Developer Fees - How They are Viewed by the IRS

person A.J. Johnson today 11/29/2015

  Developer fees represent payment for a developer’s services and are (at least partly) includable in eligible basis for a Low-Income Housing Tax Credit (LIHTC) project. There are three basic types of developer fees.   Turnkey Project Fee   The taxpayer (usually a partnership) enters into a development agreement with a developer to pay an amount that includes all hard construction costs and the developer’s fee. If the actual costs exceed the budget, the developer fee is decreased. Fixed Amount Developer Fee A fixed amount developer fee occurs when the "hard costs" and the developer fee are separately stated line items in the contract. Unlike a turnkey agreement, the developer fee does not decrease if the hard costs exceed the budgeted amount. Completed Project Developer Fee A completed project developer fee is passed on to the ultimate purchaser of the building as a component of the purchase price. The individual components (land, new construction, acquisition or an existing building, rehab costs, and developers fee) may not be separately stated.   Related Parties In many cases, the developer is the general partner of the partnership owning the project. The developer may also be related to the entity that actually constructed the project or the property management company operating the project (in some cases - both).   Audit Issues & Techniques   There are four basic issues an IRS examiner will focus on when examining a developer fee:
  1. Character of the services to be provided;
  2. Services actually provided;
  3. Reasonableness of the fee amount; and
  4. Method of payment.
  Character of the Services to be Provided   The services to be provided will be identified in the agreement entered into by the taxpayer and the developer. Typically, the developer agrees to provide (or may have previously provided) services relating to the acquisition, construction, and initial operating phases of the development.  
  • Development Costs Includable in Eligible Basis
    • Examples of services typically includable in eligible basis:
      • Negotiation of agreements for architectural, engineering, and consulting services, the construction of the project or improvements includable in eligible basis, and the furnishing of the associated supplies, materials, machinery or equipment.
      • Applying for and maintaining all government permits and approvals required for the construction of the project and securing the certificates of occupancy when completed.
      • Complying with the requirements imposed by insurance providers during construction.
      • Providing oversight, including inspections, during the course of construction and approving eventual payment for the services rendered.
      • Implementing the taxpayer’s decisions relative to the design, development, and construction of the project.
    • Development Costs not Includable in Eligible Basis
      • Development of a low-income project involves services that are not related to the actual construction of the low-income buildings and, therefore, the cost of such services is not includable in eligible basis. Examples include
        • Acquisition of the project site, including locating the site, performing economic and feasibility studies, market studies, and negotiation of the purchase price.
          • Note - a portion of the purchase price may be included in eligible basis if the purchase includes the acquisition of a building that is subsequently rehabilitated for use as low-income housing.
          • A developer may advise the taxpayer regarding available sources of financing, such as federal, state or local subsidy programs, as well as commercial financing. The cost of such services may not be included in eligible basis.
        • Maintaining contracts, books and records sufficient to establish the value of the completed project.
        • Partnership Costs - services associated with the partnership’s organization, syndication of partnership interests, or securing the allocation of tax credits, are not includable in eligible basis.
  • Initial Lease-Up Costs - the taxpayer may contract with the developer to complete the initial leasing of the rental units. Typical costs would be
    • Hiring on-site staff;
    • Advertising; and
    • Maintaining model units.
These costs are not includable in eligible basis.
  • On-going Management Costs - the developer may also contract to provide on-going management of the day-to-day operations after the initial lease-up. These services may include providing qualified on-site managers, physically maintaining the site, resolving tenant issues, and renewing leases and obtaining new residents. Such costs are not part of eligible basis.
  Services Actually Provided   During an audit, the IRS will work to determine whether the developer actually performed the services covered by the fee. Normally, one developer will initiate development and then provide services throughout the development process until the project is completed. However, there are instances where more than one developer is involved. For example, a for-profit developer may work with a qualified nonprofit organization to develop a low-income project qualifying for a credit allocation from the nonprofit set-aside. When there are multiple developers, there are two basic questions:
  1. How were developmental responsibilities divided among the developers; and
  2. Did the developer have the skills and expertise needed to provide the developmental services and complete the project?
