News

Opportunity Zones Present New Development Opportunities

The Tax Cuts & Jobs Act of 2017 created something called "Opportunity Zones." This is a brand new section of the federal tax code. An Opportunity Zone or "OZ" is an economically-distressed community where new investments may be eligible for preferential tax treatment. Communities must be nominated by their state for the designation and then certified by the Secretary of Treasury as an OZ.   The first OZs were designated in 18 states on April 9, 2018, and as of the beginning of June, 46 states and six territories/districts had submitted almost 8,000 census tracts to be designated OZs.   It is hoped that these zones will spur economic development and job creation in distressed communities. This is essentially a federal tax "carrot" designed to encourage development in these areas by providing tax benefits to investors. Included in the potential benefits will be (1) deferral of tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund; and (2) if the investor holds the investment in the Opportunity Fund for at least ten years, the investor would be eligible for an increase in basis equal to the fair market value of the investment on the date that the investment is sold or exchanged.   Qualified Opportunity Funds   A Qualified Opportunity Fund (QOF) is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an OZ and that uses the investor s gains from a prior investment for funding the QOF.   To become a QOF, an eligible taxpayer simply self-certifies; no approval or action by the IRS is required. The taxpayer will complete a form (to be released by the IRS) and attach it to the federal tax return for the taxable year.   Impact on Affordable Housing   OZs are not specifically intended for housing production, but mixed-use (residential/commercial) and workforce housing have significant potential as OZ efforts. Affordable housing is in fact one of the activities specifically targeted in the new legislation.   Funds are now being formed and the first investments are expected by early 2019. The biggest current impediment to fund formation is timing; gain must be invested within 180-days of selling property and that may not work with the timing requirements of specific deals. Some potential participants are examining the possibility of bridge financing to deal with this issue.   Once these funds get off the ground, it is expected that real estate will be a prime area for investment. This is due to the fact that investors are going to want deals that appreciate in value and not those that are highly risky; real estate is a sound investment and many of the likely investors are already familiar with these deals.   While in its infancy, the OZ program offers potential for affordable housing developers, and may well provide another source of investors - including individual investors vs. corporate investors. In addition, since banks often have little if any gain to invest, new types of investors will be participating in the OZs, further creating the potential for new affordable housing opportunities.    

Website Accessibility

In recent years, there has been a spate of litigation relating to website accessibility under the Americans with Disabilities Act (ADA). The ADA provides that no person shall be discriminated against in the full and equal enjoyment of the goods, services, facilities, privileges, advantages, or accommodations of public accommodation. These requirements clearly apply to public accommodations such as stores, hotels/motels, movie theaters, etc; all such places must be accessible to people with disabilities.   The lawsuits relating to website accessibility allege that when businesses fail to make their websites accessible to individuals with visual impairments, it is a violation of the ADA. People with visual impairments rely on screen-reading technology to access information on the Internet. Such technology reads aloud the information on a website. However, in order to use this technology, websites must be coded in a way that allows the information to be translated into meaningful text. If a website does not utilize this code, it will be inaccessible to persons with visual impairments.   This is an evolving area of law, and there has been no clear consensus by the courts as to how this will go. In fact, it is not yet clear that the ADA even applies to commercial websites. The business community takes the position that the ADA applies only to physical locations of business - not their websites. However, in several recent cases, the courts have ruled against retailers, refusing to dismiss ADA claims regarding website accessibility.   Recent Cases   An Ohio court refused to dismiss an ADA website accessibility lawsuit against Jo-Ann Fabrics, a company that sells fabric and other merchandise at its stores and through its website. In the suit, a blind customer alleged that she was unable to access information through the company s website because it was not compatible with screen-reading technology. The court refused the Company s request to dismiss the case, rejecting the claim that the ADA applied only to physical locations and not the Internet (Castillo v. Jo-Ann Stores, LLC, Ohio, February 2018). Andrews v. Blick Art Materials, LLC, New York, December 2017 - in this case, the court approved a settlement against a retailer that sold art supplies online and in its stores. The complaining shopper, who is legally blind, alleged that the retailer discriminated against him based on his disability because he was unable to use the company s website to buy art supplies, when non-disabled customers were able to do so. The court had previously refused to dismiss the case, leading to the settlement.   So far, no complaints have been files against the multifamily housing industry, but the cases that have been filed are a warning shot across our bow. In 2017 and so far in 2018, hundreds of lawsuits have been filed over the lack of website accessibility and more are coming down the road.   It is not inconceivable that communities could face ADA claims based on website accessibility. The ADA applies to public spaces, which include apartment leasing offices and parking lots, since we invite the public to these spaces. In the 21st Century, much of the information the public obtains about rental properties is from the web, and community websites are a go-to resource for many people looking for housing. These sites include pricing information, floor plans, location maps, photos and videos. If a website does not meet accessibility standard, it is not accessible to individuals with vision impairments, which could lead to an ADA claim.   It is worth noting that as far back as 2010, the Justice Department pledged to issue ADA guidelines on website accessibility, but so far has not done so. The only guidelines that have been issued apply to government entities. There is nothing to indicate that the current Justice Department intends to issue guidance, so as an industry, we are pretty much on our own.   Based on this new area of litigation, it is recommended that owners and management companies begin researching the issue and make a determination of what it will take to make websites accessible. The industry standard at this point is the Web Content Accessibility Guidelines 2.0 (WCAG 2.0). These standards, published by a working group of experts, have been widely accepted as providing full and equal access to people with disabilities by a long list of countries, state and local governments, and companies.   So - just one more issue to be concerned about. Being proactive, and looking into this now rather than later, may be worthwhile for owners and managers in the multifamily housing industry.

