News

DOJ Aggressively Pursuing Accessibility Cases

On February 24, 2014, the Department of Justice announced that a federal district court in Jackson, MS approved a settlement of a DOJ lawsuit against the original owners and developers of nine apartment complexes in Mississippi, Louisiana and Tennessee. The complexes contain more than 800 ground floor units that are required to comply with the accessibility requirements of the Fair Housing Amendments Act of 1988 (FHA). In addition, eight of the developments contain leasing offices that were in violation of the Americans with Disabilities Act (ADA) accessibility requirements for public use areas. Under the terms of the settlement, the owners and developers must retrofit the properties to meet FHA requirements. The improvements include reducing door threshold heights, replacing excessively sloped portions of sidewalks, installing new and properly sloped curb ramps, installing cane detection at stairwells, installation of accessible door hardware and ensuring that there are a sufficient number of accessible parking spaces at the properties. In May 2013, as part of the same lawsuit, the court approved a settlement with the nine architects and civil engineers who were involved in the design of the projects. Those defendants paid a total of $865,000 toward accessibility retrofits and $60,000 to compensate persons harmed by the improper designs. In a similar case that was settled in December 2013, a WV developer and affiliated entities agreed to pay $110,000 and make all required retrofits to remove accessibility barriers at 30 apartment complexes, involving more than 750 units. All the properties were developed with Low-Income Housing Tax Credits. In this case, the corrective actions include replacing cabinets in bathrooms and kitchens to provide sufficient room for wheelchair users, reducing door threshold heights, replacing excessively sloped portions of sidewalks and installing properly designed curb ramps from parking areas. These are just two examples of the very aggressive approach being taken by DOJ relative to the FHA design requirements. All owners or multifamily properties built for first occupancy after March 13, 1991 are subject to the law if their complexes have ground floor units or elevators. Owners should be familiar with the requirements of the law and assess their properties for compliance. If properties do not comply, a proactive approach to correction is recommended.

