For over fifty years the HUD Section 202 program funded the construction of housing and the provision of supportive services for elderly households. The original program authorized federal direct loans with below-market interest rates and little to no rental subsidy to serve moderate-income elderly and disabled families. The program evolved through several financing and rental assistance phases before shifting to capital advances, 40-year forgivable loans, with rental subsidies provided to very low-income elderly families through project rental assistance contracts (“PRAC”).  Aside from a modest FY2018 appropriation, Congress last funded new construction of Section 202 units in FY2011.  As a result, preservation of the existing stock of Section 202 capital advance units and supportive services is critical to maintaining this housing resource for the growing population of very low-income elderly families.

 

Background:  Section 202 Program

In 2000, Congress acted to preserve a large portion of the Section 202 direct loan inventory by authorizing the repayment and refinancing of those Section 202 properties originally financed with high interest rate loans, which were generally constructed between 1975 and 1992.  The program required the owner of a direct loan project to record a long-term use agreement on the property and demonstrate that refinancing would produce debt service savings, a low bar given the low interest rate environment of the early 2000s.   Debt service savings could be used to provide additional supportive services and other uses beneficial to the residents, as permitted by the statute.  Refinancing also generated funds for needed repairs.

In 2010, Congress expanded the scope of the preservation effort by authorizing the repayment and refinancing of pre-1975 Section 202 direct loans with original interest rates below six percent to allow property owners to address the physical needs of those projects.  The expanded program permitted an increase in debt service to fund capital improvements.  Accordingly, the statute allowed an increase in Section 8 rents to support the refinance; however the overall increase was limited to mark-up-to-market or mark-up-to-budget rent increases under the Multifamily Housing Reform and Affordability Act.  In addition, HUD required any rehabilitation to address significant repair needs and qualify as a substantial rehabilitation, as defined by FHA.

The bulk of the existing Section 202 capital advance properties have operated for at least ten years, and the oldest are approaching twenty-five years of age.  As a result, many of these properties require major repairs and updates.  Because capital advances do not amortize and PRAC rents are sized accordingly, the financing challenges associated with preservation are somewhat unique but align more closely with the needs of pre-1975 Section 202 direct loan properties as expenses for debt service are expected to increase as a result of rehabilitation.

 

“The 2018 Act”

Through the 2018 Consolidated Appropriation Act (“the 2018 Act”) Congress expanded the Rental Assistance Demonstration Program (“RAD”), which allows the conversion of certain types of housing subsidy to Section 8 assistance, to permit conversion of PRACs to long-term Section 8 project-based rental assistance contracts and project-based voucher contracts.  In addition, the 2018 Act authorized the subordination and/or restructuring of existing capital advances, as necessary, to facilitate restructuring.  These changes are designed to allow Section 202 capital advance owners to leverage their rental assistance to make necessary repairs and updates.

HUD is currently drafting a much-anticipated revision of the RAD Notice, which will detail the program requirements for “RAD for PRAC” as a Component 2 RAD program.  Congress did not cap the number of units that may convert under Component 2, so the selection process is not competitive.  RAD is revenue neutral:  it permits conversion of existing subsidy but does not provide additional funding.  As a result, this program presents some unique challenges that need to be addressed in the RAD notice:

 

Rents / Rental Subsidy

PRAC rents were not designed or permitted to support an amortizing mortgage.  Even if the existing capital advance “debt” is subordinated or restructured rather than refinanced, Section 8 rents based on current pre-RAD budgets without debt service would limit a Section 202 owner’s ability to support loan amounts necessary to provide adequate funding for transaction costs and necessary repairs/rehabilitation.  While the introduction of other sources of financing, including soft loans and low-income housing tax credits, will defray some of this expense, the availability of subsidy and the method of determining rents, both initially and over time, will play a key role in determining the feasibility of this program for individual projects.

Restructuring of Existing Capital Advances

The 2018 Act authorizes the subordination and restructuring of the existing Section 202 capital advance, which currently includes obligations under a note, mortgage/deed of trust and use agreement.  Subordination and restructuring of the capital advance must be considered within the context of acceptable project ownership structures, which Congress expanded in 2000 and 2010 to include for profit limited partnerships with various types of nonprofit general partner control. A shift to for-profit ownership will be required for capital advance properties to take advantage of some financing tools. However, the entity that will become the “debtor” under any capital advance note and deed of trust/mortgage, the obligations of the continuing capital advance, and tax implications related to those obligations, must be addressed within the context of potential changes in ownership structure.

