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HUD Proposed Legislation on Assisted Rents and Other Issues

On April 25, 2018, HUD sent a legislative proposal to Congress titled, "Making Affordable Housing Work Act of 2018." The proposed legislation contains seven sections that, if passed into law by Congress and signed by the President, would significantly impact the rent paid by low-income residents in HUD assisted housing. Highlights of the proposed bill follow.   Rental Payments Amendments   OCCUPANCY REQUIREMENTS & FAMILY RENTS: Occupancy Requirements Income Limits - at the time of initial occupancy, families must be low-income. This is defined as no more than 80% of the area median gross income. Overhousing - No one person, living alone, may be provided an assisted housing unit of two or more bedrooms, unless that person is - An elderly person; A person with disabilities; A displaced person; or The remaining member of a tenant family. Absence of Children - the temporary absence of a child from the home due to placement in foster care shall not be considered in determining family composition and family size (this does not change current regulation). Rent Structures Rents for Families - a family shall pay as monthly rent the higher of 35% of the family s monthly income (no deductions would be permitted - i.e., dependent, child care, disability, elderly or medical); or 35% of the amount earned by an individual working 15 hours a week for four weeks at the federal minimum wage, rounded to the nearest $10. HUD may adjust the number of hours of work per week used to determine the family rent through regulation, but the number of hours may not be less than 15. (Based on the current $7.25 minimum wage, this comes out to a minimum of $154 per month in rent). Rents for Exempted Families - Elderly families, disabled families, and such other families defined by HUD through regulation will pay month rent that is the higher of - 30% of the family s monthly income (again, this is the gross income); or minimum rent, which shall be at least $50 and may be adjusted through regulation. Hardship Exemption - Hardship exemptions include the following: The family has lost eligibility for, or is awaiting an eligibility determination for, a Federal, State, or local assistance program, including a family that includes a member who is an alien lawfully admitted for permanent residence under the Immigration and Nationality Act who would be entitled to public benefits but for title IV of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996. The family would be evicted as a result of the imposition of the family rent structure. The income of the family has decreased because of changed circumstances, including the loss of employment. A death in the family. Other situations as may be determined by the Public Housing Agency (PHA), owner, or HUD. Waiting Period - if a family requests a hardship exemption and the PHA or owner reasonably determines the hardship to be of a temporary nature, an exemption shall not be granted for the 90-day period following the request for the exemption. A family may not be evicted for nonpayment of rent during the 90-day period. If the family thereafter demonstrates that the financial hardship is of a long-term basis, the PHA or owner shall retroactively exempt the family from the family rent for the 90-day period. Alternative Family Rent Structures - HUD established rents - HUD may establish alternative family rent structures that a PHA or owner may elect to adopt. These may include, but are not limited to, tiered rents, stepped rents, or timed escrow. PHA and Owner Established Rents - PHAs and owners may request HUD approval for an alternative rent, as long as the alternative Serves substantially the same number of families as the HUD prescribed family rent without additional Federal appropriated funds; Is appropriate for the housing market; Provides a reasonable hardship exemption for families; and Meets any other standards established by HUD. Alternative Income Recertifications - HUD may establish requirements for income recertifications different from those in the proposes bill. Minimum Family Share - Minimum Work Requirements - a PHA or owner may establish minimum work requirements for individuals or families, excluding persons at least 65 years of age, persons with disabilities, elderly and disabled families, and such other individuals or families as defined through HUD regulation. A PHA or owner that imposes work requirements will be exempt from imposing the community service and self-sufficiency requirements otherwise required by HUD. HUD will publish regulations establishing - Criteria regarding the population that may be subject to work requirements; The maximum number of hours per week that a PHA or owner may require; The definition of work, including forms of employment or employment related activities that would satisfy any work requirement of the PHA or owner; and Other HUD imposed criteria. Reviews of Family Income - Review of family income shall be made - In the case of all families, upon the initial provision of housing assistance for the family; and Every three years thereafter. (Note that this changes the current requirement that only fixed income reviews are required on an every three-year basis. Based on the language in the proposed bill, all recertifications would be done an a three-year basis). Interim Reexaminations - Interims will only be required if a family s income decreases by 20% or more. Interims for elderly families, a disabled family, or other families as defined by HUD through regulation would only be required if the family s income decreases by 10% or more. There would no longer be interims for increases in family income. Calculation of Income - Use of current year income - income for initial occupancy or income recertifications would use the income of the family as estimated by the PHA or owner for the upcoming year, which may be based on the prior year s income. Safe Harbor - PHAs or owners may determine family income based on timely income determinations through other means tested Federal public assistance programs (e.g., TANF determinations, Medicaid assistance, and SNAP). HUD will develop electronic procedures to enable PHAs and owners to have access to such determinations. Important Definitions in the proposed bill - Elderly Family - head, co-head or spouse must be elderly (62+) - For purposes of determining whether the 35% or 30% rent requirement must be met, requesting interim reexaminations, and setting work requirements, all adults living in the unit, other than a live-in aide, shall be a person with disabilities or who is at least 65 (not 62) years of age. Disabled Family - head, co-head or spouse must be disabled - For purposes of determining whether the 35% or 30% rent requirement must be met, requesting interim reexaminations, and setting work requirements, all adults living in the unit, other than a live-in aide shall be a person with disabilities or who is at least 65 (not 62) years of age. Elderly Person - a person who is at least 62 years of age. INCOME - Excluded Amounts - new guidance - Any return on net family assets, as long as the value of the net family assets is under $25,000, after an annual inflation adjustment to be published by HUD; and All expenses relating to VA aid and attendance. HOLD HARMLESS FOR ELDERLY & DISABLED FAMILIES - in terms of implementation of the new rent requirements, for disabled families and families consisting of persons 62 and older receiving assistance at the time this bill is enacted, any rent increases shall be phased in over two triennial recertifications. TENANT BASED ASSISTANCE (housing choice vouchers) - if the rent for a family receiving tenant based assistance (including any utility allowance) does not exceed the applicable payment standard, the monthly assistance payment for the family shall be equal to the amount by which the rent for the unit exceeds the minimum family share for the unit. This will essentially require that PHAs pay the full payment standard - even if the LIHTC maximum rent is less than the payment standard. if the rent for a family receiving tenant based assistance (including any utility allowance) exceeds the applicable payment standard, the monthly assistance payment for the family shall be equal to the amount by which the applicable payment standard exceeds the minimum family share. In other words, PHAs will not be able to pay more than the payment standard. SELF-CERTIFICATION OF ASSETS - the law signed by President Obama in 2015 permitted self-certification of assets under $50,000; this proposed bill would change that threshold to $25,000.   This proposed legislation is just that - PROPOSED! Owner and managers of HUD-assisted housing should make no changes to procedures currently being followed. This legislation will face an uphill battle in Congress - especially with regard to the rent changes, which will have a significant impact on low-income residents. At this time, the proposed bill has not been scheduled for hearings and rapid action is unlikely.   I will stay on top of any progress this bill (and any other important housing legislation) makes through Congress and will provide updates as those changes occur.

