News

HUD Publishes 2017 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. HUD has indicated that the U.S. median income limit is higher this year than it was in 2016. The median has increased by 3.5% and is now $68,000.   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 3.56% from 2016 to 2017.   Owners of LIHTC projects may rely on the 2016 income limits for all purposes for 45 days after the effective date of the newly issued limits. This 45-day period ends on May 29, 2017.   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

Proposed Changes to LIHTC Program

On July 14, 2016, the "Affordable Housing Credit Improvement Act of 2016" was introduced in the Senate by Senators Cantwell, Hatch, and Wyden. It would make a number of changes to the Low-Income Housing Tax Credit (LIHTC) program, including (1) increases in the amount of available credit, (2) reforms relating to tenant eligibility, (3) locking in of the 4% rate, (4) permitting relocation costs to be included in eligible basis, (5) reforms relating to Native American Assistance, and (6) changing the name of the program to the "Affordable Housing Tax Credit."   Amendments to this bill have been offered to the 115th Congress, as follows:   New provision addressing planned foreclosures: current law permits an extended use agreement for a LIHTC property to be terminated if the property is foreclosed on. A loophole in the law has allowed owners to get out of the long-term use commitments by devising an arrangement where a related party holds a note on the property, and then takes the property through foreclosure in connection with the note. The related party then converts the property to market rate, raising rents and reducing affordability. While such an action is prohibited if it is part of an arrangement to terminate the extended use agreement, since the IRS is no longer involved with the property after year-15, there is concern that enforcement in this area is lacking. >Proposed Change: 42(h)(6) would be amended to give authority to state housing finance agencies (HFAs) to make the determination that the foreclosure was an "arrangement" to terminate extended use. HFAs would have 60-days to review these transactions. New Provision Raising the Cap on Difficult to Develop Areas (DDAs): the bill introduced in July 2016 would repeal the 20 percent cap on qualified census tracts (QCTs), allowing all census tracts that meet the HUD guidelines to qualify for a 30% basis boost for projects located in those areas. HUD also maintains a similar 20% cap on DDAs, which are areas with high construction, land, and utility costs relative to area incomes. >Proposed Change: Raise the 20% cap on DDAs to 30%, allowing more affordable housing projects to be built in higher-cost, high-opportunity neighborhoods. Additional Criteria for Community Revitalization Plans: under current law, state qualified allocation plans (QAPs) must give preference to projects that contribute to a concerted community revitalization plan (CCRP). The July draft bill gives HFAs the responsibility for making this determination, but provides no definition for a CCRP. >Proposed Change: the new law would include criteria that states should consider when determining if projects contribute to a CCRP, including whether the plan is geographically specific, has a plan for implementation and goals for progress, includes a strategy for obtaining public and private commitments in other, non-housing infrastructure or other improvements beyond LIHTC developments, and demonstrates the need for revitalization. Local Approval: the draft bill from July requires the Treasury Department to issue guidance prohibiting any state QAP from including local approval or local contribution requirements. >Proposed Change: simplifies the provision by writing the prohibitions in the statute rather than requiring Treasury guidance. The law would permit HFAs to consider local contributions, but only to the extent that they contribute to an overall measure of a projects ability to leverage outside investment and are considered on a level playing field with all other funding sources. Technical Corrections: current draft bill refers to "state housing credit agencies." >Proposed Change: since some states have multiple allocating agencies, the term will be changed to "housing credit agencies." These proposals, along with other draft legislation relating to the LIHTC program may or may not be part of any final tax reform. We will have a better idea once proposed tax reform legislation comes out of the House Ways & Means Committee, which could occur this summer. Any final tax reform legislation is not likely before late summer or early fall, if at all.

National Origin - Still a Protected Class

Despite all the hyperbolic language regarding Muslim bans swamping the airways and newspapers, individuals are still protected from housing discrimination on the basis of their national origin. Recent efforts by the new administration to control entry into the United States by certain groups has led some property owners and managers to change screening requirements at properties. Owners and managers should be reminded that they cannot create screening procedures that discriminate on the basis of national origin.   Leasing decisions should be based solely on legitimate screening criteria, relating to one of four areas: Is the applicant eligible? Will they pay their rent? Will they take care of the property? Will they respect their neighbors?   Owners should make sure they do not require a different level of documentation for some prospects than for others based on where they come from. For example, applicants from the Middle East should not be held to a higher standard than other applicants.   In response to the President s attempts to bar citizens of some Muslim-majority countries from entering the United States, some owners may believe that people from Middle Eastern countries can be treated differently; this is not the case. Regardless of an applicant s religion or national origin, they must be treated exactly the same way as any other applicant.   Owners and managers should remember that discrimination does not come only from management staff - it can come from other residents. Some owners have asked residents to report suspicious activity by other residents, but this does not excuse discrimination against certain religions or individuals from certain countries. Any complaint by one resident against another must be based on legitimate issues and not for discriminatory reasons. Tenant-on-tenant harassment is illegal and if management is aware of such harassment and fails to take action, the owner may be held liable.   The bottom line is that you should not let highly publicized fear mongering or prejudice lead to a fair housing violation. All applicants and residents must be treated equally and managers have to overcome their own fears and prejudices when determining the housing privileges to be provided.