States Begin Issuing Average Income Set-Aside Guidance

A number of states have now begun to issue guidance regarding the implementation of the "Average-Income" minimum set-aside test, which was signed into law as part of the Consolidated Appropriations Act of 2018. Eight states have provided formal guidance. Alaska - will not permit owners to elect income-averaging for LIHTC sites. Only the 20/50 or 40/60 minimum set-aside will be permitted; California - will allow applicants to use the average income set-aside for new projects. When doing so, the property wide average income based on unit designations must be no higher than 50%, as opposed to the 60% average permitted under Federal law. In addition, owners must make all buildings in the project part of a multiple building project as reflected on the Line 8b election on Form 8609; Georgia - will permit income averaging beginning in 2018, but LIHTC resyndications and properties with a commitment of HOME funds from the State Agency (DCA) will not be allowed. Also, the 8609, Line 8b election must be made and the number of income averaging designations will be limited to no more than four - 30, 50, 60, and 80 percent; Indiana - owners with an allocation of 2018 credits may request use of the average income option unless doing so would reduce either the number of LIHTC units or the application point score. Documentation requirements include an updated market study; Iowa - income averaging will not be permitted for 2018 credit allocations, but may be for 2019; Texas - agency staff may approve income averaging as long as no representations made in the application for credits change. If there is any change from what was offered in the application for credits, approval may only be granted by a vote of the agency board. Owners will also need an updated market study and approval from funding sources. Texas will also permit units to "float," as long as the overall low-income percentage remains the same as the original commitment; Ohio - a draft 2019 QAP permits income averaging as long as (1) all units are low-income [i.e., no market rate units]; (2) at least 50% of all units must be occupied by persons earning 60% of AMI or less; (3) applicants may need a legal opinion regarding compliance with other subsidies; (4) in the case of a resyndication, there can be no increase in rents or occupancy limits for any LIHTC unit; and (5) owners will need to make the 8b election on the Form 8609s; and Wisconsin - will permit income averaging in 2018 for 100% affordable 4% deals (i.e., bond financing will be required). Guidance from additional states will be forthcoming, but no owner of a LIHTC property should consider making the Average Income election without first discussing doing so with the applicable state agency.

