News

HUD Implements HERA Changes to Tenant Based and Project Based Vouchers

On June 25, 2014, HUD published a notice implementing changes made by the Housing & Economic Recovery Act (HERA) of 2008 to the Tenant Based and Project Based Voucher Programs.   Two changes will make it easier to use Project-based vouchers (PBV) with the LIHTC program: The Project-Based Voucher Contract initial rent will be a "floor" rent, meaning that future reductions in local voucher payment standards will not result in PBV going lower than the payment when the PBV contract was entered into (this is similar to the gross rent floor for the LIHTC program); and The initial term of a PBV contract may be 15 years instead of ten, which makes it much easier to get lenders and investors on board with LIHTC projects using PBVs. Another important component of the HUD notice relative to tenant-based voucher residents on LIHTC properties is that Public Housing Agencies (PHAs) are not required to conduct a rent comparability study if the rent charged for voucher units does not exceed the rent charged for LIHTC units occupied by non-voucher residents. Keep in mind however, that this notice does not prohibit PHAs from undertaking such studies in these cases.   This notice does create one possible concern for existing housing that will be utilizing a PBV contract, and that is the potential for expansion of the Davis-Bacon wage rates to "existing housing" under the PBV program. The definition of existing housing under the notice is a project that is substantially compliant with Housing Quality Standards (HQS) upon proposal selection and fully compliant with HQS when the PHA and owner enter into the HAP contract. Work done on such deals previously did not have to comply with Davis-Bacon wage rates. This final rule re-interprets the applicability of Davis-Bacon to "existing housing," and applies to projects with nine or more units. In certain areas of the country, this could have significant impact on project costs.

HUD Notice on Implementation of FY 2014 Appropriations Provisions

On June 25, 2014, HUD published a Notice establishing the terms and conditions by which HUD will implement changes to the statutory definition of a "public housing agency" (PHA), the frequency of housing inspections, the statutory definition of "extremely low-income," and utility allowances for tenant-paid utilities. The effective date of the Notice is July 1, 2014. Background The 2014 Appropriations Act includes five statutory changes to the Housing Act of 1937 that are designed to reduce administrative burdens on PHAs, enable PHAs to better target assistance to families in need of such assistance, and reduce Federal costs. The only statutory change that is applicable to the multifamily project-based Section 8 program is the added definition of "extremely low-income" in Section 238 of the Act. For all other statutory changes, the changes provided in the HUD Notice apply only to the public housing and Section 8 voucher programs. PHA Consortia Section 212 of the 2014 Appropriations Act amends the definition of a PHA to include a consortium of such entities. Biennial Inspections Section 220 allows PHAs to comply with the requirement to inspect assisted dwelling units during the term of a housing assistance payment (HAP) contract by conducting biennial housing quality standard inspections (HQS) instead of annual inspections. PHAs are also able to utilize alternative inspection methods to demonstrate that housing meets the housing quality requirements under the voucher program. PHAs are still required to conduct an initial inspection, prior to entering into a HAP contract, and interim inspections, if a family or government official notifies the PHA of a unit s failure to comply with HQS. This section is immediately effective for any unit under HAP contract where the PHA has conducted an HQS inspection within the 12 months preceding 7/1/14. If the most recent inspection occurred more than 12-months prior to 7/1/14, the PHA is required to conduct an annual HQS inspection for that unit. If PHAs desire to conduct inspections more frequently than on a biennial basis, they may do so. A PHA may comply with the biennial inspection requirement by relying upon an inspection conducted by another housing assistance program. If there is reliance on another program, the PHA must identify the alternate program in its administrative plan. Other acceptable programs for inspection standards include the HOME Program, the LIHTC Program, and other inspections by HUD. If a property is inspected under an alternative inspection method that does not employ a pass/fail determination for the inspections - e.g., the LIHTC program - then the PHA must review the deficiencies noted in the alternative inspection to determine whether any deficiency would have resulted in a "fail" score under HQS.   Extremely Low-Income Section 238 creates a statutory definition of "extremely low-income families," which is defined as very low-income families whose incomes do not exceed the higher of the Federal poverty level or 30% of area median income. This provision affects the ELI targeting requirements for the public housing, housing choice voucher (HCV), project-based voucher (PBV), and multifamily project-based Section 8 programs. As of July 1, 2014, compliance with the targeting requirements under each of these programs is required and the new definition of ELI is effective. As of this date, no family on a waiting list may be skipped over if that family meets the new definition of ELI as enacted by Section 238. For the multifamily project-based Section 8 programs, the contract administrator must ensure that families qualifying at ELI income occupy not less than 40 percent of the Section 8-assisted dwelling units that become available. HUD s office of Policy Development and Research has calculated the new income limits for extremely low-income families, using the new ELI definition. These new limits are available online at http://huduser.org/portal/datasets/il/il14/index.html. Operators of these properties should immediately download and put into place the revised income limits for their properties.       Utility Allowances   Section 242 establishes a cap on the utility allowance for families leasing oversized units. The cap is based on family size rather than the size of the unit leased, with the ability to set a higher amount to provide a reasonable accommodation to the family of a person with disabilities.  