Recognizing Drug Operations in Apartment Communities

Train Management Staff to Recognize Drug Operations   The manufacture of methamphetamines in apartment communities if becoming more common each year. Makeshift meth labs are discovered with increasing frequency in apartment communities, and the residual effects on the property can be devastating.   In some cases, apartments that are used as drug labs become so toxic that demolition is required.   Management should take specific steps to train staff in the recognition of potential drug labs. These steps include:   Focus on training the maintenance staff. It is maintenance personnel who are most likely to enter apartments for work or inspections and they need to know how to recognize potential drug manufacturing or sale. Staff should be told to look for warning signs, but not to search for evidence. Searching a resident's apartment could be an invasion of privacy and should be left to law enforcement with appropriate warrants.   Staff should look for signs of drug activity that are in "plain view." There should be no opening drawers, closets, or looking under beds. An example of "plain view" would be a scale or bags filled with a white powdery substance on a kitchen counter.   Distribute a list of warning signs of drug sales and manufacturing. Such a list should include: >Blacked-out windows: People committing crimes in their homes often put up material such as tin foil or black trash bags on their windows to prevent others from seeing in; >Grow lights: If a unit is filled with special high-intensity lights, known as "grow lights," this can be a sign that the person living there is growing marijuana; >Odors: Almost all drug manufacturing produces an odor. Sometimes the odor can be extremely foul smelling, and even dangerous. The growth of marijuana plants inside a unit gives off a strong, sweet-smelling odor. The manufacture of methamphetamine creates a very strong, pungent odor, described as similar to urine, ether, or ammonia. The heating of crack cocaine often produces a smell similar to the smell of burning electrical wires; >"Chemistry" setups: Meth and other drugs produced in crystal form are usually produced with what may resemble an old chemistry set. Look for items like glass beakers, hot plates, glass cookware, funnels, coffee filters, and plastic tubing. These items will often be set up on bathroom or kitchen countertops, near water sources and drains; >Large amount of chemicals: These chemicals could include antifreeze, camp stove fuel, gasoline, or ether; >Many packages of cold pills: These pills contain ephedrine, and are used to manufacture meth. A few packs of cold pills are nothing to be concerned about, but if staff sees tens or hundreds of packs lying around, drug manufacturing is highly likely; >Baby food jars with milky liquid inside: People who produce crack cocaine often cook and store the drug in baby food jars; >Large quantities of baking soda: This is used to make crack cocaine and small, empty bags of junk food are often used to hide drugs; >Weight scales and packaging materials: A common sign of drug selling is the presence of a weight scale and large amounts of small plastic bags for packaging of the drugs; >Plumbing alterations: Drug manufacturers will sometimes remove the fixtures in a sink or even remove a toilet completely to use the water pipes. Exposed pipes in a kitchen or bathroom may be a sign of drug manufacturing; >Deadbolt locks or hasps or doors: This may be a sign of illegal drug activity; and >Stained walls, windows, or carpets: The manufacture of drugs -especially meth - can leave mustard-colored stains on walls and ceilings and dark brown or orange stains on carpets. It can also leave burgundy colored stains on aluminum windows.   Tell staff what to do if drug activity is suspected. It should be immediately reported to upper management, who should then seek legal advice on how to proceed. Although the presence of these signs may indicate drug activity, they could also be legitimate - especially if just one of the indicators is present.   In short, staff should be aware of the signs of illegal drug activity. This higher level of awareness can assist in preventing illegal activity at your property and protect the value of the property for the owner.