Draft House Tax Reform Act of 2014 Retains (but changes) LIHTC Program

On February 26, 2014, the House Ways & Means Committee under Chairman David Camp released a discussion draft Tax Reform Act of 2014. While tax reform almost certainly not going to happen in 2014, this draft proposal is significant in that it retains the Low-Income Housing Tax Credit Program, while eliminating virtually all other business tax credits. The importance of being included in the draft tax bill of the House cannot be overstated. While confidence has been high that the Senate would ultimately retain the LIHTC program, the position of Camps committee regarding the LIHTC has been in doubt. The inclusion of the LIHTC program in the Ways & Means draft bill provides a reason to be optimistic that when tax reform finally passes, the LIHTC program will be part of it. This speaks volumes about the success of the program, as well as the level of support it has in Congress and the hard work of the affordable housing industry. Not all tax credits fare as well in the draft bill. It repeals the historic rehabilitation tax credit, the renewable energy investment tax credit, and the production tax credit. It also does not renew the New Market Tax Credit, which expired at the end of 2013.   While the draft bill does retain the LIHTC program, it also makes major changes, which will significantly impact how the program operates. Changes in the program based on the draft bill are as follows:   The 4% credit is eliminated, as is the tax-exempt bond program. Interest on bonds issued after 2014 would be taxable, including those for multifamily housing projects. This essentially means that there would be no more tax credit for acquisition costs and no more automatic credits for tax-exempt financed projects. No more 130% basis boost for properties located in high cost areas and qualified census tracts. This change will result in more properties being awarded credits, but will make it more difficult to serve extremely low-income families and provide costly tenant services. There would be no more national pool of unused credits. Any states not allocating credits in two years would lose them. The floating rate for 9% credits would remain in place (i.e., no fixed 9% rate). The credit period would be extended from ten to 15 years, meaning there would be no more recapture, but the PV of the credits will also be reduced since acceleration of credit would no longer be permitted. A major change is that states would no longer allocate credits, but instead will allocate qualified basis. For example, instead of the current mechanism whereby a state allocates credits equal to $2.30 per capita or $2,665,000 (whichever is higher), states would allocate qualified basis in the higher amount of $31.20 per capita or $36,300,000. Over a 15-year period, this amount would be approximately the same present-value as 2014 s $2.30 per person in ten-year credits. Under the Camp proposal, the allocated qualified basis will be indexed annually based on inflation in increments of $.20 and $100,000 respectively. While not a change, the draft law makes clear that federal grants used to finance development costs will still not be includable in eligible basis. General public use requirements would be revised to eliminate the eligibility of housing set aside for persons identified by certain Federal or state programs and individuals involved in artistic & literary activities but would add veterans. States would no longer be required to include in their LIHTC selection criteria a preference for energy efficient projects and projects of historical significance. New York & Illinois would no longer be required to suballocate tax credits to Chicago and New York City All these changes would be effective for calendar years after 2014, and there would be a transition rule ensuring that credit allocations made before 2015 would receive qualified basis allocations equivalent to the tax credit allocation they would have received notwithstanding the change in tax law.   The Joint Committee on Taxation (JCT) has estimated that the effect of these changes would save $10.7 billion over ten-years, most of which are the result of extending the tax credit period from ten to 15-years. A number of other proposals would impact real estate, including a proposal to extend the depreciable life of residential real estate from 27.5 years to 40 years. However, the annual depreciation would be increased based on inflation.   While the inclusion in the LIHTC program in this draft bill and the fact that the changes for the most part do not do serious damage to the program are very good news for our industry, keep in mind that there is virtually no chance for tax reform in 2014. House Speaker John Boehner has made no commitment to a vote on the Camp bill this year, and both Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have stated that no tax reform bill should be expected this year. Reinforcing this fact is the intent of Senate Finance Committee Chairman Ron Wyden to deal with expiring tax provisions in 2014. If tax reform was expected this year, there would be no reason to focus on these tax extenders.   The takeaway in all this is that 2014 will more than likely be just another year in the LIHTC program - the rules will be what they have been for years. However, 2015 may bring significant changes to the program, but it does appear that there will be a program. That, in and of itself, is terrific news for the affordable housing industry.

Social Security Administration Changes Rules Regarding Proof of Income Letters

On February 4, 2014, the Social Security Administration (SSA) announced that effective October 1, 2014, SSA field offices will no longer offer benefit verification letters. Budget cuts are responsible for this cutback. Households needing verification of SS benefits should now be obtaining them online. Since many SS recipients are not computer savvy, management staff may have to assist in the process - at least initially. Residents and applicants should be informed that they should go to www.socialsecurity.gov/myaccount to set up a personal account. Once the account is set up, SS recipients can easily view, print or save official letters that include proof of benefit amount and type; Medicare start date and withholding amount; and age.

2014 Appropriations Act Makes Changes to Program Rules

The President signed the 2014 Omnibus Appropriations Act into law on January 17, 2014. In addition to funding for the Nation s various housing programs, the Act also made some substantive changes to the law relative to Housing Choice Vouchers and Public Housing. Some of the more important changes include: Public Housing Agency (PHA) inspection of units occupied by Voucher recipients may now be biennial instead of annual. This will not only reduce the administrative burden for PHAs, but will make life easier for residents and landlords. In addition, alternative inspection methods may also be relied upon by the PHA, including federal, state and local housing programs. This means that owners with tax credit properties that have a state tax credit review during a particular year could request that the PHA accept the results of that inspection for any voucher units that may have been inspected. HOME program inspections could also suffice. Interim inspections of voucher units may still be required if a resident or government official believes that a unit does not comply with Housing Qualify Standards (HQS). In such instances, if the condition is life threatening, the PHA must inspect the unit within 24-hours. Otherwise, the inspection must be conducted within a reasonable timeframe. New potential sanctions for owners whose properties have low REAC scores apply to properties in the following categories: Score less than 30; Score between 31 and 59, and that fail to certify in writing to HUD within 60-days that all deficiencies have been corrected; or Consecutive inspections with a score of less than 60. Owners will have 60-days to offer a Compliance, Disposition & Enforcement Plan. Failure to comply with the plan could lead to a variety of sanctions: Abatement or partial abatement of the Section 8 Contract; Civil money penalties; Transfer of Section 8 Contract to another owner; or Judicial receivership. Public Housing Rent changes There will be a flat rent floor of 80% of FMR for higher income public housing residents. This will be phased in with a deadline of June 1, 2014; A family s rent cannot be increased by more than 35% annually. The definition of Extremely Low-Income (ELI) has been changed to the higher of the federal poverty level or 30% of area median income. Family size and not number of bedrooms will determine utility allowances for the voucher program. The change also requires a PHA to approve a higher allowance for a household with a disabled family member if needed as a reasonable accommodation.   Note that the changes regarding flat rents, ELI definition, and utility allowance provisions all require HUD notices followed by rulemaking before they can be implemented.