  Reasonable Fee   As a best practice, the state agencies have limited the developer fee amount that can be supported by the credit. This limit is typically a percentage of total costs. There is no requirement that the IRS accept the developer fee allowed by the state agency, and the Service may raise issues involving the reasonableness of the fee if the facts and circumstances warrant doing so.   Method of Payment   Developer fee payments made during development, or at the time development is completed, and which are identified in the taxpayer’s books as payments of developers fees are generally not challenged by the IRS. Deferred fees however, will get a much harder look. In these cases, the IRS will consider whether the payment is contingent upon providing services usually associated with the duties of a general partner. They will also consider whether payment of the developer fee is contingent on successfully operating the project, or maintaining the project, in compliance with §42. If these conditions exist, separately or in combination, then the deferred portion of the fee is not includable in eligible basis because the developer is being paid for services unrelated to the development of the low-income building. Intent to Pay Deferred Developer Fee   A major element in any IRS decision as to whether a deferred developer fee may be included in basis is whether or not the taxpayer intends to pay the deferred fee. This is especially important if the parties to the transaction are related (for business purposes). Consideration will be given to whether:
  • The note and/or other documentation bears no interest rate or no repayment is required for extended periods of time, suggesting that the agreement is not an arm’s length transaction;
  • Payment is contingent on events unlikely to occur;
  • Payment is subordinate to payment of other debt, and it is unclear that payment would ever be financially possible;
  • The developer holds a right of first refusal to purchase the property for a price equal to the outstanding debt; or
  • The general partner, who is (or is related to) the developer, is required to make a capital contribution sufficient to pay the deferred fee if the fee is not paid before a specified date.
If the above fact patterns exist, separately or in combination, the deferred developer fee note may not be bona fide debt. So, what does the IRS consider to be "bona fide" debt?   Generally, debt, whether recourse or nonrecourse, is includable in the basis of property. However, the obligation must represent genuine, noncontingent debt. Nonrecourse debt is not includable if the property securing the debt does not reasonably approximate the principal amount of the debt, or if the value of the underlying collateral is so uncertain or elusive that the purported indebtedness must be considered too contingent to be includable in basis.   Recourse liabilities are generally includable in basis because they represent a fixed, unconditional obligation to pay, with interest, a specified sum of money. However, an obligation, whether recourse or nonrecourse, will not be treated as true debt where payment, according to its terms, is too contingent or repayment is otherwise unlikely. A liability is contingent if it is dependent upon the occurrence of a subsequent event, such as the earning of profits.   Genuine Indebtedness   When considering whether transactions characterized as "loans" constitute genuine indebtedness, tax courts have isolated a number of criteria from which to judge the true nature of an arrangement that in "form" appears to be debt. In Fin Hay Realty Co. v. United States (1968), the court outlined 16 nonexclusive factors that bear on whether an instrument should be treated as debt for tax purposes:
  1. The intent of the parties;
  2. The identity between creditors and shareholders;
  3. The extent of participation in management by the holder of the instrument;
  4. The ability of the debtor to obtain funds from outside sources;
  5. Thinness of capital structure in relation to debt;
  6. The risk involved;
  7. The formal elements of the arrangement;
  8. The relative position of the obligees as to other creditors regarding the payment of interest and principal;
  9. The voting power of the holder of the instrument;
  10. The provision of a fixed rate of interest;
  11. Any contingency on the obligation to repay;
  12. The source of the interest payments;
  13. The presence or absence of a fixed maturity date;
  14. A provision for redemption by the corporation;
  15. A provision for redemption at the option of the holder; and
  16. The timing of the advance with reference to when the taxpayer was organized.
The court stated, "Neither any single criterion nor any particular series of criteria can provide an exclusive answer…" The Tax Court also held that the case-enumerated factors are merely aids to determine whether a given transaction represents genuine debt.   The weight given to any factor depends upon all the facts and circumstances. No particular factor is conclusive in making the determination of whether an instrument constitutes debt or equity. There is no fixed or precise standard. Among the common factors considered when making this determination are whether:
  • A note or other evidence of indebtedness exists;
  • Interest is charged;
  • There is a fixed schedule for payments;
  • Any security or collateral is requested;
  • There is any written loan agreement;
  • A demand for repayment has been made;
  • The parties records, if any, reflect the transaction as a loan; and
  • The borrower was solvent at the time of the loan.
