News

Smoke Free Public Housing - HUD Proposed Rule

Smoke Free Public Housing - HUD Proposed Rule, November 17, 2015   On November 17, 2015, HUD published a proposed rule in the Federal Register that would require all public housing agencies (PHAs) that administer public housing to implement a smoke-free policy. The rule proposes that no later than 18 months from the effective date of the final rule, each PHA must implement a policy prohibiting lit tobacco products in all living units, indoor common areas in public housing, and in PHA administrative office buildings. The smoke-free policy must also extend to all outdoor areas up to 25 feet from the housing and administrative office buildings.   The comment due date for the proposed rule is January 19, 2016.   The proposed rule would apply to all public housing, other than dwelling units in mixed-finance buildings. For example, projects developed under the Rental Assistance Demonstration (RAD) program that mix public housing and Low-Income Housing Tax Credits (LIHTC) would not be subject to the rule. PHAs may, but would not be required to, further restrict smoking to outdoor dedicated smoking areas outside the restricted areas, create additional restricted areas in which smoking is prohibited (e.g., near a playground), or, alternatively, make their entire grounds smoke free.   PHAs would also be required to document their smoke-free policies in their PHA plans, a process that requires resident engagement and public meetings. The prohibition on lit tobacco would also be included in a tenant s lease, which may be done either through an amendment process or as tenants renew their leases annually.   Background   HUD guidance already exists on many of the topics covered by the smoke-free policy proposed to be required by the new rule. Hundreds of PHAs have already voluntarily implemented smoke-free policies, and the infrastructure already exists for the enforcement of lease violations.   Over 700,000 units would be affected by this rule (including over 500,000 units inhabited by elderly households or households with a non-elderly person with disabilities), and their non-smoking residents would have the potential to experience health benefits from a reduction of exposure to secondhand smoke (SHS).   The U.S. Surgeon General estimates that exposure to secondhand tobacco smoke is responsible for the death of 41,000 adult non-smokers in the United States each year from lung cancer and heart disease. (By way of comparison, approximately 33,580 persons died from auto accidents in the United States in 2014). The Surgeon General has concluded that there is no risk-free level of exposure to SHS, and that eliminating smoking in indoor spaces fully protects nonsmokers from exposure to secondhand smoke.   An estimated 58 million Americans remain exposed to SHS, including 15 million children ages 3 to 11. The home is the primary source of exposure for children. Individuals living in multiunit housing can be exposed to SHS even if no one smokes in their households. Surveys of multiunit housing residents indicate that 26 to 64 percent of residents reported SHS incursions into their units from external sources, such as hallways or adjacent units. 65 to 90 percent of the residents experiencing such incursions were bothered by them.   The Surgeon General concluded in 2006 that separating smokers and nonsmokers, building ventilation, and cleaning the air cannot eliminate exposure to SHS; that can only be accomplished by eliminating smoking from indoor spaces.   The Financial Cost of Smoking   Beyond the higher healthcare expense, tobacco smoking can have profound financial impacts on PHAs and owners of other multiunit properties. According to the U.S. Fire Administration, smoking is the leading cause of fire deaths in multiunit properties.   Smoking is also associated with higher maintenance costs for landlords of multiunit housing, due to additional cleaning, painting, and repair of damaged items at unit turnover. A survey of public and subsidized housing managers found that the additional cost of rehabilitating the units of smokers averaged $1,250 to $2,955 per unit, depending on the intensity of smoking. Researchers from the Centers for Disease Control (CDC) estimate that a nationwide smoke-free public housing policy would result in an estimated annual cost savings of $152.91 million, including $42.99 million in reduced renovation costs and $15.92 million in averted fire losses.   Moving to Smoke-Free Public Housing Units   Over 500 PHAs have already implemented smoke-free policies in at least one of their buildings. The greatest concentration of these PHAs is in the Northeast, West, and Northwest. This proposed rule would cover all types of lit tobacco products, including, but not limited to cigarettes, cigars, and pipes. The prohibition does not specifically cover waterpipe tobacco smoking (hookahs). However, since such smoking does produce SHS that contains harmful toxins, HUD may include a prohibition on this in the final rule.   The proposal also does not include electronic nicotine delivery systems such as electronic cigarettes ("e-cigs"), but these also may be prohibited in the final rule.   HUD s proposal does not prohibit individual PHA residents from smoking. PHAs should continue leasing to persons who smoke, but may prohibit smoking in public housing and administrative offices.   It will likely be some time before HUD issues a final rule on this issue, but PHAs should begin preparing to make public properties nonsmoking. There is little doubt that this rule will become final; it is just a question of when.