HUD-DOJ Initiative to Fight Sexual Harassment in Housing

The Department of Housing and Urban Development (HUD) and the Department of Justice (DOJ) have begun a nationwide initiative intended to combat sexual harassment in housing. This effort includes an interagency task force between HUD and DOJ, an outreach toolkit, and a public awareness campaign. In October 2017, the DOJ started a pilot program to combat sexual harassment in housing in D.C. and the Western District of Virginia, which includes Abingdon, Charlottesville, Harrisonburg, Lynchburg, and Roanoke. This action increases DOJ efforts to protect women from harassment by landlords, property managers, maintenance workers, security guards, and other employees and representatives of rental property owners. The goal of the pilot program was to develop improved ways to connect with both victims of sexual harassment in housing and organizations that assist such victims. In addition to D.C. and Western Virginia, the DOJ tested certain aspects of the initiative in New Jersey, Central California, Massachusetts, Vermont, and Michigan. The result of the pilot was in increase in harassment reporting from both D.C. and Western Virginia. In D.C., the Department has generated six leads since October 2017, with three leads coming from Virginia. If implemented nationally, DOJ believes this will lead to hundreds of new reports of sexual harassment in housing. Because of these results, three major components of the initiative are being rolled out. First - the HUD/DOJ Task Force to Combat Sexual Harassment in Housing will develop a shared strategy for combatting sexual harassment in housing across the country. This strategy focuses on five key areas: (1) continued data sharing and analysis; (2) joint development of training; (3) evaluation of public housing complaint mechanisms; (4) coordination of public outreach and press strategy; and (5) review of existing federal policies. Second - the outreach toolkit is designed to leverage HUD and DOJ s nationwide network of U.S. Attorney s Offices. The kit provides templates, guidance, and checklists based on pilot program feedback. The goal is to improve available enforcement resources and help victims of sexual harassment to connect with DOJ and HUD. Third - the public awareness campaign, which has three major components: (1) a partnership package with relevant stakeholders; (2) launch of a social media campaign; and (3) Public Service Announcements [PSAs] run by the Executive Office of U.S. Attorneys. This campaign is specifically designed to raise awareness, and make it easier for victims all over the country to find resources and report harassment. This new focus on sexual harassment in housing at the federal level reinforces the importance of having specific, stand-alone policies relating to sexual harassment. Owners and operators of rental housing should enact such policies if they don t already have them, and those who do have sexual harassment policies should review them to ensure they are adequate. Key points to remember regarding sexual harassment in housing include: Establish a Zero-Tolerance Policy Against Sexual Harassment Have a clear, written policy that sexual harassment of any kind will not be tolerated and will result in prompt disciplinary action; Offer examples of prohibited conduct, such as: Explicitly or implicitly suggesting sex in return for living in the community, receipt of services, or otherwise related to the terms and conditions of the tenancy; Suggesting or implying that failure to accept a date or sex would adversely affect a resident s tenancy; Initiating unwanted physical contact, such as touching, grabbing or pinching; Making sexually suggestive or obscene comments, jokes or propositions; and Displaying sexually suggestive photos, cartoons, videos or objects. The policy should encourage anyone who feels they have been sexually harassed to file a complaint, and provide details on how to do so. Focus on Employee Hiring & Training Make sure all employees are trained with regard to the rules. Check references on new employees, including criminal record checks. Require all employees - from leasing agents to maintenance workers (full or part-time) to receive fair housing training, including the sexual harassment policies. Explain what sexual harassment is, including examples, and include a record of all training. Adopt rules specific to