News

NCSHA Provides Updated LIHTC Compliance Forms

The National Council for State Housing Agencies (NCSHA) has released updated model compliance forms for housing credit developments. Virtually all Housing Credit agencies (HCAs) require Housing Credit development owners to use specific forms in their compliance reporting. NCSHA, in collaboration with its members, has developed model compliance forms over the years and has recently released updated versions of these forms. NCSHA has updates seven different forms: Owner s Certification of Continuing Program Compliance;Tenant Income Certification;Employment Verification;Certification of Zero Income;Under $5,000 Asset Certification;Student Self-Certification; andStudent Status and Financial Aid Verification NCSHA is encouraging HCAs to adopt these model forms in order to standardize compliance monitoring practices across all states. However, no HCA is required to use the forms and if they choose to do so, may adapt the forms to suit their needs. While the forms have been created for HCAs to use as desired, they may also be used by individual owners/managers of LIHTC properties, if approved by the applicable HCA. All owners and managers of LIHTC properties should check with their HCAs regarding required forms relating to LIHTC compliance.

HUD Publishes Proposed Rule on Implementation of The Housing Opportunity Through Modernization Act of 2016 (HOTMA)

HUD published a proposed rule implementing The Housing Opportunity Through Modernization Act of 2016 (HOTMA) in the federal register on September 17, 2019. HOTMA was enacted on July 29, 2016. This rule would make sweeping changes to current HUD programs, including public housing and project-based Section 8, especially with regard to income calculation and reviews. Other major changes include the continued occupancy of public housing residents with increases in income. The rule is also intended to create consistency between various HUD programs, so there would be changes to the HOME, Housing Trust Fund, and Housing Opportunities for Persons with Aids programs. Comments on the proposed rule are due no later than November 18, 2019. Following is an overview of the major changes that would occur if the final rule is adopted. Income Reexaminations Reviews of family income shall be made upon the request of a family at any time the income or deductions of the family change by an amount that is estimated to result in a decrease of 10 percent or more in annual adjusted income, or of such lower amount as HUD may establish or permit the PHA or owner to establish. Interim recertifications will not be required if the decrease in adjusted income is less than 10 percent, but PHAs or owners will be able to establish policies to conduct interims when income decreases by less than 10 percent.PHAs and owners must conduct an interim reexamination of income at any time the family s adjusted income is estimated to have increased by 10 percent or more. However, PHAs and owners will not be required to conduct an interim for increases in income during the last three months of a certification period. In a major change, increases due to employment income will not be considered when determining whether a household s income has increased, unless the increase in earned income corresponds to previous decreases resulting from the family s request for an interim reexamination. Calculation of Family Income For purposes of move-in (initial occupancy), the initial provision of housing assistance, or for an interim reexamination of family income, the income for the upcoming year must be estimated (this is in line with current rules). In determining annual income for annual recertifications, the proposed rule requires that the PHA or owner use the income of the family as determined by the PHA or owner for the preceding year, taking into account any changes in income as reflected on interim certifications during the year. In cases where an interim recertification was not done because the change in income was less than 10 percent, the income will be adjusted to reflect the change in income. De Minimis Error A PHA or owner will not be out of compliance with the income determination requirements due to de minimis (minor) errors in the determination of income. HUD is proposing to define "de minimis" as any error where the calculation of income varies from the correct income by no more than 5 percent. However, the PHA or owner will still be required to take corrective action to repay a family if the error resulted in the family being overcharged for their rent. Definition of Annual Income The proposed regulation provides a new definition of income. This proposed rule would specify that annual income also includes the imputed return on assets over $50,000, based on the current passbook savings rate if the actual income from assets cannot be computed. It appears that this may change the requirement as it now exists to count the higher of the actual or imputed income to assets. The language in the proposed rule would require that if actual income from assets can be determined, it must be used - even if less than imputed income. The $50,000 figure will be adjusted for inflation. Income sources that were previously included in annual income are generally unchanged. Income Exclusions The proposed rule removes current exclusions for inheritances, capital gains, gifts, and other sporadic income. HUD seems to be taking the position that these amounts should be included in annual income. Based on this change, realized capital gains obtained from the sale of property in a given year would be included as income. The value of unrealized capital gains - meaning the value of any increase in an asset from one year to the next - would be included under the definition of Net Family Assets. Earnings in excess of $480 for full time student dependents age 18 or older and for adoption assistance in excess of $480 per child will still be excluded, but the $480 will be adjusted annually based on the inflation rate. Currently, the earned income of foster adults is counted, but under the proposed regulation, such income will be excluded. Under the proposed rule, educational assistance relating to books and room and board will also be excluded, which is not currently the case. Under current law, only the medical portion of the Aid and Attendance program for veterans is excluded. The proposed rule excludes the full amount of Aid and Attendance. Adjusted Income The $480 dependent deduction would remain in place but would be adjusted annually for inflation, adjusted to the next lowest multiple of $25. The one-time elderly deduction would increase from $400 to $525, adjusted annually for inflation. All other deductions currently permitted would remain. However, the deduction for medical expenses, which is now permitted when such expenses exceed 3% of gross income, would not be permitted until the expenses exceed 10% of gross income. This means that families who receive a health and medical expense deduction may see a significant increase in their adjusted income and rent. If the family can demonstrate a hardship resulting in an inability to pay the rent as a result in the change in the medical deduction, the PHA or owner will be required to recalculate the family s adjusted income. In such case, the deduction would be the amount in excess of 6.5% of the family s annual income instead of 10%. This hardship exemption would expire at the family s next regular income reexamination or at such time as the owner determines that the family can afford the rent based on the regular 10% adjustment, whichever comes first. The childcare deduction remains in place, but the proposed rule allows a hardship exemption for this deduction. Under this rule, a hardship exemption would be provided to allow the deduction for reasonable childcare costs to continue in certain circumstances for a family that no longer has a member that is employed or seeking to further his or her education. The family would be required to demonstrate that their inability to pay the increased rent is due to the loss of the childcare deduction. The family would also have to demonstrate why the childcare expense remains necessary even though no family member is employed, actively seeking employment or furthering his or her education. For example, the family member may have had to temporarily suspend their educational pursuits as the result of injury or illness and due to the injury or illness, they are unable to be the primary full-time caregiver for the child. This exemption would be temporary and would end no later than the family s next regular reexamination. Income Limitation for Existing Public Housing Residents While already in place through prior HUD guidance, the proposed rule would create a new 24 CFR 960-507, which would place an income limitation on a public housing tenancy for families at 120 percent of AMI.  This limit would not apply to PHAs operating fewer than 250 public housing units that have rented to over-income households because there are no income eligible families on the waiting list or applying for public housing assistance. If a family s income has exceeded the 120% limit for two consecutive years, a PHA must terminate the family s tenancy within six months after the expiration of the two year period or charge a monthly rent equal to the greater of (1) the applicable Fair Market Rent (FMR); or (2) the amount of monthly subsidy for the unit including amounts from the operating and capital fund. Limitation on Assets The regulation would limit the amount and type of assets that a family assisted under public housing or Section 8 can possess. Families would be ineligible for public housing or Section 8 assistance if their net family assets exceed $100,000, adjusted annually for inflation.Families could not receive assistance if they have a present ownership interest in, legal right to reside in, and the effective legal authority to sell real property in the jurisdiction in which the property is located that is suitable for occupancy by the family as a residence. This provision excludes any property that is jointly owned by a member of the family and another individual or individuals who would not reside with the family. It would also not apply if the family is receiving HUD assistance while living in the home, is a victim of domestic violence, or is offering the home for sale, as demonstrated by a listing agreement.The proposed rule excludes the value of any accounts approved by the IRS as retirement accounts, including IRAs, employer retirement plans, and retirement plans for self-employed individuals.Any income distributed from any trust will be considered income, except in the case of distributions from non-revocable trusts, made to cover the medical expenses for a minor.The proposed rule would revise the existing exclusion in HUD s regulations for the value of necessary items of personal property, to provide that the exclusion will apply to items of personal property with a total value under $50,000, other than necessary items. Necessary items may include items such as a car used for personal transportation. Authorization for Financial Disclosures Under current regulation, Consent to Release forms are valid for 15-months after they are signed. The proposed regulation will make the forms valid until the earliest of: (1) the rendering of a final adverse decision for an applicant; (2) the cessation of a participant s eligibility for assistance from HUD and the PHA; or (3) the express revocation by the applicant of the authorization, in a written notification to HUD. The proposed regulation will also incorporate the new requirements into the HOPWA, HOME,  and HTF. As noted earlier, comments on this proposed regulation are due by November 18, 2019. The changes outlined in this regulation are extensive and all PHAs and owners of affected properties should carefully review and comment on the proposed regulation. After the comment period, HUD will review the comments and publish a final rule with appropriate changes from the proposed rule. No final rule should be expected prior to early to mid-2020.