Farm Bill Protects Rural Area Designation

After a three-year struggle, the Farm Bill (H.R. 2642) was finally passed by Congress on February 4, 2014, and will now go to the President, who has indicated that he will sign the bill into law. The 357 page bill deals primarily with agricultural and food issues, but one small section is very important to the development industry.   Approximately 55 areas around the country with MTSP income limits lower than the National Non-Metropolitan Income (NNMI) limits have been in danger of losing their status as rural areas. These areas are found in the following states: Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, and Texas.   Section 3004 of HERA allows LIHTC properties without tax-exempt bonds to use the higher of the MTSP limits or NNMI limits. Properties eligible to use the NNMI limits are held harmless from reductions in income limits from one-year to the next. IRC 142(d)(2)(E) states that the MTSP for a LIHTC property will never be less than the income limit used in the prior year. IRC 42(i)(8) states that for non-tax-exempt bond properties located in a rural area, "any income limitation measured by reference to the Area Median Gross Income (AMGI) shall be measured by reference to the greater of the AMGI or NNMI." Since AMGI is replaced for LIHTC properties in rural areas by the greater of MTSP or NNMI, use of NNMI or MTSP is held harmless.   However, if a property loses its rural designation, it will no longer be eligible to use the NNMI and will have to use the appropriate MTSP limit. The property would be able to use the highest MTSP limit in place since the project was placed in service, but this still could be less than the NNMI that had been in use.   How is a Rural Area Defined?   Technically, the definition of a rural area is based on the Housing Act of 1949. The Department of Agriculture (UDSA) list of eligible areas is usually an accurate indicator of a rural area, but since USDA has delayed implementation of 2010 census data (the census no longer will provide income information), and some legislative amendments that altered the 1949 Act have expired, care should be taken in depending on the USDA list of rural areas.   Generally, communities with less than 20,000 people and meeting certain other criteria have qualified as rural. In 1983, Congress amended the 1949 Act, "grandfathering" growing rural communities. The most recent legislation in this area allowed communities of up to 25,000 to remain eligible if they were eligible under either the 1990 or 2000 census, but this provision expired on September 30, 2012.   Based on the 2010 census data, approximately 900 areas could have been deemed ineligible for rural funding and use of the NNMII income limit benefit. However, with passage of the Farm Bill, and assuming signature by the President, these 900 areas will remain rural and will be eligible to use the higher of the NNMIL or the MTSP limits. Section 6208 of the Farm Bill maintains the list of rural areas as currently constituted until receipt of data from the 2020 census and further increases the population to be considered rural from 25,000 to 35,000. This is very good news for affordable housing developers in these areas and provides income limit protection at least until the 2020 census data becomes available.

