News

A. J. Johnson to Host Full-Day Webinar on Income and Asset Requirements

A. J. Johnson will be conducting a webinar on December 16, 2020 on The Verification and Calculation of Income and Assets on Affordable Housing Properties. The Webinar will be held from 10:00 AM to 4:00 PM Eastern Time. This six-hour course (there will be a one and a half lunch break) provides concentrated instruction on the required methodology for calculating and verifying income, and for determining the value of assets and income generated by those assets. The first section of the course involves a comprehensive discussion of employment income, along with military pay, pensions/social security, self-employment income, and child support. It concludes with workshop problems designed to test what the student has learned during the discussion phase of the training and serve to reinforce program required techniques for the determination of income. The second component of the training focuses on a detailed discussion of requirements related to the determination of asset value and income and is applicable to all federal housing programs, including the low-income housing tax credit, tax-exempt bonds, Section 8, Section 515, HOME, and Public Housing. Multiple types of assets are covered, both in terms of what constitutes an asset and how they must be verified. This section also concludes with a series of problems, designed to test the student s understanding of the basic requirements relative to assets. Those interested in participating in the Webinar may register on the A. J. Johnson Consulting Services website (www.ajjcs.net) under "Training Schedule."

A. J. Johnson to Offer Fair Housing Webinar on December 15

A. J. Johnson will be conducting a webinar on December 15, 2020, on Compliance with Federal and State Fair Housing Requirements. The Webinar will be held from 1:00 PM to 4:30 PM Eastern Time. The course will equip attendees with the knowledge and understanding needed to avoid fair housing violations.The course curriculum is centered around the regulations in the two major fair housing laws, The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) and Section 504 of the Rehabilitation Act of 1973. The course also includes a discussion of the additional state and local protected characteristics. In addition, relevant portions of the Americans with Disabilities Act (ADA) are covered.In addition to covering each of the protected classes in detail, the session will feature the most up-to-date information on the new HUD guidance regarding assistance animals and criminal record screening. The course concludes with a review of advertising requirements and how the law is enforced at the federal level. Those interested in participating in the Webinar may register on the A. J. Johnson Consulting Services website (www.ajjcs.net) under "Training Schedule."