Unauthorized Distribution of Project Funds - HUD Announcement, November 2015

The Department of Housing & Urban Development (HUD) recently sent a series of emails and published newsletters issuing announcements regarding restrictions on the distribution of project assets. The announcements were sent at the request of the HUD Office of Inspector General (OIG) based on the results of recent OIG audits that showed a pattern of improper asset disbursement. Following is an example of the language used in the HUD email: "This email is intended to remind all project owners of their responsibility to know HUD's restrictions concerning the distribution of project assets. It is being sent at the request of the Office of the Inspector General based on the results of a recently conducted audit of Multifamily Housing projects. This knowledge is critically important because Owners who make or take distributions from project funds in violation of their business agreements with HUD may be subject to both civil and criminal penalties, as well as administrative sanctions, such as debarment from participating in federal programs. HUD defines a distribution as any withdrawal or taking of cash or any assets of a project other than for the payment of reasonable expenses necessary to the operation and maintenance of the project.   Examples of distributions include, but are not limited to, the disbursement of project assets as payments to the project's owning entity or its members, partners, or shareholders; the disbursement of project cash in payment of non-project (entity) expenses; the taking of project property (supplies or fixed assets) from the project for non-project purposes; the disbursement of project assets as loans to other entities; and the disbursement of project assets as repayments on outstanding owner advances.   The specific restrictions regarding distributions from your project are identified in your business agreements with HUD.   Additional requirements may also be found in HUD's Multifamily Housing Handbooks and Notices, which are updated periodically and are available on-line at Hud.gov. Please take this opportunity to familiarize yourself with those restrictions, if any, and ensure that they are fully incorporated into your system of internal controls. Your auditor, if you have one, should be able to assist you in this regard".   If you should have any questions about your particular business agreements, you should contact your local HUD office.  

Local Ordinances and Assistance Animals

Apartment owners and managers are well aware that when required due to the disability of an applicant or a resident, no matter what a property s policy on pets may be, fair housing law requires that individuals with disabilities be permitted to use an assistance animal at a community. Many current fair housing complaints by the disabled involve requests for assistance animals. A recent case, and a clarified position from the Department of Justice may affect an owner s decision as to whether to permit an assistance animal when there is a local ordinance banning certain breeds or types of animals.   In July 2014, in Warren v. Delvista Towers Condominium Association, Inc., a court refused to dismiss claims against the Florida Condo Association for refusing to permit a resident to keep his dog as an emotional support animal. This was the case even though the dog was a pit bull, a prohibited breed under local law.   The community position is that it would be unreasonable for the community to violate a local ordinance by permitting the pit bull. However, the court ruled that the ordinance banning pit bulls did not necessarily make the request unreasonable. According to the Court, if the county ordinance was enforced, it would violate federal fair housing law by permitting a discriminatory practice.   The United Stated Department of Justice, in a Frequently Asked Questions publication (July 2015), stated that municipal ordinances banning certain dog breeds do not apply to service animals. "Municipalities that prohibit specific breeds of dogs must make an exception for a service animal of a prohibited breed, unless the dog poses a direct threat to the health or safety of others. Under the direct threat provisions of the ADA, local jurisdictions need to determine, on a case-by-case basis, whether a particular service animal can be excluded based on that particular animal s actual behavior or history, but they may not exclude a service animal because of fears or generalizations about how an animal or breed might behave." While the ADA and Fair Housing Act have different rules governing assistance animals, HUD may take a similar position relative to assistance animals associated with someone s home.   Based on this case and the DOJ position, I can no longer recommend to clients that they use a local ban on breeds as a reason for automatically rejecting a request for an assistance animal related to the ability of a disabled person to have full use and enjoyment of a property. In such cases, before rejecting such requests, I recommend that the owner of the property request that the locality waive the requirement for an assistance animal. If the locality refuses, the owner should retain evidence of the formal refusal on the part of the locality and then seek legal counsel on how to proceed. The goal in these cases should be to pass as much liability as possible onto the locality by showing that the property owner has done everything in their power to accommodate the needs of the disabled resident.

