News

Rent to Own vs. Seller Financing

The Difference Between "Seller Financing" and "Rent-to-Own"   Chapter Five of HUD Handbook 4350.3, Chg. 4 outlines various requirements relative to the determination of value and income for assets. One of the more unusual assets managers of affordable housing developments may encounter is a mortgage or deed of trust. Also known as "seller financing," this situation occurs when an individual sells a piece of real estate, but instead of the purchaser obtaining a mortgage from a bank, the seller loans money to the purchaser through a mortgage or deed of trust. This may also be referred to as a "contract sale."   A mortgage or deed of trust held by a family member is included as an asset. Payments on this type of asset are often received on a monthly basis and include both interest and principal. As stated by HUD, the value of the asset is the unpaid principal as of the effective date of the certification. Each year this balance will decline as more principal is paid off. The interest portion of the payment is counted as actual income from the asset.   But, what about a "rent-to-own" situation? How does this differ from a contract sale for purposes of determining income?   In a seller financing situation, the purchaser legally owns the home and the seller and purchaser sign a legal mortgage agreement that specifies the term of the loan, interest rate, monthly payments, and additional clauses - just like a traditional mortgage. The purchaser is responsible for upkeep and taxes, unlike a rent-to-own, where the landlord is responsible for both. When a seller finances the sale of a home, the asset for the seller is the deed of trust - the home is an asset for the purchaser.   In a rent-to-own situation, also known as a "lease-purchase," the owner retains ownership of the home and acts as a landlord. This is a legally documented transaction under which the property is leased in exchange for a weekly or monthly payment, with the option to purchase at some point during the agreement. A major difference between this and seller financing is that the lessee can terminate the agreement by simply returning the property.   Structure of a Rent-to-Own The tenant lives on the property and pays toward purchasing at a fixed price within a specific period of time, usually one to five years. As part of the contract, the renter may be required to make a nonrefundable deposit, often included as part of a downpayment at the end of the lease term. At the end of the lease term, the tenant has a right of first refusal to purchase the property at an agreed upon sales price, or walk away and forfeit the deposit.   In a true lease-option, there is a clear line between a lease and a purchase. First, a tenant has a written lease and a written sales agreement, and the lease specifies a termination date. A lease-option rent amount is expected to reflect market value rents for the neighborhood. Also, the tenant acquires no equity or interest in the property during the lease term, nor are they responsible for investing their own money in improvements or repairs.   When faced with a situation where it is unclear whether it is seller financing or a lease-purchase, managers should examine the structure of the arrangement. Is there a lease? Who is responsible for upkeep and repairs? Examining the structure of the arrangement will assist management in determining whether to treat the situation as a contract sale or a rental. If it is clearly a sale, the value of the deed of trust (the asset) should be determined as noted above, and the income from the asset is the interest that the purchaser will pay during the 12-month period following the effective date of the certification. If it is a lease, the asset is the property, and the cash value of the property is the value of the asset. The rent paid is income to the asset (verified operating expenses may be deducted from the rental income in order to determine net income to the asset).   In summary, a key to understanding whether there is seller financing or a rent-to-own arrangement is a determination regarding who owns the property. Once this is known, management can easily judge whether to treat the real estate or the deed of trust as an asset.  

