GRAND RAPIDS — The conversion of several low-income properties to market-rate apartments by a West Michigan-based property investor has raised concerns in Lansing and Washington, D.C.

Eenhoorn LLC, a Grand Rapids-based real estate investment and property management firm, used a deed in lieu of foreclosure process that stripped away the affordability requirements on four of its Michigan properties, which had received Low Income Housing Tax Credits (LIHTC) since the 1990s, according to a review of state records by MiBiz.

Critics allege Eenhoorn used what regulators call a “planned foreclosure” scheme to get around the LIHTC rent restrictions and unlock the company’s ability to charge market-rate prices for the multi-bedroom units. Housing advocates fear the move could displace poor families during a time of affordable housing scarcity in cities like Grand Rapids.

“We’re losing a very precious resource there. We’re losing very specific types of low-income housing,” said John Smith, a staff attorney with Legal Aid of West Michigan, a nonprofit advocate for low-income individuals and families.

Handing over a property deed to a lender gives a borrower a legal way to avoid both an expensive, drawn-out foreclosure process and the stigma of an actual foreclosure. For the lender, it means releasing a borrower from its obligations, taking over the property and assuming the risk that the property may not be worth enough to cover the debt it is owed.

With Eenhoorn, the company owned the four properties in question — including two Grand Rapids developments, one in Richland Township near Kalamazoo and one in Lansing — via affiliates. When those affiliates fell into financial distress, they essentially turned over the deed to the lender — in this case, another company tied to Eenhoorn — instead of going through a foreclosure process.

The legal maneuver freed the properties in question of rent restrictions that were part of the original development agreement under LIHTC. In the case of a LIHTC property, a foreclosure or a transfer of deed in lieu of foreclosure are the only ways a property can be stripped of its 30-year restrictions, according to a state compliance manual for the tax credits.

Eenhoorn executives say the firm followed the law, and they contend internal policies bar the company from raising rents on existing low-income tenants.

Still, agencies at the state and federal level are investigating the practice of using parts of the foreclosure process to strip away affordability requirements for the properties.

Kevin Elsenheimer, the executive director of the Michigan State Housing Development Authority (MSHDA), the state agency that administers LIHTC, sent a letter to the Internal Revenue Service in September asking the agency to issue guidance “to protect the residents of affordable housing in this state from planned foreclosure schemes.”

“There are some legal issues here and it raises concerns,” said Clarence Stone, MSHDA’s director of legal affairs, who could neither confirm nor deny that Eenhoorn is the company it is investigating. “The purpose of LIHTC is to provide affordable housing. If you have planned foreclosures, that policy objective is being thwarted.”

A copy of Elsenheimer’s letter obtained by MiBiz redacted all the names. The IRS declined to comment for this report.

‘BOGUS’ ACCUSATIONS

It’s unclear just how much a company like Eenhoorn might benefit financially from converting the units from affordable housing to market rate. However, developers familiar with LIHTC development thought the financial gains could be substantial.

Additionally, sources who spoke on condition of anonymity pointed out that traditional developers of LIHTC properties face stiff competition for the highly sought-after tax credits. MSHDA scores each project in the process of awarding the tax credits, and a history of foreclosures would typically weaken a developer’s scores.

But because Eenhoorn did not develop any of the four properties — it acquired them once they were already built and had the tax credits in place — it would not have the same motivation to avoid the foreclosure process, sources said.

For their part, executives with Eenhoorn and attorneys speaking on their behalf insist that the transfer of deed in lieu of foreclosure process for all the properties did not constitute an end-around the LIHTC requirements.

“The planned foreclosure (accusation) is bogus,” said Paulus Heule, president of Eenhoorn, referring specifically to the deed in lieu of foreclosure issued in 2015 for The Lofts, a 55-unit apartment building at 26 Sheldon Boulevard SE in downtown Grand Rapids.

Heule, the Honorary Consul to the Kingdom of the Netherlands in West Michigan, said the company executed the deed in lieu of foreclosure process because the properties fell underwater financially and could not cover their debt service. Heule said he purchased the various properties’ debts “just like any other bank.”

Heule and his attorney, Nyal Deems, a partner at Varnum LLP, say the company has a policy not to increase rents on tenants in LIHTC units who wish to stay in their apartments after the properties have gone through the deed in lieu of foreclosure process, even though the company is no longer bound to rent restrictions.

“It is the policy of this Company to maintain those rent levels such that they do not exceed what would have been permitted had the regulatory agreement remained in place for the tenants who were tenants of the apartments at the time of the foreclosure, for as long as those tenants remain in the apartments with terms of 12 months or longer,” according to a copy of Eenhoorn’s policy supplied to MiBiz.

