Compliance Strategies for Avoiding Investor Penalties with Acquisition/Rehab Tax Credits

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By Erik Whitton, Spectrum Enterprises, Inc.

In January 2007, the Internal Revenue Services issued the first edition of the 8823 Guide for the federal low-income housing tax credit program. Chapter 4 contained new guidance regarding acquisition/rehab projects, permitting acquisition tax credits to be claimed earlier than previously allowed, provided that the existing tenants are tax credit-certified within 120 days of the acquisition (closing) date and that rehab is completed in the same calendar year.

This guidance was retained in the 2009 update of the Guide. Investors have been aware of this new guidance and the allowance of these “reach back” credits. In fact, many deals we have consulted on include a very aggressive credit delivery schedule where all or most of the credits are promised as of acquisition. (Note: Tax credits are actually claimed starting in the month following the date of the building’s acquisition/placement-in-service, unless the acquisition date is on the first of the month, in which case credits may be claimed for that month.) Nevertheless, three years since this new guidance first came out, many property managers have been slow to understand and implement the compliance steps necessary to avoid costly penalties with their equity partners. When you mix a management company unaware of the IRS guidance with an owner that commits to an aggressive credit delivery schedule to the investor, the penalties for shortfalls can be severe downward adjusters.

Specifics of the Guidance

Acquisition credits for a building must be claimed starting in the same year as the rehabilitation credits. Accordingly, the rehabilitation must be completed by the end of the same tax year in which the acquisition occurred, in order to be able to begin claiming the acquisition and rehab tax credits in that year.

As of the 2007 IRS Guide, a property manager (in determining whether a building’s existing tenant households qualify as low-income) must use the building’s acquisition date as each resident’s move-in/effective date on all Tenant Income Certification (TIC) forms.

The manager has 120 days from the acquisition date to complete as many tenant income certification packages as possible. This process includes a questionnaire asking each household’s composition, income, assets, and student status; third-party verifications (e.g., of income and assets); and a completed and executed TIC form. For files completed within 120 days, the TIC form should use the annual HUD income limit in effect on the date of acquisition.

Acquisition and rehabilitation tax credits can then be claimed, starting the month following the date of acquisition, for all units occupied by tenants whose files are completed within the 120-day window. Credits for units where the tenant files are completed after 120 days are claimed later, beginning in the same month that the file was completed.

Under the new guidance, an acceptable set of tenant files could show TIC move-in/effective dates that precede the date of supporting verification documents, or signature dates on TIC forms dated several weeks after the effective date. Previously, these practices would have been viewed as poor management. (Note: In all cases, do not backdate signatures on tenant files.)

Files not fully completed within 120 days should record, as the move-in/effective date, the date that the file was fully completed and executed, and use the prevailing annual HUD income limit at the time. The unit becomes credit-qualified on the date that the last adult member of the household signs the TIC form (after all verifications have been received).

Consider this hypothetical scenario:

  • An owner with a tax credit allocation acquires an existing, 10-unit HUD Section 8 building on March 5, 2009. All rehab is completed by October 31, 2009.
  • The manager income-certifies 9 tenant households by July 3, 2009. These 9 units are considered qualified as of March 5, 2009. Credits may be claimed starting in April.
  • Even though HUD’s 2009 income limits come out on March 19, 2009, the TIC forms for the 9 units must use the 2008 income limits in effect on the acquisition date.
  • One tenant is uncooperative, so the file is not fully completed until December 15, 2009. The TIC here records the HUD 2009 income limit, and the unit is not credit-qualified until December 2009. The owner loses the “reach back” benefit on this unit.

The Do’s and Don’ts:

  • To avoid problems and facilitate the expedited delivery of credits:
  • Make sure all staff is aware of the date of acquisition, the 120-day deadline date, and the promised credit delivery schedule.
  • Make sure there is sufficient staff to complete the required paperwork within 120 days.
  • Ensure that on-site management staff is trained and experienced in tax credit compliance.
  • If, prior to the acquisition date, the building or tenants have been assisted by an affordable housing program (e.g., HUD Section 8), the manager should review all households that were certified under that program within 120 days before the acquisition date. In this way, many third-party verifications completed for that program can be used for the tax credit qualifying file, saving time and effort.
  • Leasing staff should immediately begin to meet with residents to have them complete the tax credit questionnaire. If the property’s management staff isn’t changing, this can begin before the anticipated closing date. This questionnaire should ask for all information needed to determine tax credit eligibility. For instance, an existing HUD Section 8 building may not have used a questionnaire asking residents about their student status (essential in the LIHTC program), or asked residents only for their current (not anticipated) annual income. If necessary, the manager should modify the questionnaire to ask for all necessary tax credit information. (Note: The IRS considers a household as over-income if their questionnaire is missing, incomplete, or insufficient.)
  • Beginning 30 days after acquisition, the manager should flag any households not cooperating with the income certification process and exert extra effort to get their paperwork completed by the 120-day deadline.
  • Identify all households that will not be LIHTC-eligible as soon as possible (ideally, before acquisition). Together, the manager, owner, and investor should develop a plan to maximize the number of tax credit units. The earlier one becomes aware of ineligible tenants the sooner they can replaced (if possible) with new eligible households in time. (Note: Households cannot be evicted or leases not renewed without good cause.)
  • After each household completes the questionnaire, the manager should ask for the third-party income/asset verifications and ask the household to complete any required affidavit forms.
  • Once all verifications are received for a household, the manager should complete the income/asset worksheet; complete, sign, and date the TIC form; and have the TIC form signed by all adults living in the unit.
  • The manager should complete any additional form(s) required by the tax credit allocating agency (e.g., lease rider).

In working on acquisition/rehab tax credit deals, developers and owners need to be aware of the favorable IRS guidance in the 8823 Guide and provide the necessary oversight to ensure that the property management company adheres to this guidance and will take the necessary steps to fulfill the expedited delivery of acquisition credits to the investor, and avoid the costly consequences for failure to do so.  

Erik Whitton is the Director of the Private Consulting Division at Spectrum Enterprises, Inc. He may be reached at 207-767-8000 x210; [email protected]; www.spectrumlihtc.com