Owner-Adopted Preferences in the RAD Program

On June 29, 2018, HUD published a list of allowable owner-adopted preferences for RAD properties, including direction for owners wanting to establish an owner-adopted elderly preference. The guidance highlights current HUD policy located in the RAD Notice (PIH 2012-32[HA] H-2017-03, REV-3), HUD Handbook 4350.3, REV-1, the Section 8 Statute, the regulation at 24 CFR 5.655, and Housing Notice 2013-21. The guidance clarifies that owners of RAD properties are not permitted to establish an elderly "designation" (i.e., a set-aside of units for the elderly) because the Section 8 statute, unlike the statute governing public housing, does not authorize designations. However, owners of RAD properties may adopt a selection "preference" for elderly individuals and/or elderly families, which permits those applicants to be selected from the waiting list and housed before other eligible families. Any preference adopted as part of the conversion that will alter the occupancy of the property is subject to an upfront civil rights review during the RAD conversion process. Certain preferences also require approval from HUD s Multifamily Field Office, as described below. Owner-Adopted Preferences That Do Not Require HUD Multifamily Field Office Approval Project owners may adopt a preference for any or all of the populations in 24 CFR 5.655(c)(5) without prior HUD approval. These four preferences are for: Single persons who are 62 or older over other single persons; Single persons who are displaced over other single persons; Single persons who are homeless over other single persons; and/or Single persons with disabilities over other single persons. Preferences That Require HUD Multifamily Field Office Approval As stated in V.b of Housing Notice 2013-21 (issued July 25, 2013), Section 8 project owners may establish an owner-adopted preference for populations other than those noted above but must obtain local HUD office approval to do so. Examples include but are not limited to: Elderly families; Near-elderly single persons; and/or Near-elderly families RAD Conversions Prior to June 15, 2015 RAD conversions prior to Revision-2 of the RAD Notice (PIH 2012-32) may have established the statutory elderly preference following 24 CFR 880.612a. In addition, properties may have incorrectly identified and implemented an elderly "preference" as an elderly "designation." This is because 24 CFR 880.612a was not included in Appendix I of the RAD Notice prior to June 15, 2015. Owners who have done either are required to review their policies and, if necessary, modify them to comply with RAD Notice-Revision 3, 24 CFR 5.655(c), and Housing Notice 2013-21. Fair Housing Requirements for Preferences An owner may not adopt a preference that would have the purpose or effect of substantially delaying or denying the participation of other eligible families in the program on the basis of race, color, national origin, religion, sex, disability, or familial status, or would create or perpetuate segregation. Identifying Preferences in the Tenant Selection Plan Owners must also include a description of any preference in use at the property. This includes the regulatory approved preferences found at 24 CFR 5.655(c)(5) and any preferences that have been approved by HUD (e.g., elderly families, near-elderly single persons, near-elderly families). Owners must inform all applicants about available preferences and give all applicants an opportunity to show that they qualify for available preferences. This notification to applicants must be made when a new preference is implemented.

Administration Proposing Significant Government Reorganization - Impact on Housing Programs

The administration recently released Delivering Government Solutions in the 21st Century: Reform Plan and Reorganization Recommendation. This series of recommendations would reorganize how the federal government works and includes a number of revisions that would impact the affordable housing community. The U.S. Department of Agriculture s (USDA) Rural Housing Loan Guarantee Program and the rural rental assistance program would be transferred to the Department of Housing & Urban Development (HUD). HUD s Community Development Block Grant (CDBG) program would be consolidated with Economic Development Assistance programs from the Economic Development Administration and reorganized under a newly created Bureau of Economic Growth within the Department of Commerce. A permanent Council on Public Assistance would be created, composed of Health & Human Services (HHS), which would also be renamed the Department of Health & Public Welfare (HPW). The USDA nutrition assistance programs would be under the purview of this new department. This new "Council" would coordinate the efforts of HPW, HUD, USDA, and the Department of Education with regard to all public assistance programs, including the goal of implementing federal wide work requirements for participation in these programs. At this point, this is only a proposal, and Congressional action is required for any of the proposed changes. Owners of properties with assistance through the Rural Housing Service (RHS) should be aware however that it is possible that at some point in the future, oversight responsibility for rural housing projects will move from Rural Development to HUD.