FY 2018 Presidential Budget Proposals for HUD

FY 2018 Presidential Budget Proposals for HUD   The new President has presented his preliminary budget numbers to Congress and if accepted as final numbers, many HUD programs will be devastated as the result of a $6 billion cut. Following are highlights of the proposed HUD budget: The only bright spot is that funding for project-based rental assistance programs may survive the massive cuts and maintain current levels. This will hopefully maintain the basic viability of project-based assistance projects (such as Section 8); $1.3 billion reduction from the public housing operating fund. The current backlog in capital needs for public housing is $43 billion and growing at $3.4 billion annually. This 68% funding reduction will almost ensure a continued and rapid decline in the condition of public housing; $600 million cut in the public housing operating fund; Elimination of the Community Development Block Grant (CDBG) program ($3 billion); Elimination of the HOME Program (a program that provides significant soft financing for Low-Income Housing Tax Credit Projects); $300 million reduction in voucher funding (including Veterans vouchers), resulting in a loss of up to 200,000 vouchers; $42 million cut in the Section 202 program for the elderly (10%); $29 million reduction in the Section 811 program for the disabled (20%); $150 million reduction in Native American Housing funding (20%); and A cut of 5% in HUD salaries and administrative costs. As noted, this is a preliminary budget, and must work its way thorough both houses of Congress. However, this is a clear indicator that the new administration will not be friendly to domestic programs in the years ahead. We should know by summers end the true extent by which the HUD programs will be cut.

GAO Report - The Role of Syndicators in the LIHTC Program - February 16, 2017

GAO Report - The Role of Syndicators in the LIHTC Program - February 16, 2017   The Government Accountability Office (GAO) has issued its third and final report on the Low-Income Housing Tax Credit Program (LIHTC). The two prior GAO reports detailed how the IRS and State Housing Finance Agencies (HFAs) administer and oversee the program. These reports were issued on July 15, 2015 and May 11, 2016, respectively. Neither of these reports was complimentary to the IRS or the allocating agencies, and both offered recommendations for program approval.   This final report is basically an informational report on what syndicators in the LIHTC program do and how they do it. It also provides basic statistical information on the activity of syndicators for the period 2005 to 2014.   All three reports were prepared at the request of Senator Chuck Grassley (R-IA), a member of the Senate Finance Committee.   Syndicators act as intermediaries between developers and investors, and manage funds that invest in LIHTC projects. Along with the developers and State HFAs, they are one of the major players in the LIHTC program. Syndicators include specialty firms and large financial institutions.   Overall Results of the Study   19 for-profit and 13 nonprofit syndicators were studied. All the syndicators operate in multiple states and average more than 20 years of LIHTC experience.   Syndicators play several roles in the market place. They bring together developers and investors; and They oversee the development and management of the projects.   Syndicators are compensated through an acquisition fee (generally 2-5% of gross equity raised) and an annual asset management fee.   Why do Investors Use Syndicators?   There are a number of advantages to the use of syndicators by investors:   The investor may not have the capacity or expertise to directly acquire and manage a LIHTC investment; Syndicators may have exceptional knowledge of local or regional markets. This plays a role in the ability of banks to benefit from Community Reinvestment Act (CRA) requirements. Investment in LIHTC projects may help a bank receive positive consideration.   Background   Once a project is awarded tax credits from an HFA, the developer will often attempt to obtain funding from investors who will contribute equity in return for the tax credits.   The developers sell an interest in the project - either directly to investors or to a syndicator managed fund. Most investors are corporations.   Direct Investment   Investors own a "Limited" partner interest in the partnership that owns the property, with the developer normally being the "general" partner.   Only a few larger institutional investors have the capacity to fund and manage the acquisition, underwriting, and management of these complex projects. In these cases, the investors may invest directly in the project, without going into a syndicator sponsored "fund."   Syndicated Approach   Use of syndicators enables investors to invest in a fund organized and managed by a syndicator. The funds are Limited Partnerships (LPs) in which investors own the LP interest in the fund and the fund owns the LP interest in various property partnerships. Syndicators manage two types of funds:   Proprietary Funds: typically a single investor who has great control over the location of the properties; and Multi-investor funds: these funds allow an investor to diversify risk because there are several investors in the fund and the risk is shared among the investors. They also share the rewards based on the proportion of investment.   In both cases, the syndicator originates the investments, performs underwriting, and presents the investment to investors.   Most syndicators are for-profit firms that operate in multiple states. Since 1986, syndicators have closed more than $100 billion in LIHTC equity. 71% of this was raised between 2005 and 2014. About 51% of equity raised during this period was in multi-investor funds, but the majority of the funds were proprietary. Properties funded by for-profit syndicators tend to be larger than the nonprofit funded projects, and the GAO estimates that about 75% of projects placed in service from 2005 to 2014 had equity raised by syndicators.   Foreclosures   The foreclosure rate for LIHTC projects is very low (there have been no LIHTC foreclosures for funds created by regional nonprofit syndicators).   Role of Syndicators in Developing and Monitoring LIHTC Projects   Syndicators play a major role in the success of the LIHTC program, including: Connecting investors to projects; Evaluation of deals and acquisition of properties; Monitoring of projects during construction; Ongoing asset management (inspection, monitoring, and reporting on properties); Syndicators report regularly, usually through quarterly and annual financial statements, and prepare tax forms for investors. Work with underperforming projects; This includes replacement of poor-performing general partners and management agents. Some syndicators use their own funds to resolve issues, rather than allow the investors to incur losses. Dispose of interest in properties at the end of the 15-year compliance period.   Why do investors use syndicators?   Need for expertise - most investors are not experts in the LIHTC program; Lack of staff resources or interest in ongoing asset management - only a few investors have this expertise in-house; CRA considerations - banks have very limited expertise and investments in LIHTC projects may help a bank receive positive consideration toward its regulatory rating; and Size of investment - large investors use syndicators to efficiently invest large amounts of money; smaller investors may lack the capital to invest in a LIHTC project independently and will instead invest through a multi-investor fund.           How are syndicators selected?   Previous experience with the syndicator - this is a factor for both developers and investors; Tax-credit pricing; Strength of syndicator s business and quality of the portfolio; Geographic presence and expertise; Diversification of risk; and Mission - e.g., non-profit syndicators may focus on particular population groups.   The report outlined syndicator participation by state. The number of syndicators operating in each state ranges from 8 to 24. Indiana and Michigan have the most operating syndicators (24) and Hawaii the fewest (8).   For-profit syndicators raise the majority of money through proprietary funds and nonprofit syndicators raise most of their proceeds through multi-investor funds.   As noted earlier, this report was informational only. The GAO made no recommendations relative to syndicator operations or the raising of equity for LIHTC projects. The two prior GAO reports are more likely to impact upcoming comprehensive tax reform as it related to the LIHTC program.    

