News

2014 Income Limits Published

On December 18, 2013, HUD published the 2014 income limits for HUD programs as well as for the Low-Income Housing Tax Credit and Tax-Exempt Bond programs. The limits for the LIHTC and Bond projects are published separately from the limits for HUD programs. LIHTC and Bond properties use the Multifamily Tax Subsidy Project (MTSP) limits, and are held harmless from income limit (and therefore rent) reductions. These properties may use the highest income limits used for resident qualification and rent calculation purposes since the project has been in service. HUD program income limits are not held harmless. Projects in service prior to 2009 may use the HERA Special Income Limits in areas where HUD has published such limits. Projects placed in service after 2008 may not use the HERA Special Limits. Owners of LIHTC projects may rely on the 2013 income limits for all purposes for 45 days after the effective date (December 18, 2013) of the newly issued limits, so the 2013 limits may be used until February 1, 2014. Download the FY 2014 income limits: MTSP (LIHTC) Limits Section 8 Limits Section 221(d)(3) BMIR, Section 235 & Section 236 Limits

Fair Housing Reminders During the Holidays

As we approach the holiday season, it is important to remember the fair housing prohibition against discrimination on the basis of religion. There is absolutely nothing wrong with being festive during the holidays. Seasonal decorations do not have to be outlawed and the season can be celebrated without promoting a particular religion or particular religious holiday. The three major religions in the United States are Christianity, Judaism, and Islam, but many other religions are represented in our Nation. A growing number of Asian Americans has led to a growth of non-Abrahamic faiths in the U.S. - especially Buddhism and Hinduism. Buddhists and Hindus now account for two percent of the U.S. population, which is the same as the Jewish population. Also, many Americans now have no religious affiliation, with more than 13 million describing themselves as agnostic or atheist. There are a few points all operators of multifamily housing should remember as we head into the holidays: Make everyone feel welcome at your property. There is nothing wrong with decorating your property in a festive way, but make sure the decorations do not appear to promote a particular religion or religious holiday. In other words, even if most of your residents are Christian, don t focus solely on Christmas. When decorating for the holidays, be inclusive. Being festive is great - just don t send the message that anyone is unwelcome because of his or her religious beliefs. There is nothing wrong with secular messages such as "Season s Greetings" or "Happy Holidays." Decorations such as lights, evergreens, icicles and snowflakes always work, and never suggest one religion over another. HUD now recognizes even the image of Santa Claus and the expression "Merry Christmas" as being secular (non-religious). Also, Christmas trees and Menorahs are now considered non-religious for fair housing purposes (but Nativity scenes are still considered to be religious). It is important to remember that religious displays - as well as non-religious displays - are permissible in common areas, as long as the same opportunity is made available to all religions. When communicating with prospects by phone, email or in any other way, use non-religious language. While you won t get into trouble for using the term "Merry Christmas" when welcoming people to your community, since you don t know the religion of a prospect, a more professional term would be "happy holidays." Keep all community activities religion neutral. Make sure that none of your events are religious in nature or promote a particular holiday. For example, if you have a holiday party, don t call it a Christmas party or play Christmas carols with religious themes. If you allow common areas to be used for private activities, allow equal access. Make it available to residents regardless of whether they want to use it for secular or religious purposes. The Department of Justice has indicated that it is unlawful for communities to allow residents to reserve a community room for social events such as bingo or birthday parties, but deny it to residents who want to hold a prayer meeting. Also, if religious activities are permitted, it must be allowed for all religions. Allow residents to display religious decorations in their units. When it comes to what residents do inside their units, they should be allowed to display whatever holiday decorations they wish as long as they do not violate community rules (e.g., the use of candles or live Christmas trees). When it comes to the outside of doors or mantles, residents should be allowed to decorate as they desire, unless the lease gives more control to the landlord. Any complaints regarding religious discrimination or harassment should be promptly addressed. It is especially important to address disputes among neighbors - especially if they involve religious discrimination. Bottom line - have a good time during the holidays. Make the community festive and welcoming - but don t make anyone feel unwelcome or uncomfortable due to their religion.