Affordable Housing Priorities of the Incoming Biden Administration

Elections have consequences. With the election of Joe Biden as President, the consequences for the affordable housing industry are likely to be very positive and will at the least put an end to the ambivalent - and even hostile -  approach that the Trump administration has taken toward affordable housing during the past four years. The incoming administration has presented a detailed and comprehensive blueprint for how it will approach the housing affordability problem for the next four years.  Following are some of the major elements of the plan, with a focus on affordable rental housing. End redlining and other discriminatory housing practices. The Biden Plan includes a Homeowner & Renter Bill of Rights that will expand protections for renters, including a law prohibiting landlords from refusing to accept vouchers. The mechanism for this would be a revision to the Fair Housing Act, adding "Source of Income" as new protection.Tenant eviction protection will be pushed with the passage of The Legal Assistance to Prevent Evictions Act of 2020. This will assist tenants facing eviction in obtaining legal assistance.The elimination of local and state housing regulations that perpetuate discrimination - specifically exclusionary zoning. Biden s proposed legislation would require any state or locality receiving Community Development Block Grant (CDBG) funds or (more significantly) Surface Transportation Block Grants to develop a strategy for inclusionary zoning and will fund states to assist them in eliminating exclusionary zoning policies. This is a particularly important proposal, especially the withholding of transportation funds. While not all localities use CDBG money, virtually every city and state want to share in the federal transportation funds. The inability to build new roads or improve highways would be a major issue for localities and the potential withholding of such funds would be a serious "stick" in the push for inclusionary zoning. This could open up substantial new urban areas for the development of affordable rental housing.Strengthen the Community Reinvestment Act (CRA) to ensure that non-bank financial service institutions (e.g., mortgage and insurance companies) serve all communities.Provide downpayment assistance through a refundable and advanceable tax credit of $15,000 and fully fund the Housing Choice Voucher and Project-Based Rental Assistance (PBRA) programs. Under this proposal, Housing Choice Vouchers would be made available to every eligible household. Currently, 75% of eligible families do not receive assistance. This, along with fully funding the PBRA programs, would provide assistance to 17 million households.Creation of a new renter s tax credit, designed to reduce rent and utilities to 30% of income for families who make too much money to qualify for rental assistance.Expand housing benefits for first responders, public school teachers, and other public and national service workers who commit to live in persistently impoverished communities. This program would provide additional down-payment assistance and low-interest rehab loans.Establish a $100 billion Affordable Housing Fund to construct and upgrade affordable housing - primarily in areas with a short supply of affordable housing.Increase funding for the HOME program by $5 billion.Increase funding for the Housing Trust Fund (HTF) Program by $20 billion.Expand the Low-Income Housing Tax Credit Program (LIHTC) by $10 billion.Increase funding for repairs to the Rural Development Section 515 Program. Most of these proposals will require Congressional action, so the issue of who controls Congress is no small thing. Obviously, if the Democrats win both the Georgia Senate seats in the January 5 runoff election, the chance for passage of Biden s plan increases. However, even if Republicans retain the Senate, there is strong support for affordable housing. Susan Collins of Maine was re-elected. She heads up the Subcommittee on Transportation, Housing & Urban Development (THUD) and is a strong advocate for affordable housing. In fact, it has been the Republican Senate, along with the Democratic House, that has prevented many of the draconian cuts to affordable housing favored by the Trump Administration. Impact on Agencies As with any change in administrations, the top leadership of both HUD and Rural Development will change. An additional factor is that during the past four years, many agency professionals have retired or resigned; these positions are harder to replace than the political appointees.  Having said that, appointment of qualified leadership can go a long way in attracting qualified professionals and retaining those that are there. President Elect Biden has not yet named his choices to head HUD and Agriculture, but a number of names have been floated: High on the list of possible HUD Secretaries is Alvin Brown, the former Mayor of Jacksonville, FL and former executive director of the White House Community Empowerment Board. Brown worked at HUD under Bill Clinton.Maurice Jones, who held the number two slot at HUD under Secretary Shaun Donovan is also high on the list. Jones left HUD to serve as Virginia s Secretary of Commerce and Trade and now leads the Local Initiatives Support Corporation (LISC), a nonprofit that supports community development.In the mix as well is Diane Yentel, the president and CEO of the National Low-Income Housing Coalition. Yentel was also at HUD during the Obama administration, directing the public housing management and occupancy division.Representative Karen Bass (D-CA) and Atlanta Mayor Keisha Lance Bottoms have also been mentioned as possible nominees, along with Tampa Mayor Jane Castor. Any of the named individuals would result in immediate improvement in the morale at HUD, which has deteriorated under the leadership of Ben Carson. Regardless of who is selected to head HUD, some initiatives of the Trump/Carson era will certainly be rolled back, including (1) the anti-Transgender rule changes to the Equal Access Rule, (2) changes to the Affirmative Fair Housing Plan requirements, (3) the changes to the Disparate Impact Rules, and (4) elimination of the proposal to force mixed-status immigrant families to separate or face eviction from HUD-assisted housing. As for the Department of Agriculture, which oversees the rural housing programs, former Senator Heidi Heitkamp of North Dakota appears to be the front runner. She has strong moderate credentials and would likely be supported in the Senate - even by Republicans. Members of the Congressional Black Caucus have been pushing Representative Marcia Fudge (D-OH). Fudge is the top candidate among progressives, and currently chairs the House Agriculture subcommittee on nutrition and has been a strong critic of USDA budget cuts. A longer shot is Representative Cheri Bustos (D-Il), who chairs the democrats campaign arm. She is also on the House Agriculture Committee but her seat is in a vulnerable district and could go to a Republican in a special election. For this reason, her selection seems unlikely. In the not-to-distant future, the efforts to revise America s approach to affordable housing will begin. It is certain that greater priority will be given to affordable housing over the next four years than during the most recent four years.

