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HOTMA Adds New Income Exclusions

HOTMA Adds New Income Exclusions for Affordable Housing Projects Introduction In February 2023, the U.S. Department of Housing and Urban Development (HUD) published the Final Rule implementing the Housing Opportunity Through Modernization Act (HOTMA). Subsequently, on September 29, 2023, HUD released Notice H 2013-10, offering additional guidance and clarifications regarding the implementation of the Final Rule. Among the many changes, HUD has added a number of new income exclusions, impacting a broad spectrum of HUD-assisted properties, projects under the Rural Housing Service Section 515 program, the Low-Income Housing Tax Credit (LIHTC) program, and properties with Tax-Exempt Bonds. This article will delve into the essential changes in income exclusions that affordable housing managers must acquaint themselves with. Note: This article does not address all income exclusions listed in 24 CFR 5.609(b), but only those that are newly added or updated by the final rule. Nonrecurring Income The nonrecurring income exclusion replaces the former exclusion for temporary, nonrecurring, and sporadic income (including gifts), but it provides a narrower definition of excluded income in contrast to the former broad exclusion of temporary, nonrecurring, or sporadic income. Income that will not be repeated beyond the coming year (i.e., the 12 months following the effective date of the certification), based on information provided by the family, is considered nonrecurring income and is excluded from annual income. However, income received as an independent contractor, day laborer, or seasonal worker is not excluded from income, even if the source, date, or amount of income varies. Income that has a specific end date and will not be repeated beyond the coming year during the family s upcoming annual reexamination period will be excluded from a family s annual income as nonrecurring income. This does not include unemployment income and other types of periodic payments that are received at regular intervals (such as weekly, monthly, or yearly) for a period of greater than one year that can be extended. For example, an increasing number of cities and states are piloting guaranteed income programs that have discreet beginning and end dates. This income can be excluded as nonrecurring in the final year of the pilot program. For example, for an annual reexamination effective 2/2/24, guaranteed income that will be repeated in the coming year but will end before the next reexamination on 2/1/25 will be fully excluded from annual income. Income amounts excluded under this category may include but are not limited to, nonrecurring payments made to the family or to a third party on behalf of the family to assist with utilities, eviction prevention, security deposits to secure housing, payments for participation in research studies depending on the duration, and general one-time payments received by or on behalf of the family. Following are examples of income that may be excluded: Payments from the U.S. Census Bureau for employment lasting no longer than 180 days and not culminating in permanent employment; Direct federal or state economic stimulus payments; Amounts directly received by the family as a result of state refundable tax credits or state tax refunds at the time they are received; Amounts directly received by the family as a result of federal refundable tax credits or federal tax refunds at the time they are received; Gifts for holidays, birthdays, or other significant life events or milestones (e.g., wedding, baby shower, or anniversary gifts); In-kind donations (e.g., food, clothing, or toiletries received from a food bank or similar organization); Lump-sum additions to net family assets (e.g., lottery winnings, contest winnings, etc.); Income of Live-in Aides, Foster Children, and Foster Adults (note that the exclusion of income for foster children and adults is a change from current regulation); Payments received for the care of Foster Children or Adults or State or Tribal Kinship or Guardianship Care Payments; Insurance payments or settlements for personal or property losses, including but not limited to payments under health insurance, motor vehicle insurance, and workers compensation (note