News

A. J. Johnson Consulting to Introduce Pre-MOR Review Service

A. J. Johnson Consulting Services will begin offering a new service in January 2013. This service will be conducting pre-MOR reviews for properties with project-based Section 8 assistance. Those properties subject to HUD and Contract Administrator review will benefit from this affordable "early look" at the property. The purpose of the review will be to assess risk areas relative to tenant files, general site documentation requirements, and physical condition. Following the assessment, recommendations for improvement will be made that will enable owners and agents to improve on the REAC scores they would otherwise receive, and to ensure that the properties remain in good standing with HUD or Contract Administrators. If you are interested in talking to us about this service, feel free to give me a call.

IRS Proposed Rule on Utility Allowances

The IRS has published a proposed regulation that will amend the IRS utility allowance regulation 1.42-10. This regulation outlines requirements relative to utility allowances on low-income housing tax credit buildings. The proposed regulation updates 1.42-10 to clarify that utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company. The proposed regulation affects owners of LIHTC properties that claim the credit, the tenants in those projects, and the Housing Credit Agencies that administer the credit. When the IRS amended Regulation 1.42-10 on July 29, 2008, the Service did not address the issue of Submetering, and the way the regulation was written required that, since the tenants in a submetered building would be paying the owner for utilities and not making payment directly to the utility company, any payment to the owner would be considered rent and no utility allowance would be permitted for submetered utilities. After comments from the industry on why this requirement would be harmful to properties, and would not encourage conservation, the IRS published Notice 2009-44, clarifying that for purposes of 1.42-10, utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company, and not by or through the owner of the building. The amount paid by the tenants cannot exceed the amount they would pay if they paid the utility company directly, except that a reasonable administrative fee of $5.00 per unit per month (unless State law provides otherwise) may also be charged, and would not be considered rent. While direct Submetering of utilities is acceptable to the IRS for purposes of establishing a utility allowance, ratio utility billing systems (RUBS) will not be an acceptable means of billing residents for utilities for the purpose of establishing a utility allowance. What this effectively means is that if a property uses any type of RUBS system for tenant payment of utilities, those charges will be considered rent, and not subject to any approved utility allowance. The proposed regulation also makes clear that state housing agencies may require certain information before a particular method can be used, or they may disapprove use of a method. The proposed regulation makes two important modifications to Notice 2009-44. First, if two or more utilities such as electricity and water are submetered, then the building owner or agent must separately state the amount billed to the tenants for each submetered utility. Second, if an owner imposes an administrative fee for Submetering, the fee may not be more than the lesser of (1) $5.00 per month; or (2) the actual monthly costs paid or incurred for administering the arrangement (whether internal costs or amounts paid to third parties). The owner s actual costs include internal costs (such as amounts paid to employees) and external costs (such as amounts paid to third party service providers) for administering the Submetering arrangement, as well as that month s portion of costs that relate to the Submetering equipment and that are not included in eligible basis. Any amount charged in excess of the lesser of $5.00 per unit per month or actual administrative costs will be considered rent. As noted, this is a proposed regulation. It will not be made final until after a public hearing (to be held on November 27, 2012) and written comments are received and considered. Until the regulation is made final, taxpayers may continue to rely on the current IRS Regulation 1.42-10 and Notice 2009-44.

