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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us) STATE OF MICHIGAN FRANK J. KELLEY, ATTORNEY GENERAL Opinion No. 6590 June 27, 1989 STATE HOUSING DEVELOPMENT AUTHORITY: Ownership of residual receipts upon dissolution of a limited dividend housing association Upon dissolution of a limited dividend housing association, residual receipts remaining after payment of all eligible project expenses and limited dividend payments become the property of the Michigan State Housing Development Authority. Terrence R. Duvernay Executive Director Michigan State Housing Development Authority 4th Floor Plaza One Building 401 South Washington Square Lansing, Michigan 48913 My opinion has been requested concerning a question relating to mortgage loans made by the Michigan State Housing Development Authority (Authority) under its multi-family rental program. The Authority makes mortgage loans to construct or rehabilitate multi-family housing projects throughout the State of Michigan. Pursuant to the State Housing Development Authority Act of 1966, 1966 PA 346, MCL 125.1401 et seq; MSA 16.114(1) et seq (the Act), and specifically MCL 125.1444; MSA 16.114(44), loans may only be made to nonprofit housing corporations, consumer housing cooperatives, limited dividend housing corporations, limited dividend housing associations, mobile home park corporations, mobile home park associations, or to any public body or agency. Profit motivated developers usually choose to form a limited dividend housing association (association) to function as the borrowing entity. The association agrees to rent a certain portion of the total units in the housing project to persons of low and moderate income. The association investors agree to limit their return on their investment to a certain percentage as determined by the Authority at the time the loan is made. In return, the association receives benefits such as a below market interest rate on the loan, federal or state rent subsidies, or interest rate subsidies and/or various other tax benefits. You have requested my opinion of whether the Authority owns the so-called "residual receipts" left after payment of cumulative permissible distributions and eligible project expenses when the association pays off its mortgage loan. (1) In the letter of request it is stated: "Residual Receipts are those funds (together with interest generated by those funds) which result at year end from rents or subsidy payments after all the current obligations of a project have been satisfied (including without limitation, debt service, operating expenses, taxes, insurance, maintenance, funding of replacement reserves, escrows, one month's rent potential, etc.) These funds are required to be paid to the Authority and placed in an interest bearing 'Operating Reserve Account.' Funds in the Operating Reserve Account can be used for future operating deficits, capital improvements or limited dividend payments for that project, as requested by the owner and approved by MSHDA [the Authority]." MCL 125.1493; MSA 16.114(93), in pertinent part, provides: "In addition to other requirements of law, the partnership agreement, joint venture agreement, trust agreement, or other document of basic organization of the limited dividend housing association shall provide all of the following: "(b) That every member of a limited dividend housing association shall be deemed, by acceptance of a beneficial interest in the limited dividend housing association or by executing the document of basic organization, to have agreed that he or she at no time shall receive from the limited dividend housing association any return in excess of the face value of the investment attributable to his or her respective interest plus cumulative dividend payments at a rate which the authority determines to be reasonable and proper, computed from the initial date on which money was paid or property delivered in consideration for the interest; and that upon the dissolution of the limited dividend housing association, any surplus in excess of those amounts shall be paid to the authority or to any other regulating governmental body as the authority directs." (Emphasis added.) MCL 125.1494; MSA 16.114(94), defines the term "surplus" as follows: "As used in this chapter, the term 'surplus' shall not be deemed to include any increase in assets of any limited dividend housing association organized in accordance with the provisions of this chapter, by reason of reduction of mortgage, by amortization or similar payments or realized from the sale or disposition of any assets of a limited dividend housing association to the extent such surplus can be attributed to any increase in market value of any real property or tangible personal property accruing during the period the assets were owned and held by the limited dividend housing association." MCL 125.1493; MSA 16.114(93), and MCL 125.1494; MSA 16.114(94), thus, mandate that the basic document of organization of the limited dividend housing association