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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.

Congressional Spending Bill Keeps Funding for Many Housing Programs

Congress has approved a $1.3 trillion spending bill designed to provide funding for the federal government for the rest of the fiscal year, which ends September 30. The bill has been sent to the President s desk for signature (although he is threatening to veto the bill because it does not provide enough funding for the "wall"). Assuming the bill is actually signed into law, it does spare a number of housing programs that the President wanted to severely cut or eliminate.   In the bill, HUD receives a $4.7 billion overall funding boost, instead of the $6 billion reduction the president sought.   The bill includes significant increases to programs the President had proposed cutting or killing, including the Community Development Block Grant (CDBG) program, the HOME program and a 42% increase in funding for the RAD program, which the President planned to eliminate completely.   The most important addition is an increase of $1.25 billion for HUD s core rental assistance programs, including Section 8.   Thankfully, Congress has shown that it is not on board with the President s desire to gut the nations affordable housing programs.

HOME Funds and Affirmative Fair Housing Marketing Plans

In February 2018, the HUD Office of Community Planning and Development issued guidance relating to the requirement that projects funded with HOME funds have an Affirmative Fair Housing and Marketing Plan. This requirement is contained in the HOME final rule (24 CFR 92.351(a)), and requires that Participating Jurisdictions (PJs) and state recipients develop, adopt, and follow written affirmative marketing procedures and requirements for rental and homebuyer projects containing five or more HOME-assisted housing units, regardless of the specific activity the HOME funds finance (e.g., acquisition, rehabilitation, and/or new construction). The PJ, its subrecipients, and project owners it funds must implement the written affirmative marketing procedures for the program or project.   The objective of affirmative marketing is to ensure that PJs, subrecipients, and project owners design and employ marketing plans that promote fair housing by ensuring outreach to all potentially eligible households, especially those least likely to apply for assistance. Affirmative marketing consists of actions to provide information and otherwise attract eligible persons to available housing without regard to race, color, national origin, sex, religion, familial status, or disability. The affirmative marketing requirements also apply to projects targeted to persons with special needs. If a PJ s written agreement with a project owner permits a rental housing project to limit tenant eligibility or to have a tenant preference in accordance with 92.253(d)(3), the PJ must have affirmative marketing procedures and requirements that apply in the context of the limited/preferred tenant eligibility for the project.   The affirmative marketing procedures must describe specific steps that must be taken to ensure that applicants who are unlikely to apply for housing without special outreach have equal access to housing opportunities generated by the use of HOME Program funds. There are five elements that each PJ or state recipient s marketing procedures must include:   A description of how the PJ plans to inform the public, subrecipients, owners, and potential tenants about Federal fair housing laws and the PJ s affirmative marketing policy; The requirements and practices that each subrecipient and owner of HOME-funded housing must adhere to in order to carry out the PJ s affirmative marketing procedures and requirements; A statement of procedures to be used by subrecipients an owners to inform and solicit applications from persons in the housing market who are least likely to apply for the housing without special outreach; A list of what records the PJ will keep, and what records the PJ will require the subrecipients and owners to keep, regarding efforts made to affirmatively market HOME-assisted units, and to assess the results of these actions; and A description of how the PJ will annually assess the success of the affirmative marketing action(s) and what corrective actions will be taken where affirmative marketing requirements are not met.   PJs must implement their affirmative marketing procedures in projects or programs that they administer directly. PJs must also provide their affirmative marketing procedures to subrecipients that administer all or a portion of the PJ s HOME program and to owners/developer of HOME projects with five or more HOME-assisted units. The requirement to affirmatively market must be included in the written agreement between the PJ and the subrecipient or owner. The PJ must ensure that subrecipients and owners have an understanding of the fair housing practices for advertising and soliciting applications (targeted populations should include those least likely to apply), know what records they must keep to document compliance, and how the PJ will assess the owner s marketing procedures and their success.   The HUD field office may request that a PJ provide the marketing procedures during monitoring and may evaluate whether the PJ is ensuring that subrecipients and owners comply with its procedures. Consequently, PJs must evaluate subrecipients and project owners records during on-site monitoring to ensure that compliance is taking place and being adequately documented.   There is no submission requirement for affirmative marketing procedures in the HOME regulations. However, as a best practice, HUD recommends that affirmative marketing procedures be included in the Consolidated Plan, so that the procedures are subject to public review and comment, PJs should review their affirmative marketing procedures at least every five years to determine if they are still appropriate to the market, or more frequently if the demographics and market conditions of the jurisdiction have changed significantly.   With changing demographics in the United States, there are challenges when marketing to an eligible population that is limited in English proficiency (LEP). If there is a LEP population, HUD encourages the PJ to:   Translate its marketing materials to serve this population; Work with the language minority-owned print media, radio and television stations; Place marketing material at movie theaters that provide free public service announcements; Partner with faith-based and community organizations that serve newly arrived immigrants; and Conduct marketing activities at adult-education training centers or during "English as a Second Language" classes.   Based on this guidance, owners of HOME funded projects are not responsible for creating affirmative marketing plans, but are required to implement the plans created by the PJ.

