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Homeownership Options for the Low-Income Housing Tax Credit Program

It is not unusual to see Extended Use Agreements (EUAs) for Low-Income Housing Tax Credit (LIHTC) properties with a provision requiring a homeownership option for residents at the end of the 15-year tax credit compliance period. In many cases, developers make commitments for homeownership at the end of the compliance period in order to obtain additional points on the LIHTC application. I have worked with clients on a number of such projects at the end of the compliance period, when it has become obvious that the homeownership component simply is not workable. While the push for points during the application period is understandable, it is in the interest of both developers and Housing Finance Agencies (HFAs) to recognize that creating a workable homeownership option for LIHTC developments is difficult, and those that do work have some common features that are worth taking a look at. While many states have dabbled in the LIHTC/Homeownership arena, in many cases the efforts have proven unworkable. However, some states have had more success than others. Perhaps the most successful state relative to converting LIHTC rental units to owner units is Ohio. A number of Ohio developers have been very successful in developing the ownership option for tax credit properties. An examination of their formula for success is instructive. First, and perhaps most importantly, all the homes are single-family homes. Homeport out of Columbus, OH has sold 26 LIHTC units to former tenants with 500 units in the pipeline. CNH Housing Partners (Cleveland) has converted 1,200 single family LIHTC homes to ownership. Before reviewing the components of a successful LIHTC ownership model, a review of "Lease to Own" basics is called for. 1. Single family homes are built with LIHTC equity and rented for 15 years - just like any other LIHTC units. 2. In year 16, tenants have the option to purchase the home at a reduced price. > One of the most workable formulas is to base the price on remaining debt, taxes, and cost of repairs made prior to the sale. > Before the sale, the property owner upgrades the properties with new roofs, furnaces, and hot water heaters. > The mortgage payment is typically less than the rent (having low mortgage rates makes this possible). > It is critical that there be financial counselors available to the tenants. These counselors should not be part of the sales team. > A key to success is that the gap between the sales price and market value must be covered, which can be done in a number of ways: - Zero interest second mortgage, which goes away in five years (this five-year requirement will discourage "flipping" of the homes). - Soft money contributed by a locality, such as HOME funds. Classes and financial education of the residents is crucial. Targeted outreach to the tenants should begin in year 11 or 12 of the compliance period, with letters, calls, and invitations to classes and counseling. This is especially important since for many residents, the main impediment to ownership is credit. Beginning the counseling and education early in the process may enable tenants to improve credit scores to the point where a mortgage if feasible. So, under what conditions does the lease-purchase option work best? First, it only works where land is readily available and cheap. It will not work in high cost areas of the country. This is why the program works so well in the "rust-belt" part of the country. Land prices are generally much lower than on either of the coasts. Urban infill also can work well and will almost always be more successful than suburban development, where land costs tend to be higher. Developers interested in pursuing the lease-purchase option as part of their LIHTC strategy should recognize the hurdles they will fact up front. 1. Since these are virtually all single-family properties, more credits will be required due to higher development costs. 2. LIHTC managers often lack the skills required for management of single-family properties. Managing a 150-unit single family subdivision is a whole different world when compared to managing a 150-unit building. 3. The lease-purchase option may result in a reduction of affordable rentals, and this may go against the HFAs Qualified Allocation Plan (QAP). 4. Single family homes have higher operating costs than multifamily units. The costs of water and sewer alone can be significantly higher. 5. The sales process can be complicated. What if not all the homes sell? What happens to the rest of the home? These questions all have to be addressed in the planning stage. 6. Many HFAs have no interest in the ownership option due to a lack of resources and the increased cost (there will be about a 30% increase in development cost due to the single-family nature of the development). Ultimately, the decision as to whether to pursue a homeownership component with a LIHTC project will depend on a number of factors, some of which I have outlined here. Even in cases where an HFA will permit an ownership component as part of an EUA, developers should go into the process with eyes wide-open, understanding that in many ways the lease-purchase option is a niche part of the tax credit world.

