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A Refresher on Low-Income Housing Tax Credit Multiple Building Projects and the Decision Regarding Deferral of Credits

Multiple Building Projects By now, virtually all tax-credit professionals know that a "project" has a different meaning for purposes of Section 42 of the Internal Revenue Code than it does for other operators of multifamily housing. Generally, a project consists of all the buildings that comprise a multifamily development with common ownership and financing. However, when it comes to Low-Income Housing Tax Credit Projects (LIHTC), the definition of a project depends on certain elections made by an owner in the first year of the credit period. Such elections are made on IRS Form 8609. On the Form 8609, Line 8b is used to designate which buildings are included in a multi-building project. By default, each building is a separate project, but buildings may be combined into a single project, or, a taxpayer may designate only some buildings as a project. Buildings included together in a project must meet specific criteria regarding proximity, ownership, financing, and comparability. The election to create a multi-building project is made by checking "yes" on Line 8b on all the 8609s for the buildings that will be included in the project. In addition, a statement must be attached to each of the 8609s with information about each building that will be included in the project. At a minimum, the election will impact how the property is operated in at least four ways: Computation of the minimum set-aside; Ability to transfer tenants between buildings; Application of the Vacant Unit Rule; and The sampling used by the State HFA when conducting tenant file reviews and physical inspections. Generally, it is recommended that buildings be grouped into a single project, but there may be reasons for creating separate projects - or even making each building a separate project. Owners should seek professional guidance when making the Line 8b elections, and managers are cautioned against advising owners on how the election should be made.   The Decision to Take Credits During the Placed in Service Year or Defer to the Following Year I review a lot of completed 8609s for clients, and many of them are for acquisition/rehab projects. The question often arises that if the acquisition placed-in-service date is in the year before the year the rehabilitation is completed, how should Line 10a on the 8609 be answered. This is the line that asks whether the taxpayer is electing to begin the credit period the first year after the building is placed in service. Under IRC 42(f)(5), the credit period for the acquisition credit cannot begin before the first year of the credit period for the rehabilitation credit, so the idea is to match up the credit periods. For example, an owner placed an acquired building in service on July 15, 2016 (the acquisition date) and completes the rehab on June 9, 2017. On the Form 8609 for the acquisition credit, the State Agency reports on Line 5 that the placed in service date is July 15, 2016, and the owner checks the Line 10a box "yes" to elect to begin the acquisition credit period in the first year after the building is placed in service - i.e., 2017. On the 8609 for the rehab credit, the Agency reports on line 5 that the placed in service date is June 9, 2017, and the owner checks the Line 10a box "no" to document that the owner is not electing to begin the rehabilitation credit period in the first year after the building is placed in service. As a result, the credit period for both the acquisition and rehabilitation credit will begin at the same time - i.e., on the first day of the 2017 tax year. If the owner is a calendar year taxpayer, both credit periods will start on January 1, 2017. This scenario was outlined in an IRS Newsletter published in February 2008 (I have changed the dates), and indicates that the IRS position is that the acquisition credit should be shown on Line 10a as being deferred. I see a lot of 8609s on which in the scenario presented above, the owners check "no" for both acquisition and rehab. Since the acquisition and rehab credits must be taken on the same schedule, checking "no" on the acquisition 8609 does not in any way risk the ability of the owner to begin the credit period in 2017. However, since the acquisition credits are actually being deferred until the year after the acquisition placed in service date, electing "no" is this case is technically incorrect, and I recommend making the more accurate election as described in this example.    

Recent HUD Appropriations Bill Changes Procedures for Failed REAC Inspections

In early May, 2017, the President signed a new HUD appropriations bill providing funding for HUD programs. While appropriation bills normally relate only to funding and do not change program regulations, Section 223 of the Bill outlined some programmatic changes relating to REAC inspections. The most significant change has to do with when HUD action will occur following a failed inspection. Under prior law, HUD enforcement action did not commence until after failure of two consecutive inspections. Now, when a property receives a REAC score under 60, HUD will notify the owner/agent (O/A) within 15-days that they are in default of the regulatory agreement (the prior requirement was a notice within 30-days). Under the new regulation, when HUD notifies the owner of default, the owner must be provided with a timeframe during which a 100% of the units must be inspected and all repairs made. This has typically been a 60-day period but HUD now is permitted to require a specific timetable, making it possible to impose both shorter and longer correction periods. Prior regulations also provided for options for enforcement on failed REAC inspections: (1)Require immediate replacement of the management agent; (2) imposition of civil monetary penalties; and (3) Seek judicial appointment of a receiver of the property who would both manage the property and correct non-compliance. The new regulation provides additional alternatives: (1) Abatement of the Section 8 contract; (2) transfer of the project to a new owner; (3) transfer of the Section 8 contract to another project; (4) pursuit of exclusionary sanctions, including suspension and debarment from federal programs; (5) create a work-out plan with the current owner (or other party) to stabilize the property; or (6) take any other action that is deemed necessary and appropriate. These changes in the law are indicative of the importance that Congress places on the REAC inspection process and emphasizes the importance that owners should place on this process.