Fair Housing Definition of a Dwelling

The Fair Housing Act (FHA) applies to "dwellings." This raises the technical issue of what a dwelling is. The answer is not as simple as one may think. The statute s definition of a dwelling includes any building occupied or intended to be occupied as a residence and any vacant land sold or leased for the construction of such a building. In addition to houses and apartments, the definition also includes mobile home parks, trailer courts, condominiums, cooperatives, and time-sharing properties. A building or land intended for non-residential use is not covered. What about temporary residences such as dormitories, homeless shelters, and extended care facilities? An early and influential decision in this area is United States v. Hughes Memorial Home, 396 F. Supp. 544 (W.D. VA. 1975). This was a private facility in VA that was established in 1922 to provide housing for orphans and other needy "white children of Virginia and North Carolina." Because the home would not accept black children, the Department of Justice (DOJ) brought a fair housing suit. The Home argued that it was not a dwelling, and therefore not subject to the FHA. Once admitted, a child was considered a permanent resident of the Home and the average length of stay was about four years. The children attended area schools during the day. The court held that while the term "residence" is not defined in the statute, the term should be given its ordinary dictionary meaning, which was "a temporary or permanent dwelling place, abode or habitation to which one intends to return as distinguished from the place of temporary sojourn or transient visit. The judge concluded, "the Home is far more than a place of temporary sojourn to the children who live there." Because the children were in fact, "residents" of the Home, the Home was a "dwelling" subject to the FHA. The basic principle established in this case is that in temporary residence cases, one must look at whether the occupants intend to remain in those residences for any substantial period of time. If occupancy is merely transient, as with most motel and hotel rooms, the property may be viewed as something less than a dwelling and would not be subject to the FHA. Seasonal dwellings, where the residents reside for substantial periods and return to them day after day are also considered dwellings for FH purposes (see United States v. Columbus Country Club, 915 F.2nd 877 (3rd Circuit 1990). How long a period of time is required to establish a residence as a "dwelling" under the FHA has not been definitively established, but it does not have to be long. In Lakeside Resort Enterprises, LP v. Board of Supervisors of Palmyra Township, 455 F.3d 154, 159-60 (3rd Cir. 2006, the court held that a proposed drug and alcohol treatment facility was a "dwelling" under the FHA because, its average stay of 14.8 days "satisfies (though barely)" the "place to return" factor. HUD has endorsed the following multi-factor test for determining whether a facility that includes short-term residencies is covered by the FHA: Length of stay;Whether the rental rate for the unit will be calculated a daily, weekly, monthly, or yearly basis; Whether the terms and length of occupancy will be established through a lease or other written agreement;What amenities will be included inside the unit, including kitchen facilities;How the purpose of the property will be marketed to the public;Whether the resident possesses the right to return to the property; andWhether the resident has anywhere else to which to return. The FHA covers nursing homes, retirement communities, college dormitories, boarding houses and residency hotels, housing for seasonal farm workers, and vacation homes, timeshares, and similar recreational properties. Whether a homeless shelter is a residence depends on circumstances, and prisons are "detention facilities," - not "residences." For most owners and managers of multifamily housing, defining a dwelling is simply an intellectual exercise. However, in the LIHTC field especially, many specialized types of housing (e.g., homeless) are being developed. In such cases, a full understanding of whether the particular property is considered a dwelling for purposes of the FHA is required. If an owner is in doubt as to how the definition may apply to their specific circumstances, legal counsel should be sought.