  The key issue is not whether certain indicators of a bona fide loan exist or do not exist, but whether the parties actually intended and regarded the transaction to be a loan. An essential element of bona fide debt is whether there exists a good-faith intent on the part of the recipient of the funds to make repayment and a good-faith intent on the part of the person advancing the funds to enforce repayment.   Related Party Transactions   In a typical LIHTC property, both the general partner and the developer are the same entity. When transactions occur between related parties rather than at arm’s length, they are "subject to particular scrutiny because the control element suggests the opportunity to contrive a fictional debt." Geftman v. Commissioner, 1998. When examining related party transactions, the Service should determine tax consequences not from the "form of the transaction," but from its "true substance." Thus, as stated in Geftman, "a transaction must be measured against an objective test of economic reality and characterized as a bona fide loan only if its intrinsic economic nature is that of a genuine indebtedness."   Intrinsic Economic Nature   A deferred developer fee will be structured as a promissory note or other debt instrument. However, courts will rely more on the relationship between the parties than to the form of the transaction. The essential question is whether the instruments "intrinsic economic nature is that of a genuine indebtedness."   The critical test of the economic reality of a purported debt is whether an unrelated outside party would have advanced funds to the borrower under similar circumstances. Creditors usually avoid subjecting funds to the risk of a borrower’s business as much as possible and seek a reliable return on their investment. For example, commercial lenders impose borrowing terms that limit risks and charge interest rates that reasonably compensate for those risks and provide a reasonable return on the investment. An example of terms that would not represent true debt would be:
  1. A note that is due and payable far in the future;
  2. No installment payments due;
  3. Note is subordinate to other debt an payable only after all operating expenses have been paid;
  4. Note is unsecured and nonrecourse; and
  5. The note is interest free.
  A taxpayer’s thin capitalization adds to the evidence that a deferred developer fee is not real debt. Even if the taxpayer is reasonably capitalized, if the terms of the debt are highly favorable (as noted above), the IRS could deem the deferred fee as not being genuine debt.   The Service will also examine the Taxpayer’s ability to repay the advance and the reasonable expectation of repayment. Normally, there are four possible sources of repayment:
  1. Liquidation of business assets;
  2. Profits;
  3. Cash flow; and
  4. Refinancing with another lender.
  In TAM (Technical Advice Memorandum) 200044004, the IRS provided an example of how the totality of circumstances will lead to the determination of whether a deferred fee is true debt. The circumstances were as follows:
  • At completion of construction, the taxpayer did not have the funds to pay the entire developers fee so it issued a note for the balance;
  • The note was payable at maturity, 13 years from completion of the project;
  • The note was unsecured and source-of-payment restrictions were in effect during the term of the note;
  • Payment was subordinate to other debts;
  • The note bore interest which was compounded annually and added to the unpaid principal during the term of the note;
  • The taxpayer was obligated to pay off the note in full at maturity and the general partners were obligated to make additional capital contributions necessary to pay off the note at maturity; and
  • Financial statements indicated that payments had been made on the note.
Despite the negative elements of the arrangement (long-term maturity, unsecured and source of payment restrictions, and subordination), the IRS concluded that the amount of the developer fee note was includable in eligible basis. There was an obligation to pay and interest accrued. The general partners were obligated to contribute a sufficient amount to pay the note in full, and the taxpayer had sufficient equity and assets to repay the note. Critical to the determination in the TAM was the fact that the note bore interest to compensate the lender for the various financial risks posed by the note. In the case of deferred developer fees, the ultimate burden to demonstrate that the developer fee was earned and is includable in eligible basis rests with the taxpayer. If the taxpayer has deferred payment, the taxpayer will also need to demonstrate the deferred fee is bona fide debt.

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Historic Housing Expansion in Reconciliation Act

Since being signed into law on July 4, I have read the "One Big Beautiful Bill twice, in an effort to determine its impact on housing - especially affordable housing. What follows is my take on the impact of the bill on affordable housing in the United States. The "One Big Beautiful Bill Reconciliation Act marks the most significant expansion of affordable housing programs in over twenty years, permanently transforming the Low-Income Housing Tax Credit program and delivering the largest housing investment in its 39-year history. Signed into law by President Trump on July 4, 2025, the legislation will fund an estimated 1.22 million additional affordable rental homes over the next decade through improved tax credit provisions and streamlined financing methods. This expansion comes at a critical time when the nation faces a serious affordable housing shortage, with the changes taking effect on January 1, 2026, and offering unprecedented long-term stability for developers and investors. The legislation narrowly passed along party lines 218-214 in the House and 51-50 in the Senate, with Vice President Vance casting the deciding vote as part of a massive $3.4 trillion reconciliation package that reshapes federal fiscal policy across multiple sectors. While the broader bill includes controversial provisions like significant tax cuts and reductions to safety net programs, the housing provisions have received bipartisan praise from industry stakeholders who see them as vital for addressing America s housing crisis. Legislative details and comprehensive scope The One Big Beautiful Bill Act (H.R. 1, P.L. 