General Partner Removal - Rights of the Limited Partner

The Delaware Supreme Court recently decided a case important to investors and developers of Low-Income Housing Tax Credit housing. The case (DV Realty Advisors LLC v. Policemen s Annuity and Benefit Fund of Chicago, DEFAX Case No. D65838 {Del. 2013}), is important because it dealt with the circumstances under which a limited partner may remove a general partner from an operating partnership. The High Court affirmed a Delaware Chancery Court ruling that the limited partners in the case made a good faith determination when removing a general partner for the best interests of the limited partnership. The relevance of the case is enhanced by the recognition of Delaware business courts as being especially sophisticated in corporate and partnership issues.   The case originated when the public fund limited partners removed the general partner of DV Urban Realty Partners I, LP, a Delaware limited partnership (which invested in commercial and residential property in Chicago). The GP challenged the removal in the Chancery Court. The Court ruled that the fund could remove the GP, but the GP appealed, arguing that the Chancery Court improperly found that the investors had operated in "good faith" with the GP removal. The GP was removed for a pattern of excessively late delivery of required financial statements.   The Limited Partnership Agreement (LPA) stated that the limited partners holding in excess of 75% of the limited partnership interests could remove the GP, as long as such removal was done in "good faith" and was in the best interests of the limited partnership. The LPA did not define "good faith," and thus both subjective and objective elements could be considered. The Chancery Court applied the Uniform Commercial Code (UCC) definition of good faith in determining that failure for three years to deliver required financial statements was adequate reason for removal and demonstrated "good faith."   On appeal, the Delaware Supreme Court found that the Chancery Court did err in using the UCC definition of "good faith," since the definition was not applicable to a limited partnership. Instead of "good faith" representing an objective reason for a decision, as outlined in the UCC definition, "good faith" in the context of a limited partnership is ensuring that the limited partners do not act in an arbitrary or capricious manner in removing a GP.   The High Court essentially defined "good faith" by defining its opposite - "bad faith." In this case, the court applied common law as it relates to the business judgment rule. This rule is a principle intended to protect officers and directors from shareholders and third parties when the officers and directors use their experience and best judgment to make decisions, as long as such decisions are made in "good faith." The type of action that would not be protected would be something "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."   In this particular case, the GP had been more than six months late in the delivery of audited financial statements to the LPs for three consecutive years. The Court ruled that even using subjective criteria, removal of the GP in this case was not indicative of bad faith, and therefore was done in "good faith."   This case is important for investors because it makes clear that substantiated reason for removal of a general partner is defensible, and unless specific reasons for removal are outlined in the LPA, limited partners has some latitude in this area. On the other hand, general partners are well advised to ensure that LPAs are as specific as possible in delineating acceptable reasons for removal.

Medical Marijuana Presents Management Challenges

As of April 2014, 21 states and the District of Columbia have legalized medical marijuana, and two states - Washington and Colorado - have legalized recreational use of marijuana. This creates a number of issues for owners and managers of multifamily properties in these states (the states are: Alaska, Arizona, California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, Vermont, and Washington). The question of whether the use of medical marijuana must be allowed as a reasonable accommodation for a disabled person depends on whether the question arises as a state or federal fair housing issue. HUD has indicated that since marijuana in any form is a violation of federal drug law, owners are not required to permit its use as a reasonable accommodation. However, States also protect the disabled from discrimination, and a State court could well take the position that refusing to permit someone to smoke medically prescribed marijuana could violate State fair housing law. So, before refusing such a reasonable accommodation request in these states, consult with your attorney. Like tobacco use, a lease can regulate marijuana use. For example, a property can be smoke-free and drug-free, meaning no smoking of any kind, including marijuana. Or, a property could prohibit smoking of any kind, but permit the use of medical marijuana in non-smoking forms. While smoking is the most expedient method of consuming medical marijuana, it can also damage the lungs and cause respiratory problems, and does generate second-hand smoke. Alternatives to smoking the medical marijuana include (1) medical marijuana vaporizers; (2) medical marijuana edibles; (3) medical marijuana tinctures and tonics; (4) medical marijuana topicals; (5) medical marijuana tea and sodas; and (6) medical marijuana hash and wax. If you operate in one of the areas that permit medical marijuana, you should be proactive about establishing a policy. Whatever you decide, the following steps should be taken: Add the necessary language to your rental criteria and distribute the criteria to prospective renters; Advertise your policy clearly; Post plain-English information about your policy in the rental office; Add appropriate language to your lease (after approval by your attorney); Enforce the terms of the lease; and Be consistent.  