The Importance of Cost Segregation Studies

Cost segregation is the process of examining all the physical components of a property and classifying them based on their life expectancy for tax purposes. A major tax court case (AmeriSouth v. Commissioner (TC Memo 2012-67), March 2012) has resulted in the reclassification of many of the elements in the petitioner s building from personal property to building. By way of background, AmeriSouth purchased the market rate complex in 2003 for $10.25 million and spent $2 million in renovations. Consultants performed a cost segregation study that resulted in increased depreciation deductions of approximately $1.4 million from 2003-2005. The IRS Commissioner subsequently denied the deductions of more than $1 million. AmeriSouth then filed a challenge to the Commissioner. In such cases, the burden of proof is on the taxpayer to provide support on why an asset should be considered to have a shorter depreciable life than the building itself (27.5 years for residential buildings). An important element of this case is that the Petitioner failed to produce evidence to support many of its positions, and in fact, failed to show up at trial. The crux of the case was whether tangible property attached to a building may be claimed as personal property and/or site improvements (which have a shorter life) rather than be considered part of the building itself. The case reviewed a dozen categories of assets, and issued very interesting findings regarding some of these. Underground Utilities Issue: do underground utilities (e.g., water/sewer/electrical lines) relate to the "operation and maintenance of the apartments?" If so, they may be considered an integral part of the building since they serve the building "generally" by providing water, sanitation, gas or electricity to the building. In AmeriSouth, the court ruled that the underground utilities were part of the building, and thus depreciable over the 27.5 years. A key part of the decision appears to focus on what the utilities are connected to, who owns the lines, and who is responsible for maintaining them. So, based on this decision, utilities connected to the "building" would be considered part of the building, but utilities that run to exterior lighting or sprinkler systems could be considered site improvements and be depreciated over a 15-year period. Also, if a utility company owns and maintains the lines, the asset is not depreciable at all - even if located on private property. Offsite Improvements What about offsite improvements that an owner pays for, but then dedicates to the utility company? In IRS Technical Advice Memo (TAM) 200017046, a developer built streets, sewer and water systems, and storm drain improvements, and then deeded those improvements to the city as public improvements. The IRS position, as expressed in the TAM, is that these assets do not constitute depreciable property to the developer and are considered intangible assets. Under IRC 1.167(a)-3, an intangible asset with an unlimited useful life is not subject to the allowance for depreciation. However, the IRS appeared to take a different position in at least one case. IRS Private Letter Ruling (PLR) 200916007 states that 1.263(a)-4(d)(8)(iv) provides that offsite infrastructure built by a "taxpayer where the real property or improvements benefit new development or expansion of existing development, are immediately transferred to a state or local government for dedication to the general public use, and are maintained by the state or local government" are considered "dedicated improvements." Dedicated improvements are considered indirect, tangible assets and are depreciable the same as other depreciable costs of the project. While applicable only to the taxpayer for which it was written, this PLR is interesting in that it was specific to a LIHTC project. The Service found that "the costs directly benefit, or are incurred by reason of, the construction of the project. Therefore, the costs are indirect costs as defined in 1.263A-1(e)(3)(i), and are capitalizable to the property produced in the project." The Service also stated in the PLR that these costs were includable in the project s eligible basis. Finish Carpentry & Cabinets Examples of finish carpentry include shelving in pantry closets and living room wall recesses, wood-base, crown molding, chair rails, wood paneling, and closet rods. The governing case for determining an asset s permanence is Whiteco Industries, Inc. v. Commissioner [65 TC 664(19750]. The court indicated that in determining the permanence of an improvement, there are six factors to consider, all of which relate to the ease of movability of an asset without causing damage to the underlying property, as well as the owners intention relative to permanency. For a typical residential apartment building, such assets will likely be replaced numerous times over the 27.5 year life of the building. For example, baseboards may have to be replaced when carpet is replaced, and cabinets and countertops are subject to heavy usage and damage that will require frequent replacement. However, the AmeriSouth decision was that such elements are integral to the building, and are thus depreciable over the 27.5 year depreciable lifespan of the building. In its decision, the court decided that wood moldings, baseboards and paneling were not purely decorative, but provide protection for other parts of the building, such as floors, walls, and ceilings. For this reason, such elements are considered and "integral" part of the building. When evaluating an asset s depreciable life, consideration must be given to whether the element is primarily decorative, as well as its permanency. In general, if an item is primarily decorative (e.g., accent lighting, false balconies, faux fireplaces, etc.), it will be considered personal property, and depreciated over a five-year period. It is the taxpayer s responsibility to support a position that an element of the building is decorative or non-permanent. Sinks & Other Elements One of the most aggressive positions taken by AmeriSouth was regarding the permanence of the sinks. AmeriSouth took the position that because the sinks are easy to remove, they should be classified as five-year depreciable personal property. The court focused on not how permanent a sink may be, but on whether or not the fixture has a special, singular purpose or use. While it is generally acknowledged that special equipment and appliances, as well as the piping, outlets and vents that serve such equipment, are personal property, the court stated, "providing water for the kitchen is hardly unusual and AmeriSouth fails to give any other evidence that it is periodically replaced or even planned to replace sinks " In this case, the sinks were classified as structural components of the building, subject to 27.5 year depreciation. The Court did rule that the five-year depreciation rule applies to vents that serve dryers in the laundry rooms, as well as the electrical outlets for washers, dryers, and refrigerators. However, vents over the kitchen stove were classified as part of the building, since the vents provide general ventilation of smoke, smells and steam from the kitchen, rather than directly functioning as part of the stove (which was classified as personal property). While the AmeriSouth decision may be an "outlier" due to the fact that the taxpayer failed to provide any support for its representations, and owners of commercial property are entitled to depreciate assets over the useful life of the asset, the burden is on the owner to provide a cost segregation study that accurately reflects the desired classification of an asset. Key elements to focus on in such studies are (1) lack of permanency; (2) property that serves a specific piece of equipment (rather than the building itself); and (3) ornamentation. Owners should be certain that the accounting firm retained to prepare cost segregation studies is experienced in this type of work and has a track record of being able to defend classifications when challenged by the IRS upon audit.

