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Verification of Value and Determination of Income from Real Estate Investments

Virtually all affordable housing programs, including those using assistance from the Department of Housing & Urban Development (HUD) and the Rural Housing Service (RHS), as well as Low-Income Housing Tax Credit (LIHTC) projects, must determine actual or potential income from assets when projecting the income of applicants and residents. The rules governing how to do this are contained in HUD Handbook 4350.3. One of the more complex assets to deal with when projecting income is real estate. In many - if not most cases - real estate owned by a member of an assisted family will be considered an asset. In this article, I will outline the circumstances under which real estate is not an asset and will explain how to determine income from real estate when it is an asset. When is real estate not an asset to a family? The decision as to whether to treat real estate as an asset depends on family circumstances. The net income derived from an applicant s real estate holdings will either be considered business income or income from an asset. If the resident s main business is real estate, income from the rental of real estate is considered business income, and since the real estate is an asset of an active business, it should not be considered an asset to the household. To consider real estate as the primary business of the individual, income from real estate should generate most of the income for the person. While relatively rare in affordable housing, the presence of residents whose main business is real estate is not unheard of. And, in such cases, the net income from the business will be counted as household income. The best documentation of such business income is IRS Schedule E (Form 1040). This form is used to report income (or loss) from rental real estate. When is the real estate an asset to the family? If real estate is not the main business of an applicant or household, then the real estate is considered an asset. If the property is rented, the net income from rent is considered asset income. To determine the value of the property, subtract amounts owed on the property, as well as a reasonable cost of sale, from its market value. For example, assume an applicant owns a single-family home that is rented. The market value of the home is $250,000, and the applicant owes $105,000 on the mortgage. Assume a cost of sale of $20,000. Cash value is determined by subtracting the cost of sale from the market value, and then subtracting the balance on the mortgage. So, the calculation is $250,000 minus $20,000 minus $105,000 = $125,000 cash value. In order to determine income from the asset, the rental income must be verified. Once the gross rent is verified, you may deduct any verifiable operating expenses, such as mortgage interest payments, taxes, insurance, and maintenance. The resulting net income is considered asset income. Verification of Cash Value To determine cash value, the fair market value must first be determined. The fair market value (FMV) is the amount that another person would pay to acquire the property in an open-market transaction. There are several ways to verify market value, including (1) tax assessments {in some states}; (2) online real estate listing; (3) an estimate from a qualified broker; or (4) a bona fide sales contract. Once the market value has been determined, a verification of any outstanding mortgage balance is required. Then, the process outlined above for determining cash value is followed. Verification of Rental Income A variety of documents may be used to verify rental income. These include a current lease, recent rent checks, or the latest IRS Schedule E (Supplemental Income and Loss). HOTMA and Real Estate HUD s Final Rule relating to the implementation of The Housing Opportunity Through Modernization Act (HOTMA) is now in effect. The final rule did not change how the cash value and income from real estate is determined. But HOTMA did establish new household asset limitations preventing households that own real property "suitable for occupancy," or assets over $100,000, from receiving HUD rental assistance. However, housing providers may establish exceptions and have a great deal of discretion in enforcing the new limits on current residents. It is also important to note that these limitations apply to HUD programs only - not RHS or LIHTC.