119-21) originated from the budget reconciliation process as a lengthy 870-1,000 page package that includes broad tax cuts, targeted spending hikes, and social program adjustments. The legislation is estimated to have a fiscal impact of $3.4 trillion over a decade, with housing provisions accounting for $15.7 billion in tax credit expansions. The bill s path through Congress highlighted strong partisan divides, with Democrats consistently opposing the legislation despite backing many of its housing provisions. The reconciliation process allowed Republicans to bypass the Senate filibuster, making it possible to pass the bill with a simple majority. The legislation includes provisions from 11 House committees and 10 Senate committees, showing its wide-ranging scope across federal policy areas. Beyond housing, the act makes the 2017 Tax Cuts and Jobs Act individual tax rates permanent, eliminates taxes on tips and overtime pay, raises the state and local tax deduction cap to $40,000 for earners under $500,000, and allocates $350 billion for border security. However, these benefits come with significant cuts to Medicaid and SNAP programs, creating a complex policy landscape that impacts housing affordability in conflicting ways. Transformative LIHTC program enhancements The legislation provides the most significant Low-Income Housing Tax Credit expansion since the program started in 1986. The main feature is a permanent 12% increase in 9% LIHTC allocations, raising the per-capita allocation from $3.00 to about $3.36 beginning in 2026. Although this percentage increase appears small, it results in an extra $132 million per year in tax credit authority across the country, with proportional increases for the eight states, D.C., and four territories that get small-state minimum allocations. The second major LIHTC change permanently lowers the private activity bond financing threshold from 50% to 25% of total project costs for 4% credit deals. This change fundamentally shifts the economics of affordable housing development by making projects eligible for non-competitive 4% credits with much less bond financing. According to a Novogradac analysis, this single change will enable 1.14 million more affordable rental homes between 2026 and 2035, forming the majority of the legislation s housing production impact. The Congressional Budget Office estimates these LIHTC changes will cost $15.7 billion over 2026-2035, making them highly cost-effective compared to other federal housing programs. The permanent nature of these provisions sets this expansion apart from previous temporary measures, offering unmatched certainty for the affordable housing sector s long-term planning and investments. The legislation initially included extra provisions for rural and tribal communities, but these were removed in the final version. The House bill would have provided an automatic 30% basis boost for properties in rural areas and tribal lands, but these enhancements did not make it through the reconciliation process, marking a significant narrowing of the original scope. Broader affordable housing provisions and opportunity zones Beyond LIHTC, the legislation includes several other housing-related provisions that expand development incentives and homeownership opportunities. The act makes the Opportunity Zones program permanent with enhanced incentives, allowing investors to defer taxation of capital gains from qualified opportunity zone investments until December 31, 2033, and providing a 10% basis increase for investments held five or more years. The legislation requires that 33% of newly designated opportunity zones be in rural areas, with automatic qualification for rural and tribal regions. This geographic focus addresses previous criticisms that opportunity zones mainly benefited already-developing urban areas while overlooking rural communities that could gain the most from investment incentives. The New Markets Tax Credit program has received permanent reauthorization with $5 billion allocated annually, ensuring stability for community development financial institutions and community development entities that fund affordable housing and commercial projects in low-income areas. This permanent setup removes the uncertainty caused by repeated short-term extensions. For homeownership, the legislation reestablishes the tax deduction for mortgage insurance premiums and makes permanent the 20% deduction for qualified business income, which specifically benefits real estate professionals. The act also raises the child tax credit to $2,500 per qualifying child through 2028 and offers various other tax incentives that could indirectly boost homeownership capacity. Market dynamics and development impacts The legislation s housing provisions will fundamentally change affordable housing development patterns and market dynamics. Lowering private activity bond requirements from 50% to 25% for 4% LIHTC deals will shift significant development activity from the competitive 9% credit market to the non-competitive 4% market. This change provides developers with greater certainty and faster project timelines, as 4% credits don t need the lengthy competitive allocation process that characterizes 9% credits. State housing finance agencies will need to modify their allocation strategies to handle increased demand while overseeing their private activity bond capacity. States with oversubscribed multifamily bond programs will benefit most from the 25% threshold reduction, as more projects will become feasible with lower bond financing requirements. The ongoing 12% increase in 9% LIHTC allocations will strengthen states ability to fund competitive projects, potentially lowering the oversubscription ratios that make 9% credits highly competitive. However, the effectiveness of these changes depends largely on the availability of gap financing sources, since LIHTC generally covers only 60-70% of development costs. This could become a critical issue since the Administration s 2026 budget proposal calls for the elimination of the HOME and CDBG programs. Construction capacity and workforce availability pose significant challenges to implementation. The U.S. construction industry faces major labor shortages, and the possibility of adding over one million new housing units could strain existing resources. Material costs might also increase due to new tariffs announced by the administration, potentially reducing some of the financial advantages