that periodic payments paid at regular intervals (such as weekly, monthly, or yearly) for a period of greater than one year that are received in lieu of wages for workers compensation continue to be included in annual income; Amounts recovered in a civil action or settlement based on a claim of malpractice, negligence, or other breach of duty that resulted in a member of the family becoming disabled. Such funds are excluded whether received periodically or in a lump sum; Veterans Regular Aid and Attendance payments made to veterans. This exclusion applies only to veterans and not to surviving spouses or other beneficiaries; Home-based care payments for a disabled family member. The payments are excluded from income as long as the amounts are provided to enable a disabled family member to remain in the unit. Both the person providing the care and the disabled person must be family members (not household members) and must live in the same household; Replacement housing "gap" payments are made under the Uniform Relocation Act (URA) as long as the payments cover actual increased out-of-pocket costs of rent and utilities. PHAs/Owners may accept a self-certification from the family stating that the income will not be repeated during the coming year. Student Financial Assistance The treatment of student financial assistance depends on the HUD program, student/household characteristics, and the type of financial assistance received by the student. The student financial assistance rules apply to both full-time and part-time students. Student financial assistance to be excluded includes, Amounts received under Section 479B of the Higher Education Act (HEA) of 1965, as amended, includingFederal Pell Grants;Teach Grants;Federal Work Study Programs;Federal Perkins Loans;Student financial assistance received under the Bureau of Indian Education;Higher Education Tribal Grant;Tribally Controlled Colleges or Universities Grant Program; and Employment Training Program under Section 134 of the Workforce Innovation and Opportunity Act (WIOA) Other Student Financial Assistance, including grants or scholarships received from the following sources:The Federal government;A State (including U.S. territories), Tribe, or local government;A private foundation registered as a 501(c)(3) nonprofit;A business entity (such as a corporation, general partnership, LLC, LP, joint venture, business trust, public benefit corporation, or nonprofit entity); or An institution of higher education. Student financial assistance does not include -Financial support provided to the student in the form of a fee for services performed (e.g., a work-study or teaching fellowship that is not excluded under the HEA; or Gifts, including gifts from family or friends. Other than funds excluded under the HEA, all student financial assistance must pay for actual educational expenses. Actual covered costs include tuition, books, supplies, room and board, and fees required and charged to a student by an institution of higher education. For a student who is not the head, co-head, or spouse, actual covered costs also include the reasonable and actual costs of housing while attending school and not residing in the assisted unit. The only situation in which HEA assistance is not automatically excluded from income is in the case of a Section 8 household during years in which a HUD appropriations act specifically requires that educational assistance in excess of actual educational costs be included in income for Section 8 households. In such years, all educational expenses in excess of actual cost will be included in income - including assistance that is part of the HEA. However, in such years, for students who are over the age of 23 with dependent children, the HEA assistance will be excluded. Conclusion The exclusions noted in this article apply to all affordable housing programs that are required to follow HUD rules when determining annual income. This includes not only projects with HUD assistance but also LIHTC properties, Rural Development Section 515 projects, Tax-Exempt Bond Projects, Housing Trust Fund Projects, and HOME projects (in most cases). Owners and managers operating properties under these programs should familiarize themselves with these new income rules and be prepared to put them into effect on January 1, 2024.