Must a Tax Credit Unit be a Tenant’s Only Residence?

Must a Tax Credit Unit be a Tenant s Only Residence?   I get asked the question above fairly often, and I always reply, "yes," without ever providing a regulatory or statutory source for that answer. So, in order to ensure my clients that I am just not making things up, I thought that a general discussion of why I take the position that a tax credit unit must be a resident s only residence is sound.   HUD guidance for the Section 8 program is very clear that a Section 8 unit must be the only residence for a Section 8 resident (see paragraph 13 of the HUD Model Lease for Subsidized Programs). However, as with many elements of the LIHTC program, issues are not as clearly defined relative to occupancy requirements. In fact, to confirm that a tax credit unit must be a tenant s sole place of residence, we have to rely on references to sections of the Internal Revenue Code that are not tax credit specific.   The term "residential rental property" generally as the same meaning for the LIHTC program as for housing financed by tax-exempt bonds. For specific guidance on this, please see the Conference Committee Report to the 1986 Act, CCH Paragraph 7252, and The General Explanation to the Tax Reform Act of 1986, page 157. See also Revenue Ruling 98-47. Section 42 itself also leads us to this definition in 42(g)(1), which states, "A qualified low-income housing project means any project for residential rental property." This is the identical language contained in IRC 142(d)(1), which is the section of the Code governing tax-exempt bonds. 1.103-8(b)(5)(i), which are part of the Treasury Regulations implementing 142, provides that individuals or families of low or moderate-income must occupy that percentage of completed units in such project applicable to the project under 1.103-8(b)(1) continuously during the project period.   It is this regulatory language regarding "continuous" occupancy that leads me to provide the opinion that once a resident enters into a lease for a tax credit unit, such unit may be their only residence. If they were to maintain a second residence, then they would not be in "continuous" occupancy of the low-income unit, and the unit would not be considered low-income.   Based on this continuous occupancy requirement, I recommend strongly that all leases for LIHTC properties contain language similar to the language in the HUD Model lease. An example of such a clause would be "The tenant must live in the unit and the unit must be the tenant s only place of residence. The Tenant shall use the premises only as a private dwelling for himself/herself and the individuals listed on the Tenant Income Certification. The Tenant agrees to permit other individuals to reside in the unit only after obtaining the prior written approval of the Landlord."   In order to ensure that LIHTC units meet the IRC definition of "residential rental property," it is important that the continuous occupancy requirements of the program be met.