of the increased tax credit provisions. Stakeholder reactions reveal sharp divisions The housing provisions have received enthusiastic support from industry groups despite opposition to the broader legislation. The National Association of Home Builders described the act as "the first time in a long time that housing has been prioritized, while the National Association of Realtors commended the achievement of their "top 5 priorities, including permanent lower tax rates and improved business income deductions. The Mortgage Bankers Association emphasized that the legislation preserves "pro-housing and pro-economic growth tax provisions, especially highlighting the permanent mortgage interest deduction and the reestablished mortgage insurance premium deduction. These industry groups see the legislation as offering crucial long-term certainty for housing investment and development. However, housing advocacy organizations offer a more nuanced view. The National Low Income Housing Coalition supports expanding the LIHTC but strongly opposes the broader legislation s cuts to Medicaid and SNAP programs. Executive Director Kim Johnson stated that "while LIHTC is an important program, LIHTC units are rarely affordable enough for households with the lowest incomes, who will be most affected by safety net reductions. The National Housing Conference praised the legislation, with President David Dworkin calling the housing provisions "the most consequential and positive housing legislation in decades. This highlights the industry s focus on production capacity rather than broader affordability issues. Implementation timeline and administrative challenges The legislation s housing provisions take effect on January 1, 2026, with state housing agencies already preparing for implementation. States will receive their enhanced LIHTC allocations starting with the 2026 allocation year, requiring updates to Qualified Allocation Plans and application processes to handle the increased volume. The Treasury Department and IRS need to develop regulatory guidance for the new private activity bond threshold calculations and basis boost provisions. State housing finance agencies are updating their technology systems and training staff for the expected increase in application volume, with some smaller states worrying about their ability to handle the expanded program scale. The Congressional Budget Office estimates that the housing provisions will cut the primary deficit by $85 billion through economic growth effects, indicating that increased housing production will generate enough economic activity to partly offset the legislation s fiscal costs. However, this estimate relies on successful implementation and full use of the expanded credit authority. Rural and tribal communities face specific implementation challenges because these areas often lack the developer capacity and technical expertise needed to fully utilize LIHTC programs. The legislation provides for enhanced technical assistance, but successful implementation will require ongoing efforts to build local capacity and expertise. Comparison to previous housing policy initiatives The One Big Beautiful Bill Act represents the largest federal housing investment since the Housing and Economic Recovery Act of 2008, but it has fundamentally different characteristics. While HERA provided temporary expansions in response to the financial crisis, the current legislation implements permanent program improvements that offer long-term stability. The 2008 legislation included a temporary 10% increase in LIHTC allocations and established the 9% minimum credit rate, but these provisions were meant as crisis response measures. The permanent nature of the current expansion sets it apart from earlier temporary initiatives and offers unmatched certainty for industry planning. Compared to Obama-era housing initiatives, the current legislation adopts a supply-side approach that emphasizes tax incentives rather than direct spending programs. The Obama administration focused on foreclosure prevention, GSE reform, and crisis response, while the current strategy prioritizes increasing production capacity through enhanced tax credits and development incentives. The 2018 Consolidated Appropriations Act increased LIHTC allocations by 12.5% for 2018-2021, but this temporary boost expired and required yearly congressional approval. The current legislation s permanent structure removes this uncertainty and allows the industry to plan for the long term. Conclusion and long-term implications The One Big Beautiful Bill Act s housing provisions mark a historic expansion of federal affordable housing programs, with the potential to significantly increase housing production over the next decade. The legislation s permanent improvements to the LIHTC program offer unprecedented stability and certainty for the affordable housing industry, while the enhanced financing mechanisms are expected to streamline development processes and shorten project timelines. However, the overall impact of the legislation on housing affordability remains complex and potentially contradictory. While the supply-side provisions are expected to increase the production of affordable housing, the simultaneous cuts to Medicaid and SNAP programs could lower housing purchasing power for the lowest-income households. The Congressional Budget Office estimates that the lowest-income households will lose an average of $1,600 per year, while higher-income households will gain $12,000 annually, indicating that the benefits may mainly go to higher-income groups. The success of these provisions ultimately depends on effective implementation, sufficient construction capacity, and the availability of additional financing sources. The legislation sets the framework for significant increases in housing production, but turning this potential into actual affordable housing units will require coordinated efforts from federal agencies, state housing finance agencies, and private sector developers. For housing policy analysts and practitioners, the legislation presents both significant opportunities and notable challenges. The permanence of key provisions offers stability for long-term planning, while the scale of potential production increases demands substantial capacity building and system adaptation. The coming years will reveal whether this historic expansion leads to meaningful progress on America s affordable housing crisis.