FAST Act Interim Final Rule Effective March 12, 2018

On December 12, 2017, HUD published an interim final rule in the Federal Register that amends the regulatory language for Public & Indian Housing PIH) and Multifamily Housing rental assistance programs. This interim rule went into effect on March 12, 2018. The rule aligns the current regulatory flexibilities with those provided in the Fixing America's Surface Transportation (FAST) Act. In addition, it extends two of the administrative streamlining changes that were adopted in 2016 for the Housing Choice Voucher (HCV) and Public Housing (PH) programs to Multifamily programs (e.g., project-based Section 8). The interim final rule implements FAST Act provisions that allow Public Housing Agencies (PHAs) and multifamily housing owners to conduct full income recertification for families with 90 percent or more of their income from fixed-income sources every three years instead of annually. The rule also aligns the current regulatory flexibilities with those provided in the FAST Act by modifying the earlier streamlining regulations. This makes the procedures for families meeting the fixed income threshold as similar as possible to families who do not have 90 percent or more of their income from fixed sources, but still have some fixed income. In addition to streamlining fixed income stipulations, the interim final rule also indicates that an owner may: >Make utility reimbursements of $45 or less per quarter ($15 a month) on a quarterly basis; and >Accept family declaration of assets of $5,000 or less (similar to the LIHTC program). Third party verification of all family assets is required at move-in and every three years thereafter. Use of streamlined procedures authorized by this rule is all at the option of the owner and are not required.

The Importance of Internal Controls

All executives are taught the importance of "internal controls." Unfortunately, many executives don t fully understand what is meant by the term "internal controls." A recent HUD audit of a Section 8 project in Port Arthur, TX serves as a reminder of the importance of both understand what is meant by the term internal controls, and the importance of having such systems in place.   What are Internal Controls   Internal controls are methods put in place by a company to ensure the integrity of financial and accounting information, meet operational and profitability targets, and transmit management policies throughout the organization. Internal controls work best when they are applied to multiple divisions and deal with the interactions between the various business departments. No two systems of internal controls are identical, but many core philosophies regarding financial integrity and accounting practices have become standard management practices.   The importance of understanding these principles were made evident by the findings of the HUD investigation.   Details of the Audit   The HUD Office of Inspector General (OIG) audited the multifamily Section 8 project in Port Arthur (Villa Main Apartments) to determine whether the project owner was administering the Section 8 program in accordance with HUD regulations and guidance.   HUD found that the owner did not administer the Section 8 program at Villa Main in accordance with HUD regulations and guidance. It assisted at least 82 tenants who were either ineligible for assistance because they did not exist or the tenant eligibility and the unit physical condition standards could not be supported. These conditions occurred because the owner and the former management agent lacked oversight of the staff. They also failed to establish effective control systems, which allowed the onsite employees to commit fraud. The employees falsified tenant eligibility, did not properly verify tenant income, and did not inspect the units are required by HUD. As a result, HUD paid the owner $534,741 in subsidies for ineligible "ghost" tenants and incurred more than $1 million in subsidies for which the owner could not support the tenants subsidy amounts or that the units were in decent, safe, and sanitary condition.   The Result   As a result of the findings, the OIG recommended in January 2018, that the project owner be required to (1) repay HUD $534,741 for housing subsidies received for ineligible nonexistent "ghost" tenants, and (2) support or repay HUD more than $1 million for tenants whose eligibility the owner could not support. In addition, HUD should require the Contract Administrator to ensure that the owner s recently implemented quality control program is working as designed and in accordance with HUD regulations. OIG also recommended that appropriate administrative actions be taken against the owner.   The results of this audit reinforce the importance of good internal controls, and the critical importance of redundant systems and strong oversight. Every owner and management company should have a system in place that includes internal audits, capital control, quality control, administrative accounting, and third party reviews. Failure to have such systems in place can result in situations similar to the one I ve outlined here. Take the time to examine your current systems, identify weaknesses, and implement improvements.

