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

A reader submitted a question on how compliance works for an LIHTC project financed through the private activity tax-exempt bond program.  They asked if there are any additional requirements a property manager must apply at an LIHTC project with bond financing.   So let’s review how compliance works at these properties.

First, know that all the same compliance requirements that apply to any LIHTC project apply to one that is bond-financed.  The same rules that govern how to calculate a household’s gross annual income, how to apply the LIHTC student rule, how to determine a household’s income limit, how to calculate maximum allowable rent, how to apply the LIHTC available unit rule, vacant unit and transfer rules, etc… govern LIHTC compliance when the project is bond-financed.  The monitoring agency will expect an owner to follow the same rules for a unit they want to produce an LIHTC as they do for any other project governed by Section 42 of the federal tax code.

Second, for the tax-exempt bond program an owner has the same options for committing to a minimum set aside as in the LIHTC program, but there is no incentive built into the bond program to have more low income units than required by the minimum set aside.  The more LIHTC-qualified units an owner has, the larger the tax credit the project produces, the larger capital contribution it attracts from the LIHTC investor.  But an owner gets the full benefit of the tax-exempt financing available through the bond program just by having enough low income units to meet their minimum set aside.  It is possible, however, for the bond-issuing agency to require additional low income units in the project’s bond regulatory agreement.

Third, there are no rules established at the federal level that limit how much rent an owner can charge for a low income unit within the tax-exempt bond program.  It is possible for the bond-issuing agency to limit how much rent an owner charges in the project’s bond regulatory agreement.  There is also the practical limitation that if an owner rents a unit to a household with income below 60 percent or 50 percent of the AMI, the resident will be limited as to how much rent they can afford to pay by virtue of their low income.  Additionally, an owner is limited as to how much rent they may charge for any low income unit for the bond program that is also an LIHTC unit by the regulations for the LIHTC program. 

Fourth, HERA 2008 streamlined the additional compliance requirements that come with bond financing.

• Prior to July 2008, the tax-exempt bond program required an owner to apply a more restrictive student rule than required by the LIHTC program.  Thankfully, HERA saved managers of bond-financed projects from needing to know two student rules.  Since HERA, all bond-financed projects, rather they have LIHTC or not, follow the LIHTC student rule.
• The available unit rule is the key to maintaining long-term compliance at all LIHTC projects.  What has been confusing for managers of bond-financed projects is that the rule is applied by building for the LIHTC program but by project for the bond program.  Again thankfully, HERA saved owners and managers from chasing their tales from trying to apply the available unit rule both by building and by project.  Since HERA, an owner of a bond-financed project with LIHTC is only required to apply the LIHTC available unit rule while for a project without LIHTC, they continue to follow the bond available unit rule.

Send me your questions at liz@lizbramletconsulting.com.  Follow me on Twitter at www.twitter.com/lizbramlet.  Check out our current training calendar by going to www.lbctrainingcenter.com and clicking on Current Calendar.

I have just been told that building management has contracted for some emergency construction work to take place next week.  It is of a nature that it may interfere with communications and disrupt my ability to present the webinar scheduled for next Tuesday.  To avoid trouble during the training, I’ve rescheduled the webinar for 12:00 Noon Eastern Time on Tuesday, February 7th. 

Contact me at liz@lizbramletconsulting.com with any questions.  Go to www.lbctrainingcenter.com and click on Current Calendar to view our current training schedule.

To generate a low income housing tax credit, a unit must:

• Be in service a full calendar month; and
• Be occupied by a qualified resident.

If a unit is placed in service on June 1, it can produce a credit for June if occupied by an LIHTC-qualified resident by June 30th.  If that same unit is not placed in service until June 2nd, it can generate its LIHTC in July if occupied by a qualifed household on or before July 31st. It is very important that both the developer and property manager for an LIHTC project understand this rule.

• A developer projects when a unit will start producing its credit to determine how much investment it will attract from the limited partner.  When laying out a project’s construction schedule, the developer must insure each unit will be placed in service in time to establish its potential to produce its credit on time.  
• A property manager is responsible for leasing each LIHTC unit to a qualified resident in time for it to actually generate its credit on schedule. 

For new construction, each building’s placed in service date is typically based on the date of its certificate of occupancy (C of O), or a temporary C of O.  If a building’s C of O is dated May 2nd, it has the potential to start producing an LIHTC in June.  For acquisition/rehab projects, the acquisition credits are placed in service on the date of acquisition.  If the ownership entity that will benefit from the credits purchases the project on June 1st, it has the potential to begin producing credits in June.  If the sale of the project is delayed by even one day, the date of acquisition is June 2nd and the project’s ability to generate LIHTC does not kick in until July. 

• If a building’s rehab credits are placed in service the year of acquisition, it can begin producing both acquisition and rehab credits in July. 
• If the rehab is not placed in service until sometime the following year, the building can start generating both acquisition and rehab credits in January of the year the owner places the rehab in service.

And, this is very important.  No unit actually starts producing its LIHTC until occupied by a qualified household.  It is the resident’s tenant income certification that makes the LIHTC happen.

Follow me on Twitter at www.twitter.com/lizbramlet.  See our current training calendar at http://stores.lbctrainingcenter.com/-strse-Current-Calendar/Categories.bok.

Follow me on Twitter at www.twitter.com/lizbramlet.  Send me your questions as liz@lizbramletconsulting.com.

Email me at liz@lizbramletconsulting.com with any questions you may have.  Follow me on Twitter at www.twitter.com/lizbramlet.

Email me at liz@lizbramletconsulting.com with any questions.  Follow me on Twitter at www.twitter.com/lizbramlet.  Sign up for my free list service by sending an email to housingnews@aweber.com.

I have added a resource center for owners and managers of acquisition/rehab LIHTC projects to my web site.  Go to www.lizbramletconsulting.com and click on Acquisition/Rehab.

Send any questions you may have to liz@lizbramletconsulting.com.  Follow me on Twitter at www.twitter.com/lizbramlet.

Email me at liz@lizbramletconsulting.com with any questions.  Follow me on Twitter at www.twitter.com/lizbramlet.  Sign up for my free list service by sending an email to housingnews@aweber.com.

We’ve scheduled our second 2012 training date for Maximizing Your Acquisition/Rehab LIHTC Project.  It will be held in Springfield, IL.  Go to http://stores.lbctrainingcenter.com/-strse-30/Maximizing-Your-Acquisition-fdsh-Rehab-LIHTC/Detail.bok for more detailed information and to register for this valuable seminar.  More 2012 dates will follow. 

Let me know if you have any questions.  Contact me at liz@lizbramletconsulting.com.  Please visit my training center and see what other classes are on the current schedule at www.lbctrainingcenter.com and click on Current Calendar.  Follow me on Twitter at www.twitter.com/lizbramlet.