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Complexities of Compliance. Maintaining Compliance in an Ever-Changing World November 3, 2009 NC Affordable Housing Conference. Recent Major Changes:. IRS Utility Allowance Guidance – July 29, 2008 Section 1.42-10 New options for calculating the utility allowance, including:

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complexities of compliance

Complexities of Compliance

Maintaining Compliance in an Ever-Changing World

November 3, 2009

NC Affordable Housing Conference

recent major changes
Recent Major Changes:
  • IRS Utility Allowance Guidance – July 29, 2008Section 1.42-10
    • New options for calculating the utility allowance, including:
      • Agency Estimate
      • HUD Utility Schedule Model
      • Energy Consumption Model
recent major changes3
Recent Major Changes:
  • Housing and Economic Recovery Act of 2008 (HERA) – July 30, 2008
    • 100% low income properties no longer required to perform annual recertifications (NC requires recertification on first anniversary of move-in)
    • New guidelines for LIHTC Income Limits
    • Rural Income Limits
    • New Full-Time Student Exception
recent major changes4
Recent Major Changes:
  • American Recovery and Reinvestment Act of 2009 (ARRA) – February 17, 2009
    • TCAP –
      • Loan funds with additional requirements in most states
      • In NC, TCAP funds will be used as temporary (bridge/interim) loans
      • No impact on long-term compliance
recent major changes5
Recent Major Changes:
  • American Recovery and Reinvestment Act of 2009 (ARRA) – February 17, 2009
    • Exchange Program –
      • Funding granted in ‘exchange’ of owner equity
      • Subject to Federal Tax Credit rules
      • 8823s will not be issued on noncompliance issues
      • Consequences of noncompliance potentially more severe, including foreclosure
recent major changes6
Recent Major Changes:
  • Issuance of first Multifamily Tax Subsidy Income Limits by HUD – Effective March 19, 2009
    • HERA Special 50%
    • HERA Special 60%
latest changes
Latest Changes:
  • 4350.3 Revision 1 Change 3 – Issued June 23, 2009
  • Revised Edition of the 8823 Guide – Issued September 25, 2009
4350 3 rev 1 change 3
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Live-in Aides –
    • Must be screened for drug abuse and other criminal activity by applying the same criteria established for screening other applicants
    • May be screened using other established criteria except for the ability to pay rent (credit)
4350 3 rev 1 change 39
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Foster Children/Foster Adults –
    • Income of foster children & foster adults must be included in household income (i.e., disability income, adult employment income, etc.)
    • Payments received for caring for foster children/adults is still excluded
    • Foster children/adults cannot be counted as family members to determine if income eligible
4350 3 rev 1 change 310
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Deployed Military –
    • Allow a guardian to move into the unit to care for children of deployed military; guardian’s income should not be counted
    • Allow tenant in assisted unit to temporarily care for children of active duty military; income of children should not be included in household income
4350 3 rev 1 change 311
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Deployed Military –
    • Give consideration for delayed payment of rent (accept late payments when appropriate)
    • Allow the lease to remain in effect for a reasonable time, based on length of deployment, even though adult military family members are temporarily absent
4350 3 rev 1 change 312
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Pension funds paid to a former spouse pursuant to a divorce decree or legal separation –
    • do not count as income for the spouse originally entitled to the pension
    • do count as income for the former spouse who is actually receiving the funds
4350 3 rev 1 change 313
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Students – Clarified that financial assistance in excess of tuition must be included in income for households receiving rental assistance unless:
    • Student is over age 23 and has dependent children living in unit OR
    • Student is living with his or her parents who are receiving Section 8
4350 3 rev 1 change 314
4350.3 Rev 1 Change 3

Changes that affect LIHTC Compliance:

  • Consent forms –
    • Each adult member must sign the form regardless of whether he or she has income
    • Each family member who is at least 18 years of age and the head, spouse or co-head, regardless of age, must sign this form at move-in and at each annual recertification
    • The form must also be signed when a new adult member joins the household
revised 8823 guide
Revised 8823 Guide

The Guide:

  • Is not a legal authority
  • Does not address tax consequences of noncompliance
  • Should not be cited by taxpayers when filing tax returns
  • Individual sections may become obsolete if the underlying authority (such as the 4350.3 handbook) is revised
revised 8823 guide16
Revised 8823 Guide
  • Recognizes the new Multifamily Tax Subsidy Projects income limits as published by HUD
  • Incorporates the changes from the 4350.3 and provides additional guidance, such as:
revised 8823 guide17
Revised 8823 Guide
  • If all low-income buildings in the project are 100% low-income buildings, owners are not required to complete annual income certifications after the first annual recert
  • “Projects” are identified based on the owner’s election as documented on form 8609, line 8b
  • Previously approved recert waivers are subsumed by the new law and are no longer in effect
revised 8823 guide18
Revised 8823 Guide
  • Children in joint custody arrangements are included as household members if they are present in the household 50% or more of the time
  • If this is disputed, determine which parent claimed the children as dependents for purposes of filing a federal income tax return
revised 8823 guide19
Revised 8823 Guide

