by A.J. Johnson, HCCP, A.J. Johnson Consulting Services, Inc.
As more Low-Income Housing Tax Credit (LIHTC) projects reach the end of the 15-year compliance period each year, owners are faced with the dilemma of what to do with the properties. Options are fairly limited, and a large percentage of the developments will be re-syndicated, and a new allocation of credits will be sought for the projects. Once the new credits are allocated, the project essentially becomes a new deal for LIHTC purposes. But, due to the fact that there was a prior allocation of credits (and almost certainly an existing extended-use agreement), the rules are different than they would be for a project obtaining its first allocation of credits.
There is a good deal of confusion in the industry with regard to the appropriate income limits and rents that should be used for the new credit allocation. And the handling of residents who qualified under the prior allocation presents a unique set of considerations. To fully understand the requirements for a re-syndicated deal in these three areas (rents, income limits and previously qualified residents), each will be reviewed as a separate issue.
When determining the appropriate rent level for a re-syndicated tax-credit deal, one must first understand how the gross rent floor was established. In 1993, Congress authorized the establishment of a gross rent floor for LIHTC properties. The purpose of this provision was to ensure that tax-credit properties had at least some protection from decreases in income limits (and the subsequent required reduction in rents) after the initial project feasibility had been determined. IRC §42(g)(2)(A) gives taxpayers the authority to establish the lowest gross rent a tax-credit property will ever have to charge. The procedure for setting this rent floor is set forth in IRS Revenue Procedure 94-57. The procedure states that the gross rent floor for a property takes effect on the date of credit allocation to the building or, at the election of the taxpayer, on the placed-in-service date for the building. Owners must make this election no later than the placed-in-service date.
Since there is no formal allocation date for buildings that receive a credit allocation due to tax-exempt bond financing, the choice for these projects is either when the agency provides an initial determination letter for the issuance of bonds, or the placed-in-service date.
Since HERA 2008 holds the income limits (and therefore the rents) of LIHTC projects harmless (i.e., the limits never go below the highest limits in effect since the property has been in service), it is generally recommended that all owners now simply default to the allocation date. This is because even if the income limits are higher on the placed-in-service date, the placed-in-service income limits are the lowest that will ever have to be used for the project. For this reason, there is no reason ever to elect the placed-in-service date for purposes of the gross rent floor.
The benefit of the gross rent floor election is that the income limits used for rent calculation may be higher than those used for the determination of tenant eligibility. For example, assume the allocation year for a project was 2012 and the property is placed in service in 2014. If the income limits are lower for the area in 2014 than they were in 2012, the 2014 limits must be used for the determination of resident eligibility, but the 2012 limits may be used for rent calculation purposes. If management were unaware of the gross rent floor provisions, they could very well be setting rents lower than required. At the same time, if management believed that the income used for the gross rent floor calculation could also be used for tenant eligibility purposes, the result could be ineligible residents.
Establishing the Initial Utility Allowances
As outlined in IRS Regulation 1.42-10, the cost of tenant-paid utilities must be included in gross rent (telephone, cable and Internet are not considered utilities). Operators of LIHTC projects have a number of options to consider when setting the allowance for a re-syndicated property.
- If the development has rents that are approved by the Rural Housing Service (RHS), the allowance approved by that agency must be used. The same is true for properties governed by an agreement with HUD, in which case the HUD-approved allowance will be used for all low-income units. Keep in mind that if a project has both RHS and HUD assistance, the RHS approved allowance must be used.
- Properties without RHS or HUD assistance may use the allowance used by the local Public Housing Agency (PHA) for the Housing Choice Voucher Program for all units. (This allowance must be used for residents with vouchers).
Properties without RHS or HUD assistance, or units without voucher residents have some additional choices relative to the allowance that may be used:
- Local utility company estimate
- Estimate of the allocating Housing Finance Agency
- HUD Model Utility Allowance
- A professional estimate by an HFA approved engineer or other qualified entity
While allowances are required to be reviewed and, if necessary, updated on an annual basis, new properties (including re-syndicated properties) have some flexibility in terms of timing. After an allowance has been initially determined for a new development, an update is not required until the earlier of two dates: the date the building has achieved 90% occupancy for 90 consecutive days, or the end of the first year of the credit period. Since many re-syndicated deals will already be 90% occupied (or will be very shortly after rehab is completed), these properties will generally have to perform an update on the allowance by the end of the first year in which credits are claimed.
Tenants Receiving Federal Rental Assistance
There are two circumstances when residents in re-syndicated LIHTC deals may pay more than the maximum permitted rent under the Section 42 program: when federal rental assistance is paid, and when overage payments are made under the Rural Development (RD) Section 515 program. However, it is important to understand that residents may only pay more than the allowable tax credit rent if (1) the income of the household exceeds the applicable income limit for the household and (2) either federal rental assistance payments are made on behalf of the household or the RD overage payments are being made on behalf of the resident.
If no subsidy is paid on behalf of the resident, the rent paid by the resident may not exceed the allowable Section 42 maximum rent. Managers should also remember that residents may not pay more than the tax-credit rent at move-in — even if rental assistance is being paid. This is because the excess rent may be paid only if the tenant’s income exceeds the allowable income limit.