employees who may enter resident units. Don t Ignore Sexual Harassment Complaints Investigate all complaints as soon as possible. Consult with your attorney and take detailed notes of all interviews. Interview all parties - both the accuser and the accused (don t assume guilt). Never ignore such complaints. Take Prompt Action to Halt Harassment If you find that a sexual harassment complaint is justified, take action to end the harassment. If the harasser is an employee, take appropriate disciplinary action, such as reprimand, suspension or termination - whatever is warranted. Get legal advice if the complaint is about a vendor or other resident. Don t Retaliate Against Anyone Complaining About Sexual Harassment. Under FHA, it is unlawful to "coerce, intimidate, threaten, or interfere with" anyone who exercises their rights under fair housing law.

Additional Guidance on the Income Average Test

In order to meet the minimum set-aside, if owners select the new Income Average test, at least 40% of the units in the project must have rents and incomes at the various designated unit income limits selected by the owner and the average of the designated unit income limits may not exceed 60%. The test must be met for each building (BIN), unless the owner makes the 8609, Line 8b multiple building election. Example 1 Unit Designation 1 20% 2 80% 3 80% 4 60% 5 60% 6 60% 7 60% 8 60% 9 60% 10 60% The average is 60% and all units are LIHTC eligible. Example 2 Unit Designation 1 20% 2 70% 3 70% 4 70% 5 70% 6 60% 7 60% 8 60% 9 60% 10 60% The average is 60% and all units are LIHTC eligible. But, make unit 1 a 30% unit and one of the 60% units would have to be designated a 50% unit. Determining the Applicable Fraction Units designated at 70% or 80% will count toward the low-income units for purposes of the applicable fraction. Example 1 80% 2 80% 3 60% 4 60% 5 60% 6 60% 7 60% 8 60% 9 40% 10 40% In this example, the average income of the designated units is 60%; therefore, all ten units may be included in the applicable fraction. This is the case even if the 80% units are larger units. Available Unit Rule (AUR) If the designated income for an over-income unit (over 140%), is 60% or less, the available unit rule is triggered when the income of the household exceeds 140% of the 60% income limit. If the designated income for an over-income unit exceeds 60% (i.e. either a 70% or 80% unit), the AUR is triggered when the income of the household exceeds 140% of the designated income limit. If a unit that is comparable or smaller in the BIN becomes vacant: If it is a LIHTC unit, it must be rented at the designated income limit it had immediately prior to becoming vacant; If it is a market unit, the unit must be rented to a household that meets the income designation for the over-income unit. Before we fully understand how to implement the AUR for projects with the Income Average Minimum Set-aside, we need additional guidance from the IRS. For example, What if multiple units at different income designations are over-income and one market unit becomes vacant? To what income designation must it be rented? Will it be based on the lowest income designation of the over-income units or will it be based on the first unit that became over-income? Potential Issue with the "30%" Units One of the permitted unit income designations is 30% of Area Median Gross Income. Many LIHTC professionals believe that the term "Extremely Low-Income" is synonymous with the 30% income limit. This was the case until FY 2014 when the Continuing Appropriations Act changed the definition of Extremely Low-Income Families to the greater of 30% of the median family income or the federal poverty guidelines as published by the Department of Health and Human Services (HHS). For this reason, the HUD published Extremely Low-Income limit may in fact exceed 30% of the median income - sometimes by substantial amounts. In fact, in more than half the country, the extremely low-income limit as published by HUD exceeds the 40% income limit. In other words, owners selecting the Income Average set-aside will have to determine the 30% level based on the HUD published 50% level for the LIHTC program using the MTSP published income limits. Hopefully, additional guidance will be forthcoming from the IRS so that owners will more fully understand the circumstances under which this new minimum set-aside election should be made.  