2024 Social Security COLA Announced

The federal government announced on October 16, 2023, that the Social Security Cost of Live Adjustment (COLA) for 2024 will be 3.2%, which is significantly lower than the 8.7% increase for 2023. This increase will provide an additional $50 per month for the average retiree. Social Security recipients will receive a notice in the mail in early December showing their new benefit amount. Recipients will see an increase in their January 2024 payment. Those receiving SSI will see the increase on December 31, 2023. Owners and managers of properties that are required to determine the income of residents should use the new COLA SS rate when projecting the income of applicants and residents. This also affects persons receiving SSI, VA pensions, Civil Service Pensions, and Railroad Retirement.

HOTMA Makes Significant Changes to Asset Rules

Navigating Changes in Asset Rules under the HUD Final Rule Implementing HOTMA Introduction In February 2023, the U.S. Department of Housing and Urban Development (HUD) published the Final Rule implementing the Housing Opportunity Through Modernization Act (HOTMA). Subsequently, on September 29, 2023, HUD released Notice H 2013-10, offering additional guidance and clarifications regarding the implementation of the Final Rule. Among the many alterations, significant changes pertain to the handling of assets for families residing in properties subject to HOTMA, impacting a broad spectrum of HUD-assisted properties, projects under the Rural Housing Service Section 515 program, the Low-Income Housing Tax Credit (LIHTC) program, and properties with Tax-Exempt Bonds. This article will delve into the essential changes in asset rules that affordable housing managers must acquaint themselves with. Asset Limitation HOTMA introduces a restriction on the eligibility of a family to receive assistance if the family possesses real property suitable for occupancy as a residence or has assets exceeding $100,000, adjusted annually for inflation. While this rule applies to new applicants, owners have discretion during recertification when enforcing the asset limitation on eligibility for assistance. HUD is expected to issue additional guidance concerning the use of this discretionary authority. Regarding assets, HUD provides clarification that net family assets do not encompass the value of "non-necessary" personal property items with a combined value of $50,000 or less, subject to annual inflation adjustments. Notably: Federal tax refunds or refundable tax credits are excluded from net family assets for 12 months after receipt. Non-revocable trusts are not considered assets if they are not controlled by a household member. The value of any "baby bond" account established, authorized, or funded by Federal, State, or local government is excluded as an asset. Necessary & Non-Necessary Personal Property Necessary personal property is exempt from net family assets calculations. Non-necessary personal property, exceeding a combined value of $50,000 (adjusted for inflation), is included in net family assets. Necessary personal property encompasses items essential for maintaining, using, and occupying the residence, supporting employment, education, health, and wellness. This category extends beyond mere essentials, including personal effects, convenient items, those assisting household members with disabilities, and reasonable accommodations for disability-related needs. Non-necessary personal property includes items such as campers, motorhomes, travel trailers, all-terrain vehicles (if not for day-to-day transportation), bank accounts, financial investments, recreational boats, expensive jewelry without religious or cultural value, collectibles, equipment not generating business income, and luxury items. Remember, if the total value of all non-necessary personal property is $50,000 or less, it is not combined with other assets for the $50,000 limit calculation. For instance, if someone owns real estate valued at $80,000 and non-necessary personal property worth $40,000, the total assets are $80,000. However, if the non-necessary personal property's value were $80,000, the total assets would be $160,000. Other Changes to Asset Rules HOTMA and the Final Rule now include "actual" income from assets in the income definition. This necessitates counting any actual income received as family income. Imputed income applies to assets exceeding $50,000 when no actual income can be computed. A key procedural change is introduced, where actual income is calculated for some assets, and imputed income is calculated for others with a combined value exceeding $50,000, effectively combining both income streams. Notably, financial assets like bank accounts with zero income (0% interest or no dividends) do not incur imputed income, whereas non-financial assets, like real property or non-necessary personal property, are subject to imputation. PHAs or owners may determine net family assets based on self-certification by the family, provided the assets do not exceed $50,000, and full verification is required every three years. However, LIHTC purposes may have different requirements for declarations, including the expected income from assets. The asset limitation rule, restricting assistance for families with real property suitable for occupancy or assets over $100,000, applies to various housing programs but not to the LIHTC program. Exceptions to the real property restriction exist, including disability-related needs, distance to work or educational institutions creating hardship, and properties posing health and safety risks. The $100,000 asset limitation does not apply to LIHTC properties. Retirement accounts recognized by the IRS are not counted as assets, and educational savings accounts are exempt as well. Owners have discretion in enforcing asset limitations during recertification, with additional HUD guidance expected. Conclusion The changes in asset rules under the HUD Final Rule implementing HOTMA have far-reaching implications for affordable housing managers. Understanding the nuances of asset limitations, necessary vs. non-necessary personal property, and imputed income calculations is vital for compliance. It's essential to note that these rules will come into effect on January 1, 2024, and operators of LIHTC properties and those with Tax-Exempt Bonds should consult with oversight agencies regarding potential implementation variations. As affordable housing stakeholders navigate these changes, thorough knowledge and adherence to the updated rules are imperative to ensure compliance and maintain the integrity of housing assistance programs.

HUD Issues New HOTMA Implementation Guidance

On September 29, 2023, HUD published Housing Notice 2023-10, Implementation Guidance: Sections 102 and 104 of the Housing Opportunity Through Modernization Act of 2016. The Notice contains implementation guidance for everything but the Section 104 asset limitation. HUD will provide additional guidance on the asset limitations at a later date.  HUD does affirm that the asset limitations will apply to the Section 202/8 program. While HOTMA does go into effect on January 1, 2024, HUD recognizes that PHAs and owners will need time to put all the new policies into place. The Notice provides guidance on these delayed timeframes, including the requirement that MFH owners (owners of Project-Based Section 8 properties and other properties governed by the HUD Office of Multifamily Housing) update Tenant Selection Plans and EIV Policies & Procedures by March 31, 2024. HUD also published a List of Discretionary Policies to Implement HOTMA. This identifies areas in which owners have policy discretion; owners must state in the Tenant Selection Plan how they will exercise such discretion. Owners and managers of impacted properties should obtain a copy of the Notice and the list of discretionary policies. We will be updating the HOTMA        training provided by A. J. Johnson Consulting Services to include this new guidance and will publish updates of the changes on our website.

