News

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

During the month of December 2022, A. J. Johnson will be partnering with the MidAtlantic Affordable Housing Management Association for two in-person training sessions intended for real estate professionals, particularly those in the affordable multifamily housing field. Following the in-person training sessions, AJ will be providing a review of testable areas and in-person administration of the Housing Credit Certified Professional (HCCP ) exam.  The following sessions will be presented: December 13: Intermediate LIHTC Compliance (In-person training in Richmond, VA) - 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. December 14: Advanced LIHTC Compliance (In-person training in Richmond, VA) - This full-day training is intended for senior management staff, developers, corporate finance officers, and others involved in decision-making with regard to how LIHTC deals are structured. This training covers complex issues such as eligible and qualified basis, applicable fraction, credit calculation (including first-year calculation), placed-in-service issues, rehab projects, tax-exempt bonds, projects with HOME funds, Next Available Unit Rule, employee units, mixed-income properties, the Average Income Minimum Set-Aside, vacant unit rule, and dealing effectively with State Agencies. Individuals who take both two days of training will be provided with study materials and a practice exam to assist in preparation for the HCCP exam, to be administered on December 15. December 15: Review of testable areas and administration of the Housing Credit Certified Professional (HCCP ) exam (In-person exam in Richmond, VA). Following the two days of intensive and comprehensive LIHTC training, AJ will provide a review of program requirements and will administer the HCCP exam in person. These sessions are part of the year-long collaboration between A. J. Johnson and MidAtlantic AHMA and 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 any (or all) of these training sessions may register by visiting either www.ajjcs.net or https://www.mid-atlanticahma.org.

Average Income Final Regulation - The Available Unit Rule

A short time ago I posted an article providing an overview of the new IRS final regulation on the Average Income Set-Aside. I promised to post a series of articles detailing some of the more complex elements of the final regulation and this is the second in that series. In this article, I will review the Available Unit Rule on Average Income projects. When Congress added the Average-Income Set-Aside, it also added a new next available unit rule (AUR) for the AI test. Under this new rule, a unit ceases to be a low-income unit if two slightly different disqualifying conditions are met: The income of an occupant of a low-income unit increases above 140% of the greater of (i) 60% of AMGI or, (ii) the imputed income limit designated by the owner for the unit; and A new occupant whose income exceeds the applicable imputed income limitation occupies any other residential rental unit in the building that is of comparable or smaller size. If the vacant unit was a low-income unit prior to becoming vacant, the unit must be occupied by a tenant who qualifies under the imputed income limit. If the vacant unit was a market unit prior to becoming vacant, it must be designated with an income limit that will enable the project to continue to have an average imputed income of no more than 60%. There is no major change to the AUR in the final regulation, but the language specifies that if a low-income resident has income in excess of 140% of the 60%, 70%, or 80% limit, and the next available unit in the building that is comparable or smaller in size to the over-income unit is a market unit, it must be designated with an income limit such that the average of all imputed income designations of residential units in the project does not exceed 60% of the AMGI. Also, if multiple units are over-income at the same time, and there is a mix of low-income and market-rate units, the owner need not comply with the AUR in any specific order. Renting any available comparable or smaller vacant unit in the building to a qualified tenant maintains the low-income status of all over-income units until the next comparable or smaller unit becomes available. A Deep-Dive into the AUR on Average-Income Projects For purposes of the AI set aside, a low-income unit will be considered "over-income" if the household s income is:More than 140% of the 60% AMGI if the unit s designated income limit is 20, 30, 40, 50 or 60 percent; or More than 140% of the unit s designated income if the unit s income designation is 70% or 80%. IRS Guidance Relative to the AUR on AI Projects IRS Final Regulation: If multiple units are over-income at the same time, the owner need not comply with the AUR in any specific order. Renting any available comparable or smaller vacant unit to a qualified tenant maintains the status of all over-income units as low-income units.E.g., assume a 20-unit building with nine low-income units (three units at 80% of AMGI, two units at 70% of AMGI, one unit at 40% of AMGI and three units at 30% of AMGI). Two units are over-income, one a 30% income three-bedroom unit and another a 70% two-bedroom unit. The next available unit is a vacant two-bedroom market unit.Renting the vacant two-bedroom unit at either the 30%- or 70%-income designation will satisfy both the minimum set-aside of 40% and the average test of 60% or less. This is the case even if the 30% unit was the first unit to exceed the 140% income level. An Over-Income unit ceases to be a qualified low-income unit if any unit in the building of comparable or smaller size is occupied by a new household whose income exceeds the designated income limit of that unit - based on the designation that unit had prior to becoming vacant. If the unit that becomes vacant is a market unit, the owner must designate the income of the next available unit such that the project continues to meet the Average Test. E.g., Household A lives in a 30% designated unit and B lives in a 70% designated unit. A s income exceeds 140% of the 60% AMGI, or B s income exceeds 140% of the 70% AMGI - the AUR is now applied to the BIN.The income of both households goes over the 140% level at the same time.Assume the BIN has two market units, four 30% units, and four 70% units. The Average Test is 50%.A market unit is rented at the 30% AMGI, maintaining four 30% and four 70% units - the 30% over-income unit now becomes a market unit, and the Average Test is still 50%. But - what if instead of renting the market unit to a designated 30% household, the owner rents the unit to a designated 50% household and makes the 30% over-income unit a market unit?Result: There are now two market units, one 50% unit, three 30% units, and four 70% units (one of which is over-income). The Average Test is now 52.5% - the project still qualifies under the Average Test but has one less 30% unit. The AUR requirement is met but this could be a LURA violation. The preceding example is why many HFAs may not allow mixed-income projects to select the AI Minimum Set-Aside. Summary Clearly, the additional complexity relative to the AUR on Average Income properties should give owners pause prior to developing mixed-income buildings with the Average-Income set-aside. However, with good management and tracking procedures, any difficulties can be overcome, and the benefits of a mixed-income project realized. One final word of warning though; as the example above illustrates, owners may be able to replace lower designated units with higher designations when complying with the AUR. While this would increase cash flow due to higher rents, it could very well run afoul of the property LURA (extended use agreement) which may stipulate a required number of units at each income level. At the very least, before taking such a step owners should confirm that no state requirements would be violated and that investors are on board with the change.