HUD Publishes 2018 Income Limits

On March 30, 2018, HUD published the 2018 income limits for HUD programs as well as for the Low-Income Housing Tax Credit and Tax-Exempt Bond programs. The limits are effective on April 1, 2018. The limits for the LIHTC and Bond projects are published separately from the limits for HUD programs. HUD has indicated that the U.S. median income limit is higher this year than it was in 2017. The median has increased by 5.7% and is now $71,900. LIHTC and Bond properties use the Multifamily Tax Subsidy Project (MTSP) limits, and are held harmless from income limit (and therefore rent) reductions. These properties may use the highest income limits used for resident qualification and rent calculation purposes since the project has been in service. HUD program income limits are not held harmless. Projects in service prior to 2009 may use the HERA Special Income Limits in areas where HUD has published such limits. Projects placed in service after 2008 may not use the HERA Special Limits. Projects in rural areas that are not financed by tax-exempt bonds may use the higher of the MTSP limits or the National Non-Metropolitan Income Limits (NNMIL). According to HUD, the NNMIL have gone up 5.8% from 2017 to 2018. Owners of LIHTC projects may rely on the 2017 income limits for all purposes for 45 days after the publication date of the newly issued limits. This 45-day period ends on May 14, 2018. The limits for HUD programs may be found at www.huduser.gov/portal/datasets/il.html. The limits for LIHTC and Bond programs may be found at www.huduser.gov/portal/datasets/mtsp.html   Please feel free to contact me with any questions.   AJ    