HUD NSPIRE Standards Include "Affirmative" Requirements

HUD s new housing inspection process provides a single inspection standard for all units under the Public Housing, Housing Choice Voucher, Multifamily, and Community Planning & Development (CPD) housing programs. The National Standards for the Physical Inspection of Real Estate (NSPIRE) replaces Housing Quality Standards (HQS) that were created in the 1970s and the Uniform Physical Condition Standards (UPCS) that were developed in the 1990s. Over the years, it became clear that the older standards provided inaccurate and inconsistent results. These prior standards placed a disproportionate emphasis on physical inspections around the appearance of items that were actually safe and functional, while a lack of attention was given to the health and safety of the properties. As a result, NSPIRE emphasizes habitability and the residential use of structures, and most importantly, the health and safety of residents. Inspectable areas under NSPIRE are the apartments themselves, elements of the building s non-residential interiors, and the outside of buildings. The goal is to ensure that the elements of these three areas are "functionally adequate, operable, and free of health and safety hazards" [24 CFR 5.703(a)]. As part of the NSPIRE standard, HUD has developed "affirmative requirements" for all units that participate in HUD s rental assistance programs. And, because the physical inspection process for the Low-Income Housing Tax Credit Program (LIHTC) is required to follow HUD inspection standards, these affirmative requirements also apply to LIHTC properties. These include basic requirements for habitability such as kitchens and flushable toilets as well as important safety concerns like Ground Fault Circuit Interrupter (GFCI) Outlets, a permanent heating source, and safe drinking water. Here are the affirmative requirements for each area: Units (A dwelling unit refers to the interior components of a household s home). Bathtub or shower must be usable in privacy. There must be food storage space. CO alarms in proper locations are required. Must be a primary cooking appliance. Any outlet within six feet of a water source must be protected. Must have a food preparation area. Guardrails must be present in required areas. The inspection date is on or between October 1 and March 31 and the permanently installed heating source is not working or is working but the interior temperature is below 68 degrees. The inspection date is on or between April 1 and September 30 and a permanently installed heating source is damaged, inoperable, missing or not installed. There is an unvented space heater that burns gas, oil, or kerosene. There must be at least one (1) permanently installed light fixture in the kitchen and bathroom. There must be at least two working outlets in each habitable room OR at least one working outlet and one (1) permanently installed light fixture. There must be a refrigerator. Hot and cold water must run from sinks. There must be a sink in the primary kitchen. Smoke alarms must be installed where required. Toilets must be usable in private. Inside (These areas refer to the common areas and building systems generally found within a residential building s interior that are not inside a unit). CO alarms in proper locations are required. Any outlet within six feet of a water source must be protected. Guardrails must be present in required areas. There is an unvented space heater that burns gas, oil, or kerosene. The inspection date is on or between October 1 and March 31 and the permanently installed heating source is not working. There must be at least one (1) permanently installed light fixture in the kitchen and bathroom. Smoke alarms must be installed where required. Outside (Outside areas refer to a building site, building exterior components, and any building systems located outside of a building or unit. These include items and places such as mailboxes, walkways, lighting, roads, parking lots, play areas and equipment, and non-dwelling buildings. Components on the exterior of a building are also considered outside areas, such as doors, fire escapes, lighting, roofs, walls, windows, foundations, and attached porches). Any outlet within six feet of a water source must be GFCI protected. Guardrails must be present in required areas. Bottom Line - owners and managers of properties subject to NSPIRE must ensure that all the noted affirmative requirements are in place prior to the first inspection using the NSPIRE standards.

A. J. Johnson Partners with Mid-Atlantic AHMA for December Training on Affordable Housing - February 2024

During February 2024, A. J. Johnson will be partnering with the MidAtlantic Affordable Housing Management Association for four live webinar training sessions intended for real estate professionals, particularly those in the affordable multifamily housing field. The following sessions will be presented: February 13: HOTMA - Update on HUD Requirements - On January 9, 2023, HUD published a final rule implementing The Housing Opportunity Through Modernization Act (HOTMA), which was signed into law on July 29, 2016. This final rule was published in the Federal Register on February 14, 2023, and will become effective on January 1, 2024. Virtually all HUD programs are impacted by the rule, as are the Low-Income Housing Tax Credit (LIHTC) Program and the Rural Development Section 515 Program. Since publishing the final rule in February 2023, HUD has provided additional guidance in the implementation of the rule. This three-hour training will explain the new HUD guidance and will cover the following areas: (1) Definitional changes relating to earned and unearned income, non-recurring income, and foster children; (2) Revised Income Exclusions; (3) New requirements relative to Student Financial Assistance; (4) Changes to the HUD permitted deductions from gross income, including a full review of the new "hardship exemptions;" (5) Brand new rules regarding assets; (6) New Interim Recertification requirements; (6); and (7) the new definition of "annual income." This session is a must for all managers of HUD, Rural Development, and LIHTC properties, and will provide plenty of opportunity for Q & A. February 15: The Basics of Low-Income Housing Tax Credit Management -  This training is designed primarily for site managers and investment asset managers responsible for site-related asset management and is especially beneficial to those managers who are relatively inexperienced in the tax credit program. It covers all aspects of credit related to on-site management, including the applicant interview process, the determination of resident eligibility (income and student issues), handling recertification, setting rents - including a full review of utility allowance requirements - lease issues, and the importance of maintaining the property. The training includes problems and questions designed to ensure that students are fully comprehending the material. February 20: Documentation of Lease Violations - Managers of multifamily housing properties too often find themselves in the position of not being able to enforce the terms of a lease or evict a resident for severe violations simply because of a failure to properly document the file. While failure to pay rent is the most common lease violation, other issues create the greatest challenge concerning eviction or lease enforcement. This 90-minute session will review some of the most problematic material lease violations and discuss how to properly document those violations. Topics to be discussed will include hoarding, tenant-on-tenant harassment, assistance animal violations, smoking violations (in non-smoking buildings), unauthorized occupants, and "quiet use and enjoyment" issues. The training is intended for site managers and leasing staff, as well as regional property managers. This session is a must for all managers of HUD, Rural Development, and LIHTC properties, and will provide plenty of opportunity for Q & A. February 22: The Verification and Calculation of Income and Assets on Affordable Housing Properties - This five-hour live webinar (there will be a 1.5-hour lunch break) provides concentrated instruction on the required methodology for calculating and verifying income, and for determining the value of assets and income generated by those assets. The first section of the course involves a comprehensive discussion of employment income, along with military pay, pensions/social security, self-employment income, and child support. It concludes with workshop problems designed to test what the student has learned during the discussion phase of the training and serve to reinforce HUD-required techniques for the determination of income. The second component of the training focuses on a detailed discussion of requirements related to the determination of asset value and income and applies to all federal housing programs, including the low-income housing tax credit, tax-exempt bonds, Section 8, Section 515, and HOME. Multiple types of assets are covered, both in terms of what constitutes an asset and how must they be verified. This section also concludes with a series of problems, designed to test the student s understanding of the basic requirements relative to assets. These sessions are part of the year-long collaboration between A. J. Johnson and MidAtlantic AHMA that is designed to provide affordable housing professionals with the knowledge needed to effectively manage the complex requirements of the various agencies overseeing these programs. Persons interested in any (or all) of these training sessions may register by visiting either www.ajjcs.net or https://www.mid-atlanticahma.org.