DC Voucher Discrimination Results in Record Penalty

The District of Columbia entered into a consent agreement on October 15, 2022, requiring three real estate firms (Daro Realty, LLC, Daro Management Services, and Infinity Real Estate, LLC)  and firm executives to pay a record $10 million in penalties for illegally discriminating against renters in D.C. who use Section 8 Housing Choice Vouchers. This is the largest civil penalty in a housing discrimination case in U.S. history. In the District of Columbia, it is a fair housing violation to discriminate based on source of income. This includes Housing Choice Vouchers. The case originated with a whistleblower and was taken up by the D.C. Attorney General. The initial lawsuit (District of Columbia v Daro Realty, LLC, et al) was filed in 2020 and alleged that the companies illegally charged Section 8 voucher recipients extra fees and posted discriminatory housing advertisements. During the litigation, the allegations were confirmed by emails between the company executives showing how they pushed to have voucher holders excluded from their properties. In one email revealed as part of the suit, an investment director wrote, "No voucher/Sec-8 - find ways to reject, applicant must meet every requirement (credit, security deposit, income, etc.), in the case that we have to lease to them which we should find every way out of, don t put in renovated units. No transfers." In another email, an executive wrote that she was doing "everything I can to reduce if not eliminate the Section 8 program from our communities. We have tightened our screening criteria as much as humanly possible." Under the terms of the settlement agreement, the three real estate companies and their principals will be required to: Pay $10 million in civil penalties for illegal housing discrimination. This must be paid within 60 days of the date of the order;Permanently stop managing residential property in D.C.;Dissolve the property management arm of its business and transition management of all the properties owned by the entities to a third-party company within 18 months;Permanently bars all defendants, including the companies and named executives, from owning any interest in a property management company in D.C; andForfeit a professional license. An executive will be required to surrender her D.C. real estate licenses and not seek reinstatement or seek to apply for a new license for 15 years. Why this case matters: 19 states and the District of Columbia expressly ban source of income discrimination in housing. This case demonstrates the seriousness given to this type of discrimination in those areas where it is illegal. Owners and managers operating in these areas must ensure that property policies in no way discriminate against persons using vouchers. This includes making sure that voucher users are not held to a different standard than non-voucher users and that different terms and conditions are not applied to voucher holders.