Documentation of Child Custody and Support

One of the most vexing problems faced by managers of affordable housing is how to handle the counting of children when full time residence in a unit is not clear. There are many households with children in shared custody situations. When certifying such households, managers must know whether to count the children for eligibility, unit size, and household income. The guidance in HUD Handbook 4350.3, Change 4 outlines the rules to be followed with regard to counting children and the requirements relative to potential income based on the presence of the children. Counting Children as Household Members The key factor in deciding whether to count a child under a shared custody arrangement is how much time the child spends in the unit. If a child lives in a unit at least 50% of the year, the child may be counted for all purposes (i.e., eligibility and unit size). If the child is counted, any unearned income of the child (e.g., SSI, child support, TANF) must also be counted for the household. However, even if the child lives only half the year in the unit, the full amount of unearned income (not a prorated amount) is counted. (Regulatory guidance may be found in HUD Handbook 4350.3, Change 4, Para. 3-6(E)(4)(b), and Exhibit 5-1). If a child lives in a unit less than 50% of the year (e.g., weekends only), the child should be treated as a guest and not counted for any purpose. Any income paid on behalf of the child should not be counted. If the amount of time a child spends in the unit is not clear, reasonable documentation may be requested to demonstrate the residency of the child. Managers must remember that court ordered legal custody may not be required. If a household has legal custody of a child, copies of the custody documents should be obtained. But, if there is no court ordered custody, other documentation may be obtained, such as: 1. School records; 2. Tax returns; 3. Verification from a prior landlord; or 4. Verification from the child s doctor. Child Support All child support received by a household should be counted as income. These payments may be received directly from an ex-spouse or parent, and in some cases from the employer of the ex-spouse or parent. In many cases, support is paid through a state s child support enforcement agency, and in some cases, the payments are part of a resident s welfare benefit, and show up as a "pass-through" payment. Regardless of how they are paid, child support payments count as income. In most cases, court ordered support is counted as income. However, if the ordered amount is not being received, there are circumstances when it does not have to be counted. Child support that is not being received does not have to be counted if: 1. The resident provides an affidavit stating that the payments are not being received; and 2. The resident has made "reasonable efforts" to collect the amount due. Reasonable efforts include filing papers with a court or enforcement agency (note that simply threatening to go to court is not adequate). If a member of the household is having money withheld from wages (i.e., garnished), the full gross wage must still be counted as income. This is a HUD regulatory requirement (4350.3, Para. 5-10[F]). Verification of Child Support When verifying child support, the following information should be verified: 1. The support amount as specified in a divorce decree or settlement agreement; and 2. Whether this amount will be terminated in the next 12 months, and if so, when. The following methods - in order of preference - may be used to verify child support: 1. A copy of a divorce decree, separation or settlement agreement stating the amount of support or payment schedules; 2. A letter from the person paying the support, stating the periodic amount to be paid; 3. A copy of the latest check - the manager should record the date, amount, and number of the check; or 4. A notarized statement or affidavit of the amount received or that support payments aren t being received and the likelihood if support payments being received in the future. (It is recommended that if this method is used, the file should document why third-party verification could not be obtained).