More Thoughts on the Income Average Test

This article is a follow up to the one I posted on March 26, 2018, relating to the Average Income Test which was included in the "Consolidated Appropriations Act, 2018," as a third set-aside election for Low-Income Housing Tax Credit (LIHTC) projects. In my example of what could happen if the 60% of Area Median Gross Income (AMGI) was exceeded (see example below), I stated that units with imputed income above the 60% limit would be removed from the building s applicable fraction. Example Assume a one-building project with a ten-unit building (all units the same size) with the following unit designations: Unit Designated Income Limit 1 60% 2 40% 3 80% 4 60% 5 80% 6 30% 7 60% 8 60% 9 50% 10 80% The average of the imputed income limitations in this case is 60% and all units would be LIHTC eligible, including the 80% units. But, move a household into Unit 6 that is at the 40% income level, and the average of the imputed income limitations is 61% and Average Income Test has been violated. One outcome of this violation could be that the 80% units would be considered market units and instead of an applicable fraction of 100%, the applicable fraction would be 70%. If the building s eligible basis is $800,000, the qualified basis will decrease from $800,000 to $560,000. If the building is entitled to a 9% credit, the annual credit will decrease from $72,000 to $50,400. If the designation of Unit 6 changed from 30% to 40% after the first year of the credit period, in addition to the $21,600 reduction in annual credits, the building would also face recapture on credits that were claimed in the years prior to the noncompliance year on the three 80% units. This scenario raises an additional question. Since the average of the imputed income limitations exceeds 60%, is the minimum set-aside met, and is the project entitled to any credits? Based on the exact wording in the new law ("The project meets the minimum requirements of this subparagraph if 40 percent or more [25 percent or more in the case of a project described in section 142(d)(6)] of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit"), it is my opinion that the project would still be tax credit eligible. This is because while the average of the low-income units exceeds 60% of AMGI, 40% or more of the units still meet the imputed income limitation designated by the taxpayer. I discussed this scenario with a state agency compliance director that I hold in high regard, and she has a different perspective on how this situation would be handled. Her thought was that only the ineligible household (the 30% unit that was rented to a 40% household) would be removed from the applicable fraction, making the applicable fraction 90%. Since the project would still meet the 40% minimum, the 80% units would still be entitled to credits. I certainly agree that renting the 30% unit to a 40% household could result in a loss of that unit, which would make the applicable fraction in my scenario above 60%. This is a reasonable position, and I would agree were it not for the language in 103(a)(C)(ii)(II) of the Act, which states "the average of the imputed income limitations designated under subclause (I) shall not exceed 60 percent of area median gross income." The use of the word "shall" places a strict requirement on the property and indicates that if the average imputed income exceeds 60% of the AMGI, the Average Income Test is not met. This is part of a "special rule" relating to the Average Income Test and does not exist for the 20/50 or 40/60 elections. While this language is clear and unambiguous in requiring that the 60% average income level must be maintained, the Act itself is silent concerning the result of exceeding the limit. The example I provided above relative to removing the units over the 60% income level from the applicable fraction was based primarily on my informal discussions with staff of both the House Ways and Means Committee and the Senate Finance Committee. In both cases, it was indicated that this view was a likely reflection of Congressional intent. However, the Act itself does not state that this would be the result of failing to adhere to the 60% average requirement, and in the end, my described result is only my opinion of the approach that could be taken. As noted above, it is entirely possible that if the 60% average is exceeded, the IRS could take the position that the Average Income Test was not met and that the project is not entitled to any credit. While this would be a draconian position for the Service to take, it is not inconceivable that it would do so. Especially when one considers that failure to meet either the 20/50 or 40/60 test does result in a loss of all credit. Ultimately, unless Congress issues clarifying guidance, we will need to await information from the IRS regarding the effect of a violation of the Income Average Test. As I recommended earlier, owners who have not yet filed IRS Form 8609 with the IRS for projects expected to begin credits in 2018 may want to wait until the IRS issues revised 8609s and clarifying guidance before submitting the 8609. However, owners should also keep in mind that if a projects Extended Use Agreement (EUA) has already been executed and recorded, the requirements of that agreement will have to be met - unless the HFA agrees to amend the agreement, which many are hesitant to do.

HUD Releases Updated Residents Rights and Responsibilities Brochure - March 2018

On March 8, 2018, HUD s Office of Multifamily Housing Programs released an updated Resident Rights and Responsibilities Brochure. The brochure may be downloaded and printed at www.hud.gov/sites/dfiles/Housing/documents/resident_rights_brochure_8.pdf.   This brochure provides a summary of key resident rights and responsibilities for residents living in HUD multifamily assisted housing, along with resources and contact information for residents needing assistance. Owners must provide applicants and residents with a copy of the brochure at move-in and annually at recertification.   While owners should have printed copies available for residents, HUD is encouraging owners/agents (OAs) to distribute the brochure electronically. Translation of the updated brochure is currently pending and will be posted to HUD s Fair Housing and Equal Opportunity website once complete.   The new brochure provides some much needed updates, including (1) additional rights for residents; (2) new protected classes introduced with the Equal Access Rule; (3) a reminder to residents that they have a responsibility to notify O/As of changes in a timely manner; (4) expanded information about the right of residents to be involved in operational issues; (5) references more HUD programs including the RAD program; (6) provides additional information about Enhanced Vouchers; and (7) updates information about HUD resources and contacts.   Owners should replace prior versions of this brochure with this new version.