include language providing for the payment to the Authority of any surplus at the time of dissolution of the association. These funds would be generated from excess rental payments by the tenants, subsidy payments to the association, and interest earned on accumulated reserves, but would not include funds attributable to appreciation of the market value of the project or funds resulting from a reduction of the mortgage by reason of amortization or similar payments. The excess rents and subsidy payments would, for the most part, be directly attributable to reduced operating costs of the association resulting from the below market interest rate on the mortgage loan, tax abatement, subsidies or other forms of assistance provided by or through the Authority. To authorize a mortgage loan, the Authority adopts a resolution setting forth the terms of the loan including, in accordance with MCL 125.1493; MSA 16.114(93), the Authority's determination of the reasonable and proper rate of return on the association's investment in the project. The Authority has adopted a rule to set forth the factors used in making this determination. 1979 AC, R 125.144, states in pertinent part: "A resolution authorizing a mortgage loan to an applicant which is a limited dividend housing corporation or limited dividend housing association shall include a determination of the maximum reasonable and proper rate of return on the investment of the applicant in the proposed housing project, which determination shall be made upon a consideration of the then-existing conditions in the housing industry and financial markets and rates of return then prescribed by other governmental agencies." The resolution of the Authority also authorizes the executive director of the Authority to issue a commitment to the association containing the terms of the loan as set forth in the resolution. If the commitment is accepted, the Authority staff proceeds to close the loan, obtaining, among other documents from the association, a mortgage, mortgage note and regulatory agreement. The regulatory agreement entered into between the Authority and the association sets forth numerous requirements as to the operation of the project including, among others, the establishment and use of various reserve accounts, and the deposit and distribution of the residual receipts. Various sections of the regulatory agreement (Michigan State Housing Development Authority Form No. PLCD 230-8--10/75--Revised 9/76, 9/77, 5/78, 12/78, 2/79, 4/79), provide in pertinent part: "WHEREAS, the Authority is unwilling to make the Mortgage Loan unless the Mortgagor agrees to be regulated in the manner set forth herein, and the Mortgagor is willing to execute and abide by this Agreement as a condition of obtaining the Mortgage Loan and receiving continuing benefits under the Act. "4. Operating Reserve Account. The Mortgagor shall establish and maintain, with the Authority an Operating Reserve Account. The Mortgagor shall deposit in the Operating Reserve Account (i) the Residual Receipts as defined in Section 5 hereof.... "Funds on deposit in the Operating Reserve Account at any time shall be characterized and may be employed as follows: "a. 'Non-Principal Operating Reserve Funds' shall include all Residual Receipts and all income from the investment of any and all Non-Principal Operating Reserve Funds and Principal Operating Reserve Funds on deposit in the Operating Reserve Account. "Non-Principal Operating Reserve Funds may be disbursed from the Operating Reserve Account, at such times and in such amounts as shall be directed or approved by an Authorized Officer of the Authority, for (i) the payment of any expenses of the operation of the Development, including interest expense, real estate taxes, other taxes, maintenance, fuel, management, legal, audit, debt service and required reserve deposits and any other cash requirements as an Authorized Officer of the Authority may determine (all such expenses collectively hereinafter called 'Operating Expenses'); and (ii) the making of annual limited dividend payments, to the extent and in accordance with the additional requirements provided in Section 24(b)(ii) hereof. "5b. Residual Receipts shall mean all Surplus Cash remaining after the making of annual limited dividend payments pursuant to Section 24b(i) hereof. "24. Distributions by the Mortgagor. The mortgagor shall not make, nor shall any partner or Owner of the Mortgagor or any person or entity having a beneficial interest in the Mortgagor, receive or retain any distribution of any assets or any income of any kind of the Development, except from the Operating Reserve Account with the approval of an Authorized Officer of the Authority, and on the following conditions: "b. All distributions in any one fiscal year of the Mortgagor shall be limited to ______ (__%) per centum on the Mortgagor's initial equity investment, or such other amount as is determined by an Authorized Officer of the Authority, and such distributions shall be calculated and may be made as follows:" The Legislature