Update on Criminal Screening for Occupancy

A recent fair housing settlement in New York City illustrates the importance of having screening policies for criminal records that only screen for criminal behavior that presents an actual threat to people or property. A New York City property management company recently settled with the New York City Commission on Human Rights after being charged with discrimination based on race, color, and national origin. The company had a blanket policy of denying housing to applicants with criminal histories regardless of the circumstances or type of crime. Under the settlement, the company agreed to pay $55,000 in emotional distress damages to an individual affected by the policy, along with $25,000 in civil penalties. The company must also develop new screening and application procedures and invite applicants with criminal histories who were previously denied to re-apply. This is the first such case in New York City and one of the first in the United States. The Commission argued that the company's blanket policy of denying housing to any applicant with a criminal record has a disparate impact on black and Hispanic New Yorkers, who studies show are disproportionately impacted by arrest, conviction, and incarceration rates. The Department of Housing & Urban Development (HUD) issued guidance in 2017 indicating that a blanket policy of denying housing to persons with criminal records is likely to violate federal fair housing law unless the owner can show that the policy shows a legitimate business interest. The HUD guidance further points out that arrest records are often inaccurate and incomplete and that relying on them as a basis for denying or terminating someone from housing may result in unjustified denials of admission or unjustified eviction. As part of any criminal screening policy, owners should conduct individualized assessments of applicant's criminal records including the nature, severity, and date of any convictions. While these assessments do not have to be done during the initial screening, any applicant or resident negatively impacted by criminal screening should be informed of their right to request an individualized assessment. In the New York City case, statistics show that blacks and Hispanics are incarcerated at disproportionately higher rates based on their share of the population. African-Americans make up only 24.4% of the city population but comprise 53.6% of the prison population. These statistics are similar to national figures. This case may serve as a leading indicator of what could be a national trend among fair housing enforcement agencies. All housing operators should carefully examine any criminal screening policies and ensure that they are designed in a way that satisfies federal fair housing guidance. At a minimum, a policy should contain the following elements: Screen only based on convictions - not arrests;Screen only for crimes that could be an actual threat to property or residents. Categories of crimes suitable for screening includeViolent Crimes;Property Crimes;Sex Crimes; andDrug Offenses Keep in mind that not all crimes in these categories present an actual threat 3. Have a procedure for individualized assessments when requested; and 4. With few exceptions, have a reasonable "look-back" rule, such as seven to ten years.

HUD Guidance on How Low Physical Inspection Scores Will be Handled

On October 29, 2018, HUD issued Notice H-2018-08 to provide guidance to HUD Multifamily staff regarding actions that should be taken when privately owned properties governed by various HUD housing programs score less than 60 or REAC inspections. The notice also explains what should happen if an owner fails to certify within three business days that exigent health and safety (EHS) violations have been corrected. The notice was effective on October 29, 2018 and applies to projects for which a physical inspection score was released on or after May 5, 2017. Notice H-2018-08 replaces Notices H-2015-02 and 2012-16. Properties participating in the following programs are subject to the Notice: Section 8 Project-Based Rental Assistance;Rent Supplement;Rental Assistance Program (RAP);Section 202 or 811 Project Rental Assistance Contracts (PRAC);Section 201/162 Project Assistance Contracts (PACs);Section 811 Project Rental Assistance (PRAs); andSenior Preservation Rental Assistance Contracts (SPRACs). Actions to be taken by HUD if a property scores less than 60 on a REAC and/or when an owner fails to certify within three business days that EHS deficiencies have been corrected include: Issue within 15-days of the physical inspection report a Notice of Violation of Regulatory Agreement (NOV) and/or a Notice of Default of Subsidy Contract (NOD). The NOV/NOD must notify the owner of the violation/default and provide a reasonable time to correct the deficiency - that is, a "cure period." Owners must provide a copy of the NOV/NOD to residents by leaving a notice under each door, posting the notice in the mail room, and on each floor, or by other means. HUD must also provide a copy of the NOV/NOD to the chief executive officer of the locality.These are two of the most important components of the Notice - both the residents of the property and the local government must be informed about the poor physical condition of the property.Issue a Demand for Corrective Action (DCA) if a property scores above 60, but HUD staff believes that unsatisfactory conditions exist (this provides a good deal of discretion to HUD staff). The DCA may require the owner to perform a unit survey and conduct necessary repairs.Conduct a REAC inspection to ensure that all deficiencies have been corrected. The timeframe for conducting the reinspection depends on whether the REAC score was 30 or less.If the score is 30 or less, the re-inspection should occur as soon as possible after the expiration of the cure period. If the score is above 30, and the owner meets the required deadlines for correction, the re-inspection should occur within one-year after the date of the last inspection. Finally, federal regulations require HUD to submit quarterly reports to Congress. The reports must include all sites that receive a REAC score of less than 60 or that receive an Unsatisfactory Management & Occupancy Review (MOR) within the prior 36-months. The report must include actions taken to address each site s physical condition to protect residents. This Notice should serve as a warning to owners of properties operating under the applicable HUD programs. Failure to maintain these developments in sound physical condition and operate them in accordance with HUD regulations will result in punitive action by HUD, negative reaction by residents, and possible local regulatory enforcement by cities or counties.

