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Combining the Low-Income Housing Tax Credit with Assisted Living Developments

Combining the Low-Income Housing Tax Credit with Assisted Living Developments Low-Income Housing Tax Credits (LIHTC) may not be used to develop hospitals, nursing homes, sanitariums, life-care facilities, or mobile home parks. The General Explanation of the Tax Reform Act of 1986 (the "Blue Book") states, "Residential rental units must be for use by the general public and all of the units in a project must be used on a non-transient basis. Residential rental units are not for use by the general public, for example, if the units are provided only for members of a social organization or provided by an employer for its employees. Generally, a unit is considered to be used on a non-transient basis if the initial lease term is six months or greater. Additionally, no hospital, nursing home, sanitarium, life-care facility, retirement home providing significant services other than housing, dormitory, or trailer park may be a qualified low-income project." In addition, the Blue Book states, "unlike the requirements for units in projects financed with tax-exempt bonds, certain single room occupancy housing used on a non-transient basis may qualify for the credit, even though such housing may provide eating, cooking and sanitation facilities on a shared basis." Private Letter Ruling (PLR) 9740007 applied to tax-exempt projects, but gives good guidance on what constitutes assisted living. While a PLR cannot be cited as precedent, they are often indicative of IRS thinking on a particular issue. In this case, the Service stated that a key distinction is whether the facility provides residences for individuals or bed-space in a health care facility. The PLR indicated, "health care facilities may be characterized by certain common qualities:" They are regulated by the appropriate health department of a state as a health care institution; They specifically accentuate the availability of immediate medical services to and/or the care of persons being serviced; The laws of the state and/or the regulations and rules of that states health department specify numerous procedures, measures and standards pertaining to both medical treatment of residents and requirements for the staff; and The required treatment of the residents/patients is far beyond a landlord/tenant relationship that may limit use by the tenant or may require the landlord to provide amenities such as food and laundry services. In outlining these elements, the IRS made clear that no individual criteria is determinative; all factors should be considered in determining whether a facility is a health care facility or residential rental property. In PLR 8945036, the IRS opined that an independent living facility may be residential rental housing as long as it does not provide professional nursing or medical care, except for emergency medical services. In the case of the project subject to the PLR, the facility had common dining, cooking, and recreation areas. Optional services included Meals, housekeeping, and laundry services; Assistance in bathing and dressing (as needed); Local transportation; Assistance with the taking of medication (if needed); and General supervision. No professional nursing care or doctors were provided. This facility was considered by the IRS to be a residential rental development, and not a medical facility. In another PLR (8944042), the presence of emergency medical services did not prevent the designation of the facility as residential rental housing. Another key element of this PLR was that services other than typical residential services were optional and the rents for residential services were within the Section 42 limits. Care must be taken when layering LIHTCs with an assisted-living facility, especially with regard to the services offered and whether non-residential services impose a mandatory fee. The most recent IRS guidance in this area is Revenue Ruling 98-47, which uses a three-building retirement complex as an example of what does and does not constitute residential rental housing. Two of the buildings provide comprehensive non-housing services, including housekeeping, daily meals, planned activities, regular transportation, and emergency call services. There were no continuous or frequent medical services. The third building provided all of the same services as the other two, but also provided frequent and continual medical services. The ruling indicates that the first two buildings are residential rental housing and the third was a health care facility. Assisted Housing & Rents Gross rent for LIHTC purposes excludes any fee for a supportive service that is paid to an owner on behalf of a low-income tenant by any government assistance program or a Section 501(c)(3) tax-exempt organization. The program must provide rental assistance and the assistance must not be separable from assistance for other supportive services, not related to housing. "Supportive Service" defined: any service under a planned program of services designed to enable residents of a residential rental property to remain independent and avoid placement in a hospital, nursing home, or intermediate care facility for the mentally or physically disabled. In the case of Single Room Occupancy (SRO) housing for the homeless, the term includes any service that assists tenants in locating and retaining permanent housing. A key element with regard to rents is whether the charges are "optional" or "mandatory." Treasury Regulation 1.42-11(b)(i) indicates that a service is optional when the service is not a condition of occupancy and there is a practical alternative. g., if meal and housekeeping services are offered, residents must be able to refuse and there would have to be cooking facilities for the resident and a nearby grocery store. There would also have to be an onsite laundry for residents or a nearby Laundromat. Non-optional or mandatory services must be included in the gross rent. Recommended Documentation There should be a separate lease and Service Agreement. The Service Agreement outlines the fees for assisted living services and should make clear that they are optional. It should also have a section where the resident acknowledges that the services are optional. The lease should cover only the traditional residential services and the cost of those services. A Discussion of Continual or Frequent Services Treasury Regulation 1.42-11(b)(2) states "if continual or frequent nursing, medical or psychiatric services are provided, it is presumed that the services are not optional and the building is ineligible for the credit, as is the case with a hospital, nursing home, sanitarium, life care facility, or intermediate care facility for the mentally or physically handicapped." This language is crucial in that it indicates that even if services are optional, if such medical services are continuous or frequent, the facility will not be considered credit eligible. The truth is, LIHTCs and assisted housing are not a perfect match. It takes a great deal of careful planning and a full understanding of the market needs to successfully combine the two. Of all the issues to be considered, developers should always keep in mind fees and charges and the types of services to be provided. These are the areas that present the most risk to this type of property in terms of whether it will pass muster with the IRS as a residential rental housing project.