Developer Fees in Eligible Basis

The most important calculation in the LIHTC program - at least in terms of credit generation - is qualified basis. Qualified basis is directly related to the amount of eligible basis (Eligible Basis times Applicable Fraction = Qualified Basis). So, it is an owner s best interest to maximize eligible basis. A cost incurred in the construction of a tax credit project is includible in eligible basis. This includes both the cost of depreciable residential rental property and the common area costs of such property (as long as the common area is a comparable amenity to all residential rental units). A recently published IRS newsletter outlined the requirements relative to the inclusion of developer fees in eligible basis. As stated in the Newsletter, "A developer fee represents payment for the developer s services and at least a portion of the fee is includible in eligible basis."   IRS Audit Issues Relative to the Developer Fee When examining developer fees, the IRS considers four basic issues: 1. Character of the services to be provided; 2. Services actually provided; 3. Reasonableness of the fee; and 4. The method of payment.   When looking at these issues, IRS examiners will review the development agreement/contract, which outlines developer responsibilities, remedies for non-performance, and payment terms. Any required deferment of the developer fee will also be stipulated. If the developer agreed to defer the fee, the developer note documenting the debt will also be reviewed, and the Service will examine the taxpayer s books and records to identify payment of the fee.   This article will examine each of the issues relative to including the developer fee in eligible basis.   Character of the Services Provided Typically, a developer agrees to provide services related to the acquisition, construction, and initial operating phases of a development. Examples of services includable in eligible basis include: 1. Negotiating agreements for architectural, engineering, and consulting services, the construction of the low-income housing or improvements includable in eligible basis, and the furnishing of the associated supplies, materials, machinery or equipment. 2. Applying for and maintaining all government permits and approvals required for the construction and securing the certificates of occupancy once construction is complete. 3. Complying with insurance requirements during construction. 4. Provision of oversight during construction. 5. Implementation of taxpayer decisions made in connection with the design, development and construction of the project. Examples of services not includable in eligible basis include: 1. Acquisition of the site, including -Location of the site; -Performance of economic and feasibility studies; -Market studies; and -Negotiation of the purchase price for the land. Note: a portion of the purchase price may be included in eligible basis if the purchase included the acquisition of a building that is subsequently rehabilitated. 2. Maintaining contracts, books and records sufficient to establish the value of the completed project. 3. Advising the taxpayer regarding available sources of financing. 4. Services associated with organization of the partnership. 5. Costs associated with obtaining the tax credits, such as application fees.   Generally, development services end when the project buildings are placed in service. However, the developer may also be responsible for oversight of initial leasing of the units, hiring on-site management, advertising, and maintenance of model units during lease-up. These costs are not directly related to the cost of construction, and are therefore not includable in eligible basis.     Services Actually Provided The services actually performed by the developer will be analyzed. There are instances where more than one developer is involved in project development. Multiple developers may be involved at the same time. A developer may work with a non-profit organization to develop a LIHTC project that qualifies for an allocation of credits under the Non-profit set-aside. In such cases, determination will have to be made as to how the development responsibilities were divided and whether or not the developer has the skills and expertise required to provide the necessary services and complete the project. In some instances, there are "consecutive" developers, in which case a determination must be made as to why the initial developer could not complete the project and what services were performed by each developer. In all cases, the taxpayer bears the burden of proving that the developer fee constituted a qualified expenditure.   Reasonableness of Fees State agencies generally limit developer fees to a percentage of total project costs. However, the IRS is not required to accept the developer fee amount allowed by the State and may raise issues regarding the reasonableness of the fee.   Method of Payment Developer fee payments made during development, or at the completion of development, and which are identified in the taxpayer s books as payments of developer fees are generally not challenged by the IRS. However, when payment is deferred, the following issues are examined: 1. Performance of Additional Services: - Payment for services usually associated with the general partner (who often is the developer); or -Is payment contingent on successful operation of the project?   