 

Scattered Site Projects

Given that many Section 202 capital advance projects include fewer than fifty units, aggregation of multiple facilities into a single scattered site project, if permitted, would distribute certain fixed expenses and increase the feasibility of the RAD for PRAC program for some projects.  Authority to transfer projects would further encourage consolidation and create an opportunity for cost savings.  Transfer authority would also provide an opportunity for some smaller sponsors and owners that no longer desire or are no longer equipped to continue in those roles to exit the program and facilitate transfer of properties to those with the tools to take advantage of the RAD for PRAC program.

 

Supportive Services

By statute, the 202 program requires owners to provide supportive services considered essential for elderly residents to continue to live independently.  Some owners receive grants to fund those services.  For others, employment of a service coordinator is considered an eligible cost under the PRAC.  Inclusion of those expenses in the Section 8 operating budget is vital to the continued provision of those services.

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About the Author

Susan E. Campbell

Susan provides counsel and assistance with housing, community development, and regulatory matters, focusing on HUD/FHA-insured loans and asset management issues.

 

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Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 4 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 4 – Failure to Address Employment Issues

Proper Documentation of Employees – Federal laws require all employers to obtain copies of certain documents at the time of hire, and to maintain copies of those documents on file for the duration of the employment.  Best practices should be adopted for all incoming employees to ensure proper documentation is received.  In addition, routine audits of employment records should be performed to make sure a company’s records would pass muster in a federal audit.  Failure to adhere to these laws can result in the business being shut down, and even criminal charges in some circumstances.  Consulting with an HR professional or an employment attorney on proper procedures and best practices in hiring and record retention is advisable.

Employment Contracts – North Carolina is an “at will” state, which means employees may be hired and fired, at will, for any cause or no cause at all.  Accordingly, most employees do not have written employment contracts.  There are two exceptions.  The first would be a union contract where a collective bargaining agreement governs the employment relationship.  The second would be a key management position where a written offer of employment is agreed to between the company and the employee.  The laws which govern what employment contracts can and cannot provide are constantly evolving.  A business wanting to use a written employment agreement to retain top executives in its business should have an employment attorney draft a standard employment agreement to ensure the employment laws regarding restrictive covenants and non-competes, confidentiality, termination, and the like are adhered to.  If you have a written employment agreement that you have been using for a number of years, it is good idea to have it reviewed every few years by an employment attorney to make sure the provisions in it are still enforceable.

Employee Policy Manual – Since most employees do not have an employment contract to govern the terms of their employment, any business that employs more than three people in the business should have an employee policy manual to guide the employment relationship. The employee handbook can cover an array of issues. One important area to address is use of computer systems and the internet. Having policies in place regarding use of a computer terminal at work by employees has been increasingly important in the age of cyber security. An HR consultant or employment attorney can prepare an employee handbook, or review and update any current policies and procedures a company may already have in place.

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About the Author

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

 

 

 

Ashley Rusher

 

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 3 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 3 – Failure to Observe Tax Laws

Payroll Taxes – For some reason, when a company is experiencing financial distress the first thing it does is steal from its employees and the federal and state taxing authorities by failing to escrow and then remit payroll taxes.  Make no mistake that is exactly what the company is doing if it withholds payroll tax from its employees and fails to pay it to the taxing authorities.  It is not only bad form, it is a crime.  The taxes withheld from employees’ pay are called the trust fund portion of the tax.  The taxes the company pays as an employer on payroll are called the employer portion of the tax.  There is a 100% penalty for business owners and other “responsible parties” who fail to remit the trust fund portion of the payroll taxes.

By way of example, if the company withholds $10 from Joe’s wages for payroll taxes and owes an additional $12 for the employer portion, but fail to remit $22 to the taxing authority, the business owners, officers, directors, payroll clerk, and anyone else the taxing authority determines is a responsible party will be held personally liable for 100% of the trust fund portion of the taxes, or $10, plus interest and other penalties.  Do not mess around with payroll taxes.  I advise my clients to always pay the government first.  “Borrowing” from the withheld taxes to fund operations is a very slippery slope from which few business owners recover.  If personal liability, inability to discharge such taxes in bankruptcy, and possible criminal charges is not enough, it can be a public relations nightmare as well.  Tax liens are published in the local Business Journal for all to see.   There is a simple solution.  At a minimum set up separate bank accounts for the collection of payroll and sales and use taxes, and do not conduct business out of those accounts except for payment of those taxes.  In addition, hire a reliable payroll service to remit employer and employee tax reports and taxes to the taxing authorities.

