News

Revisions to Public Housing Flat Rents - Interim Rule, September 8, 2015

The Department of Housing and Urban Development (HUD) published in Interim Rule in the September 8, 2015 Federal Register, titled " Streamlining Administrative Regulations for Public Housing: Revisions to Public Housing Flat Rents."   This interim rule amends HUD regulations implementing the Fiscal Year (FY) 2014 statutory language regarding public housing flat rents to allow PHAs to take advantage of the FY 2015 authority that provides PHAs with more flexibility is setting flat rents. The interim rule will be effective on October 8, 2015.   Background   Section 3(a)(2)(B) of the Housing Act of 1937 requires PHAs to set a flat rental amount for each public housing unit. In the 2014 Appropriations Act, this amount was statutorily set at no less than 80 percent of the applicable fair market rent (FMR) as determined by HUD. In the event that implementation of this requirement would increase a family s rental payment by more than 35 percent in a year, the PHA must phase in the flat rent.   In the 2015 Appropriations Act, HUD may allow a PHA to establish a flat rent based on an FMR that is based on an area geographically smaller than would otherwise be used, if HUD determines that the resulting FMR more accurately reflects local market conditions. A PHA may apply to HUD for an exception allowing a flat rental amount that is lower than the amount otherwise determined under the two allowable FMRs, if HUD determines that the two FMRs do not reflect the market value of the property and the lower flat rental amount is based on a market analysis.   What the Interim Rule Changes   This interim rule provides that HUD may permit a flat rental amount based on either 80 percent of the applicable FMR, or an FMR that more accurately reflects local market conditions and is based on an area geographically smaller than the one that would otherwise be used. This second FMR would be either the Small Area FMR (SAFMR), issued for metropolitan counties, or the unadjusted rents, for counties not covered by an SAFMR, or any other fair market rental determination. If neither a SAFMR nor an unadjusted rent has been determined for an area, PHAs must set flat rents based on the applicable FMR for the larger area.   The interim rule also provides that the PHA may submit to HUD a request for an exception to use a flat rental amount that is lower than the amount allowed under the two FMRs. This request must include a market analysis and a demonstration that the proposed lower flat rental amount is based on a market analysis of the applicable market and is reasonable in comparison to other comparable unassisted units.   PHAs may opt to continue to implement flat rents equal to not less than 80 percent of the applicable FMR.   PHAs are required to adjust flat rents downward to account for tenant-paid utilities and to revise