LIHTC Requirements Regarding Common Areas, Required Facilities, and Provision of Services

Section 42(d)(4)(B) of the Internal Revenue Code reads: "The adjusted basis of any building shall be determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided as comparable amenities to all residential rental units in such building." This is basically the statutory provision that allows owners of Low-Income Housing Tax Credit (LIHTC) projects to include in eligible basis the cost of common areas, as long as certain requirements are met.   Common Area   Common areas are facilities expected to be used by the tenants and can be reasonably associated with residential rental property. Examples provided in IRS guidance include parking areas and swimming pools. To qualify, the facility must meet two requirements:   The common area must be made available on a comparable basis to the tenants of all residential rental units (not only low-income tenants); and   No separate fee is required for the use of the facilities. This was made clear in the legislative history when 42 was originally passed as part of the Tax Reform Act of 1986, which stated, " the allocable cost of tenant facilities, such as swimming pools, other recreational facilities and parking areas, may be included provided there is no separate fee for the use of these facilities and they are made available on a comparable basis to all tenants in the project."   If such common area is excluded from eligible basis, IRC 42 does not control the taxpayer s use of the common area.   Reasonably Required Facilities   A facility reasonably required by the project is, under Treasury Regulation 1.103-8(b)(4)(iii), residential rental property that is functionally related and subordinate to the residential rental units.   Examples of such facilities include employee units, which are not considered residential rental units, but rather as facilities reasonably required by a project that are functionally related and subordinate to the rental units. Therefore, such employee units may be included in eligible basis for cost purposes, but are not part of the applicable fraction of the building.   Revenue Ruling 2004-82, Q&A #1 explains that units occupied by security officers are also treated as reasonably required facilities.     Facilities Used to Provide Services   Eligible basis also includes facilities used by the owner of the project to provide tenants with services not normally associated with the leasing of residential rental property. For example, projects that provide common dining areas in which regularly prepared meals are served, may include the cost of the dining and kitchen facilities in eligible basis. Any fees charged to residents for meals or other services must be optional to the tenants; otherwise, the fees must be included for purposes of the gross rent calculation.   In summary, to be included in eligible basis, common areas must be (1) a facility reasonably required by the project; (2) subordinate to the residential rental units; (3) available to all residents on a comparable basis; and (4) available for no fee. LIHTC operators should be reminded that the "no fee" requirement is absolute. In other words, an outside entity also could not be charged a fee to use common area that was included in eligible basis.

