January 1, 1900

by Joan H. Osborne

The architect or engineer, as a licensed professional, is charged with the knowledge of state statutes and codes that must be met in the design and construction of buildings. The task of navigating the various levels of government and the myriad of administrative agencies that may impose requirements regarding the design or construction of a building is daunting.

Licensed architects and engineers are often exposed to design inadequacy claims from owners alleging that their design criteria have not been implemented. Typically, owners dictate the design requirements for their projects and require the design professional to use their expertise and knowledge regarding building standards and local codes to implement the design to the owner's satisfaction. In certain situations, however, the design professional must look beyond the owner's design criteria, as limited by building code requirements, to determine if there are other restrictions or required design criteria affecting the design of the building. One potential source of such limitation that must be investigated is whether the financing entity imposes requirements on construction it is funding.

The design professional should always seek legal guidance when dealing with any owner receiving governmental funding as to whether the governmental policy resulting in the subsidized funding for the project has any design implications. The design professional should also question whether there are other social engineering goals that have been adopted by the financing agency. In some cases, the social engineering goals of the agency may be in direct conflict with the owner's desires for the project, and he may neglect to inform the designer about all the funding agency requirements that are being imposed. Nonetheless, as a licensed professional, the design professional will be charged with constructive knowledge of all state and local statutes, codes and ordinances and funding agency imposed requirements affecting the design of the project.

NJHMFA Guidelines Required

The New Jersey Housing and Mortgage Financing Agency (NJHMFA) exists as a funding source for major construction and permanent mortgage lender for affordable family, senior and frail elderly housing. It is also an agency that has specific design criteria for the various projects it funds. When an owner/developer is obtaining financing for a multi-family project, it must meet the NJHMFA underwriting guidelines for the project. The owner is responsible for obtaining the financing by meeting all of the lenders underwriting requirements.

The focus of the Underwriting Guidelines and Finance Policies of the NJHMFA is not limited to owner finances. The Guidelines, by reference, also incorporate some rather specific design criteria. If these design criteria are not incorporated into the NJHMFA-funded project, the design professional faces a significant and potentially expensive professional liability claim. Unfortunately, the agency design criteria are rather vague and can be easily overlooked, especially if they are not expressly pointed out by the agency. Further, the agency design criteria are designed to fulfill social engineering goals that go further than the stated agency objectives and, therefore, are not readily identifiable.

Affordable Housing Not To Be Segregated

An example of one NJHMFA social engineering goal, which is piggybacked onto the stated policy goal of creating more affordable housing for lower income and elderly persons, is the agency's requirement that lower income units not be segregated from "market-rate" housing units within the same project. This requirement applies to developments financed by the agency, where the owner intends to offer a percentage of the units at below market rental rates to create affordable housing in the community and the remainder of the housing at market rental rate. This requirement is not stated in the underwriting guidelines. Rather, it is found in a separate administrative code section N.J.A.C. 5:80-8.3 states:

In allocating the units ... the Agency may require the distribution of low and moderate income units among the different sized units to reflect the same distribution as the number of different sized units bears to the total number of units. ...Additionally, low and moderate income units shall be distributed throughout the project such that the tenants of such units will have equal access to and enjoyment of all common facilities of the project.

A designer, that is not aware of the agency's interpretation of this design requirement, may inadvertently violate the lender's requirements by placing all of the intended market rate units (with any of the associated upgrades for such units) in one location or building.

Condition Of Financing

The architect or engineer should be aware that even if the agency approves a design and allows it to be built and put into operation, the agency can come back and require changes to the building to put it in compliance with agency regulations that were overlooked at the time of construction. Pursuant to N.J.S.A. 55:14K-7(b), as a condition of obtaining a loan from the agency, the owner must grant the agency the power to:

[A]t all times during the construction, improvement, or rehabilitation of a housing project and the operation thereof: ... (3) to order any managing agent, project manager, or owner of a housing project to do such acts as may be necessary to comply with the provisions of all applicable laws or ordinances or any rule or regulation of the agency. (Emphasis added.)

The practical implication of this statute is that an owner can be required to make changes to the design of the building long after the design professional has completed its work on the project. If the NJHMFA belatedly enforces the non-segregation requirement, the owner may be required to rent upgraded units at a lower rate than expected, thus facing significant loss revenue. Additionally, the owner may have to upgrade the units previously intended to be non-market rate units, at a significant cost, in order to recover the expected rental income. The owner will likely look to the design professionals as the party responsible for these costs.

Consultation with the Construction Industry Practice Group at Hill Wallack can be helpful in dealing with governmental or other lenders before any problems occur on a project.

Joan H. Osborne is an associate of Hill Wallack where she is a member of the Litigation Division and the Construction Industry Practice Group. She concentrates her practice in the representation of architects, engineers and design professionals and their professional liability insurance carriers.