HUD Issues Updated Notice on Electronic Signature, Transmission, and Storage

On November 6, 2020, the Department of Housing and Urban Development (HUD) issued Notice H-2020-10, Electronic Signature, Transmission, and Storage - Guidance for Multifamily Assisted Housing Industry Partners. This Notice provides guidance to HUD multifamily assisted housing industry partners on electronic signatures, electronic transmission, and electronic storage of documents as required by HUD s Office of Asset Management and Portfolio Oversight (OAMPO). OAMPO permits but does not require, industry partners, to use electronic signatures, electronically transmit, and electronically store files. Owners/Agents (O/As) choosing to use electronic signatures, electronic transmission, and/or storage of electronic documents must do so in compliance with federal, state, and local laws. O/As adopting the terms of this Notice must provide applicants and tenants the option to utilize wet (i.e., original) signatures and paper documents upon request. This Notice is applicable to the following assisted multifamily housing programs and pertains to all applicants, assisted tenants, and industry partners working with these programs: Project-based Section 8 programs;Section 202 Senior Preservation Rental Assistance Contracts (SPRAC);Section 202/162 Project Assistance Contract (PAC);Section 202 Project Rental Assistance Contract (PRAC);Section 811 PRAC and Project Rental Assistance (PRA);Rent Supplement;Section 236 (including RAP); andSection 221(d)(3)/(d)(5) Below-Market Interest Rate (BMIR). The guidance in this Notice does not apply to unassisted properties with a Section 221(d)(4) mortgage, the HOME program, or to Public and Indian Housing (PIH) programs. O/As should keep in mind that some state and local laws or entities may require the use of wet signatures on some forms. Restrictions Sections of HUD s regulations for multifamily housing programs (found at 24 CFR) require some notices to tenants be sent by first-class mail, delivered directly to tenants or their units, or posted in public spaces. In these situations, electronic communication (email, posting on website, etc.) does not satisfy the requirement. O/A and industry partners must comply with current and future regulatory requirements. Regulatory requirements supersede the administrative requirements provided in this Notice and other HUD Multifamily Housing handbooks and notices. These include but are not limited to the following types of notices: Termination Notice;Change in leasing and/or occupancy requirements (e.g., proposed pet rules);Increase in Maximum Permissible Rents;Conversion of a project from project-paid utilities to tenant-paid utilities, or a reduction in tenant utility allowances;Conversion of residential units in a multifamily housing project to a nonresidential use or to condominiums, or the transfer of the project to a cooperative housing mortgagor corporation or association;A partial release of mortgage security (except for any release of property from a mortgage lien with respect to a utility easement or a public taking of such property by condemnation or eminent domain); andMaking major capital additions to the project. (The term "major capital additions" includes only those capital improvements that represent a substantial addition to the project. Upgrading or replacing existing capital components of the project does not constitute a major capital addition to the project). All owners and agents of properties subject to this Notice should obtain a copy of the full Notice and become familiar with the contents. The Notice may be downloaded from HUDCLIPS at https://www.hud.gov/program_offices/administration/hudclips/notices/hsg.