HUD Delays NSPIRE Implementation for Certain Programs

The U.S. Department of Housing and Urban Development (HUD) has announced an extension of the compliance date for the National Standards for the Physical Inspection of Real Estate (NSPIRE) for select programs to October 1, 2024. This extension is applicable to the HOME Investment Partnerships Program (HOME), Housing Trust Fund (HTF), Housing Opportunities for Persons with AIDS (HOPWA), Emergency Solution Grants (ESG), and Continuum of Care (COC) programs. The purpose of this extension is to provide jurisdictions with additional time to implement these standards, which will govern inspections and evaluations of HUD-assisted housing. NSPIRE plays a crucial role in helping HUD streamline and consolidate its inspection standards and procedures. Additionally, it incorporates provisions of the Economic Growth and Recovery, Regulatory Relief, and Consumer Protection Act into all of HUD's programs. Programs other than those noted above that are subject to NSPIRE must still adopt the new standard by October 1, 2023.

A. J. Johnson Partners with Mid-Atlantic AHMA for October Affordable Housing Training

During the month of October 2023, A. J. Johnson will be partnering with the Mid-Atlantic Affordable Housing Management Association for a Low-Income Housing Tax Credit (LIHTC) training intended for real estate professionals, particularly those in the affordable multifamily housing field. The session will be presented via live webinar. The following session will be presented: October 18: Intermediate LIHTC Compliance - Designed for more experienced managers, supervisory personnel, investment asset managers, and compliance specialists, this program expands on the information covered in the Basics of Tax Credit Site Management. A more in-depth discussion of income verification issues is included as well as a discussion of minimum set-aside issues (including the Average Income Minimum Set-Aside), optional fees, and use of common areas. The Available Unit Rule is covered in great detail, as are the requirements for units occupied by students. Attendees will also learn the requirements relating to setting rents at a tax-credit property. This course contains some practice problems but is more discussion-oriented than the Basic course. A calculator is required for this course. This session is part of the year-long collaboration between A. J. Johnson and MidAtlantic AHMA that is designed to provide affordable housing professionals with the knowledge needed to effectively manage the complex requirements of the various agencies overseeing these programs. Persons interested in this training session may register by visiting either www.ajjcs.net or https://www.mid-atlanticahma.org.

Medical Marijuana - Is It a Fair Housing Issue?

Medically prescribed marijuana use is permitted in 37 states and the District of Columbia, specifically for medical purposes.  In addition, 18 states (Alaska, Arizona, California, Colorado, Connecticut, District of Columbia, Illinois, Maine, Massachusetts, Michigan, Montana, Nevada, New Jersey, New Mexico, Oregon, Vermont, Virginia, and Washington) have also legalized recreational marijuana. Property managers often inquire about whether individuals can be denied housing based on their marijuana use, considering the drug s legal status in the state where the property is located. The answer is both "yes" and "no." Recreational marijuana users may be denied occupancy, but individuals with a physician s prescription for medical marijuana should not automatically face denial. While the Fair Housing Act (FHA) does not explicitly address drug use in housing, the legislative history used by HU, courts, and tribunals to interpret the law clearly indicates that the exclusion of current illegal drug users does not apply to individuals using controlled substances that are legally prescribed by a physician. According to an office House of Representatives report, "the exclusion does not eliminate protection for individuals who take drugs defined in the Controlled Substances Act for a medical condition under the care of or by prescription from, a physician." The report also asserts that "the use of a medically prescribed drug clearly does not constitute illegal use of a controlled substance." However, there are limitations to this protection for medical marijuana use: The marijuana must be legally prescribed by a physician for a specific medical condition authorized by state law. The person must use the marijuana solely for the prescribed condition. Usage should be confined to the person s own apartment and not common areas. The individual must not possess or cultivate more than the maximum amount permitted by law. Selling or distributing marijuana to others is not allowed. In contrast, recreational marijuana users do not enjoy the same legal protections as medical marijuana users, and they may face housing denial. However, this legal landscape can be complex. For this reason, managers should thoroughly explore state and local laws in places where recreational marijuana is legal. Property managers also need to consider one important factor when renting to individuals using medical marijuana. If the property is designated as non-smoking, permitting the smoking of medically prescribed marijuana on the premises would not constitute a "reasonable accommodation" as it fundamentally alters the property s operations.  Medically prescribed marijuana can be consumed in various forms, including food, pills, powder, topicals, and tinctures. Bottom Line: While medical (and even recreational) marijuana is permitted in many states, only users of medical marijuana are protected by the Fair Housing Act. And even users of medical marijuana must follow specific rules when using the marijuana at properties. Owners and managers of multifamily properties should develop written policies governing the use of medical marijuana at their properties, and those policies should be carefully reviewed by attorneys familiar with state and local laws relating to the issue of medical marijuana.