Sales and Use Taxes – Same song, second verse.  Like payroll taxes, sales and use taxes are trust fund taxes which create personal liability for responsible persons and potential criminal liability.  What’s more, failure to remit sales and use taxes is the fastest way to get a business shut down by the state taxing authority and company assets auctioned off to pay the back taxes.

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About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.

 

 

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If you have a business dispute in North Carolina that’s headed to litigation, the court in which the lawsuit is heard can be an important strategic factor.  If you’re planning on filing a lawsuit – particularly in a complex or high-stakes case – court options should be carefully considered.  And if you’ve been sued, don’t assume that you’re always stuck with the court that the other party chose.

Typically, lawsuits in North Carolina for amounts over $25,000 are filed in Superior Court in a county that has some connection with the case (often, where one of the parties is located).  However, some cases might be eligible for federal court.  Also, other specialized state-court options may be available.

 

Federal Court

Federal court is not available for every dispute.  But it is sometimes an option – in cases involving a “federal question” (a federal law is involved) or where there is “diversity jurisdiction” (the parties in the case are from different states and the amount in dispute exceeds $75,000).

 

Business Court & “2.1” Cases

Other options are also sometimes available within the North Carolina court system.  Notably, North Carolina offers a Business Court that is specially designed for hearing complex and high-stakes business cases.  Cases can be heard in Business Court if they involve issues such as corporate governance, securities, antitrust, “intellectual property” like trademarks or trade secrets, or business-to-business contracts in which at least $1 million is in dispute.  These types of cases are considered ‘mandatory” Business Court cases, where the Business Court is required to take the case, if requested.  In addition, in certain other circumstances where the Business Court would not otherwise be required to take the case, “complex business” or “exceptional” cases can be assigned to a Business Court judge or another judge with special areas of expertise.  These types of cases are called “2.1” cases – referring to a rule of court that allows local judges to recommend the assignment of a specialized judge.

 

Weighing the Options

In deciding where to file a business lawsuit in North Carolina – or whether to attempt to change the court in which a plaintiff filed suit against you – various factors should be considered:

• The benefit of an assigned judge. Generally, in North Carolina state court, civil lawsuits are not assigned to one judge to hear all the proceedings.  If you have several issues that come before a judge during the course of a lawsuit, you could have several different judges be involved with your case.  If you have a complex case that takes time for a judge to really understand in depth, it may be beneficial to be in Business Court or federal court (where particular judges get assigned to cases).
• Judicial expertise. While I find that judges in courts across North Carolina generally try to work hard and be fair, not every judge is going to view a complex business case in the same way.  For instance, Business Court judges generally have backgrounds as business litigation attorneys and spend their days focused on business disputes.  They are necessarily going to have a different perspective than the average Superior Court judge – who, for example, may be a former criminal prosecutor who spends the majority of his or her time presiding over cases about crimes and car crashes.  If your case involves federal law, it may similarly be advantageous to be in federal court, where judges are more familiar with federal law.
• Judicial capacity. Generally, North Carolina judges do not have judicial clerks (employees who help do research and other tasks for the judge).  But Business Court and federal court judges do.  The amount of time and attention that the court will be able to devote to meticulously considering your case may differ, depending on the court.
• Timelines. Different courts may take different amounts of time to resolve a case.  It is never clear which court will handle a case the quickest.  But, as an example, I have had cases in federal court where I have waited many months to get a ruling on a preliminary motion in the case.  The case would have been completed in state court by the time it really got started in federal court.
• “Home cooking” concerns. If you’re not in North Carolina and get sued by a North Carolinian in a North Carolina state court, you may want to consider federal court, if you have concerns about whether a North Carolina court would favor a North Carolinian.  Similarly, if you were sued in a county in which you think your opponent “knows all the judges,” a transfer to Business Court might result in the case being assigned to a judge in a different county.
• Presentation style. Are your legal arguments most effectively presented in a lengthy written brief, or in a quick oral presentation?  Federal court or Business Court is usually best where you need to provide a lot of written explanation.  Regular state courts usually depend more on oral presentation.  If it is important to you to make presentations in a technology-friendly courtroom, federal court or Business Court is often best.
• Procedural rules. Federal and state courts have different rules regarding court procedures.  Likewise, the Business Court has its own procedural rules that differ from other state courts.  These procedural rules may significantly affect, for example, the process for how “discovery” information is exchanged between the parties.
• Cost. Which court will be most cost-efficient is difficult to predict. Often federal court or Business Court can incur more costs, from higher filing fees to more attorney time needed to write briefs and comply with additional procedural rules.  However, sometimes a pretrial motion that is carefully examined by a judge who is well-educated in the applicable law can favorably resolve a case that would “drag on” in another court.