State Registered Lifetime Sex Offenders in Federally Assisted Housing

On June 11, 2012, HUD published Notice H 2012-11, which clarifies and supercedes Notice H 2009-11. The Notice reiterates the responsibilities of owners and agents of HUD-assisted properties relative to the rental of housing to lifetime registered sex offenders. The Notice makes clear that owners of Section 202 PRAC, Section 811 PRAC, Section 811 PRA, Section 202, Section 8 project-based, Section 236, Section 221(d)(3) BMIR, Public Housing, and Moderate Rehabilitation projects must prohibit admission to persons subject to a lifetime registration requirement under a State sex offender registration program. The requirement also applies to Tenant-based Housing Choice Vouchers, and Project-based Housing Choice Vouchers. If a participant who is subject to such a lifetime registration requirement was erroneously admitted into a project under one of the programs noted above, and is found to be receiving housing assistance, eviction and termination of assistance must be pursued. HUD regulations at 24 CFR 5.856, 960.204(a)(4), and 982.553(a)(2) prohibit admission to such persons after June 25, 2001. If it is discovered that a household contains a member who is a registered lifetime sex offender, the family must be given the opportunity to remove the ineligible member from the household. If the family is unwilling to remove the individual from the household, assistance to the household must be terminated. It should be noted that for admissions prior to June 25, 2001, there is no statutory or regulatory basis to evict or terminate assistance based solely of the basis of a household member s sex offender registration status. Owners and agents of all affected properties are required to perform criminal background checks during the application stage to determine if any member of the applicant household is subject to lifetime registration as a sex offender. Applicants for admission must provide a list of all states in which any household member has resided, and criminal record checks must be performed in all these states, as well as in the state where the property is located. If a family agrees to remove a registered sex offender from the household prior to move-in, the family may be admitted; if not, the application must be rejected. All owners and managers of properties subject to this requirement should obtain a copy of Notice H 2012-11 and carefully review the requirements of the Notice.

Maryland Appeals Court Deems Pit Bulls Inherently Dangerous

In Tracey v. Solesky, No. 53, September Term 2012,the Maryland Court of Appeals has determined that showing that the owner of a dog or the landlord of a property knew that a dog is at least part pit bull is sufficient to hold the owner and landlord liable for any damage or injury caused by the dog. The ruling stated, "It is no longer necessary to prove that the particular pit bull or pit bulls are dangerous."   This decision does not ban pit bulls in the State of Maryland, but it does make owners - and potentially landlords - liable for injuries caused by a pit bull. What this essentially means is that an apartment landlord can be held civilly liable for damage or injuries caused by a pit pull or pit bull mix regardless of whether the specific dog had a prior history of attacks or aggressive behavior. This decision follows a trend of states and communities taking a hard line against dangerous dog breeds, most specifically pit bulls. Pit bulls are specifically banned in Prince George s County, Maryland, and in a number of other localities around the country. Based on this decision, owners (especially those in Maryland) should give serious consideration to banning pit bulls from properties that allow pets. Maryland landlords, as well as those in other jurisdictions that have taken positions relative to the tendencies of pit bulls to act aggressively, should seek advice from legal council before approving pit bulls or pit bull mixes as Companion Animals for a disabled individual. The liability inherent in permitting the presence of a pit bull may make such an accommodation request unreasonable.

