ALJDEC decisions subject to certification as final

21F-AAATC0963-ADH · Arizona State Department of Housing · 2020-12-14

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

UNION METRO LLC

Appellant

ARIZONA DEPARTMENT OF HOUSING

Respondent.

No. 21F-AAATC0963-ADH

ADMINISTRATIVE LAW JUDGE DECISION

HEARING: October 21, 2020, through October 23, 2020, with the record held open for the submission of written closing arguments.

APPEARANCES: Appellant Union Metro, LLC (Union Metro) was represented by Nicole M. Goodwin. The Arizona Department of Housing (ADOH or Department) was represented by Orlando J. Cabrera, Sara M. Lord, and Assistant Attorney General Valerie Love Marciano.

ADMINISTRATIVE LAW JUDGE: Tammy L. Eigenheer

_____________________________________________________________________

FINDINGS OF FACT

The federal Low-Income Housing Tax Credit Program (Tax Credit Program) was established by the Tax Reform Act of 1986, is codified in Section 42 of the Internal Revenue Code of 1986, as amended (I.R.C. § 42), to encourage construction and rehabilitation of low-income rental housing.

The Tax Credit Program grants to those who invest in low-income housing an allocation of federal tax credits. The Tax Credit Program does this by allocating funds to state housing credit agencies (HCA) pursuant to state qualified allocation plans (QAP).

According to I.R.C. § 42(m)(1)(B), the term “qualified allocation plan” means any plan “(i) which sets forth selection criteria to be used to determine housing priorities of the housing credit agency which are appropriate to local conditions, (ii) which also gives preference in allocating housing credit dollar amounts among selected projects to” “(I) projects serving the lowest income tenants, (II) projects obligated to serve qualified tenants for the longest periods, and (III) projects which are located in qualified census tracts . . . and the development of which contributes to a concerted community revitalization plan.”

I.R.C. § 42(d)(5)(B)(ii) defines a qualified census tract, in pertinent part, as follows:

any census tract which is designated by the Secretary of Housing and Urban Development and, for the most recent year for which census data are available on household income in such tract, either in which 50 percent or more of the households have an income which is less than 60 percent of the area median gross income for such year or which has a poverty rate of at least 25 percent.

These three preferences are generally recognized by HCAs via a point ranking system. With regard to preference (III) as stated in the I.R.C., the I.R.S. states through its Revenue Ruling 2017-29 that QAPs shall contain “provisions that strongly favor applications from affordable housing projects that demonstrate affirmative local support. For example, under the point system that Agency uses in judging among applicant projects.”

In addition to the federally mandated preferences, I.R.C. § 42(m)(1)(C) separately requires that “certain selection criteria” be used, including:

(i) project location, (ii) housing needs characteristics, (iii) project characteristics, including whether the project includes the use of existing housing as part of a community revitalization plan, (iv) sponsor characteristics, (v) tenant populations with special housing needs, (vi) public housing waiting lists, (vii) tenant populations with children, (viii) projects intended for eventual tenant ownership, (ix) the energy efficiency of the project, and (x) the historic nature of the project.

After federal preferences and selection criteria are accounted for, states retain discretion to tailor their QAPs to meet their determined needs as they best see fit.

An example of this discretion is the state-created “set-asides,” which are categories of reserved tax credits for projects more likely to serve certain populations or specific objectives identified by the HCA.

ADOH is the state HCA authorized to administer the allocation of federal low income housing tax credits (LIHTC) for the State of Arizona.

Each year, ADOH oversees millions in credits allocated to the state from the federal government. This includes both allocations for the present year as well as funds carried over from previous years.

For allocation year 2020, ADOH oversaw the allocation of $22,114,752 in tax credits as stated in ADOH’s Credit Summary. ADOH’s Credit Summary indicated that ADOH maintained $1,529,449 in unused federal authority that will carry over to next year.