NCSHA Letter to the IRS Regarding Average Income Minimum Set-Aside

On June 13, 2018, the National Council of State Housing Agencies (NCSHA) sent a letter to the Internal Revenue Service (IRS) outlining issues that Housing Finance Agencies (HFAs) will face with regard to the new Average Income Minimum Set-Aside and providing implementation recommendations for IRS consideration. Major elements of the NCSHA letter include the following:   While it is expected that most HFAs will include income averaging as part of their programs, NCSHA does not believe that there is a legal obligation to do so. In other words, states have the ability to prohibit use of the Average Income Minimum Set-Aside. I agree with this if such prohibition is part of the HFA s Qualified Allocation Plan (QAP). NCSHA believes that HFAs will have considerable latitude in the design of income averaging policies, such as: Restricting income averaging in developments with market-rate units; Establishing a process for designating units at various income levels and whether or not to permit "floating" units; Institute procedures that would allow owners to change unit designations over time, so long as the 60% average is maintained; Determine how many income designation levels any individual project may have - i.e., HFAs are not required to permit a project to use all seven of the permitted unit designations under the Average Income Set-Aside; Require owners of multiple building developments that elect income averaging to do so for all buildings in the development rather than making different elections for different buildings; Require income recertifications for 100% low-income developments if the agency deems it necessary; and Limit or prohibit income averaging for resyndication deals; Require unit parity in regard to bedroom size by income designation to prevent owners from designating larger units at higher income designations and smaller units at lower income designations.   I agree that HFAs may implement virtually all the policies outlined as long as the policies are part of the QAP and owners are aware of the policies when applying for credits.   NCSHA also provided a number of examples of when projects would be considered in or out of compliance. An important takeaway from the examples is that the NCSHA position is that once a unit is designated under a certain income limit, failure to rent that unit at the designated limit will constitute a reportable 8823 violation. The following example makes the point:   A ten-unit development has four units designated at 20% of AMI and six-units designated at 80% of AMI, for an average of 56%. One of the 20% units is rented to a household who, at the time of initial occupancy, has a gross annual household income of 25% of AMI. The income average of the remaining nine units is 60% (three units at 20% of AMI and six units at 80% of AMI). The project does not fail the income average minimum set-aside, but the unit is not in compliance with its designated restriction. This unit is out of compliance on the date of initial occupancy, and the agency will report it as an over-income unit by checking line 11a of Form 8823.   NCSHA does provide one example of non-compliance that demonstrates the importance of understanding the importance of meeting the required unit designation and not just staying below the 60% level for the units. In the example cited above, assume two of the 20% units have been rented to households with income above the designated (i.e. 20%) level. Even if the new households have incomes below the 60% level, because they do not meet the required income designation, they are redesignated as non-low-income units, leaving only eight low income units - two at 20% and six at 80%. These low-income units now average 65% and the project loses all credit (it has failed the minimum set-aside test).   NCSHA has requested that the IRS take steps to facilitate income averaging, including:   Establish a procedure for HUD to use in calculating area-specific income limits at the various designations allowable under income averaging. Until that happens, it is assumed that HFAs and owners will determine income limits using the 50% income limit for the applicable area as a base and applying a multiplier to determine the other income limit designations. Update Form 8823 to reference Average Income for Line 11f. Establish rules for determining next available unit designation in cases when more than one household in units of different designated income levels go over income at the same time. Until such guidance is provided, NCSHA is recommending as a best practice that HFAs require owners to make a reasonable effort to designate the next available unit (if that unit is a market unit) at the lower/lowest income designation of the units with over-income tenants.   This letter highlights concerns of NCSHA relative to the Average Income Minimum Set-aside and seeks guidance from the IRS. Until such guidance is provided, owners and managers should rely on direction from the applicable HFA when implementing the Average Income Set-Aside. HFAs have significant discretion relative to administration of the LIHTC program and until the IRS provides clear guidance in these areas, I recommend that HFA directions be followed.  

Emotional Support Animals - How "Necessary" Are They?