In addition to the The Lofts, Eenhoorn affiliate-owned properties Clearpoint Valley in Grand Rapids, Savannah Trace near Kalamazoo and 900 West Townhomes in Lansing went through the deed in lieu of foreclosure process.

Heule was unable to provide a specific number of units that have converted from LIHTC rates to market rates, nor would he describe the financial benefit to the company from the conversion.

AFFORDABILITY AT ISSUE

For local advocates like Smith at Legal Aid of West Michigan, the potential to lose particular types of affordable housing is particularly troubling.

“If you look at (some of the Eenhoorn apartment) developments, they’re townhomes with two, three and four bedroom apartments basically,” Smith said. “Low income families with multiple kids, they can’t afford to buy a home.

“It’s very difficult to find three or four bedroom apartments.”

Eenhoorn now advertises the properties — which contain a mix of between one- to four-bedroom units — at rents ranging from $800 up to as much as $2,025, according to the company’s website.

Sharan Levine, a partner at Kalamazoo-based business law firm Levine & Levine with a focus on real estate law and real property, said the situation goes against the spirit of the LIHTC program.

“Michigan has a rich history in providing subsidized housing,” Levine said. “The public policy (crafted back in the 1980s) anticipated that someone might try and thwart providing that subsidized housing. (This example) strikes me as egregious.”

Per the Internal Revenue Code, LIHTC properties are required to maintain a minimum of 30 years of affordability, consisting of an initial 15 years and a 15-year Extended Use Period.

All told, the four Eenhoorn-managed apartment complexes in West Michigan received just over $3 million in LIHTC allocations annually over the course of 10 years, according to a review of state records.

Legal Aid’s Smith first became concerned about the deed in lieu of foreclosure transfers through his ongoing defense of a client who lives in a LIHTC unit at The Lofts in Grand Rapids and has been facing eviction.

“(Tenants) … who have had the right to remain there will no longer have that right if this LIHTC period is allowed to be terminated,” Smith said. “That’s ignoring the issue of cost because at the end of that three-year period, (Eenhoorn) can basically double the rent.”

QUESTION OF AUTHORITY

Aside from affordability questions, the Eenhoorn example also highlights a key concern of whether any agency has the authority to prevent so-called planned foreclosures in the first place, according to affordable housing expert Mark Schwartz.

Schwartz sits on the board of the Pennsylvania Housing Finance Agency and serves as executive director of Regional Housing Legal Services, a Glenside, Pa.-based nonprofit law firm specializing in affordable housing.

“(Congress) anticipated there could be situations where the IRS would have to provide guidance as to whether the termination was proper,” Schwartz said, adding that he’s speaking personally and not in any official capacity. “To date, to my knowledge, the IRS has not provided any guidance. They could delegate (authority) to the allocating agencies (like MSHDA). All I’m saying is that they should do something.”

Affordable housing advocates also expressed concern at the precedent set by allowing the deed in lieu of foreclosure transfers to happen in the first place.

Stone at MSHDA and executives at the Washington, D.C.-based National Council of State Housing Agencies — a nonprofit that advocates on behalf organizations like MSHDA — say the Eenhoorn example represents the first time they’ve heard of a property manager using the deed in lieu of foreclosure process with related business entities to unlock the affordability requirements.

“This is very serious,” Barbara Johnson, executive director of NCSHA, said of the process. “We’re committed to stopping it before it becomes contagious, which there’s no evidence of. … We don’t see evidence of other entities operating this way.”

LIHTC faces uncertain future: Long considered the main vehicle to cover the financing gaps that exist with the development of affordable housing, LIHTC has received considerable praise over its 30-year history.

The tax credit served as a significant driver of overall construction activity in the recent recession and can help to “strengthen struggling areas,” according to a blog post last month from the Urban Land Institute.

But despite myriad examples showing the success of the tax credit, its future remains in question.

Throughout his campaign and since the election, President-elect Donald Trump has called for an extensive overhaul of the tax code. While few specifics are known, policy watchers say they’re closely monitoring how LIHTC might fare under any revamped tax legislation.

“We (are) aware of the potential for changes with the LIHTC program as a result of the new administration’s tax reform discussions,” Andy Martin, rental development director at MSHDA, said in an email to MiBiz. “The initial feedback we’ve heard is that there is strong support for retaining the program long term. It is possible there could be modifications made as a result of the overall tax reform effort.”

Editor's note: This story has been updated to note that the LIHTC allocations were given annually over a decade.