Although this trend seems to be leaning in favor of developers, owners and managers, the initiative remains intact. Therefore, all those involved in apartment ownership or management should stay the course and abide by Prop 65 and similar initiatives. It is always best to comply, as one can never foresee what a judge or jury will do.

Interest Rates and the Housing Market

The issue of rising interest rates has stood out as one of the biggest topics in real estate throughout 2006. This upward trend has not disappeared, and it stands to remain a hot topic in 2007. As always, the effects of rising rates ripple through each facet of the real estate industry. Over the past 10 years, interest rates have proven to be the driving force behind the nation's real estate market, boosting single-family homeownership and strengthening the market as a whole.

Again, the areas of apartment ownership, management and development do not possess any immunity from such effects. This past year has shown a decrease in multifamily housing starts from that of 2005, and the National Association of Home Builders forecasts a further decrease in starts in 2007. In addition, condominium conversions, which had been booming for the past five years, have decreased dramatically, with some projects coming to a screeching halt.

What does this mean for apartment owners and developers? The answer differs among players in the for-sale versus for-rent industries. Historically, higher interest rates coupled with high prices have cooperatively resulted in a resurgence of success for rental properties. This historic trend stands to hold true in 2007. Although interest rates are relatively low and the housing market is finally correcting itself, potential buyers are still keen to "wait it out" until prices become more buyer-friendly. It remains to be seen, however, whether this price correction is just a correction or if the proverbial "bubble" is gradually deflating.

If potential buyers decide to wait it out, they may be waiting for a longer period than they had hoped, resulting in more renters for an extended period. Apartment owners should therefore hope for all possible patches to prevent a burst. On the other hand, apartment owners and managers engaged in or in the planning stages for condo conversion should wish for a minor burst. Although seemingly counterintuitive, without some kind of burst and increasing affordability, fewer buyers will be hunting for condos, which can potentially result in conversions never getting off the ground.

What are the legal consequences, if any? Multifamily housing owners, developers and managers need to be keenly aware of the dark side of the real estate market when it faces a downward turn--namely, litigation.

For multifamily housing owners and managers, an increasing amount of claims by residents is entirely possible based on sheer volume alone because until prices seriously start to drop, the number of renters will remain high. Thus, rental owners can expect more resident claims from anything from slips and falls to mold issues.

The softening real estate market and increasing rates may also result in more litigation falling onto the lap of apartment developers, builders and new owners. For those involved in new construction and development, construction costs have skyrocketed and, as a result, contractors simply cannot afford to do the work. The potential legal ramifications do not end there. Existing condo owners cannot reap huge benefits from appreciating property via refinancing, as has been the case over the past five years. They must find a new way to draw income from their homes, especially with the market expected to soften further into 2007.

One such manner of gaining income, unfortunately, results in more suits claiming various construction defects. Thus, owners have traditionally engaged in a detailed inspection of the property to detect potential defects. Those discovered defects result in claims against developers, and builders, which, in turn, inevitably result in settlements or judgments in favor of the condo owners.

Lastly, rising interest rates and a softening industry will not spare insurance as one of their victims. In the past, a tightening market is coupled with increasing insurance costs, specifically higher premiums. All players in the apartment industry need to expect those costs to rise as the market falters and make appropriate accommodations. Also, the litigation surge is likely to directly affect insurance. As claims increase, so do premiums. Owners, developers and managers must keep all of this in mind.

Building Green

Another recent shift in public interest involves mounting concerns regarding the environment. The apartment industry is no exception. In the past 10 years, "building green" has become a more common phrase among those involved in the development of all structures, especially apartment communities. This trend is not faltering in the slightest. In fact, building green is on the rise, as legal implications, such as governmental guidelines, certifications and tax consequences, have also begun to swell.

Green multifamily housing involves improving construction and design practices to advance all aspects of the industry. Green buildings result in longer lasting developments that cost less to operate and will not harm the health of either the employees or the residents of the communities. Guidelines for building green are focused on reducing pollution during the construction phase and similarly reducing energy consumption during ongoing operation.