Effect of White House Budget on HUD Programs

On May 23, 2017, the President released its 2018 Budget Proposal, which includes a 13% ($6.2 billion) cut in HUD funding. HUD's largest single expense item, the Housing Choice Voucher, is maintained at its current level, but only be increasing expenses for tenants and placing a freeze on rent adjustment increases for Project Based Rental Assistance (PBRA), Section 202, and Section 811. The proposal eliminates funding for major community development programs, including the Community Development Block Grant (CDBG) Program, HOME and the Choice Neighborhoods Initiative. Huge cuts are also proposed for project-based and Tenant-Based Rental Assistance, Section 811, Homeless Assistance Grants, and Public Housing Capital and Operating Funds. There is a small increase in funding proposed for the Section 202 Program. The only bright spot in the proposed budget is changes to the RAD program, including: *Elimination of the 225,000 unit cap; *Elimination of the September 30, 2020 deadline for first component applications; *Expanded authority to include conversion of Section 202 PRAC projects; and *Non-profit ownership at conversion may also now include situations where LIHTCs are used or where foreclosure, bankruptcy, or default occurs. Changes to rental assistance programs include: *A one-year freeze would be placed on rent adjustment increases for PBRA, Section 202, and Section 811; *Decreased voucher funding - while the same number of vouchers would be available, cost savings will come from requiring residents to contribute 35% of gross income in monthly rent as opposed to 30% of adjusted income; *Establishes a minimum rental payment of $50 per month for tenants; and *Eliminates utility reimbursements (tenants would now be required to pay for utility costs in excess of rents limits). HUD would have authority to define hardship exemptions for items like the increase in tenant rent contribution and the $50 minimum rent payment. As with most Presidential budgets, this is a starting point for discussion and will meet with a good deal of Congressional resistance. Hopefully, many of the most draconian cuts will be eliminated when a final budget is approved.

Information Contained on Legitimate Pay Stubs

We are now working in an environment where just about anything can be obtained or created online, including fake pay stubs. We all recognize that pay stubs are the primary form of verification for employment income. However, I ve been noticing a growing profusion of online services that are selling fake pay stubs to people. This makes careful examination of the stubs critical in determining whether to conduct more due diligence as part of the income review process. Here are some suggestions to keep in mind when looking at pay stubs: Don t miss the details, such as verifying that the name, address, and social security number on the stub matches the information provided on the application. Verify that the employer information matches what is on the stub. Online printers that make fake pay stubs typically fill in the blanks with generic information, and the applicant may have forgotten to replace the data or made a mistake when adding that information. If the stub is highly detailed, verify that the marital status and number of dependents also match the application. Look at the quality of the stub. The quality of a fake pay stub is only as good as the equipment on which it is printed. While we are not seeing the originals, you should be able to tell if the paper is faded, which may indicate that it was printed on a low-quality printer. Watch for lines or fonts that don t match up properly. This could indicate that the person typed the information on a separate piece of paper and then taped it to the real stub. Look at the check numbers of the stubs. If the paycheck was issued by a small business with few employees, the sequence of numbers should not increase by hundreds of numbers every two weeks. Determine whether the payment was made via direct deposit. If so, recommend that management obtain verification of the bank account to which the deposits are made to make sure the deposits match what is shown on the stub. Compare earnings - most stubs show both current and year-to-date earnings. You guys already do a good job at looking at this information, but fake stubs often show conflicting information. If there is a significant disconnect between periodic pay and YTD, it could indicate a fake stub. Each pay stub must contain certain information, including hours worked, money earned, wages paid, deductions, pay rate, gross wages, and start and end dates for the pay period. The following information will also almost always be included: Name and address of the employer; and Last four digits of the employee s social security number or an employee ID number. Now that pay stubs are the primary method for verifying employment income, it is important that managers be proficient in recognizing the legitimacy of payroll documents.  