HUD Leadership Change

President Obama has nominated San Antonio Mayor Julian Castro to be the next Secretary of Housing & Urban Development. Castro will replace Shaun Donovan, who has been HUD Secretary since the election of Obama. Obama will nominate Donovan to be the next Director of the Office of Management and Budget. It is expected that Castro will oversee implementation of three main administration objectives for HUD: 1. Increased utilization of the Rental Assistance Demonstration (RAD) program with private money backing for public housing revitalization and making Section 8 the sole source of public and assisted housing rental assistance; 2. Improve the viability of the Federal Housing Administration (FHA) in order to allow the agency's profits to continue absorbing a large part of HUD's operating expenses; and 3. Move forward with strict enforcement of federal fair housing laws under the trilogy of fair housing act regulations aimed at consolidation of fair housing actions.

HUD Updates List of Federally Mandated Income Exclusions

HUD is required to periodically publish in the Federal Register a notice that lists amounts specifically excluded by any Federal Statute from consideration as income for purposes of determining eligibility or benefits in a HUD program. The last such notice was published by HUD in the Federal Register on December 14, 2012. On May 20, 2014, HUD published an updated notice, which replaces the previously published version. This new version adds a new exclusion, includes an inadvertent omission from the 2012 Notice, and corrects two previously listed exclusions.   This Notice applies to several HUD programs, including Rent Supplement, Section 236, Section 8, and Public Housing. Because Section 8 income rules are used in the determination of income for the Low-Income Housing Tax Credit Program, the published exclusions also apply to the IRC Section 42 Low-Income Housing Tax Credit Program.   Changes to the Previously Published List Adds exclusion of any amounts in an "individual development account" as provided by the Assets for Independence Act, as amended in 2002. 1.1.Individual Development Account 1.1.1. This is a trust created for the purpose of paying the qualified expenses of an eligible individual, or enabling the eligible individual to make an emergency withdrawal. The trustee must be a federally insured financial institution, or a State insured financial institution if no federally insured institution is available. 1.1.2. Amounts in the trust may only be paid for the purpose of paying the qualified expenses of the eligible individual. 1.1.3. Qualified expenses include: 1.1.3.1. *Postsecondary educational expenses (are paid directly to the educational institution); 1.1.3.2. *First Home Purchase; 1.1.3.3. *Business Capitalization; 1.1.3.4. *Transfers to IDAs of family members 1.1.4. Eligibility Requirements 1.1.4.1. *Any individual receiving TANF is eligible. Other eligible individuals include: 1.1.4.2. *Those with adjusted income equal to or less than 200% of the poverty level, as long as the net worth of the household does not exceed $10,000. 1.1.5. The money comes from "qualified entities." These may be non-profits, state or local government agency, or a tribal government. Also, credit unions, and Community Development Financial Institutions may be qualified entities. Includes the previously omitted exclusion of any allowance paid under 38 U.S.C. 1833(c) to children of Vietnam veterans born with spina bifida, children of women Vietnam veterans born with certain birth defects, and children of certain Korean service veterans born with spina bifida. (Prior to 2012, this was an exclusion, but was erroneously removed as an exclusion in 2012). Clarifies that educational assistance in excess of tuition does not count for residents over age 23 with dependent children; and Corrects the timeline of exclusion for settlement payments pursuant to the case entitled Elouise Cobell et al. v. Ken Salazar et al.   Following is the complete list of current federally mandated excluded incomes for HUD and LIHTC programs: 1) The value of the allotment provided to an eligible household under the Food Stamp Act of1977; 2) Payments to Volunteers under the Domestic Volunteer Service Act of 1973; 3) Certain payments received under the Alaska Native Claims Settlement Act; 4) Income derived from certain submarginal land of the United States that is held in trust for certain Indian tribes; 5) Payments or allowances made under the Department of Health & Human Services Low-Income Home Energy Assistance Program; 6) Income derived from the disposition of funds to the Grand River Band of Ottawa Indians; 7) The first $2,000 of per capita shares received from judgment funds awarded by the National Indian Gaming Commission or the U.S. Claims Court, the interests of individual Indians in trust or restricted lands, and the first $2,000 per year in income received by individual Indians from funds derived from