ARIZONA’S 2020 QUALIFIED ALLOCATION PLAN

On December 18, 2019, Arizona Governor Doug Ducey approved the “Arizona 2020 Qualified Allocation Plan for the Low Income Housing Tax Credit Program” (2020 QAP or Plan).

The 2020 QAP was developed by ADOH in conjunction with comments from the public.

The 2020 QAP governed all LIHTC applications in Arizona during the year 2020. It accordingly provided specific guidance about the program and application requirements.

The 2020 QAP provided point ranking through specific scoring for both set-asides and a general pool of applicants (i.e., those projects which did not meet the criteria required by the set-aside category).

The 2020 QAP defined a “set-aside” to mean “a specific type of housing development category that the ADOH has identified as a priority for allocating tax credits.”

The 2020 QAP’s five set-aside categories were: supportive housing; tribal; balance of state; non-profit; and state special projects.

Under the state special project discretionary set-aside:

ADOH may award one (1) Project in the Department’s sole discretion that does not score high enough to receive any Allocation in the other Set-Asides or the General Pool but scores at least sixty (60) points and meets general and specific goals, threshold, and underwriting requirements of this Plan.

If a Project(s) that has received a Commitment for a Housing Assistance Payment (“CHAP”) under HUD’s Rental Assistance Demonstration (“RAD”) program or Choice Neighborhoods Implementation Grant (“Choice Neighborhoods”) is submitted, the highest scoring among them meeting all eligibility, threshold and underwriting requirements will be funded under this Set-Aside.

If no Applications are received for RAD or Choice Neighborhoods Projects, preference will be given to proposed Projects which are located in a Qualified Census Tract (as defined in IRS Section 42(d)(5)(C) and the development of which contributes to a concerted community revitalization plan (as set forth in Tab 24).

The 2020 QAP defined “project scoring” to mean “review of the applicant’s self-scores by verifying that support for the points claimed is provided in the application, based on criteria set forth in this plan.”

The 2020 QAP awarded 35 points for “Targeting Low Income Levels” pursuant to I.R.C. § 42(m)(1)(B)(ii)(1) (“projects serving the lowest income tenants”) and 10 points for “Waiver of Qualified Contract” pursuant to subsection (ii)(II) (“projects obligated to serve qualified tenants for the longest periods”).

The 2020 QAP also provided up to 2 points for “Smoke-Free Development[s]” for a total of 104 available points.

In addition to the requirements outlined in the point claiming section of the QAP and Form 2 Self Score, ADOH required applicants to check on Form 3 of the application that their development would be smoke-free.

There were zero (0) application ranking points available under the 2020 QAP’s project scoring for Qualified Census Tracts (QCT)/Concerted Community Revitalization Plans (CCRP).

Prior to 2018, ADOH had granted preference via application ranking points for QCTs/CCRPs. ADOH testified that it removed the preference points for QCT/CCRPs from QAPs after 2018 because it was concerned applicants would be “chasing points.”

As attested during the hearing, the majority of states granted preference for QCT/CCRPs via points. Arizona was the only state to structure its QAP in the manner it does.

In the event of a tie in project scoring, ADOH applied a “[t]iebreaker,” which reserved tax credits in the following order: “First, to Applicants with the lowest percentage of Tax Credits in the Development Budge calculated by dividing the total Tax Credits requested (Form 3, Page 1) by the Total Development Cost”; and “Second, to Applicants who have Project Based Rental Assistance in descending order from the greatest percentage of Units with Project Based Rental Assistance to the lowest percentage of Units with Project Based Rental Assistance, as compared to the total number of Low Income Units in the Project (i.e., not including employee Units or market rate Units).”

Neither the Internal Revenue Code nor the 2020 QAP defined a “CCRP.” However, the 2020 QAP did provide a list of factors to consider whether, and to what extent, the CCRP:

1. is geographically specific and provides a clear direction for implementation; 2. includes a strategy for applying for or obtaining commitments of public and private investment in non-housing infrastructure, amenities, or services beyond the Project; 3. demonstrates the need for revitalization; 4. is providing other new benefits to the area inside the geographically specific boundaries of the area being revitalized under the CCRP (such as jobs, transportation, commercial amenities, child care centers, healthcare centers, educational facilities, and safe open spaces); [and] 5. includes the solicitation of input from community residents and other stakeholders in the creation of the CCRP.