Building a Case Against Unauthorized Occupants

Dealing with unauthorized occupants is a troublesome issue for many affordable housing managers, but due to the requirements of affordable housing programs such as Section 8 and the Low-Income Housing Tax Credit (LIHTC), knowing who is living in a unit is critical. In subsidized programs such as Section 8, unauthorized occupants can be both a rent and an eligibility issue, while for LIHTC projects, the issue is eligibility. The results of a recent court case from New Jersey (Mansions Apartments v. Husband - April 2017) can be instructive in assisting managers in their understanding of the type of evidence that may be required to prove a case of unauthorized occupancy. Facts of the Case The resident (Husband) moved into the Section 8 project in 2007, occupying a one-bedroom apartment as the sole occupant. All rent was paid by Section 8 subsidy; On March 24, 2015, the landlord issued a "notice to cease" citing multiple violations, including "harboring a female unauthorized occupant, Michelle Dea, in the leased premises." The landlord issued a "Notice Terminating the Lease" on April 27, 2015 for failure to comply with the prior notice to cease. At this point, the harboring of "three other adult unauthorized occupants and multiple children" was also noted. The resident was given until May 31, 2015 to vacate the unit. The resident refused to vacate and a trial was held on July 9, 2015. Both the manager and maintenance technician from the property testified on behalf of the landlord; the defendant testified on her own behalf. The manager testified that Dea sought to lease her own unit and provided her driver s license as identification. The license listed the defendant s unit as Dea s address, and Dea stated that she "lived with a friend". This is what prompted the "notice to cease." The manager stated that she observed Dea "coming and going" at "all different times of the day," including weekends. The manager also testified that she saw "numerous children" and an adult male and other females at the unit. The manager did acknowledge that Dea s mother and daughter lived at the complex. The Maintenance Tech testified that he observed Dea entering and leaving the unit on a daily basis. The defendant s testimony included the following elements: She insisted that Dea never lived in the unit, but that she had spent the night once two years earlier; She stated that Dea visited two to three times per month, but then changed that to two to three times per week. Many other elements of the testimony were inconsistent.   Ruling of the Court The trial judge noted the inconsistencies in Husband s testimony and called the testimony "a fabrication," and that he found her to be "completely unbelievable, incredible, and not telling the court the truth." On the other hand, he found the manager s testimony to be "completely credible," "uncontroverted," and supported by the Maintenance Technician. The judge indicated that the driver s license showing the defendant s address, along with the testimony by staff established the unauthorized use of the unit and he granted the landlord possession and denied the defendant s request for a stay pending appeal. On August 5, 2015, the defendant filed a motion seeking a stay for hardship reasons and on August 15, the motion judge granted the stay and removal from the unit was put on hold. Motion for Reconsideration On August 12, 2015, the defendant filed a motion for reconsideration, insisting that Dea did not live with her and Dea filed a certification stating that she did not live with the resident. She further stated that her license was copied when she applied for a unit at The Mansions and that management failed to produce the copy because it would not show the address of the defendant. Dea provided copies of documents listing her name and an address in another city, but the driver s license was not one of the documents. The defense also argued that when management accepted rent for June and July 2015, which was after the termination date of May 31, a new tenancy was created. The motion judge denied the request for reconsideration and the defendant was locked from the apartment. The defendant appealed. The Appeal The landlord provided documentation that after the May 31 termination date, HUD subsidy funds on behalf of the defendant were not accepted and were in fact returned to HUD. The court was not persuaded by the defendant s argument that seeing Dea "coming and going" in the vicinity of Husband s apartment did not prove residency in the apartment and that failure to show a copy of the driver s license should defeat the assertion that the address shown on the license was that of the defendant. The appeals court deferred to the judgment of the trial judge, since it was reasonable and supported by "adequate, substantial and credible evidence." The court also ruled that acceptance of rent after the May 31, 2015 termination date was not relevant, since nonpayment of rent was not the issue - unauthorized occupancy was. The court stated, "Unlike [non-payment of] rent, however, which can be cured retroactively, not all cases for eviction can be completely cured." Finding The appeals court found no error in the original trial and upheld the judgment of possession. The lesson for owners and managers from this case is that landlords can prevail in cases involving unauthorized occupancy. However, in order to do so, managers must carefully build the case for eviction. Eyewitness testimony, corroboration, and contemporaneous documentation are critical elements when attempting to prove unauthorized occupancy. Once it is suspected that a unit contains an unauthorized occupant, landlords should carefully prepare the case through observation and documentation. As noted in this case, which took nearly two years, prevailing in such cases may take time, but gaining possession of units due to unauthorized occupancy is possible.