Understanding Vicarious Liability

Understanding "Vicarious Liability" - A Key Element of Harassment Liability Under Fair Housing Law   In October 2015, HUD issued a proposed rule to create a new fair housing regulation that will apply to both private and federally assisted communities. The new regulation - if made final - will encompass two major issues: It will establish formal standards for harassment under fair housing law, and will make it clear that all harassment, whether due to sex, race, national origin, disability, familial status, or any other protected characteristic, will be illegal; and It will clarify when housing providers and other entities or individuals may be held liable for harassment.   Liability for Fair Housing Violations   Anyone may be held directly liable for his or her own fair housing violations. For example, an individual manager or maintenance employee may be sued for making discriminatory statements or treating prospects or residents differently based on race, color, religion, national origin, sex, familial status or disability. Likewise, owners may face liability if they have rules that discriminate against applicants or residents based on a protected characteristic. Owners may also fact liability for the actions of others, including employees and other agents. This higher level of liability is known as "vicarious liability," and is a little understood element of common law. The purpose of this article is to assist housing operators and others associated with the provision of housing in their understanding of vicarious liability.   Traditional legal standards recognize two levels of liability - direct liability for one s own misconduct and vicarious liability for the misconduct of others. The standards for both types of liability follow well-established legal principles and do not add any new forms of liability under fair housing law.   Direct Liability   There are three ways, under fair housing law, in which an individual or entity may be directly liable for a fair housing violation. A person is directly liable for his own conduct that results in a discriminatory housing practice. Individual employees, managers, owners and others all are directly liable for their own discriminatory conduct. A person may also be directly liable for the misconduct of others. Such misconduct could be the behavior of an employee or agent, or a third party, such as another resident.   When a claim is based on the actions of an employee or agent, a person may be considered directly liable for failing to take prompt action to correct and end a discriminatory housing practice by that person s employee or agent, if the person knew or should have known of the discriminatory conduct. In other words, community owners are directly liable for the actions of employees and other agents when they knew or should have known about the discriminatory conduct, but did not take action to stop it.   A person also may be directly liable for failing to take prompt action to end a discriminatory housing practice by a third party, such as another resident, if the person knew or should have known about the conduct.   A key element of direct liability is knowledge; it must be clear that the person knew or should have known about the discriminatory behavior in order to demonstrate direct liability. This is not the case for vicarious liability.   Vicarious Liability   Vicarious liability is a form of strict, secondary liability that arises under the common law doctrine of 'agency.' The Latin term used in the law is respondeat superior - the responsibility of the superior for the acts of their subordinate, or, in a broader sense, the responsibility of any third party that had the "right, ability or duty to control" the activities of a violator.   The HUD proposed regulation provides that a person may be vicariously liable for a discriminatory housing practice by the person s agent or employee, regardless of whether the person knew or should have known of the conduct that resulted in a discriminatory housing practice, consistent with agency law.   HUD is making it clear that the general principles of agency law apply to fair housing cases. Under well-established agency law, the vicarious liability occurs when the discriminatory actions of the agent are taken within the scope of the agency relationship, or are committed outside the scope of the agency relationship but the agent was aided in the commission of such acts by the existence of the agency relationship.   Certain elements must generally be present to demonstrate vicarious liability, including (1) the act or action occurred while the employee [or agent] was at the workplace and within the hours of the employee's schedule; (2) the employer must have employed the employee at the time of the incident. In other words, the employee had a reason to be at work at the time; and (3) the injury was a result of the act or actions of the employee [or agent] in the capacity that the employee or agent was hired. However, HUD has indicated that with regard to fair housing, vicarious liability will be expanded to include actions by employees or agents when not working during their normal work schedule. For example, a maintenance staffer using keys held as part of his job to enter a resident's apartment after hours.   There is hope, in the form of a Supreme Court ruling from 2003. In the case of Meyer v. Holley, Mr. and Mrs. Holley was an interracial couple that tried to purchase a house in California but were discriminated against during the process. A real estate corporation listed the house for sale. The couple sued the corporation, the employee who allegedly committed the discrimination, and the President of the real estate corporation, for unlawful discrimination. The President was the sole owner of the Corporation and neither participated in nor authorized the alleged conduct. The case ultimately went to the Unites States Supreme Court, which was asked to decide whether the owners or officers of entities were automatically liable for the wrongful acts of their employees or agents, even if the owners or officers were not involved in and did not direct or authorize the unlawful discriminatory conduct. The Court ruled that the owners or officers of a corporation may only be held liable for Fair Housing violations if they directed or controlled the person with respect to the unlawful act. The Court concluded that the owner/broker of the real estate company was not liable for the unlawful acts of the real estate agent. Keep in mind that one of the key components, in this case, was that the operating entity was a corporation. The corporate structure itself provides some protection to its officers relative to personal liability.   Protection Against Vicarious Liability   Unfortunately, the possibility of vicarious liability cannot be fully eliminated no matter how diligent an owner is relative to hiring, screening, and training. However, the potential can be minimized by properly training and supervising all employees - not only managers and leasing staff. Anyone who interacts with the public or with residents, including maintenance workers and contractors, should be well supervised. Special care must be taken when hiring outside contractors, who may well be considered agents.   Any complaints regarding discrimination or harassment should be addressed immediately. An investigation should be conducted and, if warranted, adequate steps should be taken to eliminate the offensive conduct.   Ultimately, the key to prevention of liability is screening of employees (including criminal screening), training of employees, and supervision of employees. As for contractors and agents, supervision becomes even more critical, since there is often little opportunity for management companies to screen and train contractors.  