The 2020 QAP granted ADOH the broad ability to investigate, resolve, and correct discrepancies in applications in two paragraphs of the QAP. First, “ADOH may consider clarifying information submitted in a particular Tab with other information submitted in the Application. Second, “in the event of deficiencies, inconsistencies and/or conflicting data/information in the Application, ADOH may use its reasonable discretion to rely upon any portion of the Application in making its decision whether, and to what extent, the Applicant has sufficiently documented the threshold and underwriting criteria.”

ADOH also had the authority, independent of the Governor, to clarify, change or modify the 2020 QAP after it had been executed by the Governor.

The 2020 QAP provided that “ADOH may, in its discretion, make . . . such changes [as] may be necessary from time to time to respond to changing market conditions, address critical needs and maximize the Allocation of Tax Credits. Should changes to this Plan or other tax credit programs occur, ADOH must post a public notice on the ADOH website and email a notification of the same to all applicants.”

Additionally, the 2020 QAP provided that “ADOH may modify this Plan, including its compliance and monitoring provisions, from time to time, or for any other reasons as determined by ADOH” to “reflect any changes, additions, deletions, interpretations or other matters necessary to comply with I.R.C. § 42.”

UNION METRO’S APPLICATION

On or about March 24, 2020, Union Metro submitted an application requesting $1,500,000.00 in low-income housing tax credits pursuant to the 2020 QAP and I.R.C. § 42.

The Union Metro project site was located at 3250 W Indian School Rd., Phoenix, AZ. The site was vacant at the time of Union Metro’s application.

In its application, Union Metro noted that the project site was “in a Qualified Census Tract (QCT)” and submitted documentary support from Housing and Urban Development (HUD).

As part of it application, Union Metro also provided documentary evidence that the project site was located in the West Phoenix Revitalization Plan area and would contribute to the West Phoenix Revitalization Plan CCRP in Tab 24 of its application. Union Metro’s Tab 24 consisted of 437 pages of documentary support evidencing the benefit the Project would have to community revitalization, including the reduction of blight.

Union Metro accordingly “elected to be included for consideration under the State Special Project set-aside and the General Pool.”

Union Metro further stated in its application that the Project would be “a non-smoking singular four-story building.”

In addition, Union Metro stated in its “Self-Score Sheet” that the Project was a “Smoke Free Development.” Union Metro accordingly gave itself the 2 points associated with being a smoke-free development.

Union Metro also gave itself 35 points and 10 points respectively for targeting low income tenants and for waiving the qualified contract.

Across all criteria, Union Metro self-scored its project with 103 points.

Union Metro did not, however, check the box on Form 3 providing that the Project was a “smoke-free development.” Union Metro admitted its failure to check the box on Form 3 was a mistake.

Form 3 is a “live” form, i.e., an Excel sheet which parties complete by toggling boxes represented by Excel cells and uploading the working Excel file to ADOH via its electronic submission processes. As to the smoke-free development box, the box can be changed—from empty to checked, and vice versa—by clicking (toggling) anywhere within the box, title, or its description which spans the majority of the page.

ADOH reviewed Union Metro’s self-scoring, providing an audited score of 101 points.

ADOH awarded Union Metro 35 points for targeting low income levels and 10 points for waiving the qualified contract.

Despite having the authority to resolve discrepancies in applications and clarify information using supporting information submitted in other Tabs of the application, and the internal discrepancy as to whether Union Metro would be a smoke-free development, ADOH did not contact Union Metro. ADOH granted Union Metro 0 points for “smoke-free development.”