Fees for Assistance Animals - Settlement Agreement, June 2017

On June 9, 2017, HUD entered approved a settlement agreement between a Nevada fair housing organization and the owner and manager of four apartment complexes in Reno, NV. The agreement settles allegations of housing discrimination against disabled residents with assistance animals. The case came to HUD s attention when the Silver State Fair Housing Council filed four complaints against the owner and manager of Silver Lake Apartments, Vale Townhomes, Oak Manor Apartments, and Angel Street Apartments. The complaints alleged that ERGS, Inc. and Silver Lake Apartments, LLC discriminated against prospective tenants who required assistance animals by requiring these applicants to pay a pet deposit fee. Under the conciliation agreement, ERGS, Inc. will pay Silver State Fair Housing Council $20,500. ERGS, Inc., and Silver Lake Apartments, LLC will also adopt written policies that are consistent with the Fair Housing Act and provide fair housing training for all employees who interact with tenants or applicants. This case reiterates the importance of understanding the difference between "pets" and "assistance animals." While deposits for pets may be required, there is no authority to charge a fee or deposit of any kind for a disabled person needing an assistance animal. Owners and managers should review their policies and procedures to ensure that disabled residents are not facing monetary requirements relative to assistance animals.

Social Security Enhanced Security for Obtaining SS Information

Beginning June 10, 2017, the Social Security Administration (SSA) will add a second method to check the identification of anyone signing onto their "My Social Security" account. This will be in addition to the first layer of security, the account holders username and password. This will affect residents of properties that required verification of Social Security income and managers of such properties should make their residents aware of the changes. First, it is recommended that management encourage residents to set up a "My Social Security" account online with the SSA, and remind them to safely store their username and password. Also, this information should not be shared with anyone - including the manager of the property. When signing in to their accounts on or after June 10, they will be able to choose either their cell phone number or their email address as the second method of identification. The SSA has put this procedure in place to better protect accounts from unauthorized use and potential identity fraud. Since My Social Security became available in May 2012, more than 30 million people have created accounts. In the past, the SSA offered a second layer of protection only for customers who opted to use it. In the summer of 2016, the SSA added a second way to track identity when someone registered or signed into an account. However, at that time, the SSA only permitted the use of a cell phone as the second identification method. They quickly learned that many people do not have cell phones and as a result have implemented this new procedure. Since an email address is already required to use My Social Security, anyone should be able to utilize this new security layer. Each time an account holder signs into their account, they will complete two steps: Enter username and password; and Enter the security code sent by the SSA. The code will be sent either by text message or email, depending on the choice of the account holder. This will be a one-time code and a new code will be sent each time the account is signed into. Managers should inform residents of this new procedure and should also ensure that the management office email is not used as the email address to receive the code.

Equal Access to Housing for HUD Assisted Housing Projects

