Considering a Scattered-Site Tax Credit Project? Be Aware of the Special Issues and Necessary Skills

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By A. J. Johnson

Tax Credit Advisor, August 2009: Many state housing finance agencies in their low-income housing tax credit (LIHTC) programs favor preservation projects, usually by giving preference or extra competitive points to projects involving the acquisition and rehabilitation of existing properties. Preservation of affordable housing is also an emerging priority in this Congress.

Opportunities are expanding for urban infill tax credit deals, which often require consolidation of multiple sites to develop one project. Scattered-site development opportunities are particularly prevalent when combining the LIHTC with the new federal Neighborhood Stabilization Program (NSP) funds. NSP provides competitive funding awards for the purchase and redevelopment of foreclosed or abandoned residential properties, to stabilize neighborhoods marred by high foreclosures and distress. There are opportunities to assemble tracts of foreclosed/distressed properties into one LIHTC project.

Scattered-site development presents unique opportunities in some areas since dispersed, small properties (1- to 4-units) may be part of the housing stock in greatest need of preservation.

Scattered-site development has risks: non-standard properties, and potentially greater difficulty maintaining properties, supervising tenants, achieving site control of multiple properties in a short time frame, and finding LIHTC equity investors.

But there are also potential advantages. Preservation of single-family homes as rental housing may be less expensive than renovations of larger multifamily apartment complexes. In addition, in distressed areas, rental housing may be the only viable marketing option. Finally, local renters may prefer a house or duplex with yard to a standard apartment.

To be successful in developing and operating a scattered-site LIHTC project, as opposed to a single building, a sponsor must take care in structuring the deal upfront and line up property management with the special skills and expertise needed for this product.

Development Issues

In the area of structuring, a number of these development issues relate to the elections that are made by the LIHTC sponsor (owner) on IRS Form 8609. This form must be submitted to the IRS for each building before the owner can begin claiming housing credits. Each building in an LIHTC project must have a separate Form 8609 and its own Building Identification Number (BIN).

Following are the elections made on Form 8609 (all irrevocable once made) that will impact the success of a scattered-site development:

  • Line 8b. Here the owner makesthe election indicating that the building is part of a multiple-building project. Under the LIHTC program, each building is considered a separate project unless, before the close of the first calendar year in the project period, each building that is or will be part of a multiple-building project is identified as such by attaching to the building’s Form 8609 a statement containing certain information. This information is: the name and address of the project and each building in it; the BIN of each building in the project; the aggregate credit dollar amount for the project; and, the credit amount allocated to each building in the project. If this information isn’t attached, the building will be treated as a separate project.

In general, a multiple-building project includes two or more low-income buildings located on the same tract of land. There is an exception, however, for scattered-site projects A multiple-building project can include two or more buildings not located on the same tract if all of the buildings: (1) are fully occupied by low-income households; (2) are owned by the same entity for federal tax purposes; (3) have a common financing plan; and (4) have “similarly constructed” units. Accordingly, a scattered-site project can’t have any market-rate units.

A “unit” must contain separate and complete facilities for living, sleeping, eating, cooking, and sanitation. An example of a unit is an apartment that contains a living area, sleeping area, bathing and sanitation facilities, and cooking facilities. Regardless of scattered-site building types, if the units meet these basic requirements, the “similar construction” test should be satisfied.

  • Line 10a: Here the owner may elect to begin the 10-year tax credit period in the tax year after the building is placed in service, as opposed to the same year. Special rules determine the start of the credit period for multiple-building projects. For purposes of determining the start of the tax credit and compliance periods, prior buildings placed in service in a project are treated as placed in service on the most recent date that any additional building elected by the taxpayer was placed in service. Owners must be careful when making this election. For example, a building completed and placed in service in 2008 could, for tax purposes, be considered as placed in service in 2009 if a later building in the same project was placed in service in 2009. If credits for this project are first taken in 2009, the first year of the credit period will not be deferred for the building placed in service in 2008, since it will be treated as being placed in service in 2009. Failure to make the proper elections here in a multiple-building project can result in a significant reduction in tax credits from the amount to which the project is entitled. This area is confusing, so competent professional advice should be sought.
  • Line 10c: Here the owner chooses one of the two standard minimum set-aside requirements for the project: “20/50″ or “40/60″ (a third, 25/60 option is available for New York City projects only). Under 20/50, at least 20% of all the units in the project must be both rent-restricted and occupied by households earning 50% or less of the area median income (AMI). With 40/60, at least 40% of the units must be rent-restricted and occupied by households at or below 60% of AMI. Maximum unit rents for low-income units are lower under the 20/50 test than under 40/60. As previously mentioned, scattered-site projects must consist entirely of low-income units. In general, an owner should elect the 40/60 minimum set-aside for a scattered-site project, since if the 20/50 election is made all low-income units will be limited to lower monthly rent caps based on 50% rather than 60% of AMI.

Special Management Skills

Scattered-site LIHTC projects present special management challenges and require special property management skills and expertise to be successful. It is essential to plan in this area even before construction begins.

Differences in managing a scattered-site development compared to a “single-site” LIHTC project include:

  • The added expense and effort to manage physically separate properties, including extra staff time and travel;
  • Higher maintenance costs, due to properties constructed of different materials;
  • Difficulty executing an ongoing property inspection program and maintaining direct contact with residents;
  • Less control over the physical environment surrounding the properties; and,
  • Difficulty controlling access to the properties, since there isn’t a central supervisory location.

Property management for scattered-site projects must be flexible and mobile, and requires specialized knowledge and skills. The best managers tend to be individuals experienced in running developments comprised of multiple dispersed small urban properties. These same managers, though, often lack LIHTC management skills. But this can be rectified with training and oversight from tax credit compliance professionals.

The scattered-site developer should line up the property management team before starting construction. The developer should determine early whether there exists – in-house or locally – the specialized management expertise needed for this product.

Property managers skilled in scattered-site operations can also be a great help pre-construction in developing operating budgets, assessing the rental market, and determining the particular amenities required to ensure the marketability and long-term success of the project.

A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, Va.-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, [email protected].