Common Confusion Relating to LIHTC Compliance Issues (Part 1 of 2)
By Caitlin Jones & A. J. Johnson
7 min read
My experience training property managers and reviewing tenant files for compliance with the low-income housing tax credit (LIHTC) on behalf of investors has revealed common misinterpretations and precursors to noncompliance findings in a handful of areas.
Individuals responsible for overseeing LIHTC compliance (e.g. owners, managers, asset managers, housing finance agency staff) need to be aware of the correct interpretations of LIHTC program requirements to avoid noncompliance.
This article covers areas of common confusion and mistakes, and recommends how to best implement procedures to assure compliant documentation.
Incomplete Paperwork
This deficiency is the leading cause of tenant file noncompliance.
All paperwork in each tenant file must be fully complete, especially the first-year files for qualifying households in new tax credit projects.
A blank line after a question on a form doesn’t mean a “no” answer, or zero. With application forms, questionnaires, affidavits, etc., we encourage use of documents with questions that can be answered by circling a “yes” or “no”; this generally produces fewer incomplete documents.
For example, consider the following two different versions of the same question:
Version I:
Please list any income received from child support: $__________.
Version II:
(A) Do you receive child support income (circle one)? YES NO
(B) If YES above, please specify the amount: $__________
With documents such as third-party income or asset verifications, management staff should review each document twice – once when received at a second time at lease signing – to make sure all items have been fully answered and there are no blanks. We strongly suggest a second level of review; fresh eyes usually catch most omissions. If a form with missing information is returned to the property, management staff should contact the person who completed the document to go over the missing information. A separate form should be used to document this conversation, with the original verification left unaltered.
Assets
Since 2003, the U.S. Department of Housing and Urban Development (HUD) has drastically changed its rules regarding the proper treatment of certain assets, such as annuities, retirement accounts [e.g., IRAs, 401(k)s], and brokerage investment accounts or stock portfolios.
The current version of the HUD Occupancy Handbook (4350.3 REV-1, June 2007) contains certain wording that has caused tremendous confusion among property managers, HFA compliance staff, and even compliance consultants.
The bulk of this confusion seems to stem from the following HUD Handbook language regarding annuity accounts that include an ongoing payment:
“Generally, when the holder has begun receiving annuity payments, the holder can no longer convert it to a lump sum of cash…no calculation of income from assets will be made.”
In my experience, this generalization isn’t accurate, and the account should be treated as both a source of income as well as an asset (i.e. many annuity holders receive monthly payments, but can also choose to access the entire account balance).
Regarding accounts classifiable as “investments,” the HUD Handbook says: “The withdrawal of cash or assets from an investment received as periodic payments should be counted as income…if benefits are received through periodic payments…do not count any remaining amounts in the account as an asset.”
While there is nothing in the HUD Handbook specifying what an “investment” account is, most people generally agree that a retirement account is an “investment.” However, the following Handbook guidance contradicts the previous HUD excerpt:
Balances held in retirement accounts:
a. Balances held in retirement accounts are counted as assets if the money is accessible to the family member.
b. Include in annual income any retirement benefits received through periodic payment.
Our advice to clients, based on a close reading of the HUD text and a prudent overall approach to compliance, is to be conservative and count the account on both the income and asset portions of the Tenant Income Certification (TIC) form. This approach was clear in the HUD Handbook as revised in 2003.
I’m aware of state HFA compliance agencies and other leading compliance consultants who agree with this interpretation (and others who don’t). Additionally, since HUD says income includes “amounts derived from assets to which family members have access,” I feel that anything convertible to cash must appear as an asset regardless of whether periodic payments are taken.
There is an inaccuracy in HUD Handbook Exhibit 5-1 in the summary of income and assets definitions. The exhibit says, “Any withdrawal of cash or assets from an investment will be included in income, except to the extent the withdrawal is reimbursement of cash or assets invested by the family.”
The last half of this statement was probably supposed to be removed from the current version of the Handbook, since the same language was removed from earlier passages in Chapter 5. While this was the approach given in 2003, the concept of disregarding amounts initially invested from household income isn’t in the 2007 version of the HUD handbook.
HUD staff in conversations have acknowledged the Handbook language is unclear, and our understanding is that an update is in the works. Readers can be apprised of new announcements by subscribing to HUD’s Listserv. at http://www. huduser.org/emaillists/hudnews.html
Under $5,000 Asset Certification
A few years ago the National Council of State Housing Agencies created a set of “Best Practices” forms for used in LIHTC tenant files, including an “Under $5,000 Asset Certification” form.
We frequently review files where this form isn’t utilized correctly. Many forms don’t list the amount of annual income generated by assets, and/or the resident hasn’t checked the appropriate box to certify whether any assets were disposed of for less than fair market value in the past two years. A manager should carefully review this affidavit’s instructions and make sure all applicants provide the required information. Remember, that this affidavit is a gift to managers as it replaces the need to collect third-party verifications for any household with less than $5,000 in net assets. However, the affidavit only works if the file satisfies the record keeping requirements of IRS Revenue Procedure 94-65. This means a family must include a certification of the amount of annual income generated by their assets.
Also, be aware that this affidavit form may be used to satisfy LIHTC verification requirements but may not be used to satisfy the requirements of other affordable housing funding, such as HOME, RD, HUD, tax-exempt bonds, etc. n Next Month: Additional Issues Erik Whitton works for Spectrum Enterprises, Inc. based in Cape Elizabeth, ME. Spectrum offers training and consulting services for affordable housing professionals. For more information please visit www.spectrumlihtc.com and www.spectrumseminars.com. Erik may be reached at 207-767-8000 x210 or [email protected].
