Post-Year 15 Compliance Considerations

By Mark Shelburne

Remember “Y2K” and the concerns about global calamity? Fortunately it turned out to be the big event that wasn’t.

In some ways, the end of the first LIHTC properties’ initial compliance period, a.k.a. “Y15”, is the same.

According to a recent study conducted by HUD, "The vast majority of LIHTC properties continue to function in much the same way they always have, providing affordable housing of the same quality at the same rent levels to essentially the same population, without major recapitalization."

Just like Y2K, the lack of change is good, because the vast majority of LIHTC properties work well.

One reason to maintain the status quo is simply inertia. Why change the operation of a property that has adequate occupancy and cash flow?

Opportunities for Change

Yet even if an owner does not have any new or different plans, there still may be opportunities for improvement. The most readily apparent one is that there are fewer requirements based on the end of IRS involvement. The inability to issue a Form 8823 after the 15th year gives allocating agencies the opportunity to relax certain requirements.

The following are excerpts from North Carolina’s Extended Use Period Compliance Policy:

  • Full-time student households are eligible

  • The "Next Available Unit" rule does not apply

  • No restrictions on unit transfers

  • Compliance is monitored property-wide, rather than by building

Essentially, what remain in effect are the basic provisions of an extended use agreement: Income, Rent, and Suitability.

In addition to allowing greater flexibility program-wide, changes for a particular project may be easier. For example, post-15 there are no federal tax consequences for reductions in either the applicable fraction (over-income households) or eligible basis (converting common area to other uses). As a result, compliance staff can base a determination on real estate considerations and what’s best for the residents.

States’ laws provide different levels of ability for agencies to revise or use flexibility in applying rules, so be certain to find out what requirements apply, and don’t assume project changes will be acceptable. Also keep in mind possible ramifications on the ability to resyndicate later. This is especially true if seeking permission to accept tenants with higher than 60% AMI.

Some may see the end of IRS compliance as the time to increase rent and/or income limits which are already below the Section 42 limits (deeper targeting). However the IRS does not take a position on such requirements. So, from a strictly federal perspective, they can be altered during the initial compliance period. The same is true for anything solely in a Qualified Allocation Plan or other state policy.

Noncompliance

Surprisingly, the consequences of noncompliance can be worse during this period. The inability to issue an 8823 may mean an agency’s only options are to assess negative points on future LIHTC applications, placing those involved on a “not in good standing” list, or declaring a loan in default. Outcomes like these can limit or even end a company’s ability to do business.

In extreme circumstances, the agency may even bring legal action. The claim is called specific performance, and involves the plaintiff asking the court to force one side of an agreement to live up to its terms. Another possible, but less common, remedy is seeking liquidated damages.

Remember, in addition to the allocating agency, tenants have the ability enforce most or all provisions of an extended use agreement. They are considered third-party beneficiaries whose rights are not affected by agreements between the owner and agency.

Effect of Opting Out

While most continue to operate the same as always, for various reasons a few projects exit the program after Y15. Whenever an extended use period ends before 30 years, residents who were party to a lease when the event occurred (e.g. foreclosure date) are protected from:

  • Eviction or termination of tenancy other than for good cause, and

  • Any increase in rent beyond what would be allowed under Section 42.

Those moving in afterward are not afforded this protection.

There is no federal guidance on what constitutes good cause in the Section 42 context (other than possibly a court case). Another uncertainty is how the word termination applies to lease nonrenewals. Chapter 26 of the 8823 Guide says owners are “not obligated to renew a lease or enter into a new one, and failure to do so does not, per se, constitute an eviction without good cause.” However this is considered subregulatory guidance and therefore not binding. In fact, the authors say the guide “is not a legal authority.”

In almost every case, the definition of good cause and effect of a nonrenewal will be what a particular judge or magistrate determines.

Limitations and Conclusions

This article address only LIHTCs, not other federal, state or local programs too numerous to mention. For example, the minimum period under HOME is 20 years, and maintaining a favorable property tax assessment may require ongoing compliance with certain rules.

The most important advice is to consult with allocating agency staff and/or your attorney as soon as any of the issues mentioned in this article arise. Unfortunately, the notion of forgiveness being easier than permission very rarely applies in compliance or property management.

Mark Shelburne is counsel and policy coordinator for the North Carolina Housing Finance Agency. Shelburne works for the agency’s rental investment department, which is responsible for the federal and state housing credit, HOME, the state housing trust fund, and tax-exempt bonds. His primary responsibility is for the annual Qualified Allocation Plan.