HUD Imputed Rate on Assets Changes on January 1, 2024

Effective January 1, 2024, the HUD imputed rate on assets over $50,000 will increase from .06% to .40%. This is a significant increase in the imputed rate but comes with other changes to how income will be imputed to assets for properties subject to the HUD imputing rule. HOTMA and the final rule specifically include "actual" income from assets in the definition of income. Therefore, any actual income received must be counted as family income. Imputed income on assets of a combined value of more than $50,000 must be calculated if no actual income can be computed. In a major procedural change, if the actual income can be computed for some assets, but not all assets, housing providers must compute the actual income for those assets, calculate the imputed income for all remaining assets where the actual income cannot be computed, and combine both amounts to account for assets with a combined value of more than $50,000. Notice the significant difference from the current rule where income from assets more than $5,000 is the greater of the total actual income or total imputed income. Actual and imputed income are never combined. Financial assets (e.g., bank accounts) that generate no income (i.e., 0% interest or no dividends) are not assets on which income will be imputed. Non-financial assets (e.g., real property or non-necessary personal property) are subject to imputing. Owners and operators of HUD projects are subject to the imputing rule, as are operators of LIHTC and Rural Development Section 515 properties. This new imputed rate and the methodology for imputing will apply to all these properties effective January 1, 2024.

A. J. Johnson to Offer Live Webinar on Assistance Animals

A. J. Johnson will be conducting a one-hour webinar on January 24, 2024, on Assistance Animals in Multifamily Housing - Avoiding Fair Housing Violations. The Webinar will begin at 1:00 PM Eastern Time. Understanding Fair Housing Law regarding assistance animals is crucial for several reasons: Fair housing law ensures that individuals with disabilities have equal access to housing, preventing discrimination. Assistance animals are not pets but are necessary for the well-being of their owners. Landlords and housing providers must comply with these laws to avoid legal repercussions. Ignorance of the law is not a defense. The law clarifies the obligations of housing providers to make reasonable accommodations for assistance animals, even in pet-free housing. It promotes awareness and sensitivity towards the needs of individuals with disabilities, fostering a more inclusive and supportive community. Understanding these laws helps prevent misuse of the system by those who do not genuinely require assistance animals, ensuring resources and accommodations are available for those who truly need them. This one-hour live webinar will provide the information necessary for owners to comply with this complex area of fair housing law. It will cover the difference between service and support animals, how to verify the need for an assistance animal (including a detailed discussion of the "online" verification services), and what types of animals are acceptable as assistance animals. There will be plenty of time for Q&A and at the end of the session, attendees will be more confident when dealing with requests for assistance animals. Those interested in participating in the Webinar may register on the A. J. Johnson Consulting Services website (www.ajjcs.net) under "Training."

A. J. Johnson to Offer Last 2023 Fair Housing Webinar

A. J. Johnson will be conducting a webinar on December 27, 2023, on Compliance with Federal and state Fair Housing Requirements. This is A.J. s last Fair Housing training of 2023 and is a must for individuals required to take Fair Housing training this year. The Webinar will be held from 1:00 PM to 4:00 PM Eastern time. The course "Compliance with Federal and State Fair Housing Requirements" will equip attendees with the knowledge and understanding needed to avoid fair housing violations. The course curriculum is centered around the regulations in the two major fair housing laws, The Fair Housing Act (Title VIII of the Civil Rights Act of 1968) and Section 504 of the Rehabilitation Act of 1973. The course also includes a discussion of the additional state and local protected characteristics.  In addition, relevant portions of the Americans with Disabilities Act (ADA) are covered as is an in-depth discussion of reasonable accommodation requirements - including rules relating to assistance animals. The purpose of the Fair Housing Act is to eliminate housing discrimination, promote economic opportunity, and achieve diverse, inclusive communities. Professional fair housing training assists in this mission by ensuring that housing professionals understand both the rights of the public relative to fair housing and the duties and responsibilities of real estate professionals. Those interested in participating in the Webinar may register on the A. J. Johnson Consulting Services website (www.ajjcs.net) under "Training Schedule."