In either of these cases, if the fee is being paid for services rendered after the end of the project s development, the fee should not be included in eligible basis.   2. Intent to Pay Deferred Developer Fee: In determining whether there is any intention to actually pay the developer fee, the Service will consider whether: -The note bears no interest rate or no payment is required for extended periods of time; -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 to purchase the property for a price equal to the outstanding debt; or -The GP, 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 any of the above patterns exist, the deferred developer fee note may not be a bona fide debt, and therefore not includable in eligible basis.   Analysis of Debt Generally, debt is includable in the basis of property. However, the obligation must represent genuine, noncontingent debt. Recourse liabilities are generally includable in basis because they represent a fixed, unconditional obligation to pay, with interest, a specified sum of money. However, the obligation will not be treated as actual 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" are actual debt for federal tax purposes, the courts have set forth a number of criteria. In Fain Hay Realty Co. v. United States, 398 F.2d 694, 696 (3rd Cir. 1968), the court enumerated 16 nonexclusive factors: 1. The intent of the parties; 2. Identity between creditors and shareholders; 3. Extent of participation in management by the holder of the instrument; 4. Ability of the debtor to obtain funds from outside sources; 5. Thinness of capital structure relative to debt; 6. Risk; 7. Specifics of the arrangement; 8. Relative position of the obliges as to other creditors regarding the payment of interest and principal; 9. Voting power of the holder of the instrument; 10. Provision of a fixed interest rate; 11. Contingencies on the payment obligation; 12. Source of interest payments; 13. Presence (or absence) of a fixed maturity date; 14. Provision for redemption by the corporation; 15. Provision for redemption at the option of the holder; and 16. Timing of the advance relative to when the taxpayer was organized. IRS Notice 94-47, 1994-1 C.B. 357, provides that the characterization of an instrument for federal income tax purposes depends on the terms of the instrument and all the surrounding facts and circumstances. Among the factors considered by the IRS are: -Whether there is an unconditional promise on the part of the taxpayer to pay a fixed sum on demand or at a fixed maturity date that is in the reasonable foreseeable future; -Whether the lender has the right to enforce the payment of principal and interest; -Whether the instruments give the lender the right to participate in the management of the issuer (in this case the 42 project); -Whether the taxpayer is thinly capitalized; and -Whether the lender is related to the taxpayer.   The key issue for consideration 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. In the case of Section 42 projects, it is often the case that both the general partner of the taxpayer (the debtor) and the developer (the creditor) are either controlled by or are the same entity. Such cases are subject to additional scrutiny because the circumstances suggest the opportunity to contrive a fictional debt. In other words, the tax consequences must be determined, not from the form of the transaction, but from its true substance.   Intrinsic Economic Nature Usually, a deferred developer fee will be structured as a promissory note or other debt instrument. However, given the relationship between the parties, the court may give little weight to the actual form of the transaction. Instead, the court will examine three essential elements relating to whether there is actual debt: 1. Independent Creditor Test: The acid test of economic reality of a purported debt is whether an unrelated outside party would have loaned funds to the borrower under similar circumstances. Is the note due and payable within a reasonable period of time? Are installment payments due in the interim? Is the not subordinate to other debt and only payable after operating expenses have been met? Is the note secured and is there recourse if it is not paid? If these requirements are absent, it is likely that the debt is not real. 2. Debt-Equity Ratios: Courts will look at the thinness of the taxpayer s capital structure relative to accumulated debt. Thin capitalization adds to the evidence that a deferred developer fee is not genuine debt. Even if a taxpayer s capital structure is relatively strong, if the debt terms are highly favorable, the deferred developer fee may still not be considered genuine debt. 3. Potential Sources of Repayment: There must be a reasonable ability of the taxpayer to repay the advance and a reasonable expectation of repayment. There are generally four sources of repayment: (1) liquidation of business assets; (2) profits; (3) cash flow; and (4) refinancing with another lender.   Ultimately, the burden is on the taxpayer to demonstrate that the developer fee has been earned and is includable in eligible basis. If the fee has been deferred, a demonstration that the deferred fee is bona fide debt will also be required.      