Average Income Final Regulation - Qualified Groups of Units and the Applicable Fraction

A short time ago I posted an article providing an overview of the new IRS final regulation on the Average Income Set-Aside. I promised to post a series of articles detailing some of the more complex elements of the final regulation and this is the first in that series. In this article, I will review the term "qualified group of units" and how it relates to establishing a building s applicable fraction. Qualified Group of Units This new term means just what it sounds like; this is a group of units that - as a group - qualifies for tax credits and has an average imputed income limit of no more than 60%. A qualified group of units must be determined for two reasons: 1. To establish that at least 40% of the units in the project are qualified low-income units with an average imputed income of no more than 60%; and 2. to establish the units that may be included as a "group" for purposes of establishing the applicable fraction for the buildings. Determining "Qualified Groups of Units" for Purposes of the Applicable Fraction The applicable fraction is the percentage of a building occupied by qualified low-income households. It is the lesser of the percentage of low-income units or the percentage of low-income residential floor space and is determined on a building-by-building basis. Except for the first year of the credit period (where the applicable fraction is the average of the applicable fraction for each of the 12 months in the first year of the credit period), it is determined as of the last day of the tax year. Under the final regulations, the determination of a group of units to be taken into account in the applicable fractions for the buildings in a project follows the same approach as determining a group of units to be taken into account for purposes of the set-aside test.   Essentially, a taxpayer can determine this group of units by including the low-income units identified for the average income test, and any other residential units that can qualify as low-income units if they are part of a group of units such that the average of the imputed income limitations of all of the units in the group does not exceed 60 percent of AMGI. If the average exceeds 60 percent of AMGI, then the group is not a qualified group. For example, if a unit was designated at 80 percent of AMGI and if including that unit in an otherwise qualified group of units causes the average of the imputed income limitations of the group to exceed 60 percent of AMGI, then the taxpayer cannot include the 80 percent unit in the otherwise qualified group. Only the otherwise qualified group of units, without the 80 percent unit, is a qualified group of units used to determine the project s buildings applicable fractions. Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building at issue. (Although the qualified group of units for a project must have an average limitation no greater than 60 percent of AMGI, this is not true of the average limitation of the units used to compute the applicable fraction of individual buildings in the project.)This is critical and confirms that while a "project" must meet the 60% average, individual buildings are not required to do so. The following example illustrates how the qualified group of units concept is used in determining an individual building s applicable fraction: A multiple-building housing project consisting of two buildings received an allocation of housing credit dollar amount, and the taxpayer who owns the project elects the average income test.The taxpayer intends for the buildings (each containing 5 units) to have 100 percent low-income occupancy. The taxpayer properly and timely designates the imputed income limitations for the 10 units in Buildings 1 and 2 as follows:Building A contains 2 units at 80 percent of AMGI and 3 units at 40 percent of AMGI; and Building B contains 2 units at 40 percent of AMGI and 3 units at 80 percent of AMGI, as illustrated here:Building AUnit A1: 80%Unit A2: 80%Unit A3: 40%Unit A4: 40%Unit A5: 40%Building BUnit B1: 40%Unit B2: 40%Unit B3: 80%Unit B4: 80%Unit B5: 80%Notice that while the average imputed income of the "project" is 60%, the average in building B is 64%. This makes it clear that while a project must maintain the 60% average, this is not the case for individual buildings in a project.In the first taxable year of the credit period (Year 1), the project is fully leased and occupied.Also, for the first credit year, the taxpayer follows the proper procedure in identifying all 10 units as a qualified group of units for the minimum set-aside and the applicable fraction determination.Line 8b of the 8609 and the Line 8b attachment indicate that these two buildings (BINs) are part of the same project. Analysis For Year one, the identified group is a qualified group of units, and all ten units are included in the applicable fraction for the respective buildings.To determine the qualified basis, all 10 units in the identified qualified group of units across Building A and Building B are used in the applicable fraction determination when calculating the qualified basis of each building for purposes of determining the annual credit amount under section 42(a).The fact that the average of the units in Building B exceeds 60 percent of AMGI does not impact the applicable fraction of Building B because the average of the identified group of units across both buildings does not exceed 60 percent of AMGI. How Noncompliance Impacts the Applicable Fraction Assume that in Year five, the HFA performs a monitoring review of the project and finds that Unit A3 was occupied by an ineligible resident at move-in, and the unit was ineligible at the end of the tax year.  Unit A3 is removed from the count of low-income units, leaving the remaining nine units with an average imputed income of 62.22%. In order to achieve the required 60% average, the owner must designate a group of units with a 60% or less average. The owner chooses to remove A2 from the applicable fraction for the year, leaving eight low-income units in the group with an average of 60%. Result Building A s applicable fraction for Year five is 60% (three units out of five). Building B s applicable fraction for Year 5 is 100%. Summary As always, the applicable fraction is determined on a building-by-building (BIN-by-BIN) basis during each year of the compliance period. However, the "qualified group of units" is always determined on a project basis. Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building for which the applicable fraction is being determined.