has created the Authority as a quasi-corporation and as an instrumentality of the state, and has granted it general corporate powers by statute to accomplish its public purpose of providing housing for persons of low and moderate income. See Advisory Opinion re Constitutionality of PA 1966, No 346, 380 Mich 554, 575; 158 NW2d 416 (1968). MCL 125.1412; MSA 16.114(12), states that "[t]his act, being necessary for and to secure the public health, safety, convenience, and welfare of the citizens of the state, shall be liberally construed to effect its public purposes." MCL 125.1422; MSA 16.114(22), states in pertinent part: "The authority shall possess all powers necessary or convenient to carry out this act, including the following powers in addition to other powers granted by other provisions of this act: "(a) To ... make and execute contracts and other instruments necessary or convenient to the exercise of the powers of the authority; .... "(i) To make or purchase loans, ... the repayments of which are secured by mortgages, security interests, or other forms of security; ... to commence an action to protect or enforce a right conferred upon the authority by law, mortgage, security agreement, contract, or other agreement; ...." The Legislature intended that the Authority have the necessary powers it needs to accomplish its public purpose. Additionally, as set forth in MCL 125.1493(b); MSA 16.114(93)(b), it was the intent that any excess monies generated from the operation of the project over and above the agreed upon return to the limited dividend housing association be returned to the Authority for its use in furthering its public purposes. A developer could only obtain a below market interest rate loan and other benefits under the Authority's loan program after forming the appropriate entity under the Act, and contracting in the regulatory agreement and including in the basic organizational documents of the association that no member of the association would receive a return in excess of the amount determined prior to entering into the loan. The residual receipts are accumulated in a reserve account controlled by the Authority for the benefit of the project and are subject to specific regulations set forth in the regulatory agreement as to their use until the dissolution of the association. You report that the Authority has consistently maintained the position over the years that the residual receipts, if not necessary to pay limited dividend payments or eligible project expenses as described in the regulatory agreement, would ultimately belong to the Authority. In keeping with this position, the Authority has further maintained the accumulated residual receipts would not be available to the association to pay off any remaining mortgage loan balance unless arrangements were specifically structured at the time of loan closing to provide for such a result. This position is directly in line with MCL 125.1493(b); MSA 16.114(93)(b). " 'The construction given to a statute by those charged with the duty of executing it is always entitled to the most respectful consideration and ought not to be overruled without cogent reasons.' " Bd of Educ of Oakland County Schools v Sup't of Public Instruction, 401 Mich 37, 41; 257 NW2d 73 (1977), quoting from United States v Moore 95 US 760, 763, 24 LEd 588, 589 (1877), and quoted with approval in Magreta v Ambassador Steel Co, 380 Mich 513, 519; 158 NW2d 473 (1968). City of Manistee v Employment Relations Comm, 168 Mich App 422, 427; 425 NW2d 168, lv den 431 Mich 882 (1988). To conclude that the residual receipts would ultimately belong to or be used for the benefit of the association would be in direct contravention of the Act. Since any excess residual receipts would accumulate at the end of each year only after the association had received the full amount of its limited dividend payment, to distribute these funds to the association would increase distributions over the maximum return it had agreed upon at the time the loan was consummated. The association has agreed to the limited return provision prescribed by the Act through the language in its basic document of organization and by the contractual terms of the regulatory agreement. The general rule is well settled that persons contracting with a public agency are bound to take notice of the limitations of the statute under which the contract is made. Lasky v City of Bad Axe, 352 Mich 272, 276; 89 NW2d 520 (1958), People ex rel Mackenzie v Treasurer of Baraga Twp, 39 Mich 554, 556; (1878). They are supposed to know the law. Lasky, supra. It is my opinion, therefore, that upon dissolution of a limited dividend housing association, residual receipts remaining after payment of all eligible project expenses and limited dividend payments become the property of the Michigan State Housing Development Authority. Frank J. Kelley Attorney General (1 Your question arises only in regard to mortgage loans made to projects not subject to federal regulations 24 CFR 883)
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