Information to Obtain When Assuming Management of a LIHTC Property

When assuming management of a Low-Income Housing Tax Credit (LIHTC) property during the 15-year compliance period, there is critical information the new agent must have. The following list provides a good starting point for the information to obtain when assuming management of one of these properties: Location of the Resident Files: All tenant files and other information relating to property operations must be at the site. Determine the location of the initial resident files and whether copies have been made.Required Minimum Set-Aside & Applicable Fraction: Determine the applicable fraction required for each building. Keep in mind that each building has a separate Building Identification Number (BIN) and this applicable fraction is applied per BIN. The IRS Forms 8609 for each BIN are a good source for determining the Minimum Set-Aside and applicable fraction. The 8609 will also confirm whether the project is deep rent skewed. Line 8b of the 8609 will also confirm whether or not it is a multiple building project.What are the requirements of the Extended Use Agreement (EUA)? A copy of the EUA should always be available at the site. This is the deed restriction between the owner and the Housing Finance Agency (HFA) that will outline any special set-asides in addition to the minimum set-aside shown on the 8609s. It is also a good idea to obtain a copy of the original LIHTC application to the HFA and clarify any differences between the application and the EUA, keeping in mind that the EUA is the legally binding document.Is the property subject to any other housing programs? It is common for LIHTC properties to be involved in more than just the tax credit program. Examples are the HOME program, Tax-Exempt Bonds, Rural Development Section 515, HUD Section 8, and the Federal Home Loan Board s Affordable Housing Program. In situations where there is more than one program present at a property, the most restrictive rules should be followed.Have there been past violations and if so, were they corrected? If there are any outstanding violations (as determined by examining any prior 8823s issued against the project), determine what is needed for correction and confirm how long the HFA is allowing for the correction. Prior to assuming management of a tax credit property, a new agent should request copies of any prior 8823s.Have there been any fair housing complaints against the property? If there are pending actions, get the files and talk to the attorney that is representing the property.Are any low-income households over-income? If the site is mixed-income (i.e., has both low-income and market units), determine if any low-income households currently have income in excess of 140% of the currently qualifying income limit (170% if the project is deep rent skewed). Request documentation that shows the Available Unit Rule (or deep rent skewing rule) is being followed. Examine the files of all households in a BIN that moved in after a household recertified with income in excess of the 140% or 170% levels.Are there any vacant units? If there are vacant units, confirm the following: (1) the last household in the unit was eligible; (2) the unit is suitable for occupancy; and (3) reasonable attempts are being made to rent the vacant units. Also, obtain copies of all marketing materials.When does the compliance period end? This information can be confirmed by reviewing the 8609s. Once the 15-year compliance period has ended, the EUA becomes the governing document for the property and any HFA year-15 requirements should be followed. All of the information outlined above is critical to obtain prior to assuming management of an existing LIHTC property. Once a new owner acquires an existing property, or a new management company assumes management, operational responsibilities shift to the new entity. Pleading ignorance of a problem at that point will not hold water with either an HFA or the IRS. 