GAO Study is Critical of HUD Oversight of the Housing Trust Fund Program

The U.S. Government Accountability Office (GAO) was asked by members of Congress to examine the use and oversight of funds from the Housing Trust Fund (HTF) Program. In August 2023, the GAO published its findings in a report titled, "Affordable Housing - Improvements Needed in HUD s Oversight of the Housing Trust Fund Program." The report examines (1) the number and production rate of HTF units; (2) how selected grantees have used HTF and other funding sources; and (3) HUD s HTF oversight and reporting. What GAO Found As of March 1, 2022, HTF grantees had developed 2,186 rental units (in 263 projects) for households with extremely low incomes (not exceeding 30% of the area median). For the 12 selected grantees GAO reviewed, HTF accounted for about 10 percent of the total funds for 70 completed projects. Equity from investors in Low-Income Housing Tax Credits (LIHTC) was the largest funding source. 43 of the projects were new construction (with an average per unit development cost of $262,732), 26 of the projects were rehabilitation (with an average per unit development cost of $188,758), and one project was acquisition only ($34,590 per unit). Average costs vary widely from state to state, with California being the highest ($359,593 per unit) to Mississippi being the lowest ($144,614 per unit). Interestingly, the average per-unit development cost for projects with nonprofit developers was about $40,000 higher than costs for projects with for-profit developers. The reason for this appears to be that nonprofit organizations focus more on populations that are more costly to serve, such as special needs tenants who may require additional or enhanced facilities. The selected grantees were the state agencies responsible for administering the HTF program in Arizona, California, Georgia, Maine, Massachusetts, Minnesota, Mississippi, New York, North Dakota, Tennessee, and Utah. HUD monitors compliance with HTF funding commitment and expenditure deadlines, but weaknesses exist in its oversight and reporting. Specifically, HUD has not - Monitored grantee compliance with requirements for reporting project completion dates or data on total project units in HUD s information system; Effectively communicated requirements for grantees to obtain cost certifications for completed HTF projects; Conducted or scheduled a comprehensive assessment of fraud risks; and Disclosed limitations in its external HTF reports that could lead to misinterpretation of project cost and funding data. HUD officials are drafting procedures for better monitoring of HTF grantees. Implementation of these procedures will begin in 2024. HUD annually allocates HTF grant funds to states using a formula to determine grant amounts. The formula considers the shortage of rental homes affordable and available to very low-income and extremely low-income (ELI) renter households and the extent to which such households are living in substandard housing or spending more than 50% of their income on rent. The program has a minimum annual grant of $3 million for each of the 50 states and the District of Columbia. In 2022, 21 states and DC received less than $5 million and 23 states received between $5 million and $25 million. Allocations for the remaining seven states ranged from $26 million (Pennsylvania) to $132 million (California). By statute, all HTF funds must benefit very low- or extremely low-income households. HUD has indicated that at least 80% of the funds must be used for the production, rehabilitation, preservation, or operation of rental housing. 75% of the funds for rental housing must benefit ELI families or families with incomes at or below the poverty line. HTF rental units must adhere to income and rent restrictions for an affordability period of 30 years. The largest source of federal assistance for developing affordable rental housing is the LIHTC program, which provides federal income tax credits to encourage private equity investments in the construction or rehabilitation of affordable rental housing. LIHTC equity represents about 40% of total funding.  