Affirmatively Furthering Fair Housing Assessment Tool - Announcement of Final Approved Document, December 31, 2015

On December 31, 2015, HUD issued a Notice in the Federal Register announcing the final approved Affirmatively Furthering Fair Housing Assessment Tool. This is the Assessment Tool to be used by local governments that receive Community Development Block Grants (CDBG), HOME funds, Emergency Solutions Grants, or Housing for Persons with Aids (HOPWA) formula funding from HUD when conducting and submitting their own Assessment of Fair Housing (AFH). For purposes of this Assessment Tool, no AFH will be due before October 4, 2016.   The requirement to conduct and submit an AFH is set forth in HUD s Affirmatively Furthering Fair Housing (AFFH) regulations, and this Assessment Tool formal guidance can be found at www.hudexchange.info/programs/affh/.   Agencies affected by this Notice, including Public Housing Agencies (PHAs) that administer any of the above noted programs on behalf of localities, should obtain the Assessment Tool and become familiar with its requirements.

Recapture - What it is and When it Occurs

Although taxpayers claim the low-income housing credit over a ten-year period, the owner of a low-income housing tax credit project is required to provide low-income housing in compliance with IRC 42 for 15 years (the compliance period). In effect, the taxpayer is claiming credit in advance of providing housing during the last five years after the credit period has ended. As a result, 1/3 of the credit claimed each year during the ten-year credit period is associated with the provision of housing during years 11 through 15 of the compliance period. The 1/3 portion of the credit claimed each year is known as the "accelerated portion" of the credit. The accelerated portion of the credit subject to recapture decreases during the last five years of the compliance period as the taxpayer provides the housing for which the taxpayer claimed the accelerated credit during the credit period. The recapture of accelerated credit claimed for years prior to the year of an audit is a separate adjustment and is characterized as an addition to the liability of a taxpayer. A taxpayer may self-report a credit recapture amount on IRS Form 8611, Recapture of Low-Income Housing Credit. When is Recapture an Issue? Under IRC 42(j)(1), if the qualified basis of a building at the close of any taxable year in the compliance period is less than the building s qualified basis at the close of the preceding taxable year, then the taxpayer s federal income tax for that year is increased by the credit recapture amount. Recapture may not be an issue if the taxpayer discovers the noncompliance (as opposed to discovery by the State Agency or IRS) and corrects the noncompliance within a reasonable period from when it is discovered or should have been discovered. Recapture is also not required in the event of a casualty loss (to be discussed below). Credit Recapture Amount The credit recapture amount is essentially equal to the accelerated credit claimed for all taxable years prior to the year of noncompliance, plus interest at the IRS established rate. The amount is reduced in the last five years of the compliance period since the accelerated credit is being earned at that point. If the reduction in qualified basis leaves remaining qualified basis in an amount equal to or more than the maximum qualified basis identified by the state agency on Line 3a of the IRS Form 8609, then there is no reduction of credit or corresponding recapture on the decrease. This is due to what is known as "excess basis." Note also that the recapture rules do not apply when a credit is disallowed based on an adjustment to the applicable percentage. Accelerated Portion of the Credit For any year of the ten-year credit period, the accelerated portion of the credit equals one-third of the allowable annual credit. For the first ten years, the entire accelerated portion of the credit, 5/15, is subject to recapture. As the owner provides the low-income housing associated with the accelerated portion of the credit claimed in prior years during the last five years of the compliance period, the accelerated portion of the credit subject to recapture decreases. If there is a decrease in qualified basis during the 11th year of the compliance period, when the accelerated credit has still not been "earned," the recapture rate remains 0.333 or 5/15. Thereafter, the recapture rate decreases 1/15 for every year the owner provides low-income housing after the end of the ten-year credit period. This is