Determining the Income of LIHTC Applicants and Residents

The determination of income is a primary requirement when determining the eligibility of applicants and residents at Low-Income Housing Tax Credit (LIHTC) Properties. While individual Housing Finance Agencies (HFAs) have their own requirements relating to the determination of income, there are some "best practices" that may be applied in most jurisdictions. Some types of income - especially relating to employment - can be challenging to calculate. This article will provide suggestions and recommendations for determining various types of income, but all LIHTC managers should be aware of any specific requirements of their HFA. Regular Income There are generally three ways to determine income from employment: (1) a verification of annual income (VOE) from the employer; (2) a projection from year-to-date [YTD) income, which may be found on an employment verification or pay stubs; and (3) the average number of hours/overtime hours as shown on pay stubs. Generally, if there is a different result when calculating income using more than one of the methods, it is recommended that management follow up to determine the "most likely" income and use that as the certified income. However, some HFAs require the use of the "highest" result when the calculations show different figures, so managers should have a clear understanding of the HFA requirement in this area. If there is conflicting information between documents (e.g., the VOE and pay stubs), managers should attempt to obtain written clarification from the employer. If written clarification cannot be obtained, it may be possible to use an oral clarification. It is also a good idea to request additional pay stubs, which may enable a more accurate determination of income. Self-Employment In general, the following information is recommended for verifying income from self-employment: Tax returns from the prior one to three years. These should be obtained through the IRS transcript service (1-800-908-9946); the use of self-prepared returns is not recommended since there is no way to know if the returns were actually sent to the IRS.Note: for self-employed individuals who claim not to file tax returns, managers should obtain a completed copy of IRS Form 4506-T - Request for Verification of Tax Filing with the IRS - in order to verify that no return has been filed. The IRS requires that all self-employed individuals making $400 or more per year must file a federal tax return, regardless of tax liability.If a 4506-T shows that no return has been filed, the following information may be obtained to assist in determining self-employment income:Profit & Loss Statement; orStatements from recurring clientsIt is also recommended that all self-employed individuals provide an Affidavit of Self-Employment on which they state an estimate of their gross and net business income for the upcoming 12-months. Day Labor Day labor is generally applicable to a person who waits in a specified location to do various odd jobs and is paid with cash. Day Labor does not usually have a recurring clientele and can have a significant variance in terms of income or hours worked. In certain cases it is not possible to obtain third party verification of Day Labor. For this reason, a self-certification of income from the applicant/tenant may be the only option. However, before accepting such a self-certification, management should demonstrate due diligence in processing the certification. Such diligence will include a written statement from the applicant outlining details of their work, including: (1) dates of work; (2) work locations; (3) types of work; and (4) income earned for the work that is done. Since this is a type of work that can be very difficult to verify, management should ensure that any verification method used meets the requirements of the HFA. Anticipated Earnings Generally, income for the upcoming 12-months should be based on current circumstances, which should be annualized. It is not recommended that anticipated earnings be used unless there is documentation supporting such anticipation. For example, unless there is a pending offer of a salaried position - including a start date - no anticipation of employment income should be made. If the only form of income is from a household s "hope" for a future job, an HFA is very likely to question how the household will pay for rent, food, utilities, etc., and may require management to demonstrate how such items will be paid for. Cash Wages If an applicant claims that they do not receive pay stubs because they are paid in cash, the IRS has indicated that such individuals should be considered "independent contractors" and as such should file a 1040 tax return. In such cases, management should obtain a copy of the tax return (as outlined earlier) and should obtain a statement from the employer indicating the name of the employee, their position/title, and how much the employee is paid in cash each pay period. If a household that is paid in cash claims they do not file a tax return, the 4506-T (as noted above) should be required, verifying the non-filing status, in addition to the third party statement from the employer. Farm Labor Farm labor presents unique verification challenges due to the varying employment timeframes. The growing seasons are often determined based on weather and cannot be precisely predicted. If the applicant/tenant receives unemployment assistance during the off-season, only the unemployment received during the layoff period should be counted - i.e., the unemployment does not need to be annualized, as is normally the case. To adequately determine income eligibility for farm labor applicants, the following procedures are recommended: Maintain a spreadsheet tracking the growing seasons of the farms in the area around the property. This will provide a historical perspective of work and lay-off periods for prospective residents.Require a completed VOE showing the anticipated lay-off period.Obtain a payroll printout (in addition to piece count paystubs) that shows gross amounts earned per pay period.The payroll printout should include the name of the applicant/tenant, the farm they work for, and the pay rate of the employee. If this information is not included, the printout will not be an acceptable verification. Other Forms of Income Social Security and Supplemental Security Income (SSI): Most HFAs will accept the current year award letters for regular Social Security and a current Proof of Income Letter (with 120-days) for SSI. Note that some HFAs may require a confirmation of Social Security income if the Award Letter is more than 120-days old.Unemployment and TANF: Benefit letters dated within 120-days of the move-in/effective date should be obtained.Pensions, Annuity Payments, or any other form of recurring payment (excluding gifts): a document from the entity providing the payment dated within 120-days of the move-in/effective date should be obtained.Gifts: a signed and dated statement (notarized or witnessed) from the person providing the gift indicating the amount and frequency of the gift. An updated statement should be obtained for each recertification.Unemployment Income: If the tenant does not have a seasonal/recurring job, the unemployment income should be annualized for 52 weeks, even if a "maximum benefit" amount is noted on the verification letter. If the applicant/tenant has a seasonal job, recurring job, or a firm job offer, the unemployment should only be calculated for the period it will be received. Importance of Proper Verification If an HFA is not satisfied with the documentation of income in a file, it is very likely to request additional documentation to demonstrate household eligibility. Such documentation may include: Tax returns or W-2s for the move-in or recertification year;Additional paystubs;Clarification regarding the disposal of an asset; orVerification of the termination of employment Best Practice Forms There are certain forms every well-run LIHTC property will have - many of which are required by HFAs. Some of these forms are as follows: Comprehensive rental applications;Recertification Questionnaires;Child/Spousal Support Affidavits/Verifications;$5,000 and Under Asset Affidavits or third party verification when assets exceed $5,000;Student Status Affidavits;Survival Statements for assisted households claiming zero income; andLive-in Aide Verification Forms (if applicable). Ultimately, the HFAs will be looking for "due diligence" on the part of owners and managers. While each type of income will present its own challenges, the documentation outlined in this article will serve the purpose of verification in most cases.

RAD First Component - Eligibility, Conversion Requirements, and Financing Considerations