Uninformed developers and managers often become confused, as they seemingly are left in the dark as to specifically what green building entails. In essence, the goal of green building is to minimize the impact that development and business operations have on the environment relating to such principles as lot design; indoor environmental quality; operation; maintenance; and resource, energy and water efficiency.

Aside from the altruistic aspects, there are also important legal reasons to build green. The Department of Energy and the Department of Transportation recently reported that buildings account for 39 percent of the total annual energy consumption in the United States, with all transportation only making up 27 percent of such consumption. Clearly, building green can drastically decrease the United States' ongoing problem with energy over-consumption.

A LEED-ing Trend

The U.S. Green Building Council has promulgated the Leadership in Energy and Environmental Design (LEED) Green Building Rating System as the recognized standard for measuring building sustainability. According to the Natural Resources Defense Council, achieving LEED certification is the best way for an apartment owner or developer to show that the project is truly "green." LEED Certification is broken down into subcategories--Certified, Silver, Gold and Platinum--which correspond to compliance in green design categories. (See U.S. Green Building Council's Web site, www.usgbc.org, for LEED Certification requirements.) By gaining LEED certification, developers and owners can simultaneously avoiding potential costly consequences while also reaping added monetary benefits.

These potential consequences may arise in the form of fines or stop notices, as more and more governmental entities are requiring LEED certification. In fact, almost 20 states and even more local governments either mandate or strongly promote implementation of LEED standards. Obviously, the most straightforward manner to impose certification requirements is to punish developments that fail to meet these standards. As a result, to avoid unnecessary penalties, developers and owners would be wise to investigate whether their respective states or municipalities have jumped onto the environmental bandwagon.

Negative reinforcement, however, is not the only basis for building green, as several carrots sit on the end of the development stick. Specifically, economic benefits lie at the heart of building green, including reduced operating costs, reduced waste costs, reduced liability for IAQ issues, enhanced employee productivity and establishing marketing opportunities.

Additionally, the federal government has created several tax incentives for building green, which are based on energy efficiency. In particular, the Energy Policy Act of 2005 permits owners or designers of commercial buildings to claim a tax deduction of up to $1.80 per square foot for structures that save at least 50 percent of the heating and cooling energy of a building that meets prescribed efficiency standards.

Thus, it becomes quite clear: the benefits of "building green" gained by owners, developers and the public at large far outweigh any slight increases in design and construction costs which may be incurred on the front end. The shift in favor of green is in full swing. Apartment players need to be keenly aware of these changes and potential consequences.

The information contained in this article is not to be considered legal advice, and does not constitute a complete review of all potential issues that might arise in these situations. The authors strongly recommend that you consult with legal counsel regarding these issues before undertaking them.

Top 7 Legal Trends

1. ADA and FHA Enforcement. Government regulatory bodies have taken a newfound interest in ADA and FHA compliance. Take the cautious route in redevelopment and comply whenever in doubt.

2. Proposition 65 and Similar Measures. Consumer protection is a concern for legislatures. While the public and legislators are more aware of frivolous lawsuits, it is always best to comply.

3. Rising Interest Rates. Historically, higher interest rates coupled with high prices have resulted in a resurgence of success for rental properties. This stands to hold true in 2007.

4. Dark Side of the Market. Apartment professionals must be keenly aware of the dark side of the real estate market when it faces a downward turn--namely litigation resulting from the sheer volume of renters and construction defect lawsuits.

5. Higher Insurance Premiums. A tightening market is coupled with increasing insurance costs. Industry professionals must expect insurance costs to rise as the market falters.

6. Ahead of the LEED Curve. Almost 20 states either mandate or promote LEED standards implementation. Developers and owners should investigate whether their respective states or municipalities have jumped onto the environmental bandwagon.

7. Green Building Benefits. Because the shift in favor of green is in full swing, the benefits of "building green" far outweigh any slight increases in design and construction costs that may be incurred on the front end.

Morgan A. Stewart, Esq. and Saul E. Wolf of Manly, McGuire, & Stewart can be reached at 949/252-9910.