Status of Tax Reform - April 2017

For those of us who are heavily involved in the Low-Income Housing Tax Credit (LIHTC) Program, the future of tax reform is not just a casual interest. The survival of the Section 42 Program is by no means assured in this era of federal reallocation of resources. Even if the LIHTC program survives (which I believe is more likely than not), there will be changes. So, in addition to constantly educating our Congressmen and Senators about the value of the program, it is also important that we pay attention to the status of the D.C. tax reform efforts. Early this year, some members of Congress were predicting rapid progress on tax reform with passage by early summer (of course they also predicted rapid repeal of the Affordable Care Act). However, with each week, the estimates of when passage may occur keep getting later and later. Estimates moved from early to mid-summer, then late summer, and now - the end of the year is being discussed as a more realistic timeframe. Tax reform is clearly facing headwinds, and there are a number of reasons why rapid action should not be expected. The President and Congress are not on the same page when it comes to goals. The Trump plan (as proposed on April 26) increases the deficit and wants to use tax reform to fund a massive infrastructure program. The House blueprint is revenue neutral. Lobbyists have an inordinate amount of power in the Beltway and they will marshal all their resources to protect their interests. The House plan reduces tax benefits for charitable donations - this will raise the ire of religious groups. Possible reductions in the mortgage interest deduction for homeownership will be strongly opposed by the powerful real estate lobby. The Trump plan leaves in the deductions for mortgage interest and charitable contributions. There are also proposals to eliminate deductions for state and local taxes, and lawmakers from high tax states, such as California, New Jersey, and New York, will oppose this. Part of the House plan is called the "Border Adjustment Tax." This provision would tax imported goods at a higher rate than domestically manufactured products and is intended to raise $1 trillion to offset cuts to corporate tax rates. Such a provision will be strongly opposed by retailers and conservative advocacy groups, and is not supported by the Trump proposal. Any import tax will be passed onto consumers in the form of higher prices, but without this type of tax, cutting corporate tax rates by any significant amount will be more difficult. The Senate is also a problem. Less conservative than the House, many provisions desired by the House may not be acceptable to the Senate. Also, memories of the health care debacle are fresh in the mind of the House and they do not want to send a dead-on-arrival bill to the Senate. Finally, there will almost certainly be strong opposition from democrats. In addition to basic philosophical differences, the Dems are going to push for Trump to release his tax returns before agreeing to any reform. They will want to ensure that the reforms are not designed to enrich the President and his family. If the first four of these obstacles can be overcome, this last one may not be as important since the Senate may be able to pass tax reform through reconciliation, which will enable the Senate to pass legislation by a simple majority vote rather than requiring a filibuster proof 60 votes. However, use of reconciliation to pass tax-reform is a risky proposition because it would produce extreme and unstable tax policy. It also prevents tax legislation from being permanent if the tax reform increases deficits for more than ten years, which could result in having to revisit major tax code revisions in less than ten years. With all that is going against it, the idea that rapid tax reform is in the cards is losing favor, and we well could be looking at 2018 before we see any meaningful movement toward reform. In the meantime, all in our industry need to be alert to challenges to the LIHTC program and work hard to ensure that the successes and value of the program is shared with elected officials.

Executive Order May be a Threat to the Rural Development Service

On March 13, 2017, the President signed Executive Order 13781. This order instructs the Director of the Office of Management and Budget (OMB) to propose a plan to reorganize government functions and eliminate unnecessary agencies, components of agencies, and agency programs.   No later than September 9, 2017, the head of each federal agency must submit to the OMB director a proposed reorganization plan, if appropriate, in order to improve the efficiency, effectiveness, and accountability of that agency. The public will also be invited to make recommendations for federal government improvements.   By March 8, 2018, the OMB director will submit to the President a proposed plan of reorganization for the executive branch. The proposed plan will include: Recommendations to eliminate unnecessary agencies, components of agencies, and agency programs; and Recommendations on merging programs.   Among the factors to be considered in recommending actions will be:   Whether some or all the functions of an agency or program can be better administered by state or local governments or the private sector; Whether certain agency functions are redundant and duplicate those of another agency; Whether the cost of continuing to operate an agency are justified by the public benefit provided; and The cost of shutting down or merging agencies.   There has been discussion for at least the last 20-years regarding the possibility of merging the housing functions of the Rural Development Service (which administers the Section 515 multifamily housing program, as well as other housing related programs) into the Department of Housing & Urban Development. This Executive Order to a certain extent "formalizes" that effort and increases the possibility that at some point in the future, the housing programs of the Department of Agriculture will be placed under HUD purview.   We should get our first indication of the likelihood of such a move by this fall, and if it does become a recommended course of action, we will examine potential impact on owners and operators of RD housing.