Equal Access to Housing for HUD Assisted Housing Projects As many managers of HUD-Assisted properties already know, HUD prohibits discrimination against individuals based on their gender identity. HUD published a final rule entitled "Equal Access in Accordance with an Individual's Gender Identity in Community Planning and Development Programs" on September 21, 2016. This rule built upon HUD's February 2012 final rule entitled "Equal Access to Housing in HUD Programs Regardless of Sexual Orientation or Gender Identity." These rules apply to all owners, operators, and managers of shelters, and other buildings and facilities as well as providers of services funded in whole or in part by any CPD program. Now that managers of HUD-assisted properties of any type must ensure non-discriminatory actions when dealing with Lesbian/Gay/Transgendered/Bisexual (LGBT) individuals, it is important to understand various terms that are relevant to gender identity issues. Use of terms or phrases in an inappropriate way could lead a housing applicant or tenant to believe that you are discriminating against them. HUD recently provided information on various terms and definitions that managers and operators of HUD-assisted properties should be familiar with; here are some of those terms: Transgender: Umbrella term for people whose gender identity is different from their assigned sex. Sometimes an individual may determine they no longer identify as transgender after they transition. Transitioning (Gender Transition): A process that some (but not all) transgender people go through to begin living as the gender with which they identify, rather than the sex assigned to them at birth. Transitioning does not necessarily require medical procedures. Gender Identity: Internal or innate sense of being male, female, or another gender; it may or may not match the assigned sex at birth. Gender Expression: External expression of gender identity (be aware that many times people do not feel they can safely express their gender identity), exhibited through behavior, clothing, hairstyle, body language, and voice. Sexual Orientation: Physical or emotional attraction to the same and/or opposite sex; this is distinct from one s gender expression or identity. Sexual orientation includes gay, lesbian, bisexual, straight, asexual, and questioning. Generally, the term "homosexual" should no longer be used. Non-Binary Identity: This is also known as "genderqueer," and is a relatively new term describing an individual whose gender does not fit within the male-female spectrum. Non-binary/genderqueer individuals do not identity as male or female, and are not the same as transgender. Intersex: This is an umbrella term that describes people who have (were born with) natural variations that differ from conventional ideas about "female" or "male" bodies. Such natural variations may include genital and chromosomal, as well as a range of other physical characteristics. Intersex should not be confused with transgender. An out-of-date and offensive term used in the past for this condition was "hermaphrodite." Sex Reassignment Surgery (SRS): This is a surgical procedure to transition an individual from one biological sex to another. SRS is often combined with hormone treatment and psychological assistance prior to and/or following surgery. SRS is a term that is preferred over "sex change operation." Not all transgender people choose to or can afford to have SRS. These terms, and the rules relating to providing equal access to housing for LGBT persons may be confusing to owners and managers, but it is a requirement. Operators of HUD-assisted programs must become familiar with the rules relating to equal access and should have a working knowledge of LGBT vocabulary.  

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.