The Shutdown and Affordable Housing

As we enter the third week of the partial government shutdown, the impact is beginning to affect more than just the unfortunate federal workers who are not being paid. Some of America s poorest families may soon be hit by the inability of our leaders to keep the government running. The Department of Housing and Urban Development (HUD) is one of the seven agencies most directly affected by the shutdown. Since December 22, the vast majority of federal housing employees have been forced to stay home without pay, and they are prohibited from doing any work - including responding to emails. The impact is the same for the Rural Housing Service, which oversees the Section 515 program. While Section 8 assistance payments are being made at this time, HUD officials have stated that these payments could be suspended if the shutdown drags into February. About 95% of HUD s 7,500 employees have been furloughed without pay, including all those who provide assistance to property owners. If the shutdown is resolved this month, the financial impact on owners of Section 8 properties and those with voucher residents should be minimal. However, at this point, there is no agreement in sight. I recommend that affected owners think about delaying any expenditures that can be put off and keep project operating accounts as funded as possible. Don t make any purchases that can wait and delay until the last minute any payments that have deadlines. At this point, cash flow is critical, so be aggressive in collections and passive with regard to expenditures - and we ll all hope for the best.

PHA Options in Repositioning Public Housing

On November 13, 2018, HUD s Office of Public and Indian Housing (PIH) notified Public Housing Agencies (PHAs) of the options available relative to the repositioning of public housing projects. PHAs have three options relative to how they will ultimately deal with their public housing stock. Rental Assistance Demonstration ("RAD") Program: This is by far the most popular and well known option. Up to 455,000 public housing units are being converted under the RAD program to either Project-Based Vouchers (PBVs) or Project-Based Rental Assistance (PBRA).Voluntary Conversion: This is the process of converting public housing to vouchers, also known as a "Section 22" conversion. Public housing tenants are given either tenant-based or project-based vouchers. This is called "vouchering out" of public housing. This conversion requires that a PHA submit a "conversion assessment" to HUD as part of the annual PHA plan process. The conversion assessment contains five elements:An analysis of the cost of continuing to operate as public housing, compared to the cost of providing vouchers;An analysis of the market value of the project before and after rehab;An analysis of the ability of public housing residents to use a voucher, given housing market conditions;An impact analysis on the surrounding community, including the effect of conversion on the availability of affordable housing as well as the concentration of poverty in the neighborhood; andA description of the PHAs planned use of the property. The conversion must meet three requirements:The conversion cannot be more expensive than continuing to operate as public housing;The conversion must principally benefit the residents of the development, the PHA itself, and the community.With regard to resident benefit, the PHA must analyze the availability of landlords willing to accept vouchers, as well as access to schools, employment, and transportation; andThe conversion may not adversely impact the availability of affordable housing in the neighborhood. Due to these complex (and difficult to meet) requirements, voluntary conversion is a rarely used option.Section 18 Demolition: PHAs may decide to demolish or dispose of an entire development, or a portion of a development, for a variety of reasons, including the project being obsolete in terms of physical condition, location, or other factors making it unsuitable for housing purposes. Disposition may also occur for reasons such as a change in the neighborhood, the location of the project no longer being conducive to residential use, or the land on which the development was built is sufficiently valuable that the PHA can replace the existing development with a better development at no cost to HUD. Some PHAs have granted HUD a formal interest in a public housing property through a Declaration of Trust (DOT). In such cases, the PHA was required to inform the public of the granting of this interest and provide public notice that the property must be operated in accordance with public housing requirements. If a PHA has given HUD a formal interest in the public housing project, the property may not be sold or otherwise encumbered without HUD approval. This approval must be granted before any of the three methods of repositioning may be used. HUD is encouraging all PHAs to reposition public housing projects to address the overwhelming capital needs of public housing. HUD s goal is to "reposition" 105,000 public housing units by September 2019. HUD will be contacting all PHAs that own public housing in the coming months to review the various options. This effort to reposition public housing may present opportunities for private developers, and developers in cities with public housing should initiate discussions with local PHAs about opportunities for participation in the repositioning.