Domestic Violence Policies

Public housing and assisted housing communities (as well as Low-Income Housing Tax Credit [LIHTC] projects) are subject to the requirements of the Violence Against Women s Act (VAWA). HUD is currently developing regulations to implement the VAWA provisions passed into law in 2013. For LIHTC properties, guidance from the IRS is also needed. However, housing providers should not wait to extend basic protections to domestic violence victims. At the very least, under most circumstances, there should be no evictions or lease terminations of domestic violence victims.   Federal fair housing law does not specifically protect victims of domestic violence. However, the law can be used to protect such victims under sex discrimination provisions (since the vast majority of domestic violence victims are women) or even under race or national origin protections (African-American, Native American and immigrants face higher levels of domestic violence).   Domestic violence is a plague. Estimates range from 960,000 incidents of violence against a current or former spouse, boyfriend or girlfriend per year to 3 million women who are physically abused by their husband or boyfriend each year. No one has the right to commit physical violence against anyone else except in self-defense. As landlords and property managers, we have a responsibility to do what we can to assist victims of domestic violence within the parameters of existing law.   All properties - not just federally assisted or LIHTC - should establish policies regarding the protection of domestic violence victims. At a minimum, the following policies should be implemented: Do not punish victims of domestic violence for the actions of their abusers. If you do, the primary risk is a sex discrimination complaint. For example, do not evict a resident who is assaulted by a non-resident boyfriend (as long as the resident does not invite the boyfriend to the unit). Do not deny an applicant because they have been a victim of domestic violence. Do not punish domestic violence victims if they seek emergency assistance. Properties with "zero-tolerance" policies are at risk if they evict a victim because the police are called to the property. Comply with any state and local laws protecting victims of domestic violence. The states that currently have domestic violence protection laws include Illinois, Rhode Island, Wisconsin, the District of Columbia, Arkansas, Indiana, North Carolina, Oregon and Washington. If you operate housing in one of these states or the District, discuss the specific protections with your attorney. No matter where you operate, ask your attorney if there are any local domestic violence protections that you need to know about. The laws will usually include nondiscrimination provisions, eviction protection, prohibition against lease termination, the right of victims to seek help, requirements that landlords change locks (or permit victims to do so), and lease bifurcation (making the abuser move while letting the victim stay). Maintain comprehensive records. Fully document any domestic violence incidents, including calls for emergency services, neighbor complaints, and requests for assistance.   It is best to be proactive with regard to domestic violence policies. If you don t have such policies in place, now is a good time to begin the process.          