Quid Pro Quo and Hostile Environment HUD Proposed Rule, October 21, 2015

HUD has published a proposed rule in the October 21, 2015 Federal Register titled, "Quid Pro Quo and Hostile Environment Harassment and Liability for Discriminatory Housing Practices Under the Fair Housing Act." This proposed rule will formalize standards for use in investigating and adjudicating alleged harassment on the basis of race, color, religion, national origin, sex, familial status or disability under the Fair Housing Act.   The comment due date for the proposed rule is December 21, 2015.   While Title VII of the Civil Rights Act prohibits illegal harassment in employment, no standards have been formalized for assessing claims of harassment under the Fair Housing Act. Courts have often applied standards first adopted under Title VII to evaluate claims of harassment under the Fair Housing Act (FHA), but such standards are not always the most suitable for assessing claims of harassment in housing discrimination cases given the differences between harassment in the workplace and harassment in or around one s home. As described in the proposed rule, "One s home is a place of privacy, security, and refuge (or should be), and harassment that occurs in or around one s home can be far more intrusive, violative, and threatening than harassment in the more public environment of one s workplace. The Supreme Court has historically recognized that individuals have heightened rights within the home for privacy and freedom from unwelcome speech, among other things.   In addition to formalizing standards for assessing claims of harassment under the FHA, the regulation is intended to clarify when housing providers and other covered entities or individuals may be held directly or vicariously liable under the Act for illegal harassment or other discriminatory housing practices.   The rule defines "quid pro quo" and "hostile environment harassment" as conduct prohibited under the FHA, and describes the type of conduct that may establish a claim.   The Proposed Rule   The proposed rule would amend 24 CFR part 100 to establish a new subpart H, entitled, "Quid Pro Quo and Hostile Environment Harassment."   Quid Pro Quo & Hostile Environment Harassment   Any person who claims to have been injured or believes such person will be injured by prohibited harassment is an aggrieved person under the FHA, even if that person is not directly targeted by the harassment. For example, a property manager awards an apartment to an applicant in exchange for sexual favors. Other applicants, who were denied the apartment due to the manager s provision of the apartment based on sexual favors, are aggrieved persons.   Quid Pro Quo Harassment   Quid pro quo ("this for that") harassment occurs when a person is subjected to an unwelcome request or demand because of race, color, religion, national origin, sex, familial status or disability, and submission to the request or the demand is, either explicitly or implicitly, made a condition related to his or her housing.   The theory has most typically been associated with sex. For example, quid pro quo harassment occurs when a housing provider conditions a tenant s continued housing on the tenant s submission to unwelcome requests for sexual favors. A person s conduct may constitute quid pro quo harassment even when the victim acquiesces or submits to the unwelcome request or demand.   Hostile Environment Harassment   Hostile environment harassment occurs when unwelcome conduct is sufficiently severe or pervasive as to create an environment that unreasonably interferes with the availability, sale, rental, use or enjoyment of a dwelling, the provision or enjoyment of facilities or services relating to the housing, or the availability or terms of residential real estate-related transactions. Claims of hostile environment harassment should be evaluated from the perspective of a reasonable person in the aggrieved person s position.   Establishing hostile environment harassment requires a showing that: A person was subjected to unwelcome spoken, written or physical conduct; the conduct was because of a protected characteristic; and the conduct was, considering the totality of circumstances, sufficiently severe or pervasive that it unreasonably interfered with or deprived the victim of his or her right to use and enjoy the housing or to exercise other rights protected by the FHA.   Totality of the Circumstances   Factors to be considered in determining whether a hostile environment exists include, but are not limited to: The nature of the conduct; The context in which the conduct occurred; Will consider factors such as whether the harassment was in or around the home; Whether the harassment was accomplished by use of a special privilege of the perpetrator (e.g., using a passkey or gaining entry by reason of the landlord-tenant relationship); Whether a threat was involved; and Whether the conduct was likely to or did cause anxiety, fear or hardship. The severity, scope, frequency, duration, and location of the incident(s); and The relationship of the persons involved.   It is particularly important to consider the place where the conduct occurred. In a case decided under the Equal Protection Clause of the Constitution, the Supreme Court described the sanctity of the home as follows: "Preserving the sanctity of the home, the one retreat to which men and women can repair to escape from the tribulations of their daily pursuits, is surely an important value." "The State s interest in protecting the well-being, tranquility, and privacy of the home is certainly of the highest order in a free and civilized society." When harassment occurs in and around the home, the victim has little opportunity to escape it short of moving or staying away from the home - neither of which should be required. As one court noted in a sexual harassment case under the FHA, the home is a "place where one is entitled to feel safe and secure and need not flee." (Quigley v. Winter, 8th Cir. 2010). Because of the importance of the home, the proposed rule states that "the same or similar conduct may result in a violation of the Fair Housing Act even though it may not violate Title VII." This indicates HUD intent to establish a lower threshold to show hostile environment under the FHA that that required for employment.   The proposed rule provides that the absence of psychological or physical harm is not required in determining whether hostile environment harassment has occurred. However, the severity of psychological or physical harm may be considered in determining the proper amount of any damages to which an aggrieved person may be entitled.   Type of Conduct   Prohibited quid pro quo harassment and hostile environment harassment require unwelcome conduct. Such conduct may be written, verbal or other conduct and does not require physical contact. Examples include threatening imagery (e.g., cross burning or swastika), damaging property, physical assault, threatening physical harm, or impeding the physical access of a person with a mobility impairment. Unwelcome conduct can be spoken or written, such as requests for sexual favors. It may include gestures, signs, and images directed at the aggrieved persons. It may include the use of racial, religious or ethnic epithets, derogatory statements or expressions of a sexual nature, taunting or teasing related to a person s disability, or threatening statements. The unwelcome conduct may involve the use of email, text messages or social media.   