Court Rules Low-Income Residents Are Not a Protected Group

In Moody et al v. The Related Companies, LP (decided in August 2022), affordable housing tenants in an upscale New York City development filed a disparate impact claim under the Fair Housing Act (FHA). While most of the persons filing the suit were Black or Hispanic, the suit claimed a disparate impact based on their income status. The U.S. District Court for the Southern District of New York denied the claim. In this case, the plaintiffs had a different address for the same building as the market residents, had to use separate elevators from those used by the market-rate condominium owners, and lacked access to various amenities available to the market-rate owners. The property in question is 16 Hudson Yards ("Hudson Yards"). The affordable component of the housing was built under the state s 421-A program, which includes affordable rental units with market-rate units. The plaintiffs alleged that affordable housing tenants were (1) segregated from spaces used by luxury condo owners in the same building; (2) required to use "poor doors" to access their apartments (i.e., the affordable units had a different street address than that used by the market-rate residents); and (3) were refused access to certain amenities available to the market owners (e.g., access to a swimming pool, playroom, and fitness center). The affordable apartments are on lower floors than the market-rate units. The affordable and market residents have separate elevators, the lobby with the affordable address is smaller than the lobby with the Hudson Yards address, and the condos have in-unit washers and dryers, but the rental units do not. In making its decision, the court ruled that to make a disparate impact claim, there must be factual allegations that would permit the court plausibly to infer that the plaintiffs were treated differently from similarly situated persons because of their membership in a protected class. However, the luxury condo owners were not similarly situated to affordable housing tenants, and the facts presented by the plaintiffs did not indicate that the disparate treatment was due to race, color, or national origin. According to the court, the plaintiffs were unable to show that the challenged policy or practice had a disproportionately adverse effect on members of a protected class or that there was a robust causal link between the challenged policy and the adverse impact on members of a protected class. The FHA does not provide protections based on economic status, even when economic status has substantial overlap with race. In this case, the plaintiffs had to show "prejudicial treatment of minorities over and above that which is the inevitable result of disparity in income." According to the court, the plaintiffs were unable to do that. Bottom Line: Socio-economic status is not a protected characteristic under the FHA. Unless a property s policy of treating residents differently based on economic status directly contributes to racial segregation, courts are not likely to require the same living conditions for all income ranges. In this case, the court said that the plaintiffs failed to show that the affordable units were actually segregated. There was no evidence that the racial mix of the affordable units differed markedly from the luxury units. Thus, it was impossible for the court to infer that designing the building so all of the affordable units were on separate floors from luxury units resulted in the segregation of Black and Hispanic tenants.