HUD Issues Utility Allowance Factors for 2019

HUD published in the November 23, 2018 Federal Register the Utility Allowance Adjustment Factors (UAFs) for 2019. HUD permits owners to use these adjustment factors to adjust baseline utility allowances that were prepared in accordance with Housing Notice 2015-04. The factors are effective for any site with an anniversary date on or after February 11, 2019. The UAFs can be found at www.govinfo.gov/content/pkg/FR-2018-11-23/pdf/2018-25440.pdf. HUD requires multifamily owners in its programs that receive rent subsidy and where HUD approves the utility allowances, to adjust that utility allowance each year. This methodology is required for the following programs: Project-Based Section 8;Section 101 Rent Supplement;Section 202/162 Project Assistance Contract ("PAC");Section 202 Project Rental Assistance Contract ("PRAC");Section 202 Senior Preservation Rental Assistance Contracts ("SPRAC");Section 811 PRAC;Section 236;Section 236 Rental Assistance Payments; andSection 221(d)(3) Below Market Interest Rate ("BMIR") Site owners are required to establish a "baseline "utility allowance for each of their bedroom sizes once every third year. For the two years after the baseline is established, owners have the option to perform a factor-based utility allowance. It is these factors that HUD has recently published. Owners of affected projects should review and implement the UAFs for their properties for 2019.

Minimum Wage Update - 2019

As we enter 2019, the minimum wage will change in a number of states and localities. As affordable housing professionals, it is always a good idea to be aware of the minimum wage in the states in which you have properties. Following are the states with minimum wages that are higher than the federal minimum wage of $7.25 per hour. I ve also noted the changes upcoming for 2019 that I am aware of. While I believe this is a comprehensive list, owners and managers should always check with their state labor departments (as well as cities) to make sure there has not been a change in addition to the ones noted here. Unless noted otherwise, the changes are scheduled to go into effect on January 1: Alaska: $9.84;Arizona: $11.00 (increased from $10.50);Arkansas: $8.50;California: $12.00 (increased from $11.00);Colorado: $11.10 (increased from $10.20);Connecticut: $10.10;Delaware: $9.25 (effective 10/1/19 - increased from $8.25);District of Columbia: $14.00 (effective 7/1/19 - increased from $13.25) - next to San Francisco, which is $15.00, this is the nation s highest minimum wage;Florida: $8.25;Hawaii: $10.10;Illinois: $8.25;Maine: $11.00 (increased from $10.00);Maryland: $10.10;Massachusetts: $12.00 (increased from $11.00);Michigan: $9.25;Minnesota: $9.65 (for large employers) - $7.87 for small employers;Missouri: $7.85;Montana: $8.30;Nebraska: $9.00;Nevada: $8.25;New Jersey: $8.60;New Mexico: $7.50;New York: $11.10 (increased from $10.40);Ohio: $8.30;Oregon: $11.25 (effective 7/1/19 - increased from $10.25);Rhode Island: $10.50;South Dakota: $8.65;Vermont: $10.50;Washington: $12.00 (increased from $11.50); andWest Virginia: $8.75