A short time ago I posted an article providing an overview of the new IRS final regulation on the Average Income Set-Aside. I promised to post a series of articles detailing some of the more complex elements of the final regulation and this is the second in that series. In this article, I will review the Available Unit Rule on Average Income projects.
When Congress added the Average-Income Set-Aside, it also added a new next available unit rule (AUR) for the AI test. Under this new rule, a unit ceases to be a low-income unit if two slightly different disqualifying conditions are met:
If the vacant unit was a low-income unit prior to becoming vacant, the unit must be occupied by a tenant who qualifies under the imputed income limit.
If the vacant unit was a market unit prior to becoming vacant, it must be designated with an income limit that will enable the project to continue to have an average imputed income of no more than 60%.
There is no major change to the AUR in the final regulation, but the language specifies that if a low-income resident has income in excess of 140% of the 60%, 70%, or 80% limit, and the next available unit in the building that is comparable or smaller in size to the over-income unit is a market unit, it must be designated with an income limit such that the average of all imputed income designations of residential units in the project does not exceed 60% of the AMGI.
Also, if multiple units are over-income at the same time, and there is a mix of low-income and market-rate units, the owner need not comply with the AUR in any specific order. Renting any available comparable or smaller vacant unit in the building to a qualified tenant maintains the low-income status of all over-income units until the next comparable or smaller unit becomes available.
A Deep-Dive into the AUR on Average-Income Projects
IRS Guidance Relative to the AUR on AI Projects
The preceding example is why many HFAs may not allow mixed-income projects to select the AI Minimum Set-Aside.
Clearly, the additional complexity relative to the AUR on Average Income properties should give owners pause prior to developing mixed-income buildings with the Average-Income set-aside. However, with good management and tracking procedures, any difficulties can be overcome, and the benefits of a mixed-income project realized. One final word of warning though; as the example above illustrates, owners may be able to replace lower designated units with higher designations when complying with the AUR. While this would increase cash flow due to higher rents, it could very well run afoul of the property LURA (extended use agreement) which may stipulate a required number of units at each income level. At the very least, before taking such a step owners should confirm that no state requirements would be violated and that investors are on board with the change.
House and Senate Add Homeless Students and Veterans as LIHTC Student Exception
On November 16, 2022, S. 5108 was introduced in the U.S. Senate, and H.R. 9313 was introduced in the U.S. House of Representatives. The title of the bill is "Housing for Homeless Students Act of 2022. If the bill becomes law, it will amend Section 42 of the Internal Revenue Code to qualify homeless youth and veterans who are full-time students for purposes of the low-income housing tax credit. The homeless student rule would have a look-back period of seven years prior to occupancy in a LIHTC project and the veteran exception would have a five-year look-back. In other words, if a full-time student was homeless at any point during the seven years preceding occupancy at a tax credit property, that person will not be considered a student for tax credit purposes. Likewise, if a veteran has been homeless at any time during the five years preceding occupancy at a tax credit property, that person will not be considered a student for tax credit purposes. The Senate bill has been referred to the Senate Finance Committee and the House Bill to the House Ways and Means Committee. There is no specific timeframe for the bill to become law and owners and managers of LIHTC properties should not change the current procedures being followed relative to student status.
2023 Income Limits Will Be Delayed
The U.S. Department of Housing & Urban Development (HUD) normally publishes annual income limits in early April of each year. However, complications with calculating the limits due to COVID-19 will cause a delay in the release of the limits in 2023. According to HUD, the limits will be released on or about May 15, 2023. HUD normally uses American Community Survey (ACS) Data from three years prior to the income limit release to determine family median incomes and income limits. However, the Census Bureau did not release the 2020 one-year ACS data due to data collection difficulties because of the COVID-19 pandemic. For this reason, HUD will use 2021 ACS data to determine the 2023 median income and income limits for low-income housing tax credit (LIHTC) properties. Why is this important? Owners of LIHTC properties will have to wait a little longer than usual to determine the income and rent levels available to them for 2023. While increases in income limits nationally are expected to be less than in prior years, most areas should still see some increase in limits, which will allow for a modest increase in rents in 2023.
Virginia Housing Looking for Compliance Staff
Virginia Housing (formerly Virginia Housing & Development Authority) has three positions open in Compliance & Asset Management. If interested, you may access the position descriptions at https://us63.dayforcehcm.com/CandidatePortal/en-US/VHDA. Virginia Housing (VH) is one of the premier Housing Finance Agencies in the nation and I have had the privilege of working with them for more than 40 years. The Agency provides an excellent work environment and has a comprehensive benefits program, including medical, dental, vision, and prescription drug coverage. VH also has both long- and short-term disability plans and various options for retirement plans. If you (or someone you know) are looking for an excellent opportunity on the public side of the affordable housing field, I encourage you to check out the open positions at VH and consider applying.
Rural Development Suspends Interim Recertification Requirements for COLA Recipients
On November 10, 2022, the Rural Development Service released an Unnumbered Letter granting a temporary exception to tenant recertification requirements. On October 13, 2022, the Social Security Administration announced there will be an 8.7% increase in Social Security and Supplemental Security Income (SSI) benefits in 2023. This will increase the average SS payment by more than $140 per month starting in January. The RD Section 515 program requires that tenant households be recertified at least annually or when household income changes by $100 or more per month. Since the increase would require recertifications for most Social Security recipients, the Agency is temporarily waiving the recertification requirement for tenants whose household income, regardless of income type, has increased by more than $100 but less than $200. Accordingly, during the Exception period, tenants will not be required to recertify unless their household income changes by $200 or more per month. This temporary waiver will be in place for all of 2023 and will expire on December 31, 2023. During the period of the waiver, tenant households must be recertified at least annually or whenever a change in household income of $200 or more per month occurs. The requirement that borrowers must recertify for changes of $50 per month if the tenant requests that such change be made, is still in effect. Keep in mind, the exception does not waive the requirement for the annual renewal certifications. Owners will receive a copy of this notice from RD. Once received, the notice must be posted in a conspicuous location at the property and a copy of the notice must be provided to all tenants.