USDA Proposes Mandatory Market Studies for Section 538 Projects

The U.S. Department of Agriculture s Rural Housing Service (RHS) is tightening requirements for project feasibility under its Section 538 Guaranteed Rural Rental Housing Program (GRRHP). In a newly proposed rule, RHS will require all applicants seeking loan guarantees for new construction to submit a formal market study as part of a complete application. This may sound like a bureaucratic tweak, but it has real implications for lenders, developers, and rural communities. What s the Section 538 Program? Section 538 is the USDA s flagship loan guarantee program for rural multifamily housing. It backs up to 90% of loans made by private lenders for the construction or rehab of rental housing serving low- and moderate-income households in USDA-defined rural areas. It s a public-private partnership model that has delivered thousands of affordable units to small towns that are often overlooked. What s Changing and Why? Up to now, the rules under 7 CFR part 3565 have encouraged applicants to "demonstrate market feasibility, but have not required any specific documentation to prove it. Some lenders submitted comprehensive market studies; others relied on summaries, broker letters, or hastily compiled spreadsheets. That inconsistency is what the USDA wants to eliminate. Under the proposed rule, all new construction applications must include a comprehensive market study. This will: Ensure projects are built in markets with demonstrated need; Avoid oversaturation and risk to the existing affordable housing stock; Align USDA requirements with industry norms (e.g., LIHTC, HUD programs); Improve efficiency and uniformity in loan guarantee underwriting. What s a Market Study, Exactly? A professional market study typically includes: A demographic and economic profile of the market area; Rent comparables and absorption trends; An analysis of supply and demand for affordable units; Impact projections on existing housing stock; Supportable rent and unit mix recommendations. In short, it s the backbone of a smart housing investment and USDA wants it in every file. Who s Affected? Lenders & Developers: Must budget time and cost for a market study before the USDA will consider a loan guarantee for new construction. Property Managers: May see less risk of oversupplied markets hurting occupancy. USDA & Taxpayers: Benefit from better quality control and reduced risk of supporting white elephants in underserved areas. Comments Wanted Speak Now or Forever Hold Your Feasibility USDA is inviting public comments through August 30, 2025 (60 days from publication). Visit regulations.gov and search Docket No. RHS-24-MFH-0024 or RIN 0575-AD42. If you have a stake in affordable rural housing, this is your shot to weigh in. Bottom Line Requiring a market study isn t red tape it s a reality check. The move helps ensure scarce affordable housing dollars are spent where demand is real and sustainable. For lenders and developers, it s one more hoop, but also a safeguard. For rural communities, it s a sign that USDA wants housing investments to be grounded in facts, not optimism. Smart growth starts with smart data. This rule aims to make sure rural housing does just that. For more updates on affordable housing policy and compliance, stay connected with A. J. Johnson Consulting Services.

