Good Afternoon,
A reader writes in with a question about when they should complete the tenant income certifications for a Section 236/Section 8 project they are renovating using acquisition and rehabilitation LIHTC. A developer wants to know if he would not be in compliance if he instructs his property manager to complete the initial tenant income certifications for the LIHTC program as they complete the residents’ annual recertifications for HUD purposes. He would not be out of compliance if he certified his residents according to their HUD recertification schedule, but his units would not begin producing their LIHTC as early as possible and therefore, the project would not attract the maximum equity contribution possible from the LIHTC investor.
Below I have pasted a segment from a post dated June 9, 2011 titled Acquisition/Rehab With Existing Residents. The same rules that govern all LIHTC projects govern those that receive HUD mortgage or rental assistance with regards to when the owner should certify the existing residents if their goal is to maximize the value of their credit allocation.
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Completing Rehabilitation the Year of Acquisition
When an owner completes the rehabilitation activities the same year as acquiring a building, the units occupied by qualified residents may begin to produce a tax credit at acquisition. The date of acquisition is referred to as the “look-back date.”The IRS allows an owner 120 days after acquiring a building to certify the existing residents and make the TICs effective at acquisition. The owner may also complete a resident’s TIC 120 days prior to the date of acquisition and make it effective on the date of acquisition. Due to the delays a developer often experiences in buying a project, it is recommended that the manager not begin completing the TICs more than 60 days before the expected acquisition date. Information an owner obtains to qualify a resident for the LIHTC program cannot be more than 120 days old on the effective date of the TIC. The developer also wants an agreement with the outgoing owner, confirmed for property management, on if, how and when vacant units should be rented to new residents.
EXAMPLE
Owner buys a building on 5/1/2011 and completes the rehabilitation during 2011. Any TIC the owner completes by 8/31/2011*, using the resident’s income and income limit as of 5/1/2011, can be effective on 5/1/2011. A resident’s signature should be as of the date they sign the TIC and not back-dated to the date of acquisition.
*Technically, 120 days from the date of acquisition would be 8/27/2010. The most conservative interpretation of the rule would say the owner needs to complete a TIC by 8/27/2011 for the unit to begin to produce a tax credit on 5/1/2011.
If an owner completes an existing resident’s TIC more than 120 days after buying a building, the TIC is effective, and the unit starts producing a tax credit on the day the resident signs the TIC. In our example, if a resident signed a TIC anytime during the month of September, the unit will begin producing a tax credit in September 2011. Any TICs the owner completed no earlier than 120 days prior to the date of acquisition could also be effective on May 1, 2011. If the owner purchased the building any day in May 2011 after May 1st, the building cannot start producing a tax credit until June.
Completing Rehabilitation the Year After Acquisition
When an owner completes a building’s rehabilitation the year following acquisition, the units occupied by qualified residents may begin to produce a tax credit in January of the year the owner completes the rehabilitation activities. January 1st is referred to as the “look-back date.”The owner wants the existing residents certified as of January of the year they plan to complete the rehabilitation activities.
EXAMPLE
Owner buys a building on 5/1/2011 and completes rehabilitation activities during 2012. An owner can start completing TICs as of 9/1/2011* and make them effective as of 1/1/2012.
*Technically, 120 days before 1/1/2012 would be 9/3/2011. The most conservative interpretation of the rule would say the owner should not complete an initial TIC before 9/3/2011 for a unit to begin to produce a tax credit on 1/1/2012.
A unit that is in service for an entire calendar month can produce a tax credit for that month if occupied by a qualified resident by the end of that month. Therefore, a unit can start producing a tax credit in January 2012 if the owner certifies the resident by January 31, 2012.
Revenue Procedure 2003-82 – The Safe Harbor Rule
In 2003, the IRS issued a revenue procedure providing an owner guidance on how to preserve the validity of an LIHTC resident’s initial TIC if it was completed more than 120 days prior to the start of a building’s credit period. Revenue Procedure 2003-82 tells owners how to protect their tax credits without needing to replace outdated initial TICs. If a TIC was completed more than 120 days before the start of the credit period, the owner should test the resident’s income by asking them to sign a statement certifying to any changes in their income since completing their TIC. The test should be completed during the 120 days prior to the start of the credit period. If the resident indicates a change in income, the owner asks for a copy of a document showing the change; E.g., a copy of a pay stub, benefit award letter, etc… If the resident’s income has risen above 140 percent of their income limit, the owner implements the available unit rule.
Implementing Rev Proc 2003-82 is particularly important in mixed-income projects. In a 100 percent LIHTC project, the owner always rents the next available unit to an LIHTC-qualified resident regardless of what they find when they test a resident’s income at the start of the credit period. No resident may be forced to vacate a unit due to an increase in income since completing their initial TIC. The safe harbor rule allows an owner to preserve their tax credits without forcing a resident to move. The IRS has said that a resident’s income rising above 140 percent of the income limit is not considered good cause to either refuse to renew their lease or to evict them from their unit.
While planning when to complete your existing resident’s initial TICs, don’t forget to take into account if they will be relocating around your project during the rehabilitation period. If a household will be temporarily relocated into a unit, and that unit will be in its credit period during their occupancy, you want to qualify that resident even if the building with their permanent unit will not begin its credit period until the following year. You don’t want to loose credits on their temporary unit because you failed to qualify them before they moved in.
Send a question you would like me to answer here to liz@lizbramletconsulting.com. Take advantage of our Acquisition/Rehab Resource Center at http://www.lizbramletconsulting.com/Acquisition-Rehab.html. Sign up to take Maximizing Your Acquisition/Rehab LIHTC Project at http://stores.lbctrainingcenter.com/-strse-Acquisition-fdsh-Rehab/Categories.bok