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About the Author

Elliot Fus

Elliot has practiced law for over 20 years and is a member of the Federal, North Carolina and Forsyth County bar associations.  He is an experienced litigator with major case experience in state and federal courts and in private arbitrations.

Owning a business is exciting at times, frustrating at others, but always demanding.  There are so many decisions to make on a daily basis, and often, as a business owner, you not only have to make the decisions, but must also roll up your sleeves to make those decisions bear fruit.  One decision you should make early as a business owner is determining who will be your trusted advisors to guide you through the legal and accounting issues your business will encounter.  Selecting a professional to assist you with legal and accounting decisions is vital to launching and maintaining a viable enterprise, because decisions made early in the formation of a business can have far reaching consequences down the road.

In my practice, I often see clients who chose to handle matters without engaging attorneys and accountants early in the process, and later failed to recognize issues as they arose during the day-to-day operations of the business. Those decisions can cost business owners far more money down the road than hiring the appropriate professionals in the beginning, and can have a significant effect on the ultimate success or failure of the business.  I have found those mistakes fall into seven basic categories. This is Pitfall number 2 of 7 common pitfalls I see businesses owners make. Over the next few weeks, I will be sharing all 7 of these pitfalls and proven ways to prevent them.

 

Pitfall # 2 – Failure to Plan

 Business Plan – Every company needs a business plan.  The business plan should consider the market for the product or services offered by the company, the costs to develop, market and sell the product or services, the relative cash flow needs to operate the business, how the company will be capitalized, and what net profits can be expected by running the business.  Often business owners have a great idea and jump into business without having a plan in place.  A business plan also needs to be revisited from time to time to evaluate how an ongoing business is meeting its objectives.  An accountant is a great resource for helping a company develop a business plan and financial models around that business plan.

Strategic Plan – Every business also needs a strategic plan.  The strategic plan differs from the business plan.  A business plan examines the cost of doing business so a company can be prepared financially to sustain its operations, and make money for the owners.  A strategic plan, on the other hand, is aspirational.  It is a set of goals the owner wants to accomplish for the business, and can include employee compensation and benefits, enhancing the customer experience, developing a new product or introducing a new service, or expanding existing operations.  Every business should be in tune with its industry and looking ahead five years to plan for the future of the company.  Trade publications, industry blogs, conferences, and continuing education or training programs are great ways to stay in tune with an industry and pick up on the clues to assist the company with planning for a sound future for the business.

Succession Plan – We all want to leave something meaningful and lasting behind for posterity.  Most of us have a will and do some personal estate planning so our loved ones will be provided for after we are gone, but more often than not business owners fail to take the same care in planning for the future of their company.  Business owners should not neglect the process of deciding the future leadership of the company.  Every business should have a plan in place to address what happens with the ownership and management of the company when the current owners and officers leave the company.  It is important to train individuals to assume responsibilities of top management and carefully plan who the future owners of the company will be to ensure a smooth transition without business disruption in the event of a death, resignation, or retirement.  A good business and estate planning attorney can assist a business owner with making sure the long term goals for the business carry on in the hands of those most qualified to run the business, and that the business is owned by those individuals the business owners desire to succeed them as owners.

 

About the Author

Ashley Rusher

Ashley focuses her practice on Outside General Counsel Services and Business Bankruptcy and Creditor’s Rights Practice Areas. She is an effective, results-driven advocate for her clients.  Her background of 30 years in business bankruptcies, distressed debt workouts, problem loan recovery, and real estate title and commercial litigation provides her with a solid foundation of general business, accounting and legal skills.