HUD Proposed Rule on Project-Based and Tenant-Based Vouchers

On May 15, 2012, HUD published a Proposed Rule on the implementation of the HERA 2008 changes to the Section 8 Tenant-Based Voucher and Section 8 Project-Based Voucher Programs. The proposed rule may be found in the Federal Register, Vol. 77, No. 94, dated May 15, 2012. Comments on the proposed rule are due at HUD by July 16, 2012.   The Housing & Economic Recovery Act of 2008 (HERA) made several changes to the U.S. Housing Act of 1937 that affect programs administered by HUD s Office of Public and Indian Housing (PIH), and one change that affects project based assistance programs administered by HUD s Office of Housing, including the Section 8 project-based program (this will also effect LIHTC properties since tax credit properties for the rules of the Section 8 project-based program for purposes of rent determination. While LIHTC housing is not directly affected by the rules governing PIH properties, tax credit properties are indirectly affected since voucher residents are a common part of a tax credit property s tenant base, and a number of tax credit properties use project-based vouchers (PBV).   Following are the proposed changes most likely to impact LIHTC projects: The definition of "annual income" will be amended to exclude, from the definition of income, any deferred Department of Veterans Affairs (VA) disability benefits that are received in a lump-sum amount or in prospective monthly amounts. Tax credit properties and project-based Section 8 should already be excluding this income since it was a statutory exclusion effective July 30, 2008. The full amount of periodic VA disability payments continues to be included as income.   The rule permitting "existing housing" to use PBVs is proposed to be tightened through use of the following definition of "existing housing:" A housing unit is considered an existing unit for purposes of the PBV program, if at the time of notice of PHA selection, the unit: Will comply with HQS within 60-days of the date of such selection, and the total amount of work that must be performed to cause the unit to comply with HQS does not exceed $1,000 per assisted unit (including the unit s prorates share of any work done on common areas or systems); and There is no plan to perform rehabilitation work on the unit within one year after HAP contract execution that would cause the unit to be in noncompliance with HQS and that would total more than $1,000 per assisted unit (including the unit s prorates share of any work done on common areas or systems).   PHAs may select - without competition - a proposal for housing assisted under a federal, state, or local government housing assistance, community development, or supportive services program that required a competition for selection under that program. This is particularly important for LIHTC developments awarded competitive credits. In order for this rule to apply, the project must have been selected for the other program within three years of the PBV selection date, and the award of benefits for the other program was not contingent on the receipt of PBV assistance. Under no circumstances may PBV assistance be provided to a public housing unit, an important consideration for properties with HOPE VI funding. A PHA may use the higher Section 8 rent for tax credit units if the LIHTC rent is less than the amount that would be permitted under Section 8. However, in no case may rent paid by a PHA exceed rent permitted under the Rent Reasonableness Test, except in cases where, upon redetermination of rent to owner, the reasonable rent would result in a rent below the initial rent paid for the unit. For units receiving 42 assistance or HOME assistance, a rent comparison with unassisted units is not required if the voucher rent does not exceed the rent for other LIHTC or HOME-assisted units in the project that are not occupied by families with tenant-based assistance.   If the rent requested by an owner exceeds the LIHTC rents for non-voucher families, the PHA must perform a rent comparability study and the rent shall not exceed the lesser of (1) reasonable rent as determined pursuant to a rent comparability study and (2) the payment standard established by the PHA for the unit size involved.   PHAs may enter into a HAP contract of no less than one year nor more than 15 years. Extensions may be entered into for a cumulative total of no more than 15 additional years.   These are the major elements of the proposed rule that could impact owners of LIHTC properties. However, the rule proposes a number of other changes that managers and owners working extensively with the Housing Choice Voucher Program should be familiar with. Other areas addressed by the proposed regulation include:   PBV definitions; Description of the PBV Program; Maximum amount of PBV assistance; Types of housing eligible for PBV assistance; Discussion of excess public assistance (subsidy layering review requirements); PHA-owned units; Owner certification requirements; Removal of units from HAP contracts; Prohibition on leasing to family members of the owner; Lease requirements; Owner termination of tenancy and eviction rights; Continuation of HAP payments when tenant income increases to the point where assistance is not paid; and Overcrowded/under-occupied/accessible units.

$1 Million Discrimination Settlement Reached Between HUD & PR Condo Association

HUD announced today that an agreement has been reached with a condo association in Puerto Rico with the settlement amount valued at $1 million. Isleta Marina, a two-tower, 360 unit development was alleged to have violated the Fair Housing Act due to refusal to repair any of the four elevators in the building, forcing a disabled resident to climb four flights of stairs to reach her unit, which caused further issues related to her mobility disability. The terms of the agreement include requiring the association to repair four of the eight elevators, issue a formal apology to the individual that brought the compliant and have all staff undergo fair housing training. Read the entire press release: HERE For more information about our in depth fair housing training course, visit our Services page.