Small Area Fair Market Rents (SAFMRs)

Small Area Fair Market Rents (SAFMRs)   HUD publishes fair market rents for all areas of the nation. Public Housing Agencies (PHAs) use fair market rents as a guideline when determining payment standards for the Housing Choice Voucher (HCV) program. Usually, the payment standard must fall within a range of 90% to 110% of FMR. Any rents outside this range require HUD approval.   Fair Market Rents have historically been developed for three types of areas: Metropolitan Statistical Areas (MSAs): These are large metropolitan areas made up of one or more counties; HUD Metropolitan Fair Market Rent Areas (HMFAs): These are MSAs that have been divided into smaller areas by HUD; and Non-Metropolitan Counties.   On November 16, 2016, HUD published a final rule implementing small area fair market rents (SAFMRs). This new category of fair market rents is designed to improve housing access for voucher residents. The new rule will give voucher residents access to high opportunity areas with lower poverty rates.   The SAFMR is developed on a ZIP-code basis and PHAs in these areas are required to use the SAFMR when determining the HCV payment standard. HUD has specific selection criteria that must be used when determining the areas that are required to use the SAFMR:   Number of HCV s under lease; Vacancy rate of an area; Number of units in a ZIP code where the SAFMR is more than 110% of the area-wide FMR; and Percentage of voucher holders living in concentrated low-income areas relative to all renters within these areas over the entire MSA.   Beginning in fiscal year 2018, 24 areas will be required to implement the SAFMR:   Atlanta-Sandy Springs-Marietta, GA HUD Metro FMR Area; Bergen-Passaic, NJ HUD Metro FMR Area; Charlotte-Gastonia-Rock Hill, NC-SC HUD Metro FMR Area; Chicago-Joliet-Naperville, IL HUD Metro FMR Area; Colorado Springs, CO HUD Metro FMR Area; Dallas-Plano-Irving, TX Metro Division; Lauderdale-Pompano Beach-Deerfield Beach, FL Metro Division; Worth-Arlington, TX HUD Metro FMR Area; Gary, IN HUD Metro FMR Area; Hartford-West Hartford-East Hartford, CT HUD Metro FMR Area; Jackson, MS HUD Metro FMR Area; Jacksonville, FL HUD Metro FMR Area; Monmouth-Ocean, NJ HUD Metro FMR Area; North Port-Bradenton-Sarasota, FL MSA; Palm Bay-Melbourne-Titusville, FL MSA; Philadelphia-Camden-Wilmington, PA-NJ-DE-MD MSA; Pittsburgh, PA HUD Metro FMR Area; Sacramento-Arden-Arcade-Roseville, CA HUD Metro FMR Area; San Antonio-New Braunfels, TX HUD Metro FMR Area; San Diego-Carlsbad-San Marcos, CA MSA; Tampa-St. Petersburg-Clearwater, FL MSA; Urban Honolulu, HI MSA; Washington-Arlington-Alexandria, DC-VA-MD HUD Metro FMR Area; and West Palm Beach-Boca Raton-Delray Beach, FL Metro Division   These 24 areas (representing 18 states) contain 368,000 HCVs, which is 18% of all HCVs in the United States. Increased rent levels in these SAFMRs will allow vouchers to pay a higher payment standard, increasing opportunities for voucher holders.   Since the SAFMR will better match the rent in each ZIP-code, HCV rents in some ZIP-codes will go down. This is because the FMRs in certain ZIP-codes were raised by the overall rents in the MSA. As a result, some voucher holders will see a decrease in the payment standard. There is some relief provided by the rule however. If the SAFMR decreases, the PHA does not have to lower the payment standard until the second regular recertification following the effective date of the decrease in the payment standard. Also, the decrease is limited to no more than 10% of the prior year amount.   Examples of areas affected by this change include: San Diego - the downtown area and northern coastal areas of San Diego will have increases in payment standards, but the majority of the inland areas will have decreases; Atlanta - Northern Atlanta will have increases in payment standards but the southern urban areas will go down; and Washington/Northern VA - except for the east side of DC, most of Washington will see increases in the payment standard. Southeast DC will suffer significant decreases and the VA suburbs will also see decreases in payment standards.     Project-Based Vouchers (PBVs)   PBV projects are exempt from the SAFMR requirements. However, PHAs that use SAFMR can use SAFMR for new PBV projects and for existing PBV projects if the owner and PHA mutually agree. Once a PBV project elects to use SAFMR, it cannot revert back to area-wide FMRs.   Impact on LIHTC Properties   LIHTC properties are allowed to collect the full HCV payment standard, even if the payment standard exceeds the maximum allowable LIHTC rent. This could be a significant benefit in the SAFMR areas since the allowable rents for HCV residents could go up. However, as noted earlier, in some ZIP-codes, the payment standards will decrease, and when that happens, the amount collected by LIHTC projects may also go down.   If the payment standard goes below the allowable LIHTC rent, owners will have some decisions to make. The HCV regulations permit residents to pay up to 40% of income when they move in if the rent on the unit is greater than the payment standard. However, if this 40% of income payment still does not come up to the allowable LIHTC rent, owners will have to decide whether to take a lower rent than permitted by the tax credit regulations or decline the voucher resident. While LIHTC properties may not refuse to accept voucher residents simply on the basis of the resident having a voucher, the properties are not required to accept rents lower than the amount collected from non-voucher residents.    