Court Rules That Acceptance of Voucher May be Reasonable Accommodation

In Arnold v. Elmington Property Management, LLC, the U.S. District Court for the Northern District of Alabama ruled that a landlord should grant as a reasonable accommodation its acceptance of Section 8 Housing Choice Vouchers submitted by a tenant as part of its rent payment. The landlord could not show that such acceptance would fundamentally alter property operations or cause undue administrative burdens. The decision was handed down in July 2022, in the favor of the tenant, who suffers from chronic obstructive pulmonary disease ("COPD"), neuropathy, and heart disease. The tenant received the voucher in 2005 and began renting a unit at Valley Crest Apartments in 2017 with the voucher. Elmington Property Management bought Valley Crest in 2021 and immediately informed residents that vouchers would not be accepted any longer. In November 2021, the resident requested that Elmington waive the no voucher policy as a reasonable accommodation. Elmington denied the request as unreasonable but did not state why the request was unreasonable. Nor did Elmington engage in the required "interactive process" with the resident. The court found that by accepting the voucher, Elmington would receive the full rent for the unit. Only the source of the funds would change. Elmington argued that "forced participation in Section 8 is not a reasonable accommodation", citing Salute v. Stratford Greens Garden Apartments, a case in which the Second Circuit Court found that a landlord s Section 8 participation and its related requirements necessarily imposed "unreasonable costs, an undue hardship, and a substantial burden." In this case, the court disagreed, stating that the landlord must show "special (typically case-specific) circumstances that demonstrate undue hardship in the particular circumstances." The court relied on the principle of "balancing the parties' needs" in their determination. In this case, the court ruled that Elmington presented no specific evidence that acceptance of the voucher would present an undue financial and administrative burden or fundamentally alter the property s operations. Bottom Line: Reasonable accommodation requests by the disabled can take many forms. If the applicant or resident can demonstrate that the request is necessary due to a disability, the burden is likely to fall on the landlord to prove that it is "unreasonable" in the particular case.

IRS Provides Unexpected Extension of COVID Relief

The IRS has published Notice 2022-52, providing unexpected extensions to HFAs and LIHTC properties due to the COVID pandemic. The relief has been granted due to unavoidable labor and supply-chain disruptions delaying the construction, rehabilitation, and restoration of properties throughout the United States. The following relief extensions are included in the Notice: Extension of certain placed-in-service deadlines: this provision extends placed-in-service deadlines for projects receiving allocations in 2019, 2020, and 2021.If the original deadline for a low-income building to be placed in service was the close of the calendar year 2020, the new deadline is the close of the calendar year 2022 (that is, December 31, 2022).If the original placed-in-service deadline was the close of the calendar year 2021 and the original deadline for the 10-percent test in 42(h)(1)(E)(ii) was before April 1, 2020, the new placed-in-service deadline is the close of the calendar year 2023 (that is, December 31, 2023).If the original placed-in-service deadline was the close of calendar year 2021 and the original deadline for the 10-percent test in 42(h)(1)(E)(ii) was on or after April 1, 2020, and on or before December 31, 2020, then the new placed-in-service deadline is the close of calendar year 2023 (that is, December 31, 2023).If the original placed-in-service deadline is the close of calendar year 2022 (and thus the original deadline for the 10-percent test in 42(h)(1)(E)(ii) was in 2021), then the new placed-in-service deadline is the close of calendar year 2024 (that is, December 31, 2024).If the original placed-in-service deadline is the close of calendar year 2023 (and thus the original deadline for the 10-percent test in 42(h)(1)(E)(ii) was in 2022), then the new placed-in-service deadline is the close of calendar year 2024 (that is, December 31, 2024). Extension of Agency-set reasonable restoration periods: This notice modifies and amplifies section IV.D of Notice 2022-05 by permitting a twenty-four-month extension of reasonable restoration periods set by an Agency.For purposes of 42(j)(4)(E) both in the case of a casualty loss not due to a pre-COVID-19-pandemic Major Disaster and in situations governed by section 8.02 of Rev. Proc. 2014-49 in the case of a casualty loss due to a pre-COVID-19-pandemic Major Disaster, if a low-income building s qualified basis is reduced by reason of the casualty loss and the reasonable period to restore the loss by reconstruction or replacement that was originally set by the Agency (original Reasonable Restoration Period) ends on or after April 1, 2020, then the last day of the Reasonable Restoration Period is postponed by twenty-four months but not beyond December 31, 2023.Notwithstanding the preceding sentence, the Agency may require a shorter extension or no extension at all.If a property meets the deadline imposed by the HFA (not beyond December 31, 2023), the qualified basis of the building for taxable years ending after the first day of the casualty and before the completion of the restoration shall be the qualified basis at the end of the taxable year immediately preceding the first day of the casualty.Extension of Agency-set correction periods: This section extends the correction period set by an Agency by twelve months.If a correction period that was set by the Agency ends on or after April 1, 2020, and before December 31, 2022, then the end of the correction period (including as already extended, if applicable) is extended by a year, but not beyond December 31, 2023.If the correction period originally set by the Agency ends during 2023, the end of the period is extended to December 31, 2023.Notwithstanding the preceding sentences, the Agency may require a shorter extension or no extension at all.Extension of waivers of compliance monitoring physical inspections: this section extends the temporary waiver for compliance monitoring physical inspections.An Agency was not required to conduct compliance monitoring physical inspections in the period beginning on April 1, 2020, and ending on June 30, 2022.Agencies may extend the waiver if the level of COVID transmission makes such an extension appropriate.Depending on varying rates of transmission, the extension may be State-wide, may be limited to specific locales, or may be on a project-by-project basis.No such extension may go beyond December 31, 2023.The Agency must resume compliance-monitoring reviews as due under 1.42-5 once the waiver expires.Between April 1, 2020, and the end of 2022 only, when the Agency gives an Owner reasonable notice that it will physically inspect not-yet-identified low-income units, it may treat the reasonable notice as being up to 30 days.Beginning on January 1, 2023, for this purpose reasonable notice again is generally no more than 15 days Owners and managers should note that this extended relief does not include an extension for qualifying units in order to avoid the "2/3" unit rule. For projects claiming first-year credits in 2022, units qualified no later than six months after the end of the tax year will be included in qualified basis as of the end of 2022. Units qualified after the six-month period will be treated as "2/3" units.