Nonprofit Set-Aside Issues for LIHTC Properties

IRC 42(h)(5) requires that a portion of each state s annual credit ceiling be set aside for allocation to projects involving qualified nonprofit organizations. Specifically, at least 10% of the state s allocable credit must be set-aside for a nonprofit pool.   In the recently issued draft audit Guide for the Section 42 program, the IRS provides some valuable guidance regarding this nonprofit set-aside requirement. Nonprofit developers and others working with such developers should be familiar with these specific requirements.   In order to be eligible for an allocation from the nonprofit set-aside, a qualified nonprofit organization must own an interest in the project (directly or through a partnership) materially participate (discussed later) in the development and operation of the project throughout the compliance period.   For purposes of 42, the term "qualified nonprofit organization" means any organization if- I. The organization is a qualified nonprofit for IRS purposes (e.g., a 501(c)(3) organization); II. It is determined by the State HFA not to be affiliated with or controlled by a for-profit organization; and III. One of the exempt purposes of the organization includes the fostering of low-income housing.   It is important to remember that even if a nonprofit is a partner is a LIHTC project, unless the allocation of credits came from the nonprofit set aside, the issues outlined here are of no concern to the IRS. Allocations under the nonprofit set-aside are usually made to partnerships for which the general partner is the qualifying nonprofit organization.   When conducting an audit of a project with credits from the nonprofit set-aside, one of the first steps the agent will take is to ensure that the nonprofit is, in fact, a qualified tax-exempt organization. To be tax exempt, the entity must be organized and operated exclusively for one or more of the following purposes: Religious Charitable Scientific Testing for public safety Literary Educational Prevention of cruelty to children or animals Nonprofits participating in the LIHTC program would normally be considered "charitable."   In addition to 501(c)(3) organizations, 501(c)(4) nonprofits are also eligible to apply under the nonprofit set-aside. These are nonprofit civic leagues or organizations operated exclusively to promote social welfare, or local associations of employees, the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. As with the 501(c)(3), one of the purposes of these organizations must include the fostering of low-income housing, if they seek credits from the nonprofit pool.   IRS Revenue Procedure 96-32 provides guidance for determining whether a nonprofit involved in low-income housing is serving a charitable purpose by fostering low-income housing. The determination is based on the percentage of low-income units provided and the income level of the tenants. These guidelines are applied continuously throughout the 15-year compliance period. At least 75% of the units must be occupied by residents with incomes of 80% or less of the area median income, and either: 40% of the units occupied by residents at or below 60% of the median income; or 20% of the units occupied by residents at or below 50% of the median income. These determinations are made at the time a resident first occupies a unit.   There is also an "ownership test." The nonprofit must have an ownership interest in the project for the entire compliance period. The interest may be owned directly or indirectly through a partnership. They can also own stock in a qualified corporation that owns a LIHTC project. A qualified corporation must be a corporation that is 100% owned at all times during its existence by one or more qualified nonprofit organizations (i.e., there can be no portion of ownership by a for-profit).   One of the most confusing requirements relating to the nonprofit set-aside is the "material participation" stipulation. A qualified nonprofit organization must materially participate in both the development and operation of the project throughout the 15-year compliance period. IRC 469(h) defines material participation as activity that is regular, continuous, and substantial. The IRS applies the following guidelines to determine if the participation is "material." Is the activity a principle business or activity of the nonprofit? Is there involvement in the actual operations of the activity? Services provided must be integral to project operations. Simply consenting to someone else s decisions or periodic consultation with respect to general management decisions is not sufficient. Participation must be maintained throughout the year. Periodic consultation is not sufficient. Regular on-site presence at operations is indicative of material participation. Providing services as an independent contractor is not sufficient. If the partnership has one or more for-profit general partners, the nonprofit partner could have less participation in the partnership, which will attract scrutiny from the IRS.   If there is both for-profit and nonprofit general partners, they cannot be related; i.e., share officers or board of directors. These arrangements are subject to intense IRS scrutiny, and may call into question the exempt status of the nonprofit entity. The issue here is whether the nonprofit acts exclusively as a charity or are the actions of the nonprofit furthering the interests of private investors. Some red flags in this area include: The nonprofit is not the only general partner; The nonprofit s minority partnership interest provides for minimal participation in the operations of the project; The nonprofit makes guarantees to the limited partners against loss of tax credits; and Excessive private benefits result from the sale of the property, development fees, or management contracts.   If the IRS determines that an allocation of credits under the nonprofit set-aside was not appropriate, credits may be disallowed in their entirety. Any noncompliance in this area must be corrected as of the end of the taxable year in which the noncompliance occurs. If this does not happen, the IRS will whether noncompliance rests solely with the nonprofit organization, or if other entities share responsibility. If responsibility does not rest solely with the nonprofit, the no credit is allowable for the taxable year the noncompliance occurred or any subsequent taxable year until the noncompliance is corrected; If responsibility rest solely with the nonprofit, a determination will be made as to whether the noncompliance was corrected with a "reasonable period." The IRS has determined that a "reasonable period" for correction of noncompliance caused solely by a qualified nonprofit will be the same as the reasonable correction period for casualty losses. This is no longer than two years following the end of the tax year in which the noncompliance first occurred. If the noncompliance is corrected within this reasonable timeframe, there should be no disallowance of credit. If it is not corrected within this reasonable period, no credit is allowable for the taxable year the noncompliance occurred or any subsequent year until the noncompliance is corrected.   The draft Audit Guide also notes some related issues that nonprofit developers should be aware of: Federal Financing: If a nonprofit secures federal funding and loans the proceeds to the project, the loan must qualify as bona fide debt in order to be included in eligible basis; Developer Fees: if the nonprofit earns a developer fee for putting the deal together, it must be able to demonstrate that it has the actual expertise to undertake the development; Related issues here are (1) private inurement, in which some of the developer fee benefits a for-profit entity; and (2) unrelated business taxable income. If excessive fees are generated for activities not related to a charitable purpose, the entities tax-exempt status could be jeopardized.   Nonprofit organizations considering seeking an allocation of credits from the State s nonprofit set-aside should be aware of the requirements relating to the nonprofit pool, as should for-profit developers considering partnering with nonprofits on LIHTC projects.  