Occupancy Rights of Domestic Violence Victims Who Are Not the Eligible Voucher Holder

Reminder to PHAs: Domestic Violence Victims May Have Occupancy Rights Even if They are not the Eligible Tenant Under the Voucher Program   A recent court case (A. S. v. Been, January 2017) serves as a reminder to PHAs that victims of domestic violence have VAWA protection even if the perpetrator of the violence is the eligible tenant.   In this case, a Section 8 voucher resident claimed that her husband attempted to rape her. She obtained an Order of Protection and submitted a HUD-91066 form to the PHA to initiate a lease bifurcation action in accordance with VAWA.   The husband was the holder of the voucher and the victim sought to have the voucher transferred to her name.   After a number of hearings and procedures, the PHA terminated the husband s voucher with no mention of a process to appeal the decision. The wife filed suit to force the PHA to transfer the voucher and the PHA asked the court to dismiss the case. The PHA s reasoning was that since the voucher was not in the wife s name, she had no protected property interest. The wife argued that VAWA establishes that she had a protected property interest.   A New York district court denied the PHA request and ordered a trial. The court s reasoning was: The PHA is subject to VAWA; VAWA allows a victim the opportunity to seek eligibility to receive the voucher if the PHA terminates the husband s voucher; VAWA expressly provides for a bifurcation procedure to protect victims of domestic violence; VAWA s bifurcation procedure allows PHAs to terminate assistance to any individual who engages in domestic violence without "penalizing a victim of such criminal activity who is also a tenant or lawful occupant of the housing." The statute also states that if the individual who is removed due to the perpetration of domestic violence is the "sole tenant eligible to receive assistance under a covered housing program," the PHA "shall provide any remaining tenant an opportunity to establish eligibility for the covered housing program;" and The court indicated that the law gives occupants of a unit who are not the voucher holders themselves some interest in the voucher.   The conclusion here is that lawful occupants of a unit assisted through the voucher program are protected by VAWA, including the lease bifurcation provisions.