RD to Implement HOTMA Income and Certification Rules on July 1, 2025

Although HUD has postponed implementation of HOTMA for its Multifamily Housing Programs until January 1, 2026, the USDA Rural Housing Service (RHS) Office of Multifamily Housing has announced that the Housing Opportunity Through Modernization Act (HOTMA) will take effect on July 1, 2025, bringing significant changes to income calculation rules for multifamily housing programs. Key Implementation Details To accommodate the federally mandated HOTMA requirements, Rural Development published comprehensive updates to Chapter 6 of Handbook 2-3560 on June 13, 2025. All multifamily housing tenant certifications effective on or after July 1, 2025, must comply with the new HOTMA requirements. Recognizing the challenges of the transition period, Rural Development has announced a six-month grace period. Between July 1, 2025, and January 1, 2026, the agency will not penalize multifamily housing owners for HOTMA-related tenant file errors discovered during supervisory reviews. Legislative Background HOTMA was signed into law on July 29, 2016, directing the Department of Housing and Urban Development (HUD) to modernize income calculation rules established initially under the Housing Act of 1937. After years of development, HUD published the Final Rule on February 14, 2023, updating critical regulations found in 24 CFR Part 5, Subpart A, Sections 5.609 and 5.611. The HOTMA changes specifically affecting the RHS Multifamily Housing portfolio are contained in 24 CFR 5.609(a) and (b) and 24 CFR 5.611, which standardize income calculation methods across federal housing programs. Notable Policy Changes Unborn Child Consideration One of the most significant changes involves how unborn children are counted for household eligibility purposes. Under the new rules, pregnant women will be considered as part of two-person households for income qualification purposes, aligning Rural Development policies with other affordable housing programs, including HUD and the Low-Income Housing Tax Credit (LIHTC) programs. However, the household will not receive the $480 dependent deduction until after the child is born, maintaining consistency in benefit distribution timing. Updated Certification Forms Rural Development has released an updated Form RD 3560-8 Tenant Certification, which was initially published on December 6, 2024, and revised on April 18, 2025. The form is available on the eForms Website for immediate use. The previous version of the form has been renumbered as RD 3560-8A and should be used for all tenant certifications effective before July 1, 2025. Implementation Timeline The HOTMA implementation has experienced some delays. Originally scheduled to take effect on January 1, 2025, the Rural Housing Service announced on October 3, 2024, that implementation would be postponed to July 1, 2025, to allow additional time for property owners and managers to prepare. Rural Development initially implemented HOTMA through an unnumbered letter dated August 19, 2024, which outlined the overview and projected timeline for implementation. Industry Impact The HOTMA changes represent the most significant update to federal housing income calculation rules in decades, affecting thousands of multifamily housing properties across rural America. Property owners and managers have been working to update their systems and train staff on the new requirements. The six-month penalty-free transition period demonstrates Rural Development s commitment to supporting property owners through this complex regulatory change while ensuring long-term compliance with federal requirements. Moving Forward Multifamily housing stakeholders are encouraged to review the updated Chapter 6 of Handbook 2-3560 and ensure their staff is adequately trained on the new HOTMA requirements. Property owners should also verify they have access to the updated Form RD 3560-8 and understand the timing requirements for its use. For ongoing updates and additional resources, stakeholders can subscribe to USDA Rural Development updates through the GovDelivery subscriber page. The implementation of HOTMA represents a significant step toward modernizing and standardizing income calculation methods across federal housing programs, ultimately improving consistency and fairness in affordable housing administration.

HUD’s Proposed Rule to Eliminate Affirmative Fair Housing Marketing Plans: A Critical Analysis

Introduction The Department of Housing and Urban Development (HUD) has proposed eliminating the requirement for Affirmative Fair Housing Marketing Plans (AFHMPs), a cornerstone of fair housing enforcement for decades. This proposed rule, published on June 3, 2025, represents a significant departure from established fair housing practices and raises serious concerns about the federal government s commitment to ensuring equal housing opportunities for all Americans. HUD s justification for this elimination rests on six primary arguments, each of which fails to withstand careful scrutiny and analysis. Background on Affirmative Fair Housing Marketing Plans AFHMPs have long served as essential tools in combating housing discrimination by requiring property owners and managers to actively market housing opportunities to groups that are least likely to apply. These plans ensure that information about available housing reaches all segments of the community, not just those who traditionally have had better access to housing information networks. Analysis of HUD s Justifications 1. Claims of Inconsistency with Fair Housing Act Authority HUD argues that its authority under the Fair Housing Act and Executive Order 11063 is limited to the "prevention of discrimination, claiming that AFHM regulations go beyond this scope by requiring outreach to minority communities through targeted publications and outlets. The agency characterizes this as impermissible "racial sorting. This argument fundamentally misunderstands both the nature of discrimination and the historical context of fair housing enforcement. Information disparities have long been one of the most prevalent and effective forms of housing discrimination. When certain groups systematically lack access to information about housing opportunities, the discriminatory effect is equivalent to being explicitly excluded. The failure to provide equal access to housing information is, in itself, a discriminatory act, not merely a neutral information gap. AFHMPs address this reality by ensuring that housing information reaches all communities, particularly those that have been historically excluded from traditional marketing channels. 