News

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.

IRS Notice of Proposed Rulemaking on Average Income Test

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 80% 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 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.

Website Accessibility Bill Introduced in Congress

On October 1, 2020, Congressmen Lou Correa (D-CA) and Ted Budd (R-NC) introduced the bipartisan Online Accessibility Act (H.R. 8478) which would create guidance to help businesses ensure their website complies with the ADA. The purpose of the bill is to increase website accessibility and reduce predatory lawsuits filed against businesses. The bill would provide the information small businesses need to comply with the website accessibility requirements of the ADA. According to Congressman Budd, in 2019, over 2,000 website accessibility lawsuits were filed by plaintiffs alleging that certain websites were not ADA compliant. If enacted, this new law would provide guidance to businesses that, if followed, would eliminate the risk of liability. Background The ADA requires that public accommodations must be accessible to persons with disabilities. The lawsuits that have been filed relative to websites allege that the websites are not accessible to people with disabilities (vision, hearing, or other impairments). To date, large retailers and other "deep pocket" businesses have been the primary targets of these suits, but the multifamily housing industry is at risk for this new form of "drive-by" accessibility testing. These claims would not be brought under the Fair Housing Act but under the ADA. There is no fair housing requirement that websites be accessible, but the ADA applies to public spaces, which includes leasing offices since they are open to the public. Community websites are now a primary source of information on rental options, and unless those websites meet accessibility standards, the information may be inaccessible to individuals with vision, hearing, or other impairments. Recommendation Unless done so already, all housing providers with websites should get a professional review of that website by someone knowledgeable about the requirements for website accessibility. This review should include the company website and that of each property. The review should examine the following issues: Do you have audio content that is not accompanied by a text alternative or captioning? Such content is not accessible to persons with hearing impairments.Are links on your website signified by a different color text only - or are they also underlined? Links marked only by a change in the color of the text may be hard for users who are color blind or have other vision impairments to differentiate from the non-linked text.Does your site have the option for text to be increased in size without losing content?Can the visitor use the keyboard to navigate if the visitor is not able to use a mouse due to Parkinson s disease or other disability? The government has been slow to issue guidelines on website accessibility and it is no sure thing that they will do so unless the bill noted above is passed into law. In the meantime, the current industry standard is the Web Content Accessibility Guidelines 2.0 (WCAG 2.0). The WCAG standards, published by a working group of experts, have been widely accepted as providing full and equal access to people with disabilities by most countries and as well as state and local governments. More information about this standard may be found at https://www.w3.org/WAI/standards-guidelines/wcag/.

Venmo - Understanding the Payment App

In the process of reviewing thousands of tenant files annually, we are seeing rapid growth in Venmo and PayPal transactions on bank accounts. We often receive questions from property managers regarding how to handle these transactions, with the primary question being, "Is this income?" What is Venmo Venmo is a peer-to-peer (P2P) payment app available on iPhones and Android phones that allows for the quick and easy exchange of money directly between individuals. Founded in 2009, Venmo began as a text message-based payment delivery system. Then, in March 2012, the company introduced a platform with an integrated social network, in an effort to capitalize on the growing P2P economy. Less than six months later, Braintree, the mobile payment system used by Airbnb, Uber, and other e-commerce companies, acquired Venmo. Less than one year after that, Venmo enjoyed a huge boost in users, when the payment company PayPal acquired Braintree and rapidly monetized Venmo s user base. How Venmo Works After installing the app on their phones, then linking their Venmo accounts to their credit card, debit card, or checking accounts, Venmo users can instantly begin exchanging funds among one another, with Venmo functioning as a virtual fiscal intermediary. In other words, Venmo may be seen as a middleman between the two bank accounts of the two users conducting a payment transaction. Consider the following example: Sally agrees to sell Mary a bracelet for $50. Instead of transacting with Mary s bank account, Mary sends Sally the funds via Venmo, which then raises the balance in Sally s account by $50, while reducing Mary s Venmo balance by that same amount. In this way, a Venmo balance is essentially a virtual ledger that represents funds trading hands, without actually executing transactions outside the Venmo platform. Therefore, until Venmo transfers the balance into the recipient's bank, the money is not technically in that user s possession. How Should Venmo Transactions Be Handled? If managers see consistent deposits from Venmo, the applicant/resident should be asked to provide an explanation. While most Venmo deposits will be sporadic and non-recurring (and thus not counted as income), there are cases when the deposits may be regular and recurring and will represent income to the household. For example, in the scenario shown above, if Sally regularly sells jewelry via Venmo, this would constitute income and should be handled in much the same way as a self-employed person s income would be handled. Gathering the most recent four to six bank statements and projecting annual income from the deposits would be a reasonable approach to handling the deposits. In short, Venmo deposits should not be ignored, but should be investigated to determine if they represent income to a household that must be counted for housing purposes.