As to whether Union Metro contributed to a CCRP, ADOH admitted at the hearing that it only reviewed Union Metro’s application in cursory fashion. Ms. Redondo testified she “glanced at” Tab 24 and did not verify the underlying information; Ms. Dhillon-Williams deferred to Ms. Redondo; and Ms. Blodgett did not review Tab 24 at all.

DENIAL AND APPEAL

On or about June 29, 2020, ADOH mailed Union Metro its denial/notice of appealable agency action. The notice of appealable agency action provided:

In the 2020 Round, the point threshold for competitively scored projects was 103 points. The amount of Tax Credits as a percentage of Total Development Costs required to receive a Reservation through the tiebreaker at Section 2.8 of the QAP was 7.71%. Your Project claimed 103 points on its Self-Score Sheet, and received 101 points based on the Department’s review. . . . The amount of Tax Credits you requested represented 7.94% of Total Development Costs. As a result, your Project did not qualify for tax credits.

This is the Department’s final determination regarding the Application for Low Income Housing Tax Credits for this Project. . . .

* * *

Please note, this letter shall be considered a Notice of Appealable Agency Action pursuant to A.R.S. § 41-1092.03.

On or about July 27, 2020, Union Metro appealed and raised the two issues it perceived to be responsible for its denial: (1) the lack of preference for QCT/CCRPs; and (2) the denial of 2 points for being a smoke-free development.

On or about August 20, 2020, ADOH responded with the corresponding two points: “First, Union Metro did not make a required certification in its application when it failed to ‘check the box’; but even if it had ‘checked the box’ (and received the 2 scoring points for doing so), Union Metro’s application did not qualify for an award of tax credits because Union Metro did not win the tiebreaker in the ‘General Pool’ category”; and “Second, Section 2.6 of Arizona’s 2020 Qualified Allocation Plan contains the mandated preference required by § 42 of the Internal Revenue Code, although Union Metro was not the prevailing applicant in that particular category, which is the ‘Set-Aside’ category. Accordingly, no basis existed to award Tax Credits to Union Metro.”

ADOH further wrote that, “[n]otably, had the preference issue been raised earlier, it could have been dealt with in an effort to avoid an appeal or to avoid affecting other parties whose interests may be impacted.”

ADOH did not address Union Metro’s position that its project site was in a QCT or contributed to a CCRP. Nor did ADOH address any other point designation, i.e., the 35 points for targeting low income levels or 10 points for waiving the qualified contract.

ADOH stated, in a footnote, that it was “prepared to present a comparison between the development of the Harmony Project [which was selected by ADOH under the discretionary State Special Project Set-Aside], and its related phases, with Union Metro’s Project, if and when appropriate.”

During the hearing, ADOH argued that Union Metro did not contribute to a CCRP and that the West Phoenix Revitalization Plan was obsolete.

ADOH acknowledged that there had been no development of the West Phoenix Revitalization Plan area. Ms. Dhillon-Williams understood from Union Metro’s application that the West Phoenix Revitalization Area was an active CCRP. So too did the City of Phoenix.

In terms of development, the City of Phoenix testified that CCRPs identify and promote/rehabilitate areas of slum and blight. And that “the definition of revitalization is bringing a neighborhood up from decades of disinvestment and slum and blight.”

Union Metro’s proposed site was located on land that “was largely blight.”

Ms. Dhillon-Williams made a trip to the Union Metro site one week before the hearing and took pictures of the site that showed a vacant parcel with debris.

CONCLUSIONS OF LAW

A. Jurisdiction

The Office of Administrative Hearing’s (OAH) authority extends over “contested cases” (proceedings in which a party’s legal rights or duties are determined by an agency after an administrative hearing) and “appealable agency actions” (actions other than contested cases in which an agency determines a party’s legal rights or duties). See Whitmer v. Hilton Casitas Homeowners Ass’n, 245 Ariz. 77, 80 ¶ 11 (App. 2018). OAH thus has authority to issue findings of fact and conclusions of law regarding those same “legal rights or duties.”