Updated HUD Guidance on REAC Inspections During the COVID-19 Pandemic

On November 13, 2020,  HUD issued updated guidance on the inspection of Public and Multifamily Housing projects during COVID-19. This guidance was issued in the form of an updated FAQ. The FAQ is comprehensive but following is some of the most relevant guidance for multifamily owners and agents. Properties will be selected for inspection based on county COVID-19 risk factors. Inspections will generally be scheduled in counties that are considered low risk for six consecutive weeks based on data from Johns Hopkins University and the Harvard Global Health Institute.Public housing projects are not being inspected at this time, except where a PHA has requested an FY2020 PHAS assessment, or under limited circumstances, for developments that require an emergency inspection.It is expected that inspections that were awarded prior to REAC s suspension of inspections will be conducted by September 30, 2021.At this time, only in-person inspections for UPCS will be conducted. REAC may consider remote inspections in the future.All certified inspectors will be tested for COVID-19 prior to their first inspection and every 30-days thereafter until otherwise directed by HUD. In addition to this testing requirement, REAC is requiring inspectors to:Wear PPE including masks and gloves;Frequently use hand sanitizer;Practice physical distancing; andFollow state and local guidelines.As REAC returns to operations, NSPIRE will be following the overall REAC COVID-19 protocol, with the addition of testing remote video technology in low-risk areas.If a property receives the 14-day notice of an inspection, but the county-level risk changes prior to the inspection, the inspection will be canceled.If a property in a low-risk area has positive COVID-19 cases at the property, the inspection may go forward, if agreed to by the property representative and inspector.It is possible for a property representative to refuse an inspection due to COVID-19 concerns. The guidance in Notice PIH-2019-02/H-2019-04 should be consulted.Inspectors will inquire about any known COVID-19 cases currently at the property. However, no Personally Identifiable Information (PII) will be requested, nor should such information be provided.During a unit inspection, only one escort and the inspector may enter a unit. Physical distancing will be practiced.If tenants refuse to permit the inspector into the unit, the Inspector will follow UPCS protocol for a "tenant refusal" and select another unit. If an inspection does not meet the sample size requirements after exhausting all alternate units, REACs Research & Development division will analyze the results to determine if the inspection results are representative of the physical condition of the property.HFAs that conduct REAC inspections are required to follow REAC s COVID-19 risk analysis when scheduling inspections. HFAs may begin inspecting properties in low-risk counties on October 5, 2020. While this outlines some of the major owner/agent related issues addressed in the FAQ, interested parties should obtain and review the complete document.