HUD Updates COVID-19 Guidance

On October 14, HUD issued updated guidance on COVID-19 as it relates to HUD-assisted properties. Following is some of the new guidance issued by HUD. On-Site COVID Testing HUD will permit the temporary use of property common areas, parking lots, and vacant offices by providers of healthcare services to provide flu shots and/or COVID-19 testing for residents. The services must not affect property operating costs beyond budgeted and approved supportive services funds. Owners and agents should ensure that the testing site has a Clinical Laboratory Improvement Amendments (CLIA) certificate of waiver or is covered by another facility s CLIA certificate. Owners and managers are encouraged to consult with their legal counsel before hosting healthcare services on site. Update on the CDC s Temporary Halt in Residential Evictions to Prevent the Further Spread of COVID-19 Notice and Order This CDC order of September 4, 2020, imposed a temporary halt in residential evictions to prevent the further spread of COVID-19 and is in effect until December 31, 2020. The order applies to all tenants, lessees, or residents of residential property in the United States who are subject to eviction for nonpayment of rent and who sign and submit a declaration, as described in the Order, under penalty of perjury. The CDC does have a sample declaration form on its website. The Order only applies in areas that do not already have a moratorium on residential evictions in place that provides the same or greater level of public health protection than the CDC s Order. The Order applies to all HUD-assisted housing programs. Under the Order, HUD-assisted residents must sign and submit a declaration to become a "covered person" and receive the Order s protection. The signed declaration must be submitted to the owner or management agent of the residential property where they live or to another person who has a right to have them evicted or removed from where they live. A resident cannot be required to complete the declaration. However, without the declaration, residents are not protected from eviction under the Order. This means that until the declaration is signed and submitted to the owner or agent, the CDC eviction protection is not in place. The Order is separate from the now-expired eviction moratorium in Section 4024 of the CARES Act, the active eviction moratorium related to the forbearance required under Section 4023 of the Act, and any other eviction moratoriums afforded to federally insured or guaranteed loans. HUD Encourages - but Does Not Require - Owners to Notify Residents of the CDC Protection While the Order does not mandate resident notification, HUD is encouraging owners and agents to notify their residents that the CDC eviction moratorium is in place and that execution of the declaration in the Order is required in order to be covered by the CDC order. If owners choose to make such notification, they should document that the notice has been made. Owners and agents should also review their state and local laws, as some may have different notification requirements regarding the moratorium and providing the Declaration to tenants. Covered Residents May be Evicted for Reasons Other than Nonpayment of Rent Covered persons may still be evicted for reasons other than not paying full rent or making a full housing payment. The Order does not prevent eviction for (1)engaging in criminal activity while on the premises; (2)threatening the health or safety of other residents; (3)damaging or posing an immediate and significant risk of damage to the property; (4)violation of applicable building codes, health ordinance, or similar health & safety regulation; or (5)violating any other contractual obligation of a lease, other than the timely payment of rent (including nonpayment or late payment of fees, penalties, or interest). The Order is not a "Waiver" of Rent Covered persons still owe rent to the landlord. The Order halts residential evictions only temporarily. Covered persons still must fulfill their obligation to pay rent and follow all other terms of the lease and policies of the property in which they live. Covered persons must use best efforts to make timely partial payments that are as close to the full payment as their individual circumstances permit. When the order expires at the end of 2020, a covered person will owe unpaid rent and any fees, penalties, or interest as a result of their failure to pay rent or make a housing payment on a timely basis during the period of the Order. The CDC eviction moratorium differs from the CARES Act eviction moratorium in this regard: fees for nonpayment of rent from March 27, 2020 - July 24, 2020, could not be charged. The prohibition on charging fees or related penalties for nonpayment of rent continues to apply to properties in forbearance under Section 4023 of the CARES Act. HUD is encouraging (but not requiring) O/As to consider entering into repayment agreements for all outstanding payments with residents facing financial difficulties during the pandemic. What is required of residents in order to be eligible for the protection? A resident must provide a completed and signed declaration to their landlord, owner, agent, or another person who has a right to have them evicted or removed from where they live. The declaration may be signed and transmitted either electronically or by hard copy. Each adult listed on the lease, rental agreement, or housing contract should complete the declaration. In certain circumstances, such as individuals filing a joint tax return, it may be appropriate for one member of the household to provide an executed declaration on behalf of other adult residents party to the lease. Evictions Initiated Prior to the Order are Subject to the Order Any evictions for nonpayment of rent that were initiated prior to September 4, 2020, but have yet to be completed, are subject to the Order. Any eviction that occurred prior to the Order is not covered. Other October 14 Guidance Hazard Pay Hazard pay has historically been included in income for HUD programs and is not broadly excludable under 24 CFR 5.609.  O/As should examine whether the pay increase is temporary or recurring in determining whether it will trigger an income reexamination. My recommendation in this area is that unless the Hazard Pay has a specific end date that is no more than 180 days after the start of the pay, the pay should be counted as income. If the pay will absolutely end (i.e., may not be extended) within 180-days of the start of the income, it should be considered temporary and excluded. Lease Execution After Closing a RAD Deal In order to provide PHAs and owners additional time to execute individual leases with tenants in light of social distancing measures, HUD will permit the HAP effective date to be the first day of the third full month after closing upon request (rather than the first day of either of the first two months following closing). E.g., RAD closing occurs on November 15. The HAP effective date may be December 1, January 1, or February 1. This option will be available for any closing that occurs through March 31, 2021.