An individual violates the Act so long as the quid pro quo or hostile environment harassment is because of a protected characteristic, even if he or she shares the same protected characteristic as the targeted person.   With respect to sexual harassment, harassing conduct need not be motivated by sexual desire in order to support a finding of illegal discrimination. Sexually harassing conduct must occur "because of sex." For example, conduct motivated by hostility toward persons of one sex; conduct that occurs because a person acts in a manner that conflicts with gender-based stereotypes of how persons of a particular sex should act; or conduct motivated by sexual desire or control.   Number of Incidents   A single incident can constitute an illegal quid pro quo, or, if sufficiently severe, a hostile environment. In Quiqley v. Winter, the court cited as a quid pro quo violation the implication by a landlord that the return of a security deposit depended on seeing the plaintiff s nude body or receiving a sexual favor. The court also stated that touching of an intimate area of a plaintiff s body is conduct that can be sufficiently severe to create a hostile housing environment - even if it was an isolated incident.   Establishing Liability for Discriminatory Housing Practices   Direct Liability   A person is directly liable for failing to take prompt action to correct and end a discriminatory housing practice by that person s employee or agent where the knew or should have known of the discriminatory conduct. The proposed rule also states that a person is directly liable for failing to fulfill a duty to take prompt action to correct and end a discriminatory housing practice by a third party (i.e., a non-agent) when the person knew or should have known of the discriminatory conduct.   With respect to a person s direct liability for the actions of an agent, the law recognizes that a principal who knows or should have known that his or her agent has engaged in or is engaging in unlawful conduct and permits it to continue is complicit in or has approved the discrimination. With regard to direct liability for the conduct of a non-agent, the traditional principle of liability that a person is directly liable under the Act for harassment perpetrated by non-agents if the person knew or should have known of the harassment, had a duty to take prompt action to correct and end the harassment, and failed to do so or took action that he or she knew or should have known would be unsuccessful in ending the harassment. For example, an owner may be liable for acts of tenants and management s children after failing to respond to a tenant s complaints of harassment (see Neudecker v. Boisclair Corp., 8th Cir. 2003). This indicates that management will be held liable for tenant-on-tenant harassment if they know of the harassment and fail to take action. It is important to note however, that not every quarrel among neighbors amounts to a violation of the FHA.   Corrective actions appropriate for a housing provider to use to stop tenant-on-tenant harassment might include verbal and written warnings; enforcing lease provisions to move, evict or otherwise sanction tenants who harass or permit guests to harass; issuing no trespass orders or reporting conduct to the police; and establishing an anti-harassment policy and complaint procedure. When the perpetrator is an employee of the housing provider, corrective actions might include training, warnings, or reprimands; termination or other sanctions; and reports to the police. The housing provider should follow up with the victim of the harassment after the corrective action is taken to ensure that it was effective.   The "knew or should have known" concept of liability is well established in civil rights and tort law. A principal "should have known" about the illegal discrimination of the principal s agent when the principal is found to have had knowledge from which a reasonable person would conclude that the agent was discriminating. For example, if a housing provider s male maintenance worker enters female tenants units without notice using a passkey, and enters their bedrooms or bathrooms while they are changing or showering and exposes himself, and the tenants complain about this conduct to the manager, the manager has reason to know that unlawful discrimination may have occurred. If the manager conveys this information to the owner, neither the owner nor the manager takes any corrective action, they are both liable for violating the FHA. In such as case, the principal is liable as if the principal had committed the act.     Vicarious Liability   A person is vicariously liable for the discriminatory housing practices of his or her agents or employees based in "agency law." Under agency law, a principal is vicariously liable for the actions of his or her agents taken within the scope of their relationship or employment, as well as for actions committed outside the scope of the relationship or employment when the agent is aided in the commission of such acts by the existence of the agency relationship. Unlike direct liability, someone may be vicariously liable for the acts of an agent regardless of whether the person knew of or intended the wrongful conduct or was negligent in preventing it from occurring. To be vicariously liable, an agency relationship must exist.   Unlike Title VII, the "affirmative defense" against vicarious liability does not apply to fair housing, and no known court case has extended the Title VII affirmative defense to fair housing claims. Under Title VII, an employer may avoid vicarious liability by showing that the employer exercised reasonable care and took corrective action, and that the victim failed to take advantage of administrative options to address the issue. In the housing context, whether the perpetrator is a property manager, mortgage loan officer, a realtor or a management company s maintenance person, a housing provider s agent holds an unmistakable position of power and control over the victimized home seeker or resident. For example, a property manager can recommend (or sometimes even initiate) the eviction or a harassment victim or refuse to renew a lease, while a maintenance employee may withhold repairs to a victim s apartment or may access the victim s apartment without proper notice or justification.   This proposed rule is the first comprehensive guidance from HUD regarding the issue of harassment, and will have a significant impact on fair housing harassment cases in the future - especially those relating to sexual harassment. I would expect publication of the Final Rule sometime in the spring or summer of 2016, but even without a Final Rule, the guidance is important and will impact how harassment complaints are dealt with by HUD going forward.    

