The Impact of the Housing Assistance Tax Act on Management of Tax Credit Properties
By Caitlin Jones & A. J. Johnson
9 min read
One section of the new Housing and Economic Recovery Act of 2008 (H.R. 3221, Public Law 110-289), entitled the “Housing Assistance Tax Act of 2008,” contains numerous changes to the federal low-income housing tax credit (LIHTC) and tax-exempt housing bond programs designed to improve their efficiency.
A number of the revisions will directly impact the day-to-day operations of housing credit and bond-financed rental housing projects. This article focuses on some of these. (For details on all LIHTC amendments, see Tax Credit Advisor, September 2008, p. 1.)
Annual Recertification Repeal
One change made by the Act, effective for years ending after July 30, 2008, waives the annual tenant recertification requirements for both housing credit and tax-exempt bond-financed properties that are 100% low-income, provided no residential unit in the project is occupied by tenants who fail to satisfy the otherwise applicable income limits.
While this change may be very attractive to owners and managers due to the time savings involved in not having to perform recertifications, great care should be taken prior to terminating the recertification process. No project should stop recertifying residents until the state housing credit agency (HCA) issues guidance about its requirements in this area. Some states have already issued guidance; the positions they take regarding recertifications vary. Some permit a total cessation of recertifications; some require at least one recertification for each resident; others may not permit the termination of recertifications at all
Even if the HCA allows the termination of recertifications, taxpayers should make sure that all residents are, in fact, low-income prior to stopping the process. If no recertifications are performed, and a subsequent HCA review reveals not all residents were low-income at the time the process was halted, there could be serious ramifications for the project’s credits. This is because the property will not have been eligible to stop recertifying tenants since not all the tenants were low-income.
If the taxpayer is confident that all residents are low-income and ceases the recertification process, care should be taken to ensure that all future residents are carefully screened for eligibility. Renting to ineligible residents in the future could result in potential problems under the “available unit rule” if the owner is unable to show that, at the time of move-in of the ineligible resident, that no current resident had an income in excess of 140% of the applicable income limit for a low-income household.
Community Facilities, Grants
The Act increases the maximum portion of an LIHTC project that can be used as space for a “community service facility” and included in eligible basis, from 10% of eligible basis before, to 25% of the first $15 million in eligible basis plus 10% of any additional eligible basis. Effective for buildings placed in service after July 30, 2008, this change will enable owners of tax credit properties to offer significantly enhanced services to the community at-large due to the increase in space that will be usable as a community service facility, while being able to include a greater amount of space for this purpose in eligible basis.
A community service facility is a facility within an LIHTC project intended to provide services for non-residents. Individuals served must have incomes at or below 60% of the area median income limit (see IRS Revenue Ruling 2003-77), and the services provided must improve the quality of life for the project’s tenants. These facilities are only permitted for projects in qualified census tracts (QCTs).
A second amendment provides that a project’s eligible basis must be reduced by the amount of a federal grant, only if the grant is received prior to the start of the compliance period. Grants received during the compliance period that enable the property to be rented to low-income residents won’t affect eligible basis, as long as the grant doesn’t increase the building’s eligible basis. This change, effective for buildings placed in service after July 30, 2008, is important for management in that it will permit grants for operations [such as U.S. Department of Housing and Urban Development (HUD) Supportive Service Grants, or federal crime prevention grants] without reducing credits to investors.
The new law also clarifies that certain specific federal funds aren’t considered grants, such as federal rental assistance programs, HUD Section 236 interest reduction payments, or McKinney Act homeless assistance funds.
Foster Care Recipients
Section 3004 of the Act addresses the treatment of units occupied by individuals who previously received foster care assistance. This amendment effectively adds a fifth exception to the general student rule, which provides that units occupied entirely by full-time students don’t qualify as low-income units for housing credit purposes.
Under two of the four standard exceptions to the general rule, a unit occupied entirely by full-time students will qualify as a low-income unit if any of the students receive assistance under Title IV of the Social Security Act, or participates in a federal, state, or local job training program. Additional exceptions are if the adult occupants are: single parents (and neither they nor their children are dependents of a third party, except the other parent); or, married and eligible to file a joint tax return.
The Act’s new exception, effective July 30, 2008, makes a unit eligible as low-income if there is “a student who was previously under the care and placement responsibility of the State agency responsible for administering a plan under Part B or Part E of Title IV of the Social Security Act.”
The amendment raises questions that need to be answered to properly implement this new exception. For example, how long must a student have been in foster care in order to qualify, and how long ago? If a 20-year-old college student was a foster child at age 6, does he/she qualify? A strict reading of the statutory language says “yes.” What type of verification of the former assistance is required? Title IV Part B requires that states maintain an information system that can verify all children in foster care or those that have been in foster care “within the immediately preceding 12 months.” This indicates that formal verification of prior foster care may only be available for persons who received foster care within the past year. What about students for which state verification of previous foster care assistance can’t be obtained? Are they eligible if the former foster parent provides verification? If state verification is required, does this mean only students who received foster care assistance in the past 12 months are eligible?
These questions will remain unanswered until we receive guidance from the Internal Revenue Service. Until then, owners and managers faced with an application from a household affected by this change should seek guidance from their tax credit advisors and state HCA.
Hold Harmless Rule
Another amendment provides that the HUD area median gross income (AMGI) used for determining LIHTC tenant income and rent limits each year after calendar 2008 can not be less than the AMGI for the prior year. A related second amendment, more limited in scope, is designed to facilitate rent increases starting in 2009 for certain existing projects that had their tenant income and rent caps frozen in 2007 or 2008.
Median Income for Rural Projects
The Act provides for determinations made after July 30, 2008, of LIHTC tenant income and rent limits for projects in rural areas to be based on the greater of the: (1) HUD area median gross income; or (2) the national non-metropolitan median income.
Rural areas for purposes of this amendment are defined in Section 520 of the U.S. Housing Act of 1949. These are communities with a population of up to 20,000 that are “rural in character,” and that are not part of a metropolitan statistical area (MSA), or that demonstrate a serious lack of mortgage credit for lower and moderate income families. Communities larger than 10,000 but no greater 25,000 persons may also retain this designation if they are part of an MSA but still meet the “rural in character” test.
The change only applies to buildings receiving a tax credit allocation from the state’s housing credit volume cap, and not to tax-exempt bond-financed buildings that receive credits without a credit allocation.
Coordination of Certain Rules
The Act also made modifications, effective after July 30, 2008, to several rules for tax-exempt bond-financed projects to conform them to the rules for the LIHTC program:
Available Unit Rule. The Act provides that for properties with both tax credits and tax-exempt bonds, the available unit rule shall be determined on a building basis, rather than on a project basis as before. Owners should keep in mind that for properties with tax-exempt bonds only (i.e. no tax credits), the available unit rule remains a project rule.
Students. The student eligibility rule relating to tax-exempt bonds now matches the tax credit rule. This means that there are now five student exceptions for bonds as well as tax credits, regardless of whether or not the bond property also has tax credits.
Conclusion
While many of the new law’s changes will impact the management of tax credit properties, it is clear that there could be unforeseen consequences. Prior to implementing any changes in management practices, taxpayers should seek counsel from their advisors and their housing credit agency.
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].