Liability Under the Fair Housing Act

In many of my fair housing classes, the question often arises as to who is liable for a violation of fair housing law. The question is asked both my managers (who wonder if they can be held personally liable) and by owners and management company supervisors (who wonder if they can be held liable for the actions of site staff that supervisors were unaware of. The short answer is that anyone can be held liable for a fair housing violation, and in some cases knowledge of the violation is not a defense.   Generally, apartment communities are operated by management firms. In many cases, these firms act as agents of the owner. There may also be lawyers, banks, investors, and others involved in housing project operations. Each of these may have their own employees who act on behalf of their firm.   The presence of all these potential players means that the "law of agency" plays an important role in determining who may be liable for a fair housing violation.   The general rule when determining liability is that a principal is legally responsible for the acts, conduct, and statements of its agents or employees if those acts are done within the scope of the agent/employee apparent authority. One of the primary court cases in this area of law, Meyer v. Holley (2003), resulted in the court stating that while the Fair Housing Act "says nothing about vicarious liability," Congress is presumed to have intended that the statute incorporate "ordinary tort-related vicarious liability rules." These rules "ordinarily make principals or employers liable for the acts of their agents or employees in the scope of their authority or employment."   It is established law that an employer is liable for the unlawful discrimination of its employees under the doctrine of "respondeat superior." This Latin phrase, meaning "let the master answer," is a common law doctrine that makes an employer liable for the actions on an employee when the actions take place within the scope of employment. While an employee s discrimination will bind the company, supervisor personnel up the chain of command will not generally be held liable. This assumes that such personnel were unaware of the discriminatory behavior. For example, if a property manager violates the Fair Housing Act, the company he or she works for will also be liable, but the direct supervisor of the manager may not be. Courts have made clear that a company is responsible for the actions of its employees so long as the company has the power to control those actions and the employees are acting on behalf of the company.   The rule holding a principal liable for its agent s discrimination applies to all agency relationships - not just employer-employee relationships. As an example, if a real estate agent illegally discriminates against a minority home seeker, the owner that the agent represents may be held liable, along with the Agent.   Vicarious liability can result either from an "actual" agency relationship or from an "apparent" agency. "Actual" agency exists when the agent and the principal agree to have the agent act on the principal s behalf, and be subject to the control of the principal. HUD s fair housing regulations state that an agent "includes any person authorized to perform an action on behalf of another person regarding any matter related to the sale or rental of dwellings." This liability occurs even if it is reasonable for a third party to believe that the agent is acting on behalf of the principal.   A principal cannot automatically escape vicarious liability for an agent or employee s discrimination by showing that it did not explicitly authorize or approve such discrimination.   The key issue in most fair housing cases concerning whether a company or a property owner should be held vicariously liable for another person s discrimination has been whether the alleged principal actually had the authority to direct and control the agent s work. If this element of control is absent or weak, some courts have refused to attribute an agent s discrimination to other defendants. Some decisions have excused absentee property owners for the discriminatory conduct of others on the property.   The principal of vicarious liability flows "upward," not "downward." So, an employee is not generally liable for a fair housing violation of by their employer. Clearly, if an employer orders an employee to discriminate, the employer is liable. Also, if an agent (or employee) violates the Fair Housing Act on orders from the principal, the employee or agent also is liable. "Following orders" is not a defense to a housing discrimination complaint. If an employee/agent refuses to follow a discriminatory order and is fired or otherwise disciplined, he or she has a cause of action under 3617 of the Fair Housing Act against the employer.   If a principal has not directed or endorsed its agent/employee discrimination, liability of the principal does not extend to punitive damages or other relief that is ordered against intentional violators. However, punitive damages may be imposed in cases where the principal authorized or ignored the discrimination. In Davis v. Mansards, a 1984 Indiana case, the court held an apartment management company liable along with its employees for all punitive damage awards, because the company "knew or ratified discriminatory acts of their employees or agents."   A principal who is found liable solely because of its agent s discrimination may be entitled to assert a claim against the agent for actual damages and other liability the principal suffers as a result of the agent s discrimination.   This concept of "vicarious liability" makes clear the importance of regular training and supervision of agents and employees. Owners of property and of management companies cannot escape liability for discrimination based on claims of ignorance.

Problem with the 2017 MTSP Income Limits

On April 14, 2017, HUD published the 2017 income limits for HUD programs as well as for the Low-Income Housing Tax Credit and Tax-Exempt Bond programs. The limits for the LIHTC and Bond projects are published separately from the limits for HUD programs. Now that we have had a chance to review the new limits, a significant error has been discovered in the "Determination of Maximum Income Limits" section of the MTSP limits for the " on or before 12/31/08" tab.   The referenced section is showing FY 2017 as the income limit to use even if 2017 is lower than earlier years. There are also errors regarding which HERA Special Income Limit to use.   HERA 2008, Title I, Part III, 3009(a)(E)(i) states that any determination of Area Median Gross Income for any project after 2008 will not be less than the AMGI used for the project in the prior year. In other words, LIHTC projects never have to reduce income limits below the highest limit in use since the project began operating.   HUD is aware of the problem and will hopefully correct the problem shortly.