On September 5, 2019, HUD issued Notice H-2019-09, PIH-2019-23 (HA), Rental Assistance Demonstration - Final Implementation, Revision 4. This revised notice provides program instructions for the Rental Assistance Demonstration (RAD) Program, including eligibility and selection criteria. Background The RAD program was created by Congress in 2011 and provides the opportunity to test the conversion of public housing and other HUD-assisted properties to long-term, project-based Section 8 rental assistance to achieve certain goals, including the preservation and upgrading of these properties by enabling Public Housing Agencies (PHAs) to access private and public debt and equity to address immediate and long-term capital needs. RAD is also designed to test the extent to which residents have increased housing choices after the conversion, and the overall impact on the properties. RAD has two components: First Component: The First Component allows projects funded under the public housing (Section 9) program to convert their assistance to long-term, project-based Section 8 rental assistance contracts. PHAs may choose between two forms of Section 8 Housing Assistance Payment (HAP) Contracts: project-based vouchers (PBVs) or project-based rental assistance (PBRA). PHAs will convert assistance at current subsidy levels and there will be no increase in funding. The law authorizes the conversion of up to 455,000 public housing units under this component. Section I of the Notice provides instructions for PHAs applying for conversion under the First Component. While the RAD statute authorizes HUD to convert Section 8 Moderate Rehabilitation Projects (Mod Rehab) under the First Component, HUD is exercising its discretion to prioritize public housing conversions under the competitive requirements of the First Component. The demand for public housing conversions is extremely high and significantly exceeded the initial limitation on the number of units that could be converted under the First Component.  Consequently, Mod Rehab conversions will be processed exclusively under the Second Component of RAD, which is non-competitive.Second Component: The Second Component allows owners of projects funded under the Rent Supplement (Rent Supp), Rental Assistance Payment (RAP), and Mod Rehab programs to convert to PBV or PBRA contracts upon contract expiration or termination occurring after October 1, 2006. The Second Component further allows owners of projects funded under the Project Rental Assistance Contracts (PRAC) under the Section 202 program to convert to PBV or PBRA contracts. The purpose of this article is to review the basic RAD elements of the First Component relative to eligibility, conversion requirements, and financing considerations. As noted above, under the First Component of RAD, PHAs may choose between two forms of Section 8 Housing Assistance Payment (HAP) Contracts; project-based vouchers (PBVs) or project-based rental assistance (PBRA). No incremental funds are authorized for this component. As such, initial contract rents are established based on public housing funding levels and are subject to applicable program rent caps. Applications may be submitted for a specific project or a PHA-defined portfolio of projects. If a PHA applies for a portfolio award, HUD will reserve RAD conversion authority for the number of units covered by the award, and the PHA will be required to submit a RAD application for each individual project. After HUD approval, a project will receive a long-term Section 8 HAP Contract. PBV Conversions Where the PHA converts assistance of a public housing project to Section 8 PBVs, the HAP contract will be administered by the agency with which HUD has entered into the applicable Voucher ACC, which is usually the same agency that is converting assistance. Contract rents will be established and will be adjusted annually by HUD s published OCAF on each anniversary of the HAP Contract subject to appropriations and the rent reasonableness requirement. The initial contract will be for a period of at least 15-years (but may be up to 20-years). At or prior to the expiration of the initial contract and each renewal contract thereafter, the Voucher Agency shall offer, and the Project Owner shall accept, a renewal contract for the prescribed number and mix of units, either at the site of the project subject to the expiring contract, or upon request of the Project Owner and subject to PHA and HUD approval, at another site through a future transfer of assistance. PBRA Conversions Where the PHA converts assistance of a public housing project to Section 8 PBRA, the HAP Contract will generally be administered by HUD s Office of Housing, unless later assigned to a PHA that is under ACC with HUD for the purpose of administering project-based Section 8 HAP Contracts. Contract rents will be established and will be adjusted annually by HUD s published OCAF at each anniversary of the HAP Contract. The initial contract will be for a period of 20 years and will be subject to annual appropriations. At expiration of the initial contract and each renewal contract, HUD shall offer, and the project owner shall accept, a renewal contract for the prescribed number and mix of units, either on the site of the project subject to the expiring contract, or upon request of the Project Owner and subject to HUD approval, at another site through a future transfer of assistance. Eligibility To be eligible for RAD, a PHA must: Have public housing units under an ACC;Be classified as a Standard or High Performer under the Public Housing Assessment System (PHAS). If classified as "troubled," the PHA may still be eligible if the PHA is making substantial progress under its Recovery Agreement, Action Plan, Corrective Action Plan (CAP) or Memorandum of Agreement (MOA) or proposes a revision to such agreement or plan that incorporates conversion under RAD and that is acceptable to HUD.Be classified as a Standard or High Performer under the Section 8 Management Assessment Program (SEMAP) if the PHA will be administering the PBV contract under RAD. If classified as Troubled, the PHA must be making substantial progress under the CAP and HUD must have determined that the factors resulting in the PHA s Troubled status will not affect its capacity to carry out a successful conversion under RAD;Be in substantial compliance with HUD reporting and programmatic requirements and/or satisfactorily in compliance with any CAP or MOA related to any (1) program finding or (2) failure to carry out, to the satisfaction of HUD, management decisions relating to an audit by the OIG;Not have a debarment, suspension, or Limited Denial of Participation (LDP) in Federal programs lodged against the applicant, PHA Executive Director, Board members, or affiliates, unless HUD has determined that the RAD conversion is likely to place the property under the control of a more capable entity; Submit a completed application that complies with all RAD application instructions; andResolve to HUD s satisfaction any outstanding civil rights matters prior to conversion. Project Conversion Requirements and Financing Considerations HUD expects that the majority of projects undergoing conversion of assistance through RAD will do at least some rehabilitation or reconstruction. The following include requirements related to conversion plans more broadly, including those involving rehab and construction: Conversion Planning Requirements Capital Needs Assessment (CNA). Except as noted below, each project selected for award will be required to perform a detailed physical inspection to determine both short-term rehab needs and long-term capital needs. Short term needs will be included in the RAD scope of work conversion and long-term needs will be addressed through a Reserve for Replacement Account. A CNA must be submitted with the Financing Plan and must have been completed no earlier than 180 days prior to submission of the Financing Plan, unless HUD approves otherwise.The CNA must be completed by a qualified, independent third-party professional.HUD may exempt the following transaction types from a CNA:For non-FHA transactions, neither component of the CNA will be required as long as the annual deposit to the Replacement Reserve is no less than $450 per unit, and the Project:Has been newly constructed for financed with 9% LIHTC within the last five years, as calculated from the date the final certificate or occupancy was issued, orQualifies as new construction of will be financed with 9% LIHTC;For non-FHA transactions, the narrative will not be required where the transaction will be financed with 4% LIHTC;For non-FHA transactions, neither component of the CNA will be required where the total assisted units at the project will constitute less than 20% of the total units at the project.No utility consumption baseline analysis is necessary as part of the CNA conducted for the RAD conversion.Healthy Housing & Energy Efficiency. For all projects