Small HUD Projects Get Break from Financial Reporting

HUD projects that receive less than $500,000 in total federal financial assistance annually no longer have to have full financial audits performed. HUD Notice 2013-23 eliminates the audit requirement for these projects regardless of existing regulatory provisions. Owners of such projects will be able to submit owner-certified financial statements.   HUD believes this will save owners of small properties from $2,000 to $10,000 annually. The savings will be used for additional maintenance, operating costs or owner distributions.   HUD estimates that more than 2,100 projects can benefit from this new rule (534 with FHA-insured mortgages and 1,640 with Section 8 contracts). The rule applies to owners with a fiscal year ending December 31, 2013, and thereafter.

HUD Mortgage Insurance Premiums for LIHTC Projects

HUD published a Notice in the Federal Register on September 26, 2013, clarifying that conventional or FHA-insured projects with existing LIHTC s, and other affordable projects that meet LIHTC affordability criteria are eligible for the LIHTC Mortgage Insurance Premium (MIP) rate. This includes tax credit projects with FY2014-insured loans.   The Notice confirms that the 2014 MIPs are the same as the 2013 MIPs, published in the Federal Register on August 15, 2012.   The eligibility of projects with existing tax credits is intended to support the preservation of already-operating affordable housing for low-income renters.   Eligible projects with "existing" LIHTCs must meet the following criteria of affordability consistent with guidance already provided by HUD in Mortgagee Letter 2010-21: Projects that have a recorded regulatory agreement in effect for at least 15 years after final endorsement and monitored by a competent public authority; Projects that meet at the least the minimum project restrictions under the LIHTC program (i.e., the 20/50 or 40/60 minimum set-aside with rents on those units no greater than permitted LIHTC rents); and Mixed income projects if the minimum low-income unit rent, occupancy restrictions and regulatory agreement meet the above criteria.   Loans with other affordability requirements, i.e., not LIHTC or Project-Based Section 8, may also be eligible for the LIHTC MIP rate, provided the affordability requirements are equivalent to all of the criteria described above for "existing" LIHTCs.   This benefit for LIHTC properties equates to a reduction in MIP of up to 50 basis points, depending on the type of housing.

Landmark Fair Housing Decision Goes Against Hazleton, PA

On July 26, 2013, a Federal District court issued an opinion that may once and for all answer the question as to whether local governments can enforce laws that relate to the immigration status of individuals. The case is Lozano v. City of Hazleton.   Hazleton, PA has for years been attempting to prohibit the employment and housing of unauthorized aliens. The city had previously appealed a District court injunction against enforcement of the ordinances. On appeal by the City, the United States Supreme Court remanded the case for reconsideration based on the doctrine of Federal preemption regarding state treatment of unauthorized aliens.   The city ordinance required legal immigration status of anyone as a precondition to seeking rental housing within the city. Occupants of rental housing 18 or older were required to obtain an occupancy permit indicating "proof of legal citizenship and/or residency." Landlords faced fines and even imprisonment if the permitted violations of the occupancy permit.   The court had previously held that the ordinances were "attempts to regulate residence based solely on immigration status." As stated by the court, "Deciding which aliens may live in the United States has always been the prerogative of the Federal government." The court ruled that the Federal Immigration and Naturalization Act (INA), which preempts state attempts to regulate residence on the basis of immigration status, preempted the local ordinance. The court also ruled that the local ordinance interfered with discretion enjoyed by the Federal government, and the control over, the removal process, which has substantial foreign policy implications.   In its decision, the Third Circuit noted, "Congress has not banned persons who lack lawful status or proper documentation from obtaining rental or any other type of housing in the United States. Hazleton s decision to impose this distinct, unusual and extraordinary burden upon aliens impermissibly intrudes into the realm of federal authority." Hazleton is seeking to achieve "its own immigration policy," one that will certainly result in "unnecessary harassment of some aliens whom Federal officials determine should not be removed."   The court also indicated that the city s ordinances, as they impacted the rights of foreign country s nationals, could create foreign policy and humanitarian issues. The court also dismissed the city s argument that it was engaged in "concurrent enforcement" of the INA, because the city s efforts actually impair Federal regulatory interests.   The city had actually called the act of renting to unauthorized aliens harboring, but, as stated by the court, "harboring" has a different meaning in Federal law from what the city found in simple landlord-tenant relationships. The court defines harboring as conduct tending to substantially facilitate an alien s remaining in the United States illegally and to prevent government authorities from detecting the alien s unlawful presence." According to the court, renting an apartment would not, in and of itself, prevent the government from detecting the presence of an unauthorized alien, and thus it would probably not constitute harboring for purposes of the INA.   A number of other localities (notably Farmers Branch, TX) have used methods similar to Hazleton in an effort to restrict access to housing and other opportunities to unauthorized aliens. In all cases, federal courts have held that immigration status is solely within the purview of the federal government    