Senate Staff Issues Report on the State of Affordable Housing

In October 2020, the Senate Majority Staff issued a report titled, "Housing Programs - The Need for One Roof." The purported purpose of the report is to "begin a needed conversation about reforming our housing system." As noted in the report, "An important first step would be consolidating some of these programs under one roof." As made clear in the report, the "roof" that the Senate Majority Staff is referring to is the Department of Housing & Urban Development (HUD). Following are some of the major findings and recommendations from the report. The federal government spends over $50 billion per year on low-income housing assistance programs, guarantees $2 trillion in home loans, and provides billions more through the tax code. A Government Accountability Office (GAO) analysis identified 20 different entities administering 160 housing assistance programs and activities.Federal involvement in housing dates back to 1913 when the new income tax allowed for the deduction of mortgage interest and property taxes from federal income. Key housing laws and their provisions include -The Housing Act of 1934: Its reforms were designed to encourage investment in housing and boost construction employment (it was as much a jobs program as a housing program). It also created the Federal Housing Administration (FHA).The United States Housing Act of 1937: This is the "granddaddy" of America s housing laws. It created a program whereby states could establish local housing authorities for the creation of affordable housing (Public Housing). The law also created the United States Housing Agency - a forerunner to HUD - to administer the program at the federal level.The Housing Act of 1949: This law was enacted to address a perceived shortage of affordable and safe housing in the years following World War II, and included new programs for urban redevelopment, money for public housing construction, and expanded mortgage insurance for homebuyers. The Act also created a program specifically targeted at improving farm and rural housing within the U.S. Department of Agriculture.The Housing Act of 1959: This provided the first significant use of incentives encouraging private developers to build affordable housing for low- and moderate-income households.The Housing Act of 1961: Further expanded the private sector s role in providing housing.The Housing & Urban Development Act of 1965: Created HUD and the rent supplement program.The Housing & Urban Development Act of 1968: Created rental and homeownership programs for lower-income families.The Civil Rights Act of 1968: Title VIII (The Fair Housing Act) prohibited Housing discrimination.The Housing Act of 1974: Along with the 1937 and 1949 Acts, these form the "trilogy" of the most important pieces of housing legislation. The Act created the Section 8 Program and Community Development Block Grants (CDBG). As an aside, this is the legislation that started my career in affordable housing. I did my graduate thesis on this law.The Tax Reform Act of 1986: Created the Low-Income Housing Tax Credit Program.The Stewart B. McKinney Homeless Assistance Act of 1987: this was the first comprehensive approach to addressing homelessness at the national level.The National Affordable Housing Act of 1990: Authorized the HOME Investment Partnerships Program (HOME).The Housing & Economic Recovery Act of 2008 (HERA): Created the Housing Trust Fund.Low-income housing assistance programs cover three broad areas: rental housing assistance, federal assistance to state and local governments, and homeowner assistance.The agencies involved in the administration of these programs are primarily HUD (administers most low-income housing assistance programs), the Department of Agriculture (USDA), the Department of Veterans Affairs (VA), and the Treasury Department.There is bipartisan agreement that the system needs improving, with general agreement around the concept of giving greater control to tenants. The general consensus is that housing vouchers are a particularly effective housing tool.The Staff report makes a full-throated recommendation that HUD is the most logical agency to house many of the existing programs. Examples of Housing Overlap Outlined in the Report HUD s and USDA s Loan Guarantee and Rental Assistance Programs overlap.  GAO s report on opportunities for collaboration and consolidation in housing programs identified a total of 88 HUD housing programs and 18 USDA housing programs. Loan Guarantee Programs: Both HUD, through the FHA, and the USDA s Rural Housing Service (RHS) administer single-family and multi-family guaranteed loan programs. The GAO has recommended that Congress require HUD and USDA examine consolidation of certain housing assistance programs, and the single-family loan guarantee programs appear to be prime candidates for such consolidation. FHA and RHS multi-family loan programs help finance the development of new rental units or the preservation of existing units through refinancing or rehabilitation. Similarities in the delivery structure of the multifamily programs suggest that consolidation could lead to a more