HUD to Survey Residents as Part of the NSPIRE Process

The Department of Housing and Urban Development (HUD) will be conducting surveys with residents whose homes are assessed using the new NSPIRE inspection protocol. These surveys aim to pinpoint issues within the inspection process and steer HUD's initiatives to enhance the overall living conditions and satisfaction of residents. This survey seeks to understand residents' perspectives based on their experiences with the physical inspections, whether carried out by federal HUD/REAC inspectors or HUD-contracted inspectors, specifically for those residences subjected to a REAC physical evaluation. Only residents who have had their units inspected will receive the survey. The survey will be brief, taking about five minutes to complete, and will include the following questions: Whether the resident was present during the inspection; The resident's trust in HUD's provision of safe and habitable housing; The resident's level of satisfaction with their current housing conditions; The resident's level of satisfaction with the HUD inspection process. For the latter three questions, residents will express their level of agreement or disagreement on a five-point scale, from "Strongly Agree" to "Strongly Disagree." Additionally, residents will have the chance to share further comments. These remarks could prompt HUD to undertake further inspections if the feedback suggests significant concerns with the property's condition. Under the NSPIRE program, a random selection of units within a property will be inspected, along with any five units nominated by a resident organization. Post-inspection, inspectors will distribute survey flyers in the homes they've assessed. If the kitchen counter isn't an option, flyers will be placed in another prominent location within the unit. These flyers will provide a link or QR code to the survey site, offering residents a voluntary and confidential means to participate. It's important to note that the NSPIRE resident survey is distinct from previous surveys as its findings will not influence HUD's evaluation of multifamily sites. The data collected through these surveys will not contribute to the NSPIRE scoring system used to determine the overall condition, health, and safety of the properties and units inspected.

HUD Flexes VAWA Enforcement Muscle

The Department of Housing & Urban Development (HUD) has announced settlements with two housing providers, resolving allegations that they denied housing opportunities to two women who were victims of dating violence and stalking. These are the first enforcement actions by HUD against property owners for VAWA-related violations. Under the Violence Against Women Reauthorization Act of 2022 (VAWA 2022), HUD can enforce VAWA with the same rights and remedies as the agency enforces the Fair Housing Act. The two agreements provide monetary damages to the victims, priority placement on the waiting list for available units, policy changes, staff training, and operational changes. In the first case, HUD found that a tenant with a Housing Choice Voucher had her rights violated under VAWA when she requested to relocate mid-lease as an emergency transfer after being stalked by a former partner. The woman alleged that the PHA demanded confusing and contradictory documentation that it was not permitted to request under VAWA, threatened to revoke her voucher, denied her request to extend her voucher, and stopped paying its portion of the rent while she prepared to move to protect her safety. The PHA policies were not compliant with VAWA requirements, including policies for documenting status as a VAWA survivor in general. The Agency also did not have an emergency transfer plan. As part of the settlement, the PHA will adopt and implement VAWA-compliant policies, including the development of an emergency transfer plan. The Agency will also hire outside experts to provide VAWA training to staff and will pay the victim a monetary settlement. The second case involves a California management company. The property under management received HOME funds and has Low-Income Housing Tax Credits (LIHTC). In this case, the property manager violated the victim s rights by denying her application due to a history of violations of the terms or prior rental agreements that were related to her being a victim of dating violence. Management admitted that they failed to accompany the denial letter with a copy of VAWA rights, as required by law. The manager also did not advise the applicant about how she might appeal the denial. Under the terms of the agreement, the housing provider will pay the victim a monetary settlement, place her on the top of the waitlist for the next available unit at two properties, notify her in writing when such a unit becomes available, revise their policies and procedures to comply with VAWA and protect the VAWA rights of applicants and tenants. The company must also create the position of VAWA Rights Coordinator to handle VAWA matters and require employees to complete annual VAWA training. Bottom Line The two first-of-its-kind cases demonstrate the importance of all owners and managers of properties subject to VAWA to fully understand the requirements of the law. Virtually all HUD-assisted properties are subject to the law, as are properties assisted by the Rural Development Service and those with Low-Income Housing Tax Credits. Since HUD will now be enforcing VAWA in the same manner as the Fair Housing Act, annual VAWA training takes on the same importance as annual fair housing training.