Significant Improvements in Final Average Income Regulation

The IRS released final and temporary regulations on the Low-Income Housing Tax Credit Average Income Test Regulations on October 7, 2022. The regulation is now in effect. In general, these substantive final regulations provide significant flexibility with respect to satisfying the average income test, identifying a qualified group of units for use in the average income set-aside test and applicable fraction determinations, and changing the imputed income limitation designations of residential units. Following is a comprehensive description of the final regulation and the changes it has made from the proposed regulation. I recognize that the rule is complex and lengthy. For that reason, while I am providing this overview of the entire regulation, over the next few weeks I will post individual articles on the most critical individual sections of the regulation. Those articles will include examples to assist owners and managers in implementing the new regulation. Background In 2018, Section 42(g)(1)(C) was added to the federal tax code, providing for a third minimum set-aside test option - the average income test. A project meets the requirements of the average income (AI) test if 40% or more of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the specific unit. Unlike the two original minimum set-aside tests (20-50 and 40-60), the AI test requires the property owner to designate each units imputed income limitation for purposes of the AI test. The code requires that the average of the imputed income limitations designated not exceed 60% of AMGI. The possible imputed income limitations are 20, 30, 40, 50, 60, 70, and 80. The 2018 Act also added a new next-available unit rule for the AI test. Under this new rule, a unit ceases to be a low-income unit if two slightly different disqualifying conditions are met: The income of an occupant of a low-income unit increases above 140% of the greater of (i) 60% of AMGI or, (ii) the imputed income limit designated by the owner for the unit; andA new occupant whose income exceeds the applicable imputed income limitation occupies any other residential rental unit in the building that is of comparable or smaller size. If the vacant unit was a low-income unit prior to becoming vacant, the unit must be occupied by a tenant who qualifies under the imputed income limit. If the vacant unit was a market unit prior to becoming vacant, it must be designated with an income limit that will enable the project to continue to have an average imputed income of no more than 60%. In October 2020, the Department of Treasury and IRS published a notice of proposed rulemaking, with proposed regulations for the AI minimum set-aside test. The IRS received many comments on the proposed rule and in March 2021, the IRS held a public hearing on the proposed rule. Since that time, the IRS has been developing this final regulation. Review of Critical Elements of the Final Regulation The Available Unit Rule (AUR) There is no major change to the AUR, but the language specifies that if a low-income resident has income in excess of 140% of the 60%, 70%, or 80% limit, and the next available unit in the building that is comparable or smaller in size to the over-income unit is a market unit, it must be designated with an income limit such that the average of all imputed income designations of residential units in the project does not exceed 60% of the AMGI. Also, if multiple units are over-income at the same time, and there is a mix of low-income and market-rate units, the owner need not comply with the AUR in any specific order. Renting any available comparable or a smaller vacant unit in the building to a qualified tenant maintains the low-income status of all over-income units until the next comparable or smaller unit becomes available. Requirements to Satisfy the AI Test The proposed regulations would have required taxpayers to complete, not later than the close of the first taxable year of the credit period, the initial designation of imputed income limitations for all of the units taken into account for the average income test. Under the proposed regulations, the 60 percent of AMGI limit on the average of designated imputed income limitations applied to all of the low-income units in the project. The proposed requirement did not take into account whether fewer than all of those units could constitute a group of at least 40 percent of the residential units in the project such that the average of the limitations of the units in that group averaged to no more than 60 percent of AMGI. In some cases, this interpretation magnified the adverse consequences of a single unit s failure to maintain low-income status.  For example, under the proposed regulations, a unit losing low-income status would remove that unit s imputed income limitation from the computation of the average, but not impact the low-income status of any other units.  If that unit s limitation was less than 60 percent of AMGI, the loss of the unit could cause the average of the remaining low-income units to rise above 60 percent of AMGI.  