In the case of a tenant rent exceeding the tax-credit-permitted rent due to RD overage payments, all payments in excess of the allowable LIHTC rent must go to RD as an overage payment.
Since the passage of the Housing & Economic Recovery Act (HERA) in 2008, determining the appropriate income limits to use for a tax-credit property has become more challenging. This is especially the case for a re-syndicated LIHTC deal. Managers and owners of tax-credit properties receiving a second allocation of credits should think of the transaction as a new project for purposes of establishing income limits. The limits that were applicable to the prior allocation will no longer be germane to the new allocation of credits.
For example, the former allocation would have been awarded well before 2009, meaning that these projects were qualified to use HERA Special Income Limits, if those limits were in place in the locality where the project is located. However, since the project will now have a new placed-in-service date for IRS purposes (generally the date the new partnership acquires the property), no property with a second allocation of credits will be entitled to use the HERA Special limits unless the second allocation occurred prior to 2009 and the project was in service prior to 2009. For this reason, virtually all re-syndicated deals will be limited to the following possibilities relative to the income limits:
- Multifamily Tax Subsidy Project (MTSP) Income Limits; or
- National Non-metropolitan Income Limits.
MTSP limits are the go-to income limits for most LIHTC properties. These are the HUD-published limits applicable to tax credit and tax-exempt bond projects. Owners should use the MTSP limit for the area in which the property is located, keeping in mind that the income limit for rent and tenant eligibility could be different (as noted above in the discussion of rents). Also, since LIHTC income limits are held harmless (they do not go down), owners never need to use a lower income limit than the highest limit they have used since placing the project in service and beginning the process of qualifying tenants.
For example, if a project was acquired and re-syndicated in 2012 and the owner used the 2012 income limits to qualify the initial residents, the 2012 limits may continue to be used even if the 2013 and 2014 limits went down. The owner may continue to use the 2012 limits until limits published by HUD in the future for that area exceed the 2012 limits.
National Nonmetropolitan Income Limits
Tax-credit properties located in rural areas may use the higher of the MTSP limits and the National Non-metropolitan Income Limits (NNMIL), unless the property is financed by tax-exempt bonds, in which case the MTSP limits must be used. Essentially, if an area is eligible for assistance from the Rural Development Service, it is considered to be a rural area. HUD publishes the NNMIL annually when it updates all other program income limits.
Qualification of Existing Residents
When a tax-credit property is re-syndicated, residents in place at the time of acquisition may be grandfathered in with regard to income eligibility, as long as they were properly qualified under the prior allocation and there is an existing extended use agreement (EUA).
In terms of qualifying tenants from a prior allocation, per IRS Guidance in the 8823 Guide, any household determined to be income-qualified at the time of move-in for purposes of the EUA remains a qualified low-income household for any subsequent allocation of tax credits. In one of the examples on how this works for a new owner receiving both Acquisition & Rehab credits, it is indicated that the property is continuously subject to an EUA (the old agreement remains in place even when the new agreement is entered into). The new owner may rely on the previous qualification, but should test the income of the household at the beginning of the credit period in accordance with Rev. Proc. 2003-82. If, at the time of acquisition, the tenant’s income exceeds 140% of the current income limits, the available unit rule applies.
Guidance relating to qualifying tenants in place at the time of acquisition requires that such qualification occur within 120 days after the acquisition date in order to use the acquisition date as the effective date, since there is no move-in date. While there is no specific requirement by the IRS to complete a new certification at acquisition for tenants qualified under a prior EUA, the guidance indicates that the acquisition date continues to be the effective date of the TIC. For this reason, and in order to keep the tenant records as organized as possible, I recommend the following:
- The certification and paperwork that qualified the household under the prior EUA should be copied and placed in the initial resident file for the new allocation. If the property is mixed-income, the most recently completed re-certification should also be retained in the file so that requirements relating to the Available Unit Rule can be followed.
- Residents should be required to execute a certification stating household composition (to ensure that at least one member of the qualifying household remains) and student status. The household should also provide a statement of income in order to meet the requirements of the test noted above. This certification will establish the effective date for this household, and should be completed within 120 days of acquisition if the owner wishes to include the unit in the applicable fraction as of the acquisition date.
- If this initial certification is completed more than 120 days after acquisition, the date the last adult signs the TIC would become the effective date.
This procedure is important because while previously qualifying by income is acceptable, to have a qualified unit at the time of acquisition confirmation of household composition and student status are also required.
Vacant units have to be re-qualified (except on a deal where the existing owner is receiving only rehab credits), and new move-ins will have effective dates as of the move-in date.
Also, keep in mind that the rents for these previously qualified households must comply with the rent requirements for the new allocation of credits — not the prior allocation.
A.J. Johnson, president of A.J. Johnson Consulting Services, has been involved in the development and management of residential and commercial enterprises since 1976. Prior to creating his own consulting firm, Johnson served as executive vice president of Beacon Construction, Newport News, Va., for 12 years. Before joining Beacon in 1983, Johnson was with K-Mart Corporation, Portsmouth Redevelopment & Housing Authority, and Suffolk Redevelopment & Housing Authority.