Eligible Basis: IRS Reconciliation of Allowable Costs

During an audit, a primary point of examination by the IRS will be the reconciliation of eligible basis, and identification of large, unusual or questionable items.   Reconciliation of Eligible Basis   The eligible basis shown on Line 7 of the 8609 and Line 1 of the 8609-A should match. If they don t, taxpayers must be prepared to explain why.   Section 42(m)(2) requires that housing credit agencies not allocate more credit to a project than the amount necessary for the financial feasibility of the project. To ensure this, the state agency is required to evaluate the need for the credit at three separate points of the development process: (1) when the credits are initially applied for; (2) when the credit allocation is made; and (3) when the building is placed in service. This final evaluation (placed in service) must occur no later than the date the state agency issues the 8609s for the project. Prior to obtaining an 8609, owners are required to submit a cost certification. If the project has more than ten units, a CPA must do the cost certification; for projects of 11 units or less, the state agency may require that a CPA prepare the certification. The eligible basis shown on the cost certification should match the eligible basis on the 8609 and 8609-A.   Requirements of the Cost Certification   At a minimum, the final cost certification must include the following: All costs, including those that will be in eligible basis and those that will not be in eligible basis. In addition to basic construction costs, the following must be included in the certification: Site acquisition costs; Construction contingency; General contractor s overhead and profit; Architect s and engineer s fees; Permits and survey fees; Insurance premiums; Real estate taxes during construction; Title and recording fees; Construction period interest; Financing fees; Organizational costs; Rent-up and marketing costs; Accounting and auditing costs; Working capital and operating deficit reserves; Syndication and legal fees; and Developer fees   If an existing building is bought and rehabilitated, the acquisition costs for the building must be shown separately from the rehab costs and must be distinguished from the cost of the land. Large, Unusual or Questionable Items (LUQs)   During an examination, the IRS will look for specific costs that are large, unusual or questionable. The agent will: Consider the inherent character of the cost categories. They will ensure that categories not includable in eligible basis, such as the cost of land, were not shown in eligible basis on the cost certification; Consider the beneficial effects of how an item was reported. For example, allocation of the purchase price of an existing building between the building and the land. Another example would be the case of a multiple building project. Unless the actual costs associated with each building were tracked and cost certified, the total eligible basis for the entire project should be allocated among the buildings based on square footage; Consider costs that should have been in the final cost certification, but were not. Examples include partnership organizational costs, rent-up and marketing costs, and syndication fees. Even though not includable in eligible basis, these costs must be accounted for in order to ensure that such costs have not be "hidden" among allowable cost items; and Consider line items on the cost certification that are an accumulation of a larger number of separate costs. In such cases, the taxpayer will be required to explain any underlying costs.   Even when all items that are clearly excludable have not been placed into basis, the IRS will focus on two additional issues: The comparative size of the cost to total eligible basis; and The absolute size of the cost, even if comparably small, if the dollar value does not appear commensurate with the character of the cost.   Because of the importance of the cost certification to the final establishment of eligible basis, it is important that developers of LIHTC projects retain the services of accountants skilled in the LIHTC program. Issues of eligible basis are unique to the tax credit program, and only accounting firms that specialize in the Section 42 program should be used for the preparation of cost certifications.  