That noncompliant average would cause the entire project to fail the average income test and therefore fail to be a qualified low-income housing project.  In light of the potential adverse consequences of the rule, the proposed regulations provided for mitigating actions the taxpayer could take within 60 days of the close of the year for which the average income test might be violated. In response to the comments on the proposed regulation, and in order to make the AI test comparable to the 20-50 and 40-60 tests in terms of project impact, the final regulation eliminates the "mitigating actions." In the final regulation, the project satisfies the average income test if at least 40 percent of the building s residential units are eligible to be low-income units and have designated imputed income limitations that collectively average 60 percent or less of AMGI. A project satisfying this minimum requirement satisfies the average income test. Thus, the final regulations have been revised so that it is no longer necessary to consider all low-income units in a project for a residential rental property when determining whether the average income test is met. This change has created a new term that operators of LIHTC projects with the AI test have to become familiar with - "qualified group of units." This means that to qualify as a low-income unit in a project electing the average income test, a residential unit, in addition to meeting the other requirements to be a low-income unit under section 42(i)(3), must be part of a group of units such that the average of the imputed income limitations of the units in the group does not exceed 60 percent of AMGI. Thus, to provide clarity on the definition of a low-income unit for a project electing the average income test, the final regulations include a definition of a low-income unit that takes into account whether the unit is a member of a group of units with a compliant average limitation. Accordingly, under the final regulations, a project for residential rental property meets the requirements of the average income test if the taxpayer s project contains a "qualified group of units" that constitutes 40 percent or more (25 percent or more in the case of a project described in section 142(d)(6)) of the residential units in the project, and the average imputed income of the group does not exceed 60%. By removing the proposed requirement applicable to all low-income units and thus allowing a project to satisfy the average income test if it contains a qualified group of units meeting the minimum requirements, the final regulations generally avoid the outsized impact that one unit s loss of low-income status could have under the proposed regulations. In other words, it does away with the "cliff test." Determining "Qualified Groups of Units" for Purposes of the Applicable Fraction The applicable fraction is the percentage of a building occupied by qualified low-income households. It is the lesser of the percentage of low-income units or the percentage of low-income residential floor space and is determined on a building-by-building basis. Except for the first year of the credit period (where the applicable fraction is determined on a monthly basis), it is determined as of the last day of the tax year. Under the final regulations, the determination of a group of units to be taken into account in the applicable fractions for the buildings in a project follows the same approach as determining a group of units to be taken into account for purposes of the set-aside test.  Essentially, a taxpayer can determine this group of units by including the low-income units identified for the average income test, and any other residential units that can qualify as low-income units if they are part of a group of units such that the average of the imputed income limitations of all of the units in the group does not exceed 60 percent of AMGI.  If the average exceeds 60 percent of AMGI, then the group is not a qualified group. For example, if a unit was designated at 80 percent of AMGI and if including that unit in an otherwise qualified group of units causes the average of the imputed income limitations of the group to exceed 60 percent of AMGI, then the taxpayer cannot include the 80 percent unit in the otherwise qualified group. Only the otherwise qualified group of units, without the 80 percent unit, is a qualified group of units used to determine the project s buildings applicable fractions. Once a qualified group of units in a project has been identified for a taxable year, the applicable fraction for each building in the project is computed using the units that are in both the qualified group and the building at issue. (Although the qualified group of units for a project must have an average limitation no greater than 60 percent of AMGI, this is not true of the average limitation of the units used to compute the applicable fraction of individual buildings in the project.) This last provision is critical and confirms that while a "project" must meet the 60% average, individual buildings are not required to do so.) Recordkeeping & Reporting Requirements The final