Income Averaging Discussion and Examples

I posted an article on March 24, 2018, describing the two changes made to the Low-Income Housing Tax Credit (LIHTC) program by the "Consolidated Appropriations Act, 2018," the increase in credits and the new "Average Income Test." I want to provide some additional guidance regarding the Average Income Test, including how that test will impact the Available Unit Rule and Deep Rent Skewed Projects. The "actual" income of a household will not be used in determining whether the average of the imputed income limitations is 60% or less. The determination will be made based on the designated imputed income limitation of each individual low-income unit. As noted in my earlier memo, units will be designated using 10-percent increments (20%, 30%, 40%, 50%, 60%, and 70%). For example, if the 50% income limit for an area is $35,500, the 20% income limit for the area is $14,200. If the income of a household is $14,200, it may be designated as a 20% unit; if the income of the household is $10,000, it is still a 20% unit. In other words, a lower income household provides no greater benefit when calculating the average of area median gross income than a household at the maximum limit of any particular unit designation (e.g., 20% units). Let s take a look at how this determination will work. Assume a one-building project with a ten-unit building (all units the same size) with the following unit designations: Unit Designated Income Limit 1 60% 2 40% 3 80% 4 60% 5 80% 6 30% 7 60% 8 60% 9 50% 10 80% The average of the imputed income limitations in this case is 60% and all units would be LIHTC eligible, including the 80% units. But, change the unit designation of Unit 6 from 30% to 40% and the average of the imputed income limitations is 61% and the 80% units are no longer LIHTC eligible. These three units would be considered market units and instead of an applicable fraction of 100%, the applicable fraction would be 70%. If the building s eligible basis is $800,000, the qualified basis will decrease from $800,000 to $560,000. If the building is entitled to a 9% credit, the annual credit will decrease from $72,000 to $50,400. If the designation of Unit 6 changed from 30% to 40% after the first year of the credit period, in addition to the $21,600 reduction in annual credits, the building would also face recapture on credits that were claimed in the years prior to the noncompliance year on the three 80% units. This scenario raises an additional question. Since the average of the imputed income limitations exceeds 60%, is the minimum set-aside met, and is the project entitled to any credits? Based on the exact wording in the new law ("The project meets the minimum requirements of this subparagraph if 40 percent or more [25 percent or more in the case of a project described in section 142(d)(6)] of the residential units in such project are both rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit"), it is my opinion that the project would still be tax credit eligible. This is because while the average of the low-income units exceeds 60% of AMGI, 40% or more of the units still meet the imputed income limitation designated by the taxpayer. Clearly, owners electing the new average income test will be required to carefully track the status of each unit in the project to ensure that the required 60% average is met at all times. Impact on the Available Unit Rule (AUR) If the owner elects the Average Income Test, and the income of the occupants of a unit increase above 140% of the greater of - 60% of area median gross income, or the imputed income limitation designated with respect to the unit in which the increase in income has occurred, the unit will no longer be considered a low-income unit if any unit in the building (or a size comparable to, or smaller than such unit) is occupied by a new resident whose income exceeds the income limit designation that the newly occupied unit had prior to becoming vacant (if the newly vacated unit was a qualified low-income unit), and the imputed income limit which would have to be designated for the vacated unit in order for the project to meet the requirements of the Average Income Test. Example #1 (All units the same size) Unit Designated Income Limit 1 60% 2 40% 3 80% 4 60% 5 80% 6 30% 7 60% 8 60% 9 50% 10 Market Assume a 60% income limit of $42,600. 140% of this limit is $59,640. The average income of the imputed income limitations for the low-income units is 57.78% of the area median gross income so this qualifies as a low-income project. The household in unit 2 recertifies with income of $39,800. While this exceeds 140% of the 40% income limit of $28,400, it does not exceed 140% of the 60% limit; therefore, the AUR does not apply to the building. If the market unit is vacated, it may be rented to another market resident. However, if the household in Unit 2 recertifies with income of $60,000, the income now exceeds 140% of the 60% income limit and the AUR is in play. When Unit 10 is vacated, the new household must qualify at an income level that will enable to project to meet the Average Income Test and Unit 2 will be considered a market unit. If Unit 10 is rented to a household at the 60% income level, the building configuration is as follows: Unit Designated Income Limit 1 60% 2 Market 3 80% 4 60% 5 80% 6 30% 7 60% 8 60% 9 50% 10 60% The average income of the imputed income limitations for the low-income units is 60% of the area median gross income so the project continues to qualify as a low-income project. This is the case even though a 40% unit was replaced with a 60% unit. However, if a household occupied Unit 10 with income above the 60% level, the average income test would not be met and both Units 2 and 10 would be considered market units, violating the AUR and lowering the building s applicable fraction from 90% to 80%. It is important to note that other low-income units are not affected by a household that becomes over-income, and may continue to be rented at the imputed income level originally used when qualifying the building. For example, in the scenario described above, if Unit 5 is vacated instead of Unit 10, unit 5 may still be rented to a household qualifying at the 80% income level.                           Deep Rent Skewed Projects   In the case of deep rent skewed projects, the "140% rule" is replaced by the "170% rule." This rule does not change for owners who select either the 20/50 or 40/60 minimum set-aside. However, if an owner elects to use the Average Income Test, and a low-income household recertifies with income in excess of 170% of the greater of - 60% or area median gross income, or the imputed income limitation designated with respect to the unit in which the increase in income has occurred, the next low-income unit may not be occupied by any household whose income exceeds the lesser of 40% of area median gross income or the imputed income limitation designated with respect to the newly vacated unit.     Example #2 (25 unit deep rent skewed one-building project with ten low-income units)   Unit Designated Income Limit   1 60% 2 40% 3 80% 4 60% 5 80% 6 30% 7 60% 8 60% 9 50% 10 80%   Assume a 50% income limit of $35,500. The 80% limit is $49,700.   Since the project is deep rent skewed, at least 15% of the low-income residents must have incomes of no more than 40% of the AMGI. Since this project has a 40% and 30% unit, that requirement is met.   The household in Unit 10 recertifies with income of $84,500, which exceeds 170% of the 80% income limit.   The resident in Unit 6 moves out. Since this unit must be rented at the lesser of the 40% income limit or the imputed income limit for that unit, Unit 6 must be rented to a household qualifying at the 30% income limit. If the household in Unit 5 moves out, that household will have to be replaced by a household at or below the 40% income limit.               Tracking   While this new election will provide many potential benefits to a project - especially in terms of financial feasibility and a widening of the low-income market, implementation of the Average Income Test will be complex. Careful and ongoing tracking of each low-income unit will be necessary to ensure that the 60% average is maintained. Developers of LIHTC software are certain to update their products in order to assist in this tracking, but until that is done, owners are encouraged to develop in-house systems for doing so.