Short Term Rental Fees for Vouchers

In Velez v. Cuyahoga Metropolitan Housing Authority, 2015 U.S. App. Lexis 13265 (6th Cir. July 30, 2015), an appeals court ruled that fees for short-term rentals are considered rent and must be paid as part of the rent under the Housing Choice Voucher (HCV) Program.   The plaintiffs in the case entered into one-year leases with a landlord. At the end of the one-year lease, the leases were renewed for terms of less than one-year. The landlord had a policy that when leases are not at least one year, tenants are required to pay additional fees. These fees ranged from $35 to $100 per month.   The policy of the Cuyahoga Metropolitan Housing Authority (CMHA) was not to treat such short-term fees as rent under the HCV program, but considered them to be "convenience fees" charged as consideration for the increased costs associated with the administration of leases with shorter term rentals. For this reason, the tenants were required to pay the fees out-of-pocket.   The plaintiffs filed a claim in district court against CMHA, arguing that the short-term fees were "rent." The district court ruled in favor of CMHA, stating that the term "rent" under the U.S. Department of Housing & Urban Development (HUD) regulations does not include the fees that landlords charge for short-term leases. The plaintiffs then appealed to the U.S. Court of Appeals for the Sixth Circuit.   The appeals court relied on Section 8 of the Housing Act of 1937 and other HUD regulations in reaching its decision. Under the Act, housing assistance payments that a PHA makes on behalf of a low-income tenant are defined as the monthly assistance payment by the PHA, which includes a payment to the owner for rent to the owner under the family s lease. HUD regulations define "rent to owner" as "total monthly rent payable to the owner under the lease for the unit. Rent to owner covers payment for any housing services, maintenance and utilities that the owner is required to provide an pay for."   "Based on the plain meaning of the word in context, rent in Section 8 of the U.S. Housing Act means the amount paid under the lease for use and occupancy of the property," the appellate court wrote. "Because the subject fees are an expense payable by the lessees for the occupancy of the rental unit, we conclude that the expenses are part of the lessees rent under the Act." Based on this, the CMHA is required to pay the short-term rental fees charged to the plaintiffs. This assumes that the fees, when combined with other rent charged, do not exceed the HCV payment standard approved for the locality.   This is an important court ruling in that it stipulates that not only may owners participating in the HCV program charge additional rent for short-term rentals, but that PHAs are obligated to include the fees as rent when determining the PHA portion of the rent. This is the case as long as the rental amount does not exceed the local payment standard for the HCV program.    