Possible Work Requirements and Rent Changes for Affordable Housing

I have recently reviewed a draft, unpublished document dated January 17, 2018, from HUD that introduces minimum work requirements for some residents of assisted housing and raises rent for others.   This seems to continue the pattern of requiring work in return for some forms of welfare assistance. In January, the Administration said that it would permit states to impose work requirements for Medicaid and the Department of Agriculture announced in December that it will permit states to set work requirements for people who use the SNAP (food stamp) program.   While requiring work in return for aid seems reasonable, a review of the specific proposals raises questions about the impact on the most at risk families.   The proposed changes would allow public housing agencies (PHAs) to introduce minimum employment requirements for families in order to be eligible for housing assistance. Without proof of employment, housing assistance could be denied. This is only a draft (discussion) document, but it has a lot of weaknesses relative to the broad swath of families that would be impacted. For example, the draft does not provide exceptions for persons who need to care for children or disabled relatives. Nor, does it address the circumstances when a person just cannot find a job. It also does not deal with the issues of seasonal or cyclical employment.   While requiring able-bodied adults to work, train, or volunteer - at least on a part-time basis - in return for taxpayer assistance is reasonable, this draft document does not recognize volunteer work toward the minimum work requirements, nor does it count part-time work. This is a major weakness, since obtaining part-time work may be very possible, but full time employment opportunities are much more limited.   Incredibly, the language in the document includes no exemption for parents who care for children, essentially giving PHAs discretion as to whether single mothers could qualify for the housing. If such loss of housing were to occur due to a lack of employment, the risk to families would increase significantly. Without adequate housing, children may very well be placed in foster care.   The draft language caps the work requirement at 32 hours per week on average per adult, excluding elderly or disabled families. Both active employment and vocational training would qualify.   In addition to the work requirement, the proposal would raise the rent-burden on low-income families from 30% of adjusted income to 35% of gross income. Under this proposal, there would be no more deductions for expenses such as medical, dependent, childcare, disability, etc. Under the draft guidelines, each household would be required to pay a minimum rent of $50 - including elderly and disabled - regardless of income.   This draft document may explain why there has not yet been a regulatory implementation of the 2016 Housing Opportunity Through Modernization Act (HOTMA). It appears that the current administration may want to go in a completely different direction. Since HOTMA is statutory, HUD cannot just ignore its requirements. However, regulatory agencies have great discretion in how they interpret laws and HUD appears to be looking for ways around some of the HOTMA requirements.   If I receive any more information about informal HUD efforts in these areas I will let you know, but at this point, I would not count on any short-term regulations from HUD implementing the changes outlined in the 2016 legislation.  

Rental Assistance - Is It Income or Not?

After more than 40 years in the affordable housing business, I still occasionally get the question as to why federal rental assistance - such as Section 8 - is not counted as income. After all, it is a regular, recurring payment made on behalf of a household, and it does not appear to be excluded income under HUD regulation. I advise my students and clients on a regular basis that unless income is specifically excluded by HUD regulation (as outlined in Exhibit 5-1 of HUD Handbook 4350.3), it should be counted as income for purposes of all federally assisted housing programs (and most state and local affordable housing programs as well).   It is true that rental assistance is not shown as a specific excluded income in HUD regulations. This is because the language in the Included Income section of Exhibit 5-1 and in the underlying statute (The Housing Act of 1937) eliminates the need to specifically exclude rental assistance.   The Housing Act of 1937 requires that persons renting housing in programs covered by the Act pay the greater of 30% of adjusted income or 10% of gross income in rent. Based on this requirement, federal rental assistance cannot be counted as income because if it was counted as income, the result would be a circular calculation and neither the income nor the rent could be determined. A quick example illustrates the problem.   Assume a household with gross income of $20,000 and adjusted income of $19,040. Ten percent of gross income on a monthly basis is $167 and 30% of adjusted income on a monthly basis is $476, so the household s monthly rent will be $476. On an annual basis, this is $5,712. If added to the gross income, the gross income would be 25,712 and the adjusted income would be $24,752 - the required rent would be $619. Of course, this would have to be added to income, making the new income $32,178, the new adjusted income $31,218 and so on - ad infinitum.   In short, if rental assistance, that is adjusted based on income, is counted as income, neither the rent nor the income could ever be determined. While hard to discern, this is actually addressed in the Included Income Section of HUD Handbook 4350.3, Exhibit 5-1. Number 7 of the Included Income section states that "Periodic and determinable allowances" should be counted as income. As shown above, if counted as income, the amount of rental assistance is not "determinable," and therefore is not considered income.   This same requirement should be applied to state or local rental assistance that is paid (and adjusted) based on the income of the family receiving assistance. However, if any rental assistance is determinable (i.e., does not change regardless of the income of the household), it should be considered income and added to the gross income of the household.