regulations provide that a taxpayer separately identifies (i) units in the qualified group of units used for satisfying the average income set aside and (ii) units in the qualified group for purposes of the applicable fractions. This information must be provided to the HFA in a manner required by the HFA. Designation of Imputed Income Limitations and Identification of Units The final regulations require the initial designation of a unit to be made no later than when a unit is first occupied as a low-income unit. The final regulations revise the timing of the designation so that it is no longer required by the end of the first year of the credit period, and instead is based on when a unit is first occupied as a low-income unit. (Owners and managers should note that this may be before or after the beginning of the first year of the credit period). The designation must also be communicated annually to the HFA, and the HFA may establish the time and manner in which information is provided to it. This change will allow a taxpayer to make designations after having a chance to evaluate the market for a particular unit. Importantly, the temporary regulations also provide Agencies with the discretion, on a case-by-case basis, to waive in writing any failure to comply with the temporary regulations recordkeeping and reporting requirements. See 1.42-19T(c)(4). The waiver may be done up to 180 days after discovery of the failure, whether by taxpayer or Agency. At the discretion of the applicable Agency, this waiver may treat the relevant requirements as having been satisfied. Timing of Designations of Income Limitations The final regulations permit the changing of a unit s imputed income limitation in certain circumstances. For an unoccupied unit that is subject to a change in imputed income limitation, the final regulations provide that the taxpayer must designate the unit s changed imputed income limitation prior to occupancy of that unit. For an occupied unit that is subject to a change in imputed income limitation, the taxpayer must designate the unit s changed imputed income limitation prior to the end of the taxable year in which the change occurs. Changing a Unit s Imputed Income Designation The proposed regulations did not allow income limitations to be changed after they had been designated. Under the final regulations, a taxpayer may change the imputed income limitation designation of a previously designated low-income unit in any of the following circumstances: (1) In accordance with any procedures established by the IRS in forms, instructions, or guidance published in the Internal Revenue Bulletin pursuant to 601.601(d)(2)(ii)(b) of this chapter. (2) In accordance with an HFAs publicly available written procedures, if those procedures are available to all of the Agency s projects that have elected the average income test. (3) To comply with the requirements of the Americans With Disabilities Act of 1990; the Fair Housing Amendments Act of 1988; the Violence Against Women Act; the Rehabilitation Act of 1973; or any other State, Federal, or local law or program that protects tenants and that is identified by the IRS or an Agency in a manner described in (1) or (2) above.  The tenant protections that apply to an average-income project and that redesignation may enhance do not necessarily have any specific connection to section 42.   For example, the protections may be ones that apply to all multifamily rental housing, or they may apply to the project at issue because some congressionally authorized spending supported the project with Federal financial assistance. Even if tenant protection does not legally apply to a particular average-income project but does apply to analogous multifamily rental housing, the owner of the project may redesignate income limitations to implement the protection for the project s residents. (4) To enable a current income-qualified tenant to move to a different unit within a project keeping the same income limitation (and thus the same maximum gross rent), with the newly occupied unit and the vacated unit exchanging income limitations. (5) To restore the required average income limitation for purposes of identifying a qualified group of units either for purposes of satisfying the average income set aside or for purposes of identifying the units to be used in computing applicable fraction(s). This rule is limited to newly designated, or redesignated, units that are vacant or are occupied by a tenant that would satisfy the new, lower imputed income limitation. Any new designation of units must be reported to the HFA in a manner required by the HFA. Applicable Dates In general, the final regulations apply to taxable years beginning after December 31, 2022. For taxable years prior to the first taxable year to which these regulations apply, taxpayers may rely on a reasonable interpretation of the statute in implementing the average income test for taxable years to which these regulations do not apply. In essence, this indicates that the provisions of this final regulation may be applied to Average Income projects that were operating prior to 2023.