streamlined and less bureaucratic experience.HUD & USDA Rental Assistance Programs: In 2018, the Office of Management & Budget (OMB) proposed moving USDA s rental housing programs to HUD. This is being given serious consideration in Congress. HUD s Rental Assistance Programs Serve Similar Populations HUD has three primary rental assistance programs: (1) Public Housing - HUD provides aid to local public housing agencies (PHAs) that manage properties for low-income residents at affordable rents; (2) Housing Choice Vouchers - local PHAs administer these "portable" vouchers; and (3) Project-Based Section 8 - subsidies go directly to the owners of multifamily housing subsidizing the rent for specific rental units. Somewhat surprisingly, Public Housing serves the highest average incomes, with an average household income of $15,738, compared to $15,373 for vouchers and $13,301 for Project-Based Section 8. The Housing Choice Voucher program serves more elderly and disabled households than any other HUD rental assistance program. Public housing tenants are most concentrated in the Northeast but about 1/3 of all HUD-assisted housing is in the South. Why Are There So Many Rental Assistance Programs? Public housing was the only major form of housing assistance until the 1960s, and a majority of currently occupied units were built before 1969. Privately-owned and subsidized housing production accelerated after 1974 when Section 8 project-based rental assistance was created. Tenant-based assistance also started in 1974, and the voucher program is now HUD s largest low-income housing subsidy program. Many housing policy experts have argued that tenant-based vouchers that directly subsidize low-income renters are in many ways superior to programs subsidizing the production and operation of low-income housing. This is highly debatable since such a position assumes there is an adequate supply of rental housing to serve all those with vouchers. The HOME Program & the Housing Trust Fund (HTF) Overlap The HTF and the HOME Investment Partnerships Program (HOME), both within HUD, are overlapping programs that the Staff Report suggests should be consolidated or streamlined. The HTF was created under HERA 2008 and provides funds to states to use for affordable housing,  particularly for rental housing for extremely low-income households. The program provides formula-based grants to states to use for affordable housing. Each state and Washington DC receives a minimum annual grant of $3 million. The HOME program was authorized in 1990 and provides funding to states and localities for affordable housing activities benefitting low-income households - also by formula. These "block grant" funds are used for four purposes: (1) the rehabilitation of owner-occupied housing; (2) assistance to home-buyers; (3) the acquisition, rehabilitation, or construction of rental housing; and (4) tenant-based rental assistance. The funds are disbursed by HUD - 40% to states and 60% to localities. There is admittedly a great deal of redundancy and overlap in these two programs and very little doubt that they could be consolidated. Major Findings & Conclusions Congress should undertake bipartisan review and reforms to create a modern housing assistance program to improve effectiveness and efficiency.HUD is the most logical agency to house these programs.More reliance should be given to the voucher program since it is more cost-effective than place-based programs. For this reason, Congress should explore ways to expand and incentivize the use of vouchers, but a key shortcoming of vouchers is that many landlords will not accept them. Three appear to be three key factors in the reluctance of landlords to accept vouchers: (1) perception of tenants; (2) financial motivation; and (3) dealing with the PHAs. To deal with these factors, Congress should the desirability and cost-effectiveness of federal source of income protections (i.e., add source of income as a protection under the Fair Housing Act), as well as ways to positively incentivize landlords to accept vouchers, perhaps by providing a bonus for the first voucher recipient a landlord accepts. This recommendation was clearly made by staff that has never owned or operated rental housing. This would have to be one hell of a one-time bonus to convince a recalcitrant landlord to maintain ongoing participation in the voucher program. Conclusion As with most Congressional Staff reports, this one will gather as much dust sitting on shelves as it will action from elected officials. However, the recommendations relating to consolidation are likely to get some attention - especially with regard to moving the rural housing programs to HUD. It is also possible that an increase in funding for vouchers, along with an increase in the amount allocated to the LIHTC program, could result in serving significantly more of our lowest-income families than is currently possible. It is also likely that the new incoming administration will be more favorable to increased funding for affordable housing, and some of the recommendations made in this report could become part of the new administration s affordable housing recommendations.