reflected as follows: 4/15 or 0.267 for year 12; 3/15 or 0.200 for year 13; 2/15 or 0.133 for year 14; and 1/15 or 0.067 for year 15. The following example illustrates the math: Decrease in qualified basis during the 13th year of the Compliance period. The allocation of credit was based on a qualified basis of $1,000,000 and an applicable percentage of 0.0900 (the 9% credit). The allowable annual credit amount is $90,000. The tax return for the 13th year of the compliance period is audited and the IRS determines that the correct qualified basis was $750,000. The adjustment to qualified basis is $250,000. To calculated the recapture, determine the credit associated with the $250,000 basis reduction. $250,000 X .0900 = $22,500. The recapture rate in year 13 is 3/15 or 0.200. $22,500 X 0.200 = $4,500 in recapture for each year of the ten-year credit period or a total recapture of $45,000. Casualty Losses Under IRC 42(j)(4)(E), the recapture provisions do not apply if the reduction in qualified basis results from a casualty loss if the lost qualified basis is restored by reconstruction or replacement within a reasonable time established by the Secretary of the Treasury. Casualty loss is defined as the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Property damage is not considered a casualty loss if the damage occurred during normal use, the owner willfully caused the damage or was willfully negligent, or was progressive deterioration such as damage caused by termites. If the taxpayer fails to restore or replace the lost qualified basis within a reasonable period, then the recapture provisions are applied for the tax year in which the casualty event occurred. Also, IRC 42(j)(4)(E) only provides recapture relief for casualty events; it does not provide for the allowance of credit during the period of time that the building is being restored (except in the case of a Presidentially Declared Disaster Area). Noncompliance with the Nonprofit Set-Aside - 42(h)(5) The 42 recapture provisions are not applicable when the rules relating to the nonprofit set-aside are violated. However, the credit may be disallowed in its entirety if the nonprofit set-aside rules are violated. For example, if a nonprofit is not materially participating in the ongoing operation of a project for two years of the credit period, the credit for those two years may be disallowed, but there will be no recapture for prior years. Noncompliance with 42(h)(6), Extended Use Agreement Recapture provisions are not applicable due to an owner s violation of the tax credit extended use agreement. Disposition Other than by Foreclosure or Transaction in Lieu of Foreclosure Generally, the disposition of a low-income building (or interest therein) is a credit recapture event. However, the credit recapture provisions are not applicable under specific circumstances if the disposition was not by foreclosure or a transaction in lieu of foreclosure. Credit recapture provisions are not applicable solely by reason of the disposition of a qualified low-income building (or interest therein) if it is reasonably expected that the building will continue to be operated as a qualified low-income building for the remainder of the building s 15-year compliance period. Disposition by Foreclosure or Transaction in Lieu of Foreclosure In the event of a foreclosure (or transaction in lieu of foreclosure), the extended use period is terminated and the building is no longer a qualified low-income building. The termination of the extended use period results in the disallowance of the credit for the year of disposition (unless the new owner enters into a new extended use agreement by the close of the year of disposition), but does not automatically result in recapture. The disposition is treated like any other disposition of the property. The question is whether the taxpayer has a reasonable expectation that the building will continue to be operated as a qualified low-income building for the remainder of the building s 15-year compliance period. Summary The critical issues to determine in order to apply the 42 recapture rules are whether the qualified basis for a building has been reduced, and if so, the applicable year of the compliance period. Not all noncompliance results in a qualified basis reduction (e.g., lack of nonprofit participation). However, much of the noncompliance resulting from management errors will lower qualified basis, such as renting to ineligible residents and charging excess rent. For this reason, the best defense against recapture is sound management and oversight of Section 42 properties.

