Simplifying LIHTC Program Overlays; Some Sound Advice and Strategies

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By Ruth L. Theobald Probst, CPM¨, HCCPª, SHCMª

Tax Credit Advisor, April 2009: Step-by-step instructions for integrating multiple housing programs

What is the most common concern expressed by managers of Section 42 low-income housing tax credit properties?

By an overwhelmingly majority it is layering multiple housing programs on top of each other and assuring compliance with all of their various aspects, and the specific regulatory agreements that govern their implementation on a specific housing project. Following is a step-by-step approach to coordinating these variables with a high degree of confidence.

Step 1: Identify all of the programs that will be involved with a particular housing project. Unfortunately, this can be the most challenging aspect for management agents to overcome. Nevertheless it is the most critical. Ask the developer for copies of funding applications that have been approved, and/or regulatory agreements. If they cannot provide these, ask for alternative resources such as limited partner contacts or for permission to request documents from the state housing finance agency.

Step 2: Map out which units will be affected by which programs. Not all units are usually affected by all programs. Conversely several programs may affect an individual unit. Knowing this is vital to success.

Step 3: Lay one program’s regulations over another. Just one. Make certain you understand the interplay between them before placing any additional programs on top of the first two. The first two should be the ones affecting the most units. Add additional program requirements one at a time after that has been accomplished.

Example: A 100-unit project is 100% tax credit with tax-exempt bonds financed under a 40%@60% set-aside, and has 8 HOME units. This means that 100 units must comply with Section 42 requirements. Of these 100 units, 40 must comply with bond regulations (which are now very similar to LIHTC rules, thanks to the Housing and Economic Recovery Act of 2008). Eight units must comply with HOME regulations. Study the tax credit and bond restrictions first. Then add the HOME regulations, remembering that they will affect only 8 units which you will have identified in Step 2.

Step 4: Study the most restrictive principles between the programs and decide how they will be handled. Some rules combine quite well and can blend easily if they are understood. Others are in direct conflict. It is these that will require the most focus.

For instance, both the tax credit and bond programs now have the same student rules, which are quite restrictive and much more so than the HOME program. Since the tax credit program affects all units in our example above, it is the underlying rule that must be followed. There-fore, any family moving into any unit must abide by these rules even though the HOME program in and of itself would be less restrictive.

Conversely, when a HUD Section 8 project encounters a blanket of LIHTC funds for rehabilitation, any number of the in-place families may not income- or student-qualify for Section 42. Because Section 8 is the underlying program and because it disallows eviction except for its own definition of good cause, owners cannot evict families just because they fail to qualify for Section 42. The more aware ownership and management is of these oppositional realities, the more effectively they can guide the project to success.

Step 5: Take it one unit at a time. Most of us sag under the mere idea of complexity which, when fully understood, loses its terrifying power.

For instance, the “over-income” rules for the tax credit program are different than the HOME program. For Section 42, the rules are applied inside a building (BIN) when a household is recertified with income above 140% of the current eligibility income limit. For HOME, over-income is triggered when a family’s income exceeds the applicable limit by as little as one cent.

In our example there are eight HOME units, any of which would conceptually go into a HOME “over-income” status before the tax credit “over-income” event would be influenced. By understanding the thresholds at which each unit triggers that status and by taking it into account just one unit at a time, the task becomes much easier because it is focused within the confines of specific units.

Step 6: Watch income and rent limits for all program types. Different programs have their own established limits which must be complied with at the time a family moves into a unit.

Example: Section 8 rents are based on contract rents of which a family pays 30% of their adjusted income; the tax credit program sets maximum rents at a formula of 1.5 persons and 30% of the Section 42 income limits, which is then divided over a 12-month period. HOME rents are based on a comparison of Fair Market Rent against either the established Low- or High- HOME rent. All of these are different and it can be challenging to select the right rent. If you know what programs affect specific units, it is much easier to select the correct rent by selecting the rent that is the lowest of the available rent limits for that specific unit.

Step 7: Know who to ask and where to get questions answered. Your state housing finance agency is often the best source for solutions to mystifying program interaction. Often these agencies are the source of funding for the most common program blends. If you are unable to resolve challenges on your own, get expert advice from a source that understands the impact of multiple programs.

In conclusion, focus step-by-step and one at a time. Know which program rules apply to that specific unit and follow the rule that covers all programs the most thoroughly for just that one. Over the course of time you will learn that what was once complex, is now understood and you will be asking for something more challenging. Perhaps.

Ruth Theobald Probst is the president of The TheoPRO Group, a national tax credit consulting business with an emphasis on asset management and compliance. For additional information visit www.theopro.com.