By Wendi LeMense, HCCP, Royal American Management, Inc.
The IRS allows owners of LIHTC developments to select a gross rent floor election for every building in a development (IRS Revenue Procedure 94-57, regarding gross rent floor election in Section 42(g)(2)(A)) based upon when credits were first allocated to a building or the date the building was first placed-in-service. The gross rent floor election guarantees that owners do not have to reduce rent limits any lower than the floor defined as the rent limits in place at the time credits were allocated or at the placed-in-service date, as determined by the owner making a one-time only irrevocable election choosing either of the two elections. The owner must make the election no later than the development’s placed in service date. If no election is made by the owner, the gross rent floor will be defined as the maximum rent in effect when the development received its tax-credit reservation.
It is important to realize that the gross rent floor election applies to gross rents only and that the floor does not apply to net rents. This election does not insulate the owner from having to use the current utility allowance in effect. Therefore, even though the gross rent floor will never fall below what was in effective at the time credits were allocated or the placed-in-service date, the net rents can still fall below the rents that were initially charged due to the utility allowance in place at the time.
Another important note, the rents being charged based upon the gross rent floor election, may be different than the income limits that must be used. For example, a property is placed-in-service on Sept. 1, 2011. The owner elected the date of initial allocation for the gross rent floor. The tax credits were allocated in August 2010. The owner must use the 2011 income limits due to the placed-in-service date, however the 2010 rent and income limits were higher than the 2011 income limits. The owner may use the higher 2010 gross rents, but must use the 2011 income limits.
In implementing the gross rent floor election, the owner must also take into consideration any additional funding streams and the regulatory agreements tied to the additional funding. For instance, if the development has tax credits and HOME funding, the owner will have to understand and apply the most restrictive requirements regarding the two types of funding. The gross rent floor election does not apply to HOME funds, however HOME funds does have its own provision, stating rents do not have to fall below the HOME rents in effect at the time the HOME funds were committed. The gross rent floor election may still come into play at properties with tax credit and HOME funds though, as the rents allowed under the tax credit program, utilizing the gross rent floor election, may be higher than the current tax credit rents but lower than the HOME rents.
Obviously there are complex regulations governing affordable housing and it is important to have a thorough understanding of all funding streams and the applicable rules and regulations associated with each funding source. It is important that all the piece of the puzzle fit together to ensure that the development remains in compliance.
Wendi Le Mense, vice president of compliance and resident relations for Royal American Management. Le Mense is responsible for assuring that housing credit communities comply with all IRS and state housing agency policies and extended use requirements.