Fair Housing Trends - 2015

As we approach the end of the year, it is interesting to look back on 2015 and review the trends in fair housing that affect how we manage our properties. 2015 was an extremely active year from a fair housing perspective, and included a landmark Supreme Court Decision. Here are some of the major occurrences in the fair housing field over the past year.   HUD increased its focus on "retaliation" It is important to remember that even if an original claim is dismissed, retaliation is a separate offense. Do not in any way retaliate against a person for lodging a fair housing claim - even if the claim is completely bogus. Legalization of marijuana - both for medicinal and recreational use - is a growing (forgive the pun) trend. However, the use of marijuana for any reason - including medical - violates federal drug laws. This means that for purposes of the federal fair housing act, a reasonable accommodation does not have to be made for a person who wants to use medical marijuana. However, while federal law generally trumps local or state laws, if you manage property in a state that permits the use of medical marijuana, check with your attorney before denying the request of a disabled person to use medically prescribed marijuana. HUD is getting very strict with communities that enforce rules that have the effect of discriminating against families with children. Safety rules for children are fine, but don t single out the behavior of children in your community rules. Also, you must be willing to waive certain rules as a reasonable accommodation to a person with a disability. Documentation continues to be a major weakness in many fair housing cases. Owners and managers should document all interaction with residents and prospects and keep the records until your attorney gives the OK to destroy them. Disparate Impact is no longer a legal "theory;" the Supreme Court ruled in the Summer of 2015 that a case may be brought based on policies that have a discriminatory effect on members of protected classes - even if the discrimination is not intentional. Owners and managers should examine all policies and practices for negative impacts based on protected characteristics. In 2015, HUD strongly reiterated its intention to pursue cases where landlords refuse to grant reasonable accommodations to disabled persons. All owners should have a reasonable accommodation policy. All decisions relative to granting or denying reasonable accommodation requests should be made at the corporate (not property) level. When requests are denied, owners should always work to find a workable alternative. In 2015, many cases involved refusal of landlords to permit assistance animals. Owners must fully understand the difference between the Americans with Disabilities Act and Fair Housing Act definitions of what constitutes an assistance animal.   As we enter 2016, it is good to remember the fair housing basics: Thousands of fair housing complaints are lodged each year. Have a procedure for responding to such complaints - and follow the procedure. Make sure all employees fully understand the procedure. Many states and localities have fair housing laws in addition to the federal laws - know them! Review all written material on a regular basis for potentially discriminatory statements. Train employees regarding what to say - both in person and on the phone, and ensure that email responses to inquiries are consistent and non-discriminatory.

Tax Extenders Signed Into Law

Congress has passed and the President has signed the Protecting Americans from Tax Hikes (PATH) Act of 2016. The legislation includes a number of permanent (as opposed to temporary) extensions of expiring tax provisions. Included in these is a permanent extension for the minimum low-income housing tax credit rate for non-Federally subsidized buildings - (the 9%) credit. It also extends the military housing allowance exclusion for determining whether a tenant in certain areas of the country is low-income. Section 131 of the Act makes the 9% tax credit for new LIHTC projects and rehabilitation expenditures permanent. This does not apply to the acquisition cost of existing projects or projects that use tax-exempt bond financing. These projects must still use the floating 4% tax credit percentage. This amendment is retroactively effective as of January 1, 2015. Section 132 of the Act extends permanently the exclusion of the military housing allowance from income for LIHTC purposes for certain areas of the country. Excluded areas include any county which contains a qualified military installation to which the number of members of the Armed Forces assigned to the units based out of such qualified military installation increased by 20% or more as of June 1, 2008 over the personnel level of December 31, 2005 and also includes any adjacent counties. The affected military installations have to have at least 1,000 members of the Armed Forces assigned to it. A list of areas in which the BAH exclusion is applicable can be found here.  

Proposed Bill Would Require Eviction of Over-Income Public Housing Tenants

Representative Bradley Byrne (R-AL) has introduced HR 4133, a bill that would require removal of public housing tenants whose income after move-in exceeds the qualifying income limits. The proposed "Public Housing Accountability Act" was introduced on November 30, 2015 and has been referred to the House Financial Services Committee. If passed the bill would amend the Housing Act of 1937 to require annual income reviews of public housing tenants. Current law limits such reviews to the initial eligibility of the household at move-in. The bill also requires that families notified of income exceeding the limits must file an appeal within 30-days of receipt of the notice and provide documentation that was not included in the income review. If there is no appeal, or if the appeal is denied, over-income families must vacate the housing.   The bill was introduced following a report from the HUD Inspector General that showed there are thousands of residents living in public housing with income in excess of the qualifying limits. Based on the make-up of the House and Senate, there is a reasonable chance that the bill will pass in 2016.   It is worth noting that one of the reasons the law exists in its current form was so that public housing residents would not be discouraged from obtaining better paying jobs out of fear of losing their housing. Passage of this bill would almost certainly lead some public housing residents to avoid better paying jobs due to the cost of market rate housing.