interests held in such trust or restricted lands. This exclusion does not include proceeds of gaming operations regulated by the Commission; 8) Amounts of scholarships funded under Title IV of the Higher Education Act of 1965, including awards under Federal Work-Study programs or under the Bureau of Indian Affairs student assistance programs. For Section 8 programs only, any financial assistance in excess of amounts received by an individual for tuition and any other required fees and charges under the Higher Education Act of 1965, from private sources, or an institution of higher education, shall not be considered income to that individual if the individual is over the age of 23 with dependent children; 9) Payments received from programs funded under Title V of the Older Americans Act of 1965; 10)Payments received on or after January 1, 1989, from the Agent Orange Settlement Fund (101) or any other fund established pursuant to the settlement in In Re Agent Orange Liability Litigation, M.D.L. No. 381 (E.D.N.Y.); 11)Payments received under the Maine Indian Claims Settlement Act of 1980; 12)The value of any child care provided or arranged (or any amount received as payment for such care or reimbursement for costs incurred for such care) under the Child Care and Development Block Grant Act of 1990; 13)Earned income tax credit (EITC) refund payments received on or after January 1, 1991, for programs administered under the United States Housing Act of 1937, title V of the Housing Act of 1949, Section 101 of the Housing & Urban Development Act of 1965, and sections 221(d)(3), 235, and 236 of the National Housing Act; 14)Payments by the Indian Claims Commission to the Confederated Tribes and Bands of Yakima Indian Nation or the Apache Tribe of Mescalero Reservation (95); 15)Allowances, earnings and payments to AmeriCorps participants under the National and Community Service Act of 1990; 16)Any allowance paid under the provisions of 38 U.S.C. 1833(c) to children of Vietnam veterans born with spina bifida, children of women Vietnam veterans born with certain birth defects, and children of certain Korean service veterans born with spina bifida; 17)Any amount of crime victim compensation (under the Victims of Crimes Act) received through crime victim assistance (or payment or reimbursement of the cost of such assistance) as determined under the Victims of Crimes Act because of the commission of a crime against the applicant under the Victims of Crimes Act; 18)Allowances, earnings and payments to individuals participating in programs under the Workforce Investment Act of 1998; 19)Any amount received under the Richard B. Russell School Lunch Act and the Child Nutrition Act of 1966, including reduced-price lunches and food under the Special Supplemental Food Program for Women, Infants, and Children (WIC); 20)Payments funds or distributions authorized, established, or directed by the Seneca Nation Settlement Act of 1990; 21)Payments from any deferred U.S. Department of Veterans Affairs disability benefits that are received in a lump sum or in prospective monthly amounts; 22)Compensation received by or on behalf of a veteran for service connected disability, death, dependency, or indemnity compensation as provided by an amendment by the Indian Veterans Housing Opportunity Act of 2010 to the definition of income applicable to programs authorized under the Native American Housing Assistance and Self-Determination Act (NAHASDA) and administered by the Office of Native American Housing Programs; 23)A lump sum or a periodic payment received by an individual Indian pursuant to the Class Action Settlement Agreement in the case entitled Elouise Cobell et al. v. Ken Salazar et al., 816 F. Supp.2nd 10 (October 5, 2011 D.D.C.), for a period of one year from the time of receipt of that payment as provided in the Claims Resolution Act of 2010; 24)Any amounts in an "individual development account" as provided by the Assets for Independence Act, as amended in 2002; 25)Per capita payments made from the proceeds of Indian Tribal Trust Cases as described in PIH Notice 2013-30 "Exclusion from Income of Payments under Recent Tribal Trust Settlements; and 26)Major disaster and emergency assistance received by individuals and families under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (93, as amended) and comparable disaster assistance provided by States, local governments, and disaster assistance organizations.   Keep in mind that this list represents amounts specifically excluded from income by federal statute. Exhibit 5-1 of HUD Handbook 4350.3 also includes other excluded incomes for HUD and LIHTC projects. Also, note that with regard to #21 above, Handbook 4350.3 states that deferred VA disability benefits are excluded only for persons receiving Section 8 assistance. This indicates that for persons not receiving Section 8 assistance, all VA disability - including deferred amounts - count as income (see 4350.3, Chg. 4, 5-6.Q.3).  