Appropriations Act Contains Two Major Changes to the LIHTC Program

The "Consolidated Appropriations Act, 2018" was signed into law by the President on March 23, 2018. The law includes two major changes to the Low-Income Housing Tax Credit Program (IRC 42).   Increase in Credits   The amount of credit states will be able to allocate will be increased by 12.5%, beginning in 2018 and, unless extended, ending in 2021. This increases the 2018 allocation from $2.40 per capita in 2018 to $2.70. The small state minimum amount is increased from $2,760,000 to $3,105,000. For 2019, 2020, and 2021, the amount of credit will be increased by the inflation rate. Unless extended past 2021, beginning in 2022, the amount of credit available will be reduced by 12.5%. While less than the 50% increase sought by the affordable housing industry, this additional credit will reduce - at least somewhat - the negative impact of the recent tax cuts on the amount of affordable housing that will be built.   Average Income Test   The bill includes a provision that affordable housing advocates have been seeking for a number of years, in that LIHTC projects will now be able to select from a third set-aside - an "Average Income Test." In addition to the 20/50 and 40/60 minimum set-aside tests, the new set-aside will be a 40/60 (average) test. If this new test is elected, a project will be required to rent at least 40 percent (25 percent in New York City) of the residential units in the project to households whose income does not exceed the imputed income limit designated by the owner of the project for a respective unit.   The owner of the project will designate the imputed income limit for each low-income unit. The average of the imputed income limit may not exceed 60 percent of the area median gross income. The imputed income limits for units shall be 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, or 80 percent of the area median gross income.   This new set-aside will permit a broader range of incomes in LIHTC projects and increase the feasibility of many deals, especially in high cost areas.   The income average test will also impact compliance with the Next Available Unit Rule and Deep Rent Skewed Projects. I will be testing scenarios using the average income test and will provide a more detailed description to our clients on the operational issues relating to the rule.   This new election is in effect now for all elections made after March 23, 2018. However, the IRS will have to amend and make available a revised Form 8609. I recommend that owners who will be claiming credits beginning in 2018 who have not yet filed 8609s with the IRS delay completion of the 8609 until the revised form is available. This new test will not be available to owners who have already filed their 8609s with the IRS since the minimum set-aside is an irrevocable election.