2. Constitutional Challenges Under Equal Protection HUD contends that AFHM regulations violate the Equal Protection Clause by requiring applicants to favor some racial groups over others. This characterization is both inaccurate and misleading. AFHMPs do not create preferences or favor any particular group. Instead, they ensure equitable access to information by targeting outreach to communities that are "least likely to apply for specific housing opportunities. This principle applies regardless of the racial or ethnic composition of those communities. For instance, housing developments located in predominantly minority neighborhoods are required to conduct affirmative marketing in white communities since white residents would be least likely to apply for housing in those areas. The regulation is race-neutral in its application it focuses on reaching underrepresented groups regardless of their racial identity. This approach promotes inclusion rather than exclusion and advances the constitutional principle of equal protection under the law. 3. Delegation of Legislative Power Concerns HUD s third argument that the Fair Housing Act s authorization of AFHM regulations constitutes an unconstitutional delegation of legislative power represents perhaps the weakest aspect of their legal reasoning. Congress explicitly mandated that affirmative efforts be made to eliminate housing discrimination. As the administrative agency responsible for implementing congressional intent in this area, HUD possesses both the authority and the responsibility to determine the most effective means of carrying out this mandate. The development of specific regulatory mechanisms to achieve Congress s stated goals falls squarely within HUD s legitimate administrative authority and represents appropriate implementation of legislative intent rather than overreach. 4. The "Color Blind Policy Justification HUD frames its opposition to AFHMPs as part of a "color-blind policy approach, arguing that it is "immoral to treat racial groups differently and that the agency should not engage in "racial sorting. This argument mischaracterizes the function and operation of AFHMPs. These plans do not sort individuals by race or treat different racial groups unequally. Rather, they ensure that all groups have equal access to housing information by specifically reaching out to those who are least likely to receive such information through conventional marketing channels. Critically, AFHMPs require marketing to the general community in addition to targeted outreach. This comprehensive approach ensures broad access to housing information while addressing historical information disparities that have contributed to ongoing patterns of segregation. 5. Burden Reduction for Property Owners HUD argues that "innocent private actors should not bear the economic burden of preparing marketing plans unless they have actively engaged in discrimination. This position suggests that property owners should be exempt from fair housing obligations unless they can prove intentional discriminatory conduct. This reasoning effectively provides cover for property owners who prefer that certain groups remain unaware of housing opportunities. The "burden of creating inclusive marketing strategies is minimal compared to the societal cost of perpetuating information disparities that maintain segregated housing patterns. The characterization of comprehensive marketing as an undue burden ignores the fundamental principle that equal housing opportunity requires proactive effort, not merely passive non-discrimination. This represents a retreat to a "wink and nod approach to fair housing enforcement that falls far short of the Fair Housing Act s aspirational goals. 6. Prevention vs. Equal Outcomes HUD s final argument contends that AFHM regulations improperly focus on equalizing statistical outcomes rather than preventing discrimination. This argument creates a false dichotomy between prevention and opportunity creation. AFHMPs exist not to guarantee equal outcomes but to ensure equal opportunity by providing equal access to housing information. When information about housing opportunities is not equally available to all segments of the community, the opportunity for fair housing choice is compromised from the outset. True prevention of discrimination requires addressing the structural barriers that limit housing choices, including information disparities. The Broader Implications HUD s proposed elimination of AFHMP requirements represents a concerning retreat from decades of progress in fair housing enforcement. The proposal effectively returns to an era when discrimination, while technically prohibited, was facilitated through information control and selective marketing practices. The reality of housing markets is that access to information varies significantly across communities. Property owners and managers possess considerable discretion in how they market available units. Without regulatory requirements for inclusive outreach, there are few incentives to ensure that information reaches all potential applicants. Anyone with experience in affordable housing development and management understands that information flow can be deliberately targeted and shaped. This targeting can either expand housing opportunities for underserved communities or systematically exclude them. Marketing strategies can be designed to minimize applications from certain groups while maintaining technical compliance with non-discrimination requirements. Conclusion The six justifications offered by HUD for eliminating AFHMP requirements fail to provide compelling reasons for abandoning this critical fair housing tool. The arguments reflect a fundamental misunderstanding of how housing discrimination operates in practice and ignore the crucial role that information access plays in maintaining or dismantling segregated housing patterns. Rather than advancing fair housing goals, the proposed rule exacerbates existing disparities by removing a key mechanism for ensuring that all communities have equal access to housing information. The elimination of AFHMPs would represent a significant step backward in the ongoing effort to achieve the Fair Housing Act s vision of integrated communities and equal housing opportunities for all Americans. The current proposal suggests an agency leadership more committed to reducing the regulatory burden on property owners than to expanding housing opportunities for underserved communities. This represents a troubling departure from HUD s mission and responsibilities under federal fair housing law. Moving forward, policymakers, housing advocates, and community leaders must carefully consider whether this proposed rule serves the public interest or merely provides cover for practices that perpetuate housing segregation through more subtle but equally effective means.

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