by Stephanie Naquin
While the National Oceanic and Atmospheric Administration is predicting in 2016 a near-average season for named tropical cyclones, it takes only one storm to cause a disaster. With the release of Revenue Procedure 2014-49, State Housing Finance Agencies (“SHFA”) and project owners alike are now prepared. This guidance addresses what an owner can expect if they experience a casualty loss as a result of a major disaster and how an owner can offer temporary housing to individuals that are displaced because of a major disaster.
A major disaster is an event which the President has declared to be a major disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A major disaster area is defined as any city, county or other local jurisdiction for which a major disaster has been declared and which FEMA has designated as eligible for Individual and/or public assistance. The new Revenue Procedure discusses how to weather the storm from allocation through the compliance period.
Let’s start at the beginning. Every year, each state receives low-income housing tax credits from the Treasury, and the SHFA is responsible for allocating these credits for the construction, acquisition and rehabilitation of housing for low-income households. The execution of a carryover allocation by the SHFA represents the agreement to allocate low-income housing tax credits to an owner. This agreement starts the owner’s clock for all other deadlines that must be met under §42. The first of these deadlines is the “10% Test,” which is the requirement for an owner to expend more than 10% of the development’s reasonably expected basis (which we’ll expand on later). The next deadline is for the buildings to be placed into service, meaning that the buildings are suitable for occupancy and ready for their intended use. Normally, the owner has until the end of the second calendar year after the carryover allocation was executed to place in service; however, the occurrence of a major disaster can significantly affect the owner’s ability to meet these deadlines.
If a major disaster occurs before the 10% test deadline, the SHFA may grant an extension up to six months for the owner to meet this requirement. If a major disaster occurs after the 10% test but prior to placing in service, the SHFA may grant an extension to December 31 following the end of the two-year period described above. If the owner fails to meet the extension deadline for either, credits are automatically considered returned to the SHFA the day following the end of the extension.
Once an owner navigates the front-end process and places the development into service, the next deadline to be met is the minimum set-aside, which represents the minimum number of low-income units that a project must have by the end of the first year of the credit period to be eligible for the credit. In general, for a unit to count towards meeting this requirement, it must be suitable for occupancy, occupied by an eligible household, and the gross rent must be restricted. If a major disaster occurs during the first year of the credit period, the units will not be suitable for occupancy, which would result in the minimum set-aside not being met. In this situation, the Revenue Procedure allows two options: first, the SHFA may treat the allocation as a returned credit under Treasury Regulation §1.42-14.
Alternatively, the SHFA may toll the beginning of the first year of the credit period, in which case the SHFA may suspend the provision in §42(f)(1) regarding the beginning of the first year of the credit period for a period not to exceed 25 months following the close of the month of the major disaster declaration. Once restored, the clock would resume for the purposes of meeting the first-year requirements. If the deadline is not met, credits are automatically considered returned to the SHFA the day following the end of the restoration period.
Assuming the owner has met the minimum set-aside by the end of the first year of the credit period, it is time to calculate how much credit a building will generate. In doing so, the building’s eligible basis (which is the cost to construct, acquire or rehabilitate), the applicable fraction (which represents the percentage of low income units/square footage required to be maintained), and the type of credit percentage (i.e. 9% and/or 4%) are considered. Any variation in these factors will have a direct impact on the number of credits the building could claim. This calculation is first done at the end of the first year of the credit period, which is why the above guidance about how to handle a major disaster in the first year of the credit period is important.
For all subsequent years of the compliance period, if a building’s qualified basis is less than it was in the preceding year, then the amount of credit the building will generate is calculated from the decreased basis. Less basis means fewer credits and, potentially, recapture of any credits already remunerated. For any building that has completed the first year of the credit period but is still in the compliance period, if the qualified basis decreased because of a major disaster, then the owner is provided a reasonable period to restore the building(s) that cannot exceed 25 months following the close of the month of the major disaster declaration. In this scenario, the owner is still able to claim the building’s credits, but instead of using the lesser qualified basis that results from a major disaster, the owner would use the qualified basis from the previous taxable year. No additional credit is allowed for cost incurred to restore the building’s qualified basis. If the building is not restored within that time frame, this relief is no longer available and the owner would use the actual qualified basis for each year to calculate the amount of credit, if any, the building would generate.
Not only does a major disaster change how an owner of a §42 Project traverses the waters, but such a disaster has a significant impact on the people living in the major disaster area. Often, people’s homes are damaged or destroyed, leaving them without shelter. The Revenue Procedure addresses how an owner of a §42 Project may offer housing for up to 12 months from when the major disaster occurred to displaced individuals. While not required, if an owner chooses to provide temporary housing, the project will be considered to have met all provisions of §42 so long as tenancy for existing tenants is not terminated to created availability for displaced individuals and the gross rent of the otherwise low-income unit remains restricted under §42(g). The displaced individuals do not have to be eligible for the program, which means they do not have to be income restricted and are not subject to the student rules.
So, if a displaced individual does not have to be screened for eligibility under §42 but the household must be documented as eligible for the unit to count as a low-income unit towards the applicable fraction, how can the owner show that there has been no reduction in the basis from one year to the next? In order for a low-income unit to be considered in compliance for the purposes of the applicable fraction, the displaced household members must certify their names and Social Security numbers. The household must also certify to their principal address at the time of the major disaster, that they were displaced from their principal residence as a result of a major disaster, and that their principal residence was located in a city, county, or other local jurisdiction that is covered by the President’s declaration of a major disaster and which is designated as eligible for individual assistance by FEMA because of the major disaster.
In other words, their primary residence must have been in a major disaster area and they must have been displaced specifically because of damage from the major disaster. If the temporary housing happens in the first year of the credit period, the unit is treated as low-income for qualified basis and minimum set-aside while it is occupied by the displaced individual. For any subsequent years of the compliance period, the unit retains the status it had immediately before the occupancy of the displaced individual. For the displaced household to remain in the unit and for the unit to be low-income for the purposes of qualified basis, once the temporary housing period concludes the household must be certified under all requirements of §42. In the event a unit is not in compliance with §42 solely because of continued occupancy of a unit after the temporary housing period (i.e., the household does not qualify), the owner has a 60-day period to correct. During the temporary housing period and the 60-day corrective action period, displaced individuals do not cause a reduction in qualified basis.
An unknown author once said “Serenity is not freedom from the storm, but peace amid the storm”. While major disasters will occur, this Revenue Procedure offers some peace in knowing that serenity is on the horizon.
By: Stephanie Naquin
Director of Multifamily Compliance
Texas Department of Housing and Community Affairs
Stephanie Naquin is the Director of Multifamily Compliance with the Texas Department of Housing and Community Affairs. She joined the Department in 2007 and has 13 years of industry experience ranging from leasing to compliance monitoring to program administration. Her unique range of experience has given her wide ranging skill set with a particular emphasis on monitoring and a strong expertise in utility allowance regulation.