Recent Court Case Shows Importance of Apartment Accessibility

In Ability Center v. Moline Builders, Ohio, August 2020, a court granted partial judgment to fair housing advocates in a lawsuit against multiple entities and individuals based on the design and construction of a senior housing development in Ohio. At issue was whether, under the requirements of the Fair Housing Amendments Act of 1988, the front door and walkway leading to a covered unit are required to be accessible to persons with disabilities. The defendants took the position that their only obligation was to provide an accessible route into the unit, which, they allege they had done by providing an accessible route through the garage. The Department of Justice joined the case and argued that under the FHA, the front doors and walkways are "public use and common use portions" of covered dwellings and therefore required to be accessible, regardless of whether there is another accessible route into the unit. The court agreed with the DOJ argument, ruling that failure to provide "unimpeded access" to the front door to persons who use wheelchairs, including not just those who live in the unit but also a "neighbor, friend, or family member, a political candidate, or a repairman," is "in effect, the send them away as if unwelcome." The court indicated that this is precisely the discrimination the FHA forbids. Lesson Learned Owners with properties that are subject to the accessibility requirements of the FHA (generally, those built for first occupancy after March 13, 1991), should ensure that the main entrances to buildings the contain covered units are fully accessible to the disabled. Covered units are ground floor units in buildings with four or more units. Also, in elevator buildings with four or more units, every unit on a floor served by an elevator is a covered unit. It is not enough to have secondary or alternate entrances that are accessible.