retrofitted under a RAD conversion, if systems and appliances are being replaced as part of the Work identified in the approved Financing Plan, PHAs shall utilize the most energy and water efficient options that are financially feasible and that are found to be cost effective by the CNA. Where a project is planning to use a RAD conversion in conjunction with new construction, projects shall at a minimum meet or exceed the 2009 International Energy Conservation Code (IECC) for single family or low-rise multifamily properties or the ASHRAE 90.1-2007 standard for mid- or high-rise multifamily projects.Environmental Review. Proposed RAD projects are subject to environmental review and environmental documents are required to be submitted no later than the submission of the Financing Plan.Substantial Conversion of Assistance. Conversions may not result in a reduction of the number of assisted units, except by a de minimis amount. A de minimis reduction of units may include any of the following:The greater of five units or the number of units (rounded to the nearest whole number) corresponding to five percent of the number of ACC units in the Project immediately prior to conversion;Any unit that has been vacant for more than 24 months at the time of RAD Application; andUnits that, if removed from assistance, will allow the PHA to more effectively or efficiently serve assisted households through: (1) reconfiguring apartments; or (2) facilitating social service delivery, subject to HUD approval. The de minimis allowance may be calculated across portfolio conversions but the number of de minimis units allowed must be calculated based on the RAD conversions closed prior to or simultaneous with the execution of the de minimis reduction. For example, a PHA that is converting 200 units across three properties is permitted to replace 190 RAD-assisted units (i.e., 95% of 200) across its portfolio and apply the unit reduction to a single property. However, the property that would have ten fewer units assisted under a RAD HAP Contract must convert simultaneous with or after the first two properties - not before. A PHA must demonstrate that any reduction in units better serves residents, the Covered Project, or the operating viability of the PHA s RAD or public housing portfolio, will not result in the involuntary  permanent displacement of any tenant family, and will not result in discrimination based on federally protected characteristics. Relocation Requirements. The RAD Fair Housing, Civil Rights, and Relocation Notice provides guidance on relocation planning, resident right to return, relocation assistance, resident notification, initiation of relocation, and the fair housing and civil rights requirements applicable to these activities.Right to Return. Any resident that may need to be temporarily relocated to facilitate rehab or construction has a right to return to an assisted unit at the Covered Project once rehab or construction is completed. Permanent involuntary displacement of residents may not occur as a result of a project s conversion, including, but not limited to, as a result of a change in bedroom distribution, a de minimis reduction of units, the reconfiguration of efficiency apartments, or the repurposing of dwelling units in order to facilitate social service delivery. Where the transfer of assistance to a new site is warranted and approved, residents of the Converting Project will have the right to reside in an assisted unit at the new site once rehab or construction is complete.Ineligibility of Tenant Protection Vouchers. Conversion of assistance is not an event that triggers the issuance of Tenant Protection Vouchers to residents of public housing projects going through a RAD conversion.Accessibility Requirements. Federal accessibility requirements apply to all conversions, whether they entail new construction, alterations, or existing facilities. Compliance with Section 504, the ADA, and the Fair Housing Act is required.Demolition. Conversion plans may include the partial or complete demolition of a project and replacement of assistance either on - site or off - site. A PHA may not demolish and/or dispose of units until after the closing of construction financing for the new project.Change in Unit Configuration. If a PHA is proposing to change the unit configuration as part of the conversion, the PHA must demonstrate that the change in bedroom distribution will not result in the involuntary displacement of any resident. For example, if three and four-bedroom units are replaced with one and two-bedroom units, the conversion may, but not in all cases, result in discrimination against families with children. HUD will perform an up-front review when a PHA proposes to change the unit configuration of a project.Ownership & Control. Except where permitted to facilitate the use of tax credits, during both the initial term and all renewal terms of the HAP Contract, HUD will require ownership or control of the project by a public or non-profit entity. HUD may allow ownership of a project to be transferred to a tax credit entity controlled by a for-profit to facilitate the use of the tax credits, but only if HUD determines that the PHA or a non-profit entity preserves an interest in the property.Transfer of Assistance. Approvals of a PHA or owner s request to transfer assistance will be determined in HUD s sole discretion considering the condition and needs of the Converting Project, the nature of the proposed Project, and the impact on the project residents. The transfer shall not place housing in neighborhoods with highly concentrated poverty based on the criteria formulated for transfers under Section 8(bb) of the Housing Act. The project to which assistance is transferred will be subject to all of the contract terms as described in the HAP Contract, RAD Conversion Commitment (RCC), and RAD Use Agreement.RAD Use Agreement. Pursuant to the RAD Statute, a Covered Project must have a RAD Use Agreement that will be in a form prescribed by HUD, including, but not limited to the following:Be recorded in a superior position to all other liens on the property;Run until the conclusion of the initial term of the HAP Contract, automatically renew upon extension or renewal of the HAP Contract for a term that coincides with the renewal term of the HAP Contract, and remain in effect even in the case of abatement or termination of the HAP Contract;Provide that in the event the HAP Contract is removed due to breach, non-compliance or insufficiency of Appropriations, for all units previously covered under the HAP Contract new tenants must have incomes at or below 80% of the area median income (AMI) at the time of admission and rents may not exceed 30% of 80% of AMI for an appropriate-size unit for the remainder of the term of the RAD Use Agreement; andRequire compliance with all applicable fair housing and civil rights requirements, including the obligation to affirmatively further fair housing.Davis-Bacon Prevailing Wages. The Davis-Bacon Prevailing Wage requirements apply to all work, including any new construction, that is identified in the Financing Plan and RCC to the extent that such work qualifies as development. This includes remodeling that alters the nature or type of housing units, reconstruction, or substantial improvement and is initiated within 18 months following the effective date of the HAP Contract. Davis-Bacon applies only to projects with nine or more assisted units.Lead Based Paint Hazards. PHAs are required to conduct lead-based paint inspections and lead risk assessments on any pre-1978 public housing properties. Financing Requirements & Considerations If a PHA lacks recent experience in accessing various forms of debt and/or equity capital, it may wish to consider engaging technical assistance offered by local or national development intermediaries, professional financing advisors, consultants, and/or development partners to augment its capacities. HUD will assess the capacity of the development team. Low-Income Housing Tax Credits (LIHTCs), Historic Tax Credits (HTCs), and Opportunity Zones Applicants are encouraged to use LIHTCs and, if eligible, historic preservation tax credits, opportunity zones and state or local tax incentive structures, to support capitalization. Applicants are also encouraged to assess local demand and supply considerations if proposing to utilize LIHTCs and to discuss their interest in applying for LIHTCs as soon as possible with state or local tax credit issuing agencies to obtain guidance on how to compete for awards most effectively. While the applicant must indicate in its application if it intends to use tax credits, there is no requirement to have secured those credits prior to submitting an application. This article has dealt with the RAD project conversion basic requirements and financing considerations. The next article on the RAD Notice will focus on waivers, alternatives, and other public housing requirements.