HUD Final Rule Defining "Chronically Homeless"

  On December 4, 2015, HUD published a final rule titled "Homeless Emergency Assistance and Rapid Transition to Housing: Defining "Chronically Homeless." This final rule establishes the definition of "chronically homeless" that will be used in HUD s Continuum of Care Program, and in the Consolidated Submissions for Community Planning and Development Programs. The final rule also establishes the necessary recordkeeping requirements that correspond to the definition of "chronically homeless" for the Continuum of Care Program.   This rule is effective on January 4, 2016. Continuum of Care recipients must comply with this rule as of January 15, 2016. The rule will apply to all program participants admitted after January 15, 2016. The rule does not apply retroactively to program participants admitted to a Continuum of Care program project prior to January 15, 2016.   Definition of "Chronically Homeless"   A "chronically homeless" individual is defined to mean a homeless individual with a disability who lives either in a place not meant for human habitation, a safe haven, or in an emergency shelter, or in an institutional care facility if the individual has been living in the facility for fewer than 90 days and had been living in a place not meant for human habitation, a safe haven, or in an emergency shelter immediately before entering the institutional care facility. The individual also must have been living as described above continuously for at least 12 months, or on at least four separate occasions in the last three years, where the combined occasions total a length of time of at least 12 months. Each period separating the occasions must include at least seven nights of living in a situation other than a place not meant for human habitation, a safe haven, or in an emergency shelter.   Stays in institutional care facilities for fewer than 90 days will not constitute a break in homelessness, but rather such stays are included in the 12-month total, as long as the individual was living or residing in a place not meant for human habitation, a safe haven, or in an emergency shelter immediately before entering the institutional care facility.   Chronically homeless families are families with adult heads of household who meet the definition of a chronically homeless individual. If there is no adult in the family, the family would still be considered chronically homeless if a minor head of household meets all the criteria of a chronically homeless individual. A chronically homeless family includes those whose composition has fluctuated while the head of household has been homeless.   Recipients and subrecipients of Continuum of Care program funds are required to maintain and follow written intake procedures to ensure compliance with the "chronically homeless" definition. The procedures must establish the order of priority for obtaining evidence as third party documentation first, intake worker observations second, and certification from the individual seeking assistance third.   Benefit of New Definition   This final definition is designed to ensure that communities are consistently using the same criteria when considering whether a person is chronically homeless.   Failure to maintain appropriate documentation of a household s eligibility is the monitoring finding that most often requires recipients of HUD funds to repay grant funds. This rule establishes recordkeeping requirements.   Recordkeeping Requirements   The recipient must maintain and follow written intake procedures to ensure compliance with the chronically homeless definition. The procedures must require documentation at intake of the evidence relied upon to establish and verify chronically homeless status.   In addition to the documentation required to demonstrate homelessness, the procedures must require documentation at intake of the evidence relied upon to establish and verify the disability of the person applying for homeless assistance. The recipient must keep these records for five years after the end of the grant term. Acceptable evidence of disability includes: Written verification of the disability from a professional licensed by the state to diagnose and treat the disability and his or her certification that the disability is expected to be long-term or of indefinite duration and substantially impedes the individual s ability to live independently; Written verification from the Social Security Administration; The receipt of a disability check (e.g., Social Security Disability Insurance check or Veteran Disability Compensation); Intake staff recorded observation of disability that, no later than 45 days from the application for assistance, is confirmed and accompanied by evidence as noted above.   The final rule is long and complex and recipients or subrecipients of Continuum of Care grants should obtain and carefully review a copy of the rule.