Costs Included In Eligible Basis

  The next few articles in this series of articles on the IRS Audit Guide will focus on the important issue of Eligible Basis, the beginning point for the calculation of credits. This first article will discuss the costs that may be included in eligible basis.   In any examination of eligible basis, the IRS examiner will begin with an analysis of the actual qualifying costs incurred by the taxpayer. It is the responsibility of the taxpayer's accountant (usually the accountant who completes the cost certification) to determine the items to be included in the determination of eligible basis.   Defining Eligible Basis   Eligible basis is primarily defined by 103 and 168 or the IRC, with additional clarification in 42.   Under 42(d)(4)(A), to be included in eligible basis, a cost must be related to a "residential rental property." The term 'residential rental property' has the same meaning for 42 as it does for IRC 103 (Private Activity Tax-Exempt Bonds). Essentially, a residential rental project consists of buildings or structures, together with any functionally related and subordinate facilities. A building or structure is a "discrete edifice or other man-made construction consisting of an independent foundation, outer walls, and roof. A single unit which is not an entire building but is merely a part of a building" is not a building or structure for purposes of 42.   IRS Notice 88-91 further explains that buildings include apartment buildings, single-family dwellings, townhomes, row houses, a duplex, or a condominium. Housing owned by a cooperative housing corporation or a tenant-stockholder is not included in this definition.   Buildings that may qualify for the credit include: >new buildings; >existing buildings; and >rehabilitation expenditures on an existing building.   Costs included in eligible basis must be depreciable property under ITC 168. For this reason, land may not be included in eligible basis, since land does not depreciate (i.e., it does not diminish in value over a period of time).   IRC 168(e)(2)(A) defines 'residential rental property' to mean any building or structure if 80% or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units, not including units in a hotel, motel, or other establishment if more than half the units are used on a transient basis. Also, depreciable residential rental property expensed under IRC 179 may not be included in eligible basis.   Residential Rental Unit   A unit is defined in Treasury Reg. 1.103-8(b)(8)(i) to mean "any accommodation containing separate and complete facilities for living, sleeping, eating, cooking, and sanitation". Such accommodations may be served by centrally located equipment, such as air conditioning or heating. Thus, for example, an apartment containing a living area, a sleeping area, bathing sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator, and sink, all of which are separate and distinct from other apartments, would constitute a unit.   Single room occupancy (SRO) units also qualify as residential rental units even though the units may provide eating, cooking and sanitation facilities on a shared basis.   Common Areas   Eligible basis includes the cost of common areas provided as comparable amenities to all residential rental units in a building. These are facilities for use by the tenants, and other facilities reasonably required by the project.         Community Service Facilities   The eligible basis of any building located in a qualified census tract (QCT) includes the adjusted basis of any property used to provide services for certain nontenants. These are known as "community service facilities," and must (1) be located in a QCT, (2) serve primarily individuals whose income is 60% or less of area median income, and (3) used throughout the taxable year as a community service facility. Also, any fees charged for the services provided in the facility must be affordable to persons at or below the 60% income level, and the need for the services should have been stipulated in the project's market study.   Transitional Housing & Supportive Services for the Homeless   If a project provides transitional housing for the homeless, the portion of the building used to provide supportive services may be included in eligible basis. To qualify as transitional housing: (1) the building must be used exclusively to facilitate the transition of homeless individuals (as defined in the McKinney-Vento Homeless Assistance Act) to independent living within 24 months, and (2) a governmental entity or nonprofit organization provides the individuals with temporary housing and supportive services designed to assist such individuals in locating and retaining permanent housing. No more than 20% of the building can be used for supportive services.   Functionally Related Facilities   Facilities that are functionally related and subordinate to residential rental projects may be included in eligible basis. Examples of such spaces are swimming pools, recreational facilities, parking areas, and other facilities reasonably required by the project (e.g., heating & cooling equipment, trash disposal equipment, and units for resident employees.   Landscaping & Land Improvements   If costs associated with land preparation are so closely associated with a depreciable asset so that it will have to be replaced at the same time as the depreciable asset, such costs may be included in eligible basis.   Date of Determination   For a new building, the eligible basis is the adjusted basis as of the close of the first taxable year of the credit period. The same rule applies for existing buildings, but there are additional rules. The rule also applies to rehab expenses treated as a separate new building, but only if the "minimum expenditure" test has been met.   In future articles on eligible basis, I will discuss >How the IRS Reconciles Eligible Basis and Identifies "Large, Unusual, or Questionable" Items; >How the IRS Verifies Assets Included in Eligible basis; >Specific Issues Relating to Common Areas, Required Facilities, and the Provision of Services; and >Developer Fees