Hobby vs. Self-Employment

As managers of affordable housing, we are often faced with applicants and residents who refer to themselves as "self-employed," but are unable to adequately document their income. Such individuals are not generally considered self-employed since persons who are self-employed are required to keep meticulous financial records. People who are truly self-employed are among the easiest to verify in terms of income.   Many of the applicants to affordable housing who claim to be self-employed are actually either working in cycles or have what is deemed a "hobby." In the case of cyclical or seasonal workers, HUD recommends using history as the best way to determine likely income. Prior tax returns or some past financial records may often be used to establish a likely future income. A more difficult challenge comes when trying to determine if we are faced with a self-employed person or someone who just has a "hobby."   The IRS defines a "hobby" as an activity not engaged in for profit. Certain questions to be answered to make this determination include: Does the time and effort put into the activity indicate an intention to make a profit? Does the person depend on income from the activity? Has the person altered methods of operation in order to improve profitability? Does the person have the knowledge needed to carry on the activity as a successful business? Has the person made a profit from similar activities in the past? Does the activity make a profit in some years?   If it is clear that the purpose of the activity is profit vs. pleasure, it is a business and the person should be treated as self-employed. If there is no profit and no obvious intention to make a profit, and the activity produces income at random, irregular times, it is a hobby and the income should not be counted. However, even if it is a hobby, if it produces income on a regular, recurring basis, the income should be counted for housing purposes.   Finally, remember that it is the applicant/resident s responsibility to document their income. As owners and managers, our responsibility is to seek the documentation. If someone seeking housing that is supported by taxpayers cannot document their income to the extent required to show eligibility and properly calculate rent payments, they are not entitled to assistance.

VAWA Model Emergency Transfer Plan for RD Multifamily Housing Projects

On February 10, 2014, the Rural Development Service issued Administrative Notice (AN) No. 4747 (1944-N), titled "Implementation of 42 U.S.C. 14043-e 11 of the Violence Against Women (VAWA) Reauthorization Act in Rural Development s Multi-Family Housing Programs." The AN provides guidance on how RD multi-family programs, including the Section 515 and 538 programs, must comply with VAWA.   A major component of the AN is a recommended Emergency Transfer Plan.   Under VAWA, HUD is required to develop a notice of the rights of individuals under the VAWA including the right to confidentiality and limits thereof. To date, HUD has not issued this guidance. RD indicates that the AN will be amended when HUD issues it s notice.   The AN recommends that owners and managers or RD multi-family housing update Tenant Selection Policy and Occupancy Rules to incorporate the tenant s rights and protections, to ensure uniformity in enforcement of the VAWA requirements and to avoid improper evictions. The AN (Attachment B) provides a Model Emergency Transfer Plan, as follows:   Rural Development Model Emergency Transfer Plan   Tenants who are actual or imminent victims of domestic violence shall be permitted by the owner or manager to transfer to another available and safe dwelling unit assisted under the MFH program covered by this AN when a transfer is requested by a tenant, and (1) the tenant reasonably believes that he or she is threatened with imminent harm from further violence if he or she remains within the same dwelling; and (2) in the case of a tenant who is a victim of sexual assault, the sexual assault occurred on the premises during the 90-day period preceding the request for transfer.   Tenants requesting an emergency transfer under the VAWA Act may receive benefits under 49 U.S.C. part 24, "Uniform Relocation Assistance and Real Property Acquisition Act," by requesting a Letter of Priority Entitlement from the Agency, as Rural Development considers this to be a situation beyond the tenant s control under 7 CFR 3560.159(c).   7 CFR 3560.159(c) states, "If occupancy is terminated due to conditions which are beyond the control of the tenant, such as a condition related to required repair or rehabilitation of the building, or a natural disaster, the tenants who are affected by such a circumstance are entitled to benefits under the Uniform Relocation Act and may request a Letter of Priority Entitlement (LOPE) from the Agency. If tenants need additional time to secure replacement housing, the Agency may, at the tenant s request, extend the LOPE entitlement period."   Reasonable confidentiality measures must be incorporated by owners and managers so that location of the new dwelling is not disclosed to the person that commits an actual or imminent act of violence.   It is recommended that all owners and managers of Rural Development multi-family housing projects immediately implement an Emergency Transfer Plan for victims of domestic violence. At a minimum, the Plan should incorporate the elements noted in the RD Model shown above.   While the Section 42 Low-Income Housing Tax Credit Program (LIHTC) is also a covered program under VAWA, the IRS has not yet issued any guidance relative to the emergency transfer of domestic violence victims. Such guidance is especially important due to the fact that transfers between buildings in a LIHTC project may require tenant requalification.