HUD Amends Verification Requirements

On December 10, 2013, HUD put online a revised transmittal for Handbook 4350.3, Chg. 4. It provided clarification for verification techniques - primarily those relating to EIV disputes and discrepancies. There is also an important change to Appendix 3, Acceptable Forms of Verification. A new column to the Appendix has been added under "Third Party Verification." This new column is titled " Provided by Applicant," and permits some applicant provided documents to serve as third party verification.   Following are applicant provided documents that now are acceptable as third party verification. All these changes impact the HUD assisted properties that are governed by 4350.3, and those relating to income impact LIHTC properties also.   Alimony or Child Support: Recent original letters from the Court may be provided by applicants; Auxiliary apparatus for households with disabled residents claiming disability related expenses that permit a household member to work: Copies of receipts may be provided by applicants; The cost of a care attendant for disabled family members: Copies of receipts may be provided by applicants; Child care expenses that enable a family member to work or go to school: Copies of receipts may be provided by the Applicant; Current net family assets: Applicants may provide passbooks, checking, or savings account statements; certificates of deposit; property appraisals; stock or bond documents; financial statements completed by financial institutions; copies of real estate tax statements (if tax authority uses approximate market value); copies of real estate closing documents that indicate distribution of sales proceeds and settlement costs; Dividend and Savings Account Income: Applicants may provide current statements, bank passbooks, certificates of deposit (all must show the current rate of interest); copies of Form 1099 from the financial institution may be provided by the applicant as long as there is a verification of projected income for the next 12 months; and applicants may provide broker s quarterly statements showing value of stocks/bonds and earnings credited to the applicant; Employment income including tips, gratuities and overtime: Applicants may provide W-2 forms, if the applicant has had the same employer for at least two years and increases can be accurately projected. Paycheck stubs or earning statements may also be provided by the applicant and are now considered third party verification (HUD requires that the most recent four to six consecutive stubs be used); Income maintenance payments, benefits, income other than wages (i.e., welfare, Social Security, SSI, disability income, pensions: Applicants may provide current or recent check stubs with date, amount and check number recorded by the owner; award or benefit letters or computer printout from court or public agency; and most recent quarterly pension account statement (phone verification is recommended if the printout or award letter is out of date); Interest from the sale of real property (e.g., contract for deed, installment sales contract, etc.): Applicant may provide a copy of the contract (enough information must be provided to compute actual interest income for the next 12 months);   Medical Expenses: Copies of income tax forms (schedule A, IRS Form 1040) that itemize medical expenses, when the expenses are not expected to change over the next 12 months; Receipts, or pay stubs, which indicate health insurance premium costs, or payments to a resident attendant; or Receipts or ticket stubs that verify transportation expenses directly related to medical expenses. Net Income for a Business: Form 1040 with Schedule C, E, or F; Financial statements of the business (audited or unaudited) including an accountant s calculation of straight-line depreciation expense if accelerated depreciation was used on the tax return or financial statement; or For rental property, copies of recent rent checks, lease and receipts for expenses, or IRS Schedule E. Self-employment, tips, gratuities, etc.: applicants may provide Form 1040 or 1040A showing amount earned and employment period; Unemployment Compensation: Copies of checks or records from agency provided by applicant stating payment amounts and dates; or Benefit notification letter signed by authorizing agency   Obviously, these changes will impact the way files are documented for all types of projects. Before making any change in the way verifications have been done, owners of LIHTC properties should ensure that the State Agency administering the LIHTC program will permit the change.