Dealing with Resident Owned Real Estate at Affordable Housing Properties

When determining the income of a household at an affordable housing complex with income limitations, the valuation of resident owned assets and the calculation of real or possible income from those assets is critical to the process. Assets are items of value, other than necessary personal items. Asset information (asset value and income from the asset) should be obtained at the time of application. While standard bank accounts and cash-on-hand are the most commonly held assets, a fairly high percentage of affordable housing residents own real estate; this is especially true in the case of seniors. Knowing how to value and determine income from real estate is a required area of knowledge for affordable housing managers. Normal Valuation of Real Estate When deriving the asset value of real estate that is owned but has not been sold, management must determine the actual cash value of the property, and if the value is more than $5,000, income must be imputed to the property - even if it is not actually rented (the only way to receive "actual" income from property is rental). If a property is being rented, and the cash value of the property exceeds $5,000, the rental income must be compared to the imputed income, and the higher of the two figures must be counted as asset income. To determine the cash value of real estate, the market value must be determined. This can be done through the use of tax assessments (if the assessment is at market value), appraisals, brokers estimates, listing agreements, or as illustrated by a bona fide sales contract. Once the market value is established, the cost of sale may be deducted to determine cash value. Costs relating to the sale of real estate include commissions, broker fees, closing costs, principal mortgage balance, etc. Many state agencies allow an assumed 10% cost of sale for commissions/broker fees/closing costs, but managers should check with the agency on exactly what they will permit. Once the costs of sale have been deducted, the remaining amount is the cash value of the real estate and is the value that should be shown on the Tenant Income Certification (TIC). If the value is a negative amount, the cash value should be shown as zero. Real Estate Used As Rental Property If real estate is being rented, the value of the property is derived as outline above. The income for the asset will be the greater of the net rent collected or the imputed income (if the total cash value of household assets exceeds $5,000). However, managers should remember that income is only imputed when the total cash value of a household s assets exceed $5,000 - not individual assets. For example, if the cash value of real estate is $3,000 and the average six-month balance of a checking account is $2,500, the total cash value of the assets is $5,500 and income will be imputed on the $5,500 - not separately on the individual assets. If rent is being collected on real estate, it is considered asset income, but only the net rent must be counted. So, if there are verifiable operating expenses associated with renting the real estate, those expenses may be deducted from the gross rent in order to determine the net rent. E.g., an applicant owns a house that is being rented for $1,000 per month ($12,000 annually). The applicant provides documentation showing annual taxes and insurance of $5,500, homeowners association fee of $800, and mortgage interest over the next 12 months of $2,200. These are all valid operating expenses and may be deducted, leaving net income of $3,500; this is the income from the asset. Remember - only the interest portion of mortgage payments may be deducted as an operating expense - not the principal. Foreclosure A foreclosure should be treated as a zero value asset in most cases. Usually, following a foreclosure, an owner will receive no proceeds from a sale. If proceeds are received after a foreclosure, the proceeds themselves will be considered an asset, but not the real estate, since it is no longer owned by the applicant. Also, a foreclosed property is not an asset disposed of for less than fair market value. However, until the final foreclosure documents are provided, the house is sold at auction, or the title transfers to a new owner, the real estate is still owned by the applicant and must be valued as an asset. Short Sale If a tenant engages in a "short sale" in order to avoid a foreclosure, this is not an asset disposed of for less than fair market value. A short sale is a financial option that is sometimes available to homeowners who are distressed borrowers. They are behind on their mortgage payments and have a home that is "underwater." In other words, the home is worth less than the outstanding balance on the mortgage. Reverse Mortgage A "reverse mortgage" is a loan against a home that does not have to be paid back for as long as the homeowner lives there. Once the owner moves out of the home, the loan will become due (with very limited exceptions). The homeowner still owns the home! The real estate is the asset and the market value, less the amount owed plus a cost of sale on the real estate, is the cash value of the asset.                   (As a practical matter, since the loan must usually be paid off when the homeowner moves, this would rarely, if ever, be an issue.) In most cases, the valuation of real estate and the determination of income from real estate is straightforward and relatively simple. The procedures outlined above will work in the vast majority of cases, but if there is a complicated owner structure involving real estate (e.g., real estate owned as part of a partnership), professional assistance may be required in valuing the property.