The fact that federal or state law informs or constrains the agency’s decisions does not divest OAH of the authority to determine the legal rights or duties of an agency or other party. Indeed, it is a common tenant that administrative review includes determining whether an agency’s decision is arbitrary, capricious, or not in accord with law. See, e.g., High Cty. Conservation Advocates v. U.S. Forest Serv., 67 F. Supp. 3d 1262, 1263 (D. Colo. 2014).

B. Standard of Review

The burden of proof at an administrative hearing is generally upon the appellant. Utah Construction Company v. Berg et al, 68 Ariz. 285, 205 P.2d 367 (1949).

Further, the standard of proof at hearing is a “preponderance of the evidence”. Smith v. Arizona Dept. of Transportation, 146 Ariz. 430, 706 P.2d 756 (App. 1985).

“A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960).

Therefore, Union Metro must demonstrate that the Department violated statute, rule, policy and/or general legal principle in not awarding Union Metro any credits under the LIHTC program.

An agency abuses its discretion by acting in an arbitrary or capricious manner or otherwise not in accord with the law. See High Cty. Conservation, 67 F. Supp. 3d at 1263. An Agency acts in an arbitrary and capricious manner when it fails to examine “the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made.” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); Tucson Public Schools, District No. 1 of Pima Cty. v. Green, 17 Ariz. App. 91, 94 (1972) (stating an agency acts in an arbitrary and capricious manner by acting unreasonable, “without consideration and in disregard for facts and circumstances”).

While significant time was spent arguing whether ADOH had properly implemented the federal statutes in creating the 2020 QAP, that is not within the jurisdiction of this tribunal to consider. Rather, the purpose of this proceeding is to determine whether ADOH’s failure to make an award to Union Metro was proper under the 2020 QAP.

C. The State Special Project Set-Aside Category

Notably, Union Metro did not contend that it was entitled to the award from the State Special Project Set-Aside Category. Rather, it contended that merely being included in that category was not an appropriate “preference” to comply with the federal requirements. As stated, supra, such a determination is beyond the scope of this hearing.

Because only one award could be made out of that set-aside, it did not matter whether Union Metro was located in a QCT and/or contributed to a CCRP.

With respect to the State Special Project Set-Aside Category, the 2020 QAP provided “[i]f a Project(s) that has received a . . . . Choice Neighborhoods Implementation Grant (“Choice Neighborhoods”) is submitted, the highest scoring among them meeting all eligibility, threshold and underwriting requirements will be funded under this Set-Aside.”

The evidence established that Harmony One had received a Choice Neighborhoods Grant and was appropriately funded under the State Special Project Set-Aside Category. Accordingly, the award to Harmony One was compliant with the terms of the 2020 QAP and Union Metro was not entitled to an award from the State Special Project Set-Aside Category.

D. The General Pool

A great deal of time was spent arguing whether ADOH was obligated to follow up with Union Metro regarding its inconsistent responses as to the smoke-free nature of the development.

Union Metro admitted it erroneously failed to check the box that directly asked if the development was smoke-free. Union Metro argued that its narrative statement that the development was smoke-free and its self-score sheet should have resulted in a clarifying question from ADOH.

Union Metro did not cite any authority that required ADOH to conduct such an investigation, but argued ADOH abused its discretion in failing to do so.

Union Metro acknowledged that had it been awarded the 2 points for being a smoke-free development, it would not have won the tiebreaker in the general pool. Further, Union Metro did not contradict ADOH’s position that Union Metro would have had to “leapfrog” at least four other applicants.

Accordingly, with or without the 2 points for being a smoke-free development, Union Metro’s project would not have been funded from the General Pool. Any arguments as to ADOH’s obligation to investigate further are irrelevant.

ORDER

Based on the foregoing, it is recommended that the Director of Department shall deny Union Metro’s appeal.

In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be 40 days from the date of that certification.

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-137160-45720000Done this day, December 14, 2020.

/s/ Tammy L. Eigenheer

Administrative Law Judge

Transmitted electronically to:

Carol Ditmore,

Arizona Department of Housing-54864001

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-137160-45720000