HUD Changes to Appendix 3 of 4350.3 - Acceptable Forms of Verification

Along with the recent publication of Change 4 to HUD Handbook 4350.3, HUD also amended Appendix 3, Acceptable Forms of Verification. Some of the changes are worth noting, as follows (changes are shown in parentheses): Assets disposed of for less than fair market value may now be certified to by the applicant "and or tenant," and must clearly state that no family member has disposed of assets for less than fair market value in the preceding two years. It also clarifies that only assets disposed of within a two year period prior to "certification or recertification" should be counted. Employment Income including tips, gratuities and overtime: For Section 8 properties, "it is mandatory that the EIV Income Report be used as third party verification of employment and income." This section also reconciles Appendix 3 with Chapter 5 by requiring "4-6" consecutive pay stubs when using stubs as income verification. Income maintenance payments, benefits, income other than wages (i.e., welfare, SS, SSI, Disability income, pensions): For Section 8 properties, "it is mandatory that the EIV Income Report be used as third party verification of the Social Security benefit income received." Need for an assistance animal: Letter from "appropriate third party unless the need is readily apparent or already known." This is important from a fair housing standpoint. Social Security Number: HUD now will accept an "original document issued by a federal or state government agency which contains the name, SSN, and other identifying information of the individual." HUD also included some additional information on the Appendix 3 as notes that should guide owner efforts with regard to verifications. While these notes were also on the prior Appendix 3, they are worth re-stating: Requests for verification "from a third party source" must be accompanied by a Consent to Release form "HUD-9887-A" (applies to Section 8); If an original verifying document is witnessed but is a document that should not be copied, the owner should record the type of document, any control or serial numbers, and the issuer. The owner should also initial and date this notation in the file; For all oral verifications, file documentation must include facts, time and date of contact, and name and title of the third party; and For use of EIV Income Reports as third party verification of employment and income a current Consent for Release form HUD - 9887 must be on file.

IRS Approves Same-Sex Marriage for Tax Purposes

Yesterday, I sent you an email that the IRS had not yet decided whether to recognize same-sex marriage for purposes of filing a joint federal tax return. I also indicated that I believed this was clearly contrary to the Supreme Court decision stating that refusal to grant full federal benefits to same-sex couples was unconstitutional. Today, August 29, 2013, the Treasury Department and IRS announced that all same-sex couples who are legally married will be recognized as such for federal tax purposes, even if they state they live in does not recognize their union. This is the broadest rule change yet as a result of the Supreme Court decision in June that struck down portions of the Defense of Marriage Act (DOMA). As of the 2013 tax year, same-sex spouses who are legally married will not be able to file federal tax returns as if either were single, Instead, they must file together as "married filing jointly" or individually as "married filing jointly." Properties with low-income housing tax credits will now be able to accept same-sex couples where all residents are full time students if all the adults in the unit are married, since they will now be eligible to file a federal joint tax return. It does not matter if the residents live in a state that does not recognize same-sex marriage, as long as they were legally married in a state that does. Owners and managers of LIHTC properties should be aware that this ruling applies to legal marriages, but does not apply to civil unions, registered domestic partnerships or other legal relationships.