HUD Issues Revised Final Implementation Notice for RAD Program

On September 5, 2019, HUD issued Notice H-2019-09, PIH-2019-23 (HA), Rental Assistance Demonstration - Final Implementation, Revision 4. This revised notice provides program instructions for the Rental Assistance Demonstration (RAD) Program, including eligibility and selection criteria. Background The RAD program was created by Congress in 2011 and provides the opportunity to test the conversion of public housing and other HUD-assisted properties to long-term, project-based Section 8 rental assistance to achieve certain goals, including the preservation and upgrading of these properties by enabling Public Housing Agencies (PHAs) to access private and public debt and equity to address immediate and long-term capital needs. RAD is also designed to test the extent to which residents have increased housing choices after the conversion, and the overall impact on the properties. RAD has two components: First Component: The First Component allows projects funded under the public housing (Section 9) program to convert their assistance to long-term, project-based Section 8 rental assistance contracts. PHAs may choose between two forms of Section 8 Housing Assistance Payment (HAP) Contracts: project-based vouchers (PBVs) or project-based rental assistance (PBRA). PHAs will convert assistance at current subsidy levels and there will be no increase in funding. The law authorizes the conversion of up to 455,000 public housing units under this component. Section I of the Notice provides instructions for PHAs applying for conversion under the First Component. While the RAD statute authorizes HUD to convert Section 8 Moderate Rehabilitation Projects (Mod Rehab) under the First Component, HUD is exercising its discretion to prioritize public housing conversions under the competitive requirements of the First Component. The demand for public housing conversions is extremely high and significantly exceeded the initial limitation on the number of units that could be converted under the First Component.  Consequently, Mod Rehab conversions will be processed exclusively under the Second Component of RAD, which is non-competitive.Second Component: The Second Component allows owners of projects funded under the Rent Supplement (Rent Supp), Rental Assistance Payment (RAP), and Mod Rehab programs to convert to PBV or PBRA contracts upon contract expiration or termination occurring after October 1, 2006. The Second Component further allows owners of projects funded under the Project Rental Assistance Contracts (PRAC) under the Section 202 program to convert to PBV or PBRA contracts. Major Revisions in Revision 4 This revised Notice includes a change in eligibility and selection criteria as well as clarifications of existing instructions and is more than 300 pages long. Following is a summary of the major revisions: First Component (Public Housing Conversions) Extends all resident rights to households that will reside in non-RAD Project-Based Voucher (PBV) units placed in a converted public housing project so as to facilitate the standard protection of residents;Increases resident notice requirements;Establishes a mechanism for PHAs to enter into partnerships with other PHAs in order to pool resources or capacity;Allows limited rent increases for public housing conversions to PBRA contracts in certain scenarios, including in designated Opportunity Zones (OZs);Modifies the requirements for portfolio awards so as to provide PHAs greater flexibility in staging the conversion of their properties;Streamlines Capital Needs Assessment (CAN) requirements to eliminate the submission of the CNA Tool when certain conditions have been met;Introduces a "Concept Call" so that PHAs can receive confirmation that project plans are sufficiently advanced to submit a Financing Plan;Prohibits PHAs from entering debt into the EIV "Debts Owed" module purely as a result of the 50058 End of Participations that is required to be submitted into Public and Indian Housing Information Center (PIC) as part of the conversion;Broadens the use of "tiered" environmental reviews, requires the use of the HUD Environmental Review Online System, and requires radon testing for PBRA and PBV conversions;Establishes policy that RAD rents will be updated every two years and the updated rents will be applied to new awards issued after those established dates; andEstablishes a priority for "Section 3" employment and other economic opportunities for residents of public housing or Section 8 assisted housing. Two additional First Component Changes are subject to Notice and Comment because they impact eligibility and selection criteria: Removing restrictions on certain HOPE VI projects that are under ten years old; andEliminating the selection of applications based on previously established "Priority Categories," so that HUD may review and approve applications on a first-come, first serve basis. In the event that a waiting list forms, properties located in OZs will be given priority. Second Component (Section 202 PRAC, Mod Rehab, Mod Rehab SRO, Rent Supp, RAP Conversions) Implements the provision of the 2018 Appropriations Act authorizing the conversion of Section 202 PRAC projects to Section 8 PBRA or PBV contracts;Streamlines  CNA requirements for Mod Rehab conversion to eliminate the submission of the CNA Tool in certain cases;Broadens the use of "tiered" environmental reviews, requires the use of the HUD Environmental Review Online System, and requires radon testing for PBRA and PBV conversions;Streamlines the Conversion Plan requirements for Mod Rehab Conversion when certain criteria are met;Creates an ability for Mod Rehab and SRO projects converting to PBRA to use contract rents based on the condition of the property following rehab;Provides an ability for owners or converting SRO projects serving the homeless to establish a leasing or occupancy preference that facilitates permanent supportive housing;Fully establishes resident right of return and the prohibition against re-screening for existing residents; andEstablishes a final date that any remaining RAP properties may make a submission of conversion under RAD. Notice and Comment for Changes in Eligibility and Selection Criteria This Notice is effective immediately except with respect to changes in the project eligibility and selection criteria, which are subject to a 30-day comment period. Unless HUD receives comment that would lead to the reconsideration of any of the indicated changes in eligibility and selection criteria, these changes will become effective seven calendar days following expiration of the 30-day comment period. PHAs and owners applying to RAD during the 30-day public comment period will be subject to the new eligibility and selection criteria of this Notice unless HUD makes a change based on the comments. Notice Organization The Notice is divided into four sections: Section I: Instructions to PHAs and others converting under the First Component;Section II: Instructions to owners of Mod Rehab projects converting under the Second Component;Section III: Instructions to owners of Rent Supp and RAP projects converting under the Second Component; andSection IV: Instructions to owners of 202 PRAC projects converting under the Second Component. The Notice is long, technical, and complex. PHAs and owners who are intending to participate in a RAD conversion should obtain the Notice and become familiar with the requirements. Over the next few weeks I will prepare and publish on our website a series of articles on all four sections of the Notice.