IRS ISSUES MARK-TO-MARKET RULING.

Along-awaited ruling from the Internal Revenue Service (IRS) resolves a major open tax question under the Multifamily Assisted Housing Reform and Affordability Act (MAHRAA), also known as Mark-to-Market. In exchange for reducing above-market rent subsidies to lower street rents, HUD will reduce existing Section 8 project-based subsidies by reducing mortgage debt. The law allows bifurcating the Federal Housing Administration-insured mortgages on the affected properties into a performing first mortgage and a non-performing, below-market interest rate second mortgage.

At issue was whether the IRS would consider the below-market interest rate second mortgage according to the letter of Section 7872 of the Internal Revenue Code. Section 7872 generally provides that a below-market interest rate loan has an original issue discount (OLD) equal to the present value difference between the discounted loan payments, and imputed payments at the applicable federal rate. This OlD amount is then treated as a transfer from the lender to the borrower for tax purposes. According to the July 21 IRS ruling (Revenue Ruling 98-34), because the second mortgages issued under MAHRAA are subsidized by a federal, state, or municipal government and because they were not structured primarily to avoid taxation, the second mortgage loan is exempt from Section 7872, and thus the OID is not treated as a transfer payment.

OREGON SPRINKLER LAW PENDING

Oregon could become the first state in the West to require sprinkler systems in new apartment construction with buildings taller than one story and more than 16 units. Most state building codes, including those in Oregon, require sprinkler systems in new construction of buildings three or more stories high. Many in the multihousing industry are concerned that the new requirement could intensify Oregon's affordable housing shortage by increasing construction costs that may then be passed on to renters.

FAIR HOUSING RULINGS

An apartment community's refusal to accept a third party as a guarantor for a mentally ill applicant did not violate the Fair Housing Act, according to a ruling by the U.S. District Court for the Eastern District of Michigan (Schanz v. The Village Apartments, No. 96-40355 (1998)).

The property manager, which had previously rejected the plaintiff's rental application because of insufficient income and a very poor credit record, also rejected an offer to sign a guarantee by an organization that helps disabled persons find housing. The judge ruled that the firms refusal did not constitute discrimination as there were several justifiable reasons for requiring a blood relative instead of a corporate co-signer. Refusal to accept the corporate guarantee also did not constitute a failure to reasonably accommodate the applicant's disability because the application was rejected for financial reasons rather than because of the applicant's handicap.

The San Francisco Fair Employment and Housing Commission recently awarded $2,744.35 in damages to a black Oakland woman who was rejected as a roommate by two white women because of her race, extending the coverage of California's law banning racial discrimination in housing to people who rent a house or apartment and seek a roommate. State law also forbids housing discrimination on the grounds of sex, religion, disability, national origin, and sexual orientation. The law permits advertising for a roommate of the same gender if the living room, kitchen, and bathroom will be shared. The law does not apply to a family who lives in a house and rents to only one boarder.

A developer and property owner do have legal standing to challenge as discriminatory a city's denial of a re-zoning request to build low-income housing (Blue Water Financial Co. v. City of Lansing, No. 5:97-CV-22 (1998)). The U.S. District Court for the Western District of Michigan ruled that third party developers satisfied standing requirements by establishing injury (e.g., architectural and engineering fees, lost profits, permit fees) and causation by alleging the city's refusal of the zoning request was based on the probable racial makeup of the property and that such discrimination prevented the housing from being built.

FORT WORTH MORATORIUM REJECTED

The Fort Worth, Texas, City Council recently voted to reject a proposed six-month moratorium on the permit and construction of all apartment communities in the rapidly growing Alliance Corridor section of the city, as well as a number of smaller tracts of land in the southern part of the city. The Apartment Association of Tarrant County successfully presented its case, citing discrimination of land owners, economic development disincentives, opposition by city staff, and existing guidelines for multifamily development. U