Additional of new members to an existing household:

  • Mixed Income Properties –
    • Verify additional person’s income and add to the most recent income certification
  • 100% Low Income Properties –
    • Verify additional person’s income and add to the move-in income certification (or first annual recertification in NC, if applicable)
revised 8823 guide20
Revised 8823 Guide
  • A household may continue to add members as long as at least one original member remains in the unit
  • Once all original household members move out, the remaining tenants must be income certified and re-qualify unless:
    • The newly created household was income qualified and certified at move-in OR
    • The remaining tenants independently income qualified at the time they moved into the unit
revised 8823 guide21
Revised 8823 Guide
  • Decreases in family size do not trigger recertification requirements as long as an original household member remains in the unit. Examples:
    • A child of an existing family turns 18 and moves out of the unit
    • A household was income-qualified using an unborn child, but the pregnancy ended in a miscarriage
revised 8823 guide22
Revised 8823 Guide

Future change incorporated early:

  • If the household’s income cannot be determined because the household reports little to no income, or income fluctuates, income may be determined based on actual income received in the twelve months prior to the effective date of the income certification
  • Per Federal Register notification, this change is effective January 31, 2010
revised 8823 guide23
Revised 8823 Guide

Income from a business:

  • A tax return must be filed for all self-employed individuals who operate a business
  • A low-income tenant may use a portion of a low-income unit as the principal place of business as long as the unit is the tenant’s primary residence
  • Reasonable rules may be established, such as requiring the business to be properly licensed
revised 8823 guide24
Revised 8823 Guide

Transfers:

  • In the same building, the units swap status regardless of income at the time of transfer
  • From one building to another, an income certification must be completed and –
    • If part of a multi-building project as established on the 8609, transfer is okay provided household income is below 140% of current income limit
    • If not part of a multi-building project per the 8609, household must re-qualify (move-out & new move-in)
revised 8823 guide25
Revised 8823 Guide

Transfers:

  • Households residing in 100% LIHC projects can transfer between buildings regardless of income level
  • However, be aware of whether the election on the 8609 establishing whether the building is part of a multi-building project
    • If not part of a multi-building project per the 8609, household must re-qualify (move-out & new move-in) and a certification must be completed
revised 8823 guide26
Revised 8823 Guide

Income Certifications Where Owner Acquires or Rehabs an Existing Building During the Extended Use Period:

  • Same Owner – Rehab Credit Only –
    • Previously qualified household automatically qualifies for rehab credits; if over-income, apply the available unit rule
    • Vacant units previously occupied by income-qualified households continue qualify for credits if suitable for occupancy; apply the vacant unit rule
revised 8823 guide27
Revised 8823 Guide

Income Certifications Where Owner Acquires or Rehabs an Existing Building During the Extended Use Period:

  • New Owner – Acquisition and Rehab Credit –
    • Previously qualified household must “re-qualify”; unit not eligible for credits if over current limit
    • Vacant units previously occupied by income-qualified households are not automatically “qualified” for rehab credits
revised 8823 guide28
Revised 8823 Guide

Vacant Units:

  • Vacant low-income units must also be suitable for occupancy
  • States should allow a reasonable time period to clean a vacated unit or repair damages
  • In NC, we allow up to 30 days for repair
  • All units vacant over 30 days will be inspected to determine if suitable for occupancy
revised 8823 guide29
Revised 8823 Guide

Assistance Provided Under the HOME Investment Partnership Act:

  • For buildings placed in service before July 31, 2008 –
    • If 40% or more of the units in the building are occupied by households whose income is at 50% or less of AMGI, the HOME loan is not treated as federal subsidy and 9% credits are allowed without reducing eligible basis
    • Commonly referred to as the 40-50 rule
revised 8823 guide30
Revised 8823 Guide

Assistance Provided Under the HOME Investment Partnership Act:

  • For buildings placed in service after July 31, 2008 –
    • Below market federal loans are no longer considered federal subsidy
    • 9% credits are allowed without reducing eligible basis
    • In NC 40-50 rule still applies for HOME and Housing Trust Fund Agency loans
revised 8823 guide31
Revised 8823 Guide

Gross Rent Exceeds Tax Credit Limits:

  • Code defines the maximum gross rent computed as an annual amount (30% of annual income limit)
  • HUD determines gross rent on a monthly basis
  • What impact does this have?
    • Gross rent must be computed both annually and monthly
revised 8823 guide32
Revised 8823 Guide
  • What difference does it make to calculate rent monthly and annually?
    • Gross rent limit = $777/month or $9,324 annually
    • Tenant rent = $625
    • Utility Allowance = $125
    • Application fee = $50
    • Computed Annually ($625 + $125 = $750 x 12 = $9,000 + $50) = $9,050
    • Computed Monthly: $625 + $125 + $50 = $800
revised 8823 guide33
Revised 8823 Guide