Every apartment manager is familiar with "Emotional Support Animals," or "ESAs." I would venture to say there are very few multi-family communities in existence today that don t have at least one resident with an ESA. And my experience has shown that when one household is approved for an ESA, more residents in the community tend to follow suit.   ESAs fall into the broad category of "assistance" animals, which is the housing equivalent of the Americans with Disability Act s (ADA) "service" animals. While the ADA defines what a service animal is, it is the Fair Housing Act (FHA), and associated guidance, that is the controlling law with regard to assistance animals.   FHA protections are much broader than ADA with regard to animals. The FHA (and Section 504 of the Rehabilitation Act of 1973) provide the right to "emotional support animals" for disabled individuals in their homes, provided they can produce a letter from a trained professional that says an animal could help the person cope with mental or emotional issues, including anxiety, depression, and post-traumatic stress syndrome (PTSD).   Unlike service animals, ESAs do not have to be trained to perform specific tasks, and they do not have to be dogs, which with one exception, is the case for service animals.   The only public place that permits ESAs is an airplane, and the airlines are beginning to draw the line on certain types of animals - a trend that has not yet reached into housing. ESAs are not permitted in restaurants, schools, and movie theatres - at least not yet.   Service Animals   The ADA states that service dogs (and in some cases miniature horses) which have been "trained to do work or perform tasks" related to a specific disability, must be given broad access to public places where pets are typically not permitted. The ADA sharply limits inquiries relating to a service animal. All that can be asked of an owner seeking to bring a service animal into a public establishment is (1) whether the dog is needed because of a disability, and (2) what tasks it has been trained to perform. It is illegal for the owner or employees of a public establishment to request documentation for the service dog or to inquire about the owner s disability.   Assistance Animal vs. Service Animal   While legally very different, from a fair housing standpoint, service animals and ESAs are interchangeable. Fair housing law requires a much broader interpretation of the law relating to animals for the disabled than does the ADA. Under federal law, individuals with physical or mental disabilities can bring assistance animals into their apartments but only trained service animals may be taken into public places.   The Effectiveness of ESAs   I have spent the better part of two years researching studies on ESAs and have found that there are few valid studies on the effectiveness of ESAs and the results of those that have been done are mixed.   A study published by the American Psychological Association in 2016 stated "Little empirical data exists to support the conclusion that [emotional support animals] are effective in mitigating psychological disorders and related problems, and empirical research that does exist is inconsistent, sparse, and emerging." (Professional Psychology: Research and Practice 2017, Vol. 48, No. 3, 216-223, "The Certification of Emotional Support Animals: Differences Between Clinical and Forensic Mental Health Practitioners").   A recent issue of Good Practice, a magazine published by the American Psychological Association contains an article written by Connie Galietti, Director of Legal & Professional Affairs for the group. In the article, Ms. Galietti urged psychologists to think of the ethical and practical matters that may result from writing ESA diagnosis letters. The article states "Remember, your letter is stating that the patient s diagnosis substantially impacts a life activity. Can you honestly and objectively make that determination? Does an [emotional support animal] truly minimize the impact of the patient s problem, or is this just a way of allowing a beloved pet to be able to live with your patient, or allow the patient to avoid airline pet transport fees? If you have reservations about any of these issues, you probably shouldn t write the letter." This advice is as applicable in the housing context as it is in the airline context.   To ethically prescribe an ESA, a psychologist has to be reasonably certain that the animal is necessary, evaluate the patient with the animal, and be familiar with the animal s behavior and training. The lack of clarity in the law places mental health professionals in an ethical bind: do they write a letter that lets their patient have the animal even without diagnosis guidelines or do they deny the letter and create conflict with a patient that they must continue treating? As noted in the Galietti article, therapists should give great consideration to all the related issues before writing such a letter.   Since more psychologists are not willing to "prescribe" emotional support animals, many residents are now obtaining certifications through an online cottage industry that has sprung up due to the popularity of ESAs. These ESA mills are now churning out emotional support animal "certifications" in record numbers.   The ESA Certification Industry   There is a growing chorus of criticism in the multi-family industry relating to the growth of new websites that sell inexpensive documentation that falsely identify pets as service dogs or ESAs - and this criticism is warranted.   Residents of apartment communities are willing to pay the fees for these "certifications" because having such a designation eliminates pet fees and requires the acceptance of animals at "no-pet" properties.   The National Service Animal Registry, a commercial business that sells certificates, vests, and badges for assistance animals, signed up 11,000 ESAs in 2013 - up from 2,400 in 2011.   