A high percentage of HTF projects also utilize HOME funds, which is the largest HUD-administered program that funds housing development. About 57% of HTF units completed have been efficiency or one-bedroom units, about 26% are two-bedroom units, and about 17% have three or more bedrooms. Almost all HTF activity has been rental since low-income and ELI households may have difficulty obtaining mortgages for homeownership. Most completed HTF units (about 80%) are in projects located in metropolitan areas. Grantees generally use HTF funds to target special populations and build permanent supportive housing. Nine of the 12 selected grantees awarded HTF funds to projects that targeted special populations. Special populations include individuals experiencing homelessness, formerly incarcerated individuals, older adults, and veterans. Weaknesses Identified in the Study HUD identified two weaknesses in HUD s oversight of project completion requirements: Project Completion Deadline: HUD does not have procedures for reviewing whether HTF grantees are entering completion information into the HUD database within the 120-day regulatory deadline and has not conducted reviews. It does appear that grantee confusion regarding completion requirements may be contributing to noncompliance in this area. One specific area of confusion is the difference between HTF and LIHTC definitions of project completion. Since HUD is not reviewing project completion times, it is unaware of grantee noncompliance in this area. Data on total units in completed projects: HUD s data on the total number of units (HTF plus non- HTF units) in completed projects is inaccurate, and HUD does not have a centralized process for identifying likely errors. Other program weaknesses include - Failure of the grantees to comply with cost certification requirements; HUD has not comprehensively assessed HTF fraud risks; and HUD s reporting on HTF costs and funding could be misinterpreted. Conclusions Because HUD does not review grantees final drawdown and completion dates, it has been unaware of grantee noncompliance with and confusion about the requirement to enter project completion information within 120 days of the final drawdown of funds. Conducting such reviews and providing grantees additional instruction on the requirement could help ensure the timely completion of HTF-assisted projects and enhance the accuracy of HUD s data on HTF unit production. HUD has not effectively communicated requirements for grantees to obtain cost certifications for completed HTF projects, as evidenced by the absence of cost certifications for many projects. Because HUD has not scheduled or conducted a comprehensive assessment of fraud risks in the HTF program, it is not well-positioned to identify and mitigate risks that could reduce the program s efficiency and effectiveness. Recommendations of the GAO HUD should develop and implement a centralized process to monitor HTF grantee compliance with data entry requirements; HUD should develop and implement a system to monitor the total number of units in completed projects; HUD should use formal notices and training to enhance communication of the cost certification requirements; HUD should schedule and conduct a comprehensive assessment of HTF fraud risks; and HUD should revise its public reports on the HTF program to disclose that the amount of non-HTF funds may be underreported and that HTF units are only a portion of the total units in HTF-assisted projects. HUD has agreed to all five recommendations and will implement policies to adopt these recommendations in 2024. BOTTOM LINE This report responds to a Congressional request to assess the utilization and supervision of funds from the Housing Trust Fund (HTF) program. The report covered the number of HTF units developed, funding sources, and oversight by the Department of Housing & Urban Development (HUD). By March 2022, 2,186 rental units for ELI households were developed via the HTF. In a study of 12 grantees, HTF contributed around 10% of total funds for 70 completed projects, with LIHTC being a major source. Costs varied across states, with nonprofits incurring higher costs due to serving more costly populations. HUD s oversight was found to have weaknesses, including noncompliance with project completion reporting, lack of cost certifications, incomplete assessment of fraud risks, and misleading external reporting. The GAO recommends improving monitoring, communication, risk assessment, and public reporting. HUD agreed to implement these recommendations in 2024. All HTF grantees are encouraged to review the GAO report and be proactive in implementing changes that are likely to occur in 2024.