Gross Rent Exceeds Tax Credit Limits:

  • A unit is out of compliance if the rent exceeds the limit on a tax year basis or on a monthly basis
  • Once a unit is determined out of compliance with the rent limits, the unit ceases to be a low-income unit for the remainder of the owner’s tax year
revised 8823 guide34
Revised 8823 Guide

Gross Rent Exceeds Tax Credit Limits:

  • A unit is back in compliance on the first day of the owner’s next tax year provided the rent charged does not exceed the limit
  • An owner cannot avoid the disallowance of credits by rebating excess rent, even if required by the state
revised 8823 guide35
Revised 8823 Guide

General Public Use Clarified:

  • A qualified low-income project does not fail to meet the general public use requirements solely because of occupancy restrictions or preferences that favor tenants:
    • With special needs,
    • Who are members of a specified group under a Federal or state program or policy that supports housing for such a group, or
    • Who are involved in artistic or literary activities
revised 8823 guide36
Revised 8823 Guide

Marketing:

  • Owners must make reasonable attempts to make vacant units available to the public for rent
  • Owners should advertise the availability of vacant units using advertising methods designed to be accessible to all prospective tenants
  • “Reasonable attempts” will vary based on a number of factors
revised 8823 guide37
Revised 8823 Guide

Available Unit Rule:

  • Is violated when an owner of a 100% LIHC project fails to rent a unit to an income-qualified household and cannot demonstrate due diligence when completing the initial income certification
  • Once triggered, the noncompliance is corrected by renting a sufficient number units to income-qualified households to meet the applicable fraction upon which the credit was based
revised 8823 guide38
Revised 8823 Guide

Vacant Unit Rule:

  • Noncompliance occurs when the owner does not make reasonable attempts to rent vacant low-income units and rents units to non-qualified households
    • Note: Vacant units not rent-ready after 30 days are reported under “Violation of UPCS”
    • Note: Failure to market vacant units is reported as a “General Public Use” violation
revised 8823 guide39
Revised 8823 Guide

Full-Time Student Households:

  • New wording for exceptions recognized –
    • A student previously under the care and placement responsibility of a state foster care program
    • Single parents and their children where such parents are not the dependents of a third party and the children are not dependents of anyone other than a parent
revised 8823 guide40
Revised 8823 Guide

Full-Time Student Households:

  • Student status must be verified at move-in and annually thereafter based on the anniversary of move-in
  • State Clarification – If annual recertification is required, student status is certified on the income certification
  • If annual recertification is not required, you are required to utilize the “Annual Student Certification” form
revised 8823 guide41
Revised 8823 Guide

Utility Allowance Guidance:

  • Updates to Section 1.42-10 incorporated –
    • Allowance for the cost of tenant-paid utilities, not paid by or through the owner of the building
    • Separate allowance for each utility type
    • Different types can be used for individual utilities
    • Additional utility allowance sources allowed
revised 8823 guide42
Revised 8823 Guide

Utility Allowance Guidance:

  • Noncompliance exists when:
    • Appropriate utility allowance is not used
    • Utility allowance not properly calculated
    • Rent not reduced for utility allowance paid by tenant (causes gross rent to exceed applicable limit)
revised 8823 guide43
Revised 8823 Guide

Utility Allowance Guidance:

  • Noncompliance exists when:
    • Owner does not review utility allowance at least once during calendar year
    • Owner failed to update revised utility allowance at the end of the 90-day period
    • Owner failed to maintain adequate utility allowance documentation, without which there is no way to correctly compute rent
revised 8823 guide44
Revised 8823 Guide

LIHC Building Disposition after 7/30/2008:

  • Owners are not required to recapture the accelerated portion of credit if it is reasonably expected to be operated as a qualified low-income building for the remainder of the credit period
  • Owners are not required to place a bond or pledge collateral at the time of the disposition
revised 8823 guide45
Revised 8823 Guide

Eviction or Termination of Tenancy:

  • Property owner must be able to demonstrate that good cause existed to support eviction if challenged in state court
  • Failure to renew the lease does not, per se, constitute an eviction without good cause; however, owner must be prepared to demonstrate if challenged in court that nonrenewal of lease is not a “termination of tenancy” other than for good cause
  • Owner must provide tenant with timely notice that lease will not be renewed
recommendations
Recommendations
  • Be aware of state agency requirements and expectations
  • Review your property from a state agency perspective prior to monitoring review
  • Maintain a friendly relationship with agency staff
  • Ask questions when unsure of what agency response will be
  • Take a ‘proactive’ approach to management
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