CORRECTION - IRS Notice of Proposed Rulemaking on Average Income Test

Thank God my clients read better than I type. One of my more astute readers noticed a pretty significant typo in the example in #1 below. I have corrected the error - I hope it did not create too much consternation among my careful readers. On October 30, the IRS published a Notice of Proposed Rulemaking in the Federal Register. This Notice concerns the LIHTC Average Income Test and outlines the current intention of the IRS with regard to certain rules governing the Average Income (AI) test. Written comments regarding the proposed rules must be received at the IRS no later than December 29, 2020. Background Section 42(g)(1)(C)(i) enunciates the requirement of the AI set-aside, stating that a project meets the minimum requirements of the average income test if 40 percent or more (25 percent in New York City) 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 owner with respect to the respective unit. The owner must designate the imputed income limitation for each unit and the designated imputed income limitation of any unit must be 20, 30, 40, 50, 60, 70, or 80 percent of AMGI. The Code provides that the average of the imputed income limitations designated by the taxpayer (i.e., owner) for each unit must not exceed 60 percent of AMGI. Section 42(g)(2)(D)(iii) was added to the Code to provide a new next available unit (NAU) rule for situations in which the owner has elected the AI test. Under this new NAU rule, a unit ceases to be a low-income unit if two conditions are met: (1) 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 limitation designated by the owner with respect to the unit; and (2) any other residential rental unit in the building that is of a size comparable to, or smaller than, that unit is occupied by a new tenant whose income exceeds the applicable imputed income limitation. If the new tenant occupies a unit that was taken into account as a low-income unit prior to becoming vacant, the applicable imputed income limitation is the limitation designated with respect to the unit. If the new tenant occupies a market-rate unit, the applicable imputed income limitation is the limitation that would have to be designated with respect to the unit in order for the project to continue to maintain an average of the designations of 60% of AMGI or lower. Under 42(g), once a taxpayer elects to use a particular set-aside test with respect to a low-income housing project, that election is irrevocable. Thus, if a taxpayer had previously elected to use the 20/50 or 40/60 test, the taxpayer may not subsequently elect to use the AI test. Explanation of Provisions Proposed 1.42-15, Next Available Unit Rule for the Average Income TestThe proposed regulations update the NAU provisions in 1.42.15. In situations where multiple units are over-income at the same time in an AI project that has a mix of low-income and market-rate units, these regulations provide that the owner need not comply with the NAU rule in a 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 until the next comparable or smaller unit becomes available. E.g., in 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), if there are two over-income units, one a 30% income three-bedroom unit and another a 70% two-bedroom unit, and the NAU is a vacant two-bedroom market-rate unit, renting the vacant two-bedroom unit to occupants at either the 30 or 70 percent income limitation would satisfy both the minimum set-aside of 40% and the average test of 60% or lower. This will be the case even if the 30% unit was the first unit to exceed the 140% income level.Proposed 1.42-19, Average Income TestDesignation of Imputed Income Limitations: The proposed regulations provide that a taxpayer must designate the imputed income limitation of each unit taken into account under the AI test in accordance with (1) any procedures established by the IRS; and (2) any procedures established by the Agency that has jurisdiction over the LIHTC project that contains the units to be designated, to the extent that those Agency procedures are consistent with any IRS guidance and the proposed regulations. The IRS does agree that Agencies should generally be able to establish designation procedures that accommodate their needs. Agencies will be permitted to require income recertifications, set compliance testing periods, and adjust compliance monitoring fees to reflect the additional costs associated with monitoring the AI test.Method and Timing of Unit DesignationDesignation of the AI limitation with respect to a unit is, first, for Agencies to evaluate the proper mix of units in a project in making housing credit dollar amount allocations consistent with the state policies and procedures set forth in the QAP, and second, to carry out their compliance-monitoring responsibilities.The proposed regulation requires that taxpayers designate the units in accordance with the Agency procedures relating to such designations, provide that the Agency procedures are consistent with any requirements and procedures relating to the unit designation that the IRS may require.The proposed regulations provide that the taxpayer must complete the initial designation of all the units included in the AI test as of the close of the first taxable year of the credit period.The proposed regulations provide that no change to the designated income limitations may be made. Based on this, it does not appear that the "floating" of units would be permitted. This will be problematic from a project operational standpoint and should be objected to in comments submitted to the IRS.Requirement to Maintain 60 Percent AMGI Average Test and Opportunity to Take Mitigating ActionsFor a project electing the AI test, in addition to the project containing at least 40% low-income units, the designated imputed income limitations of the project must meet the requirement of an average test. That is, the average of the designated imputed income limitations of all low-income units (including units in excess of the minimum 40% set-aside) must be 60 percent of AMGI or lower. Residential units that are not included in the computation of the average (i.e., market units) do not count as low-income units. Accordingly, in each taxable year, the average of all the designations must be 60% of AMGI or lower.In some situations, the AI requirement may magnify the adverse consequences of a single unit s failure to maintain its status as a low-income unit (this is a reference to the "cliff test" fear). Assume, for example, a 100% low-income project in which a single unit is taken out of service. Under the 20/50 or 40/60 set-asides, the project remains a qualified low-income housing project even though the reduction in qualified basis may trigger a corresponding amount of recapture. However, under the AI set-aside, if the failing unit has a designated imputed income limitation that is 60% or less of AMGI, the average of the limitations without that unit may now be more than 60%. In the absence of some relief provision under the AI test, the entire project would fail, and the taxpayer