The National Apartment Association (NAA) has stated that there are more than 20 websites for online providers that offer documentation for a fee. Agencies responsible for fair housing enforcement at the federal, state, and local level are all trying to deal with how best to respond to these online medical verifications.   Many of these sites will provide a written diagnosis within 24 hours, via email, after only a five to ten-minute phone conversation with a "mental health professional" plus a fee of as little as $80. Five to ten minutes - seriously? I talk to a lot of clients on the phone and it takes me longer than that just to begin to understand what their problem may be - much less begin to develop solutions. And I know the issues of tenant income eligibility are a lot less complex than a person s mental stability and well-being. Some sites also sell dog collars and leashes with the words "support dog" for $15 to $22 each. Nothing like the good old "up sell." A lot of these sites have been created due to the growing reluctance of professional therapists to provide verifying letters.   These ESA mills are a rip-off on two levels: First, the certifications are often bogus, with no real knowledge by the company providing the certification relative to the person s disability, and second, ESAs don t need a certification. Tenants just need a professional third party to verify that they have a disability and the disability could be ameliorated by living with the animal.   One site called United Support Animals states: "Fly with your pet in the cabin of an airplane at no cost. Keep your pet in any housing even if there is a no pet policy. Say goodbye to pet security deposits forever." This company does not even try to hide the fact that they are just assisting individuals in getting around pet restrictions and deposits.   HUD has historically been lax in terms of who can verify the need for ESAs - even going so far as to require acceptance of verification from social workers - many of whom have no clinical training. But, this may be changing. HUD s Possible New Direction   HUD is now making it a priority to crack down on bogus assistance animals. This effort is being led by the HUD Assistant Secretary for Fair Housing & Equal Opportunity, Anna Maria Farias. While I disagree with many of the current HUD efforts to diminish the nation s fair housing laws, this is one effort that should be applauded. There are indications that new guidance from HUD regarding ESAs may be issued soon.   HUD representatives have been meeting with housing industry representatives, including the NAA, but have not yet met with any fair housing and disability rights groups on the issue of assistance animals. This indicates that HUD is predisposed to make it more difficult for a person to obtain the documentation necessary to require a landlord to accept an ESA. The upcoming guidance may place limits on acceptable breeds of ESAs (barring pit bulls for example), create new verification requirements, and prohibit certain exotic or non-traditional animals (such as snakes).   State Activity is Increasing   21 States have moved to criminalize the misrepresentation of ESAs and 13 others are drafting such legislation.   Recent legislation was signed in South Dakota requiring that tenants seeking an ESA obtain verification from a "licensed health care provider." HUD has actually permitted such a policy for a number of years.   Florida passed a law in 2015 that makes it a crime for people to falsely claim that they need service dogs, but the law does not currently apply to ESAs in housing.   The Virginia Real Estate Commission and Fair Housing Board have issued a Guidance Document evaluating reasonable accommodation requests for assistance animals. The guidance provides that professional apartment management "should not be daunted by the prospect of potential litigation in accepting dubious verifications limited to vague statements on how an assistance animal would benefit the requester, but rather should insist on supplemental credible confirmation of an underlying disability. As with any other reasonable accommodation request, housing providers are absolutely within their rights to focus first on establishing the legitimacy of the requesting party s disability status as defined by fair housing law." The guidance further confirms that housing providers "may request that verifiers authenticate all or some of the following information to help evaluate their reliability and knowledge of the requester s disability." Information that housing providers should request includes: The general location of where the care was provided as well as the duration of the care (such as the number of in-person sessions within the preceding year); Whether the verifier is accountable to or subject to any regulatory body or professional entity for acts of misconduct; Whether the verifier is trained in any field or specialty related to persons with disabilities or the particular impairment cited; and/or Whether the verifier is recognized by consumers, peers, or the public as a credible provider of therapeutic care.   In summary, as an industry, we must recognize that the ability to have assistance animals in a communal environment is often necessary to enable to disabled person to engage in major life activities. In such cases, housing operators are generally going to have to permit such animals. However, we must also recognize that some people are abusing the law in a way that circumvents legitimate owner pet policies and charges. Current trends indicate that enforcement agencies are beginning to recognize this reality and a more reasonable approach to the approval of assistance animals in housing may be around the corner.    

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