would experience a large recapture.Because there is no indication that Congress intended such a stark disparity between the AI set-aside and the existing 20/50 and 40/60 set-asides, the proposed regulations provide for certain mitigating actions. If the taxpayer takes a mitigating action within 60 days of the close of a year for which the AI test might be violated, to taxpayer avoids total disqualification of the project and significantly reduces the amount of recapture.Results Following an Opportunity to Take Mitigating ActionsThe proposed regulations provide that, after any mitigating actions, if, prior to the end of the 60th day following the year in which the project would otherwise fail the 60% test, the project satisfies all other requirements to be a qualified low-income housing project, then as a result of the mitigating action, the project is treated as having satisfied the 60% or lower average test at the close of the immediately preceding year. However, if no mitigating actions are taken, the project fails to be a qualified low-income housing project as of the close of the year in which the project fails the AI test.Descriptions of Mitigating ActionsThe proposed regulations provide for two possible mitigating actions: (1) the taxpayer may convert one or more market-rate units to low-income units. Immediately prior to becoming a low-income unit, that unit must be vacant or occupied by a tenant who qualifies for residence in a low-income unit (or units) and whose income is not greater than the new imputed income limitation of that unit (or units); or (2) the taxpayer may identify one or more low-income units as "removed" units. A unit may be a removed unit only if it complies with all the requirements of Section 42 to be a low-income unit. If the taxpayer elects to identify a low-income unit as a removed unit, the designated imputed income limitation of the unit is not changed.Tax Treatment of Removed UnitsA removed unit is not included in computing the average of the imputed income limitations of the low-income units under the 60% or lower AI test. If the absence of one or more removed units from the computation causes fewer than 40% (or 25% in New York City) of the residential units to be taken into account in computing the average, the project fails to be a qualified low-income housing project. I.e., the project fails the minimum set-aside test. Also, a removed unit is not treated as a low-income unit for purposes of credit calculation. However, a removed unit will not be subject to recapture (unless the removal of the unit results in a failure to meet the minimum set-aside).Request for Comments on an Alternative Mitigating Action ApproachThis is the one area of the proposed regulation for which the IRS is especially interested in receiving comments. The alternative being proposed by the IRS is that, in the event that the average test rises above 60% of AMGI as of the close of a taxable year, due to a low-income unit or units ceasing to be treated as a low-income unit or units, the owner may take the mitigating action of redesignating the imputed income limit of a low-income unit to return the average test to 60% of AMGI or lower. If under this approach, a redesignation causes a low-income unit to exceed 140% of the applicable income limit, the NAU would apply. Proposed Applicability Date The amendments to the NAU regulation (1.42-15) are proposed to apply to occupancy beginning 60 or more days after the date the regulations are published as final regulations. The AI test regulations (1.42-19) are proposed to apply to taxable years beginning after the date the regulations are published as final regulations. However, taxpayers may rely on these proposed regulations relating to the NAU rule for occupancy beginning after October 30, 2020, and on or before 60 days after the date, the regulations are published as a final regulation. Taxpayers may also rely on the AI test proposed regulations for taxable years beginning after October 30, 2020, and on or before the date those regulations are published as final regulations. Summary These proposed regulations do provide some clarity relating to the Available Unit Rule and assist in our understanding that the IRS does not believe a project should lose all credit due to the failure of one unit as a low-income unit (unless the minimum set-aside is not met). However, a significant problem with the proposed regulation is that designations, once set, cannot be changed. The industry will certainly be objecting to this provision during the 60-day comment period. There is one other area on which clarity should be sought. All the mitigation examples in the proposed regulation include a case where a unit is lost due to no longer being suitable for occupancy. Left unanswered is what happens if a low-income unit is occupied by an ineligible household. Does the fact that the owner designation for the unit still results in the 60% AI test being met keep the property in compliance with the 60% test result in the loss of only that one unit with no requirement for mitigation measures? Or, would this unit also no longer be considered a low-income unit for purposes of the 60% average? Also, what if the issue that would remove a unit from the low-income count occurs in one year, is not discovered by the owner, and is discovered by the State Agency during a review that occurs more than 60 days after the end of the tax year in which the event occurred? While this could not happen in the case of a habitability issue, it could certainly occur relative to resident eligibility.  Comments seeking clarity on the circumstances under which a unit may no longer be counted toward the 60% average are a certainty. Until this issue is clarified, the safest course of action for owners will be to follow the mitigation alternatives outlined in the proposed regulation in any case where a low-income unit is either not in service or rented to an ineligible household. It is recommended that all LIHTC industry participants review the proposed regulations and make comments to the IRS by the deadline date of December 29, 2020.

A. J. Johnson to Host Webinar on Management of Properties with HOME Funds

A. J. Johnson will be conducting a webinar on November 12, 2020, on The Onsite Management Requirements of the HOME Program.  The Webinar will be held from 9 AM to 3:30 PM Eastern time. This six-hour course outlines the basic requirements of the HOME Investment Partnership Program, with particular emphasis on combining HOME funds with the federal Low-Income Housing Tax Credit. The training provides an overview of HOME Program regulations, including rent rules, unit designations, income restrictions, and recertification requirements. The course concludes with a detailed discussion of combining HOME and tax credits, focusing on occupancy requirements and rents, tenant eligibility differences, handling over-income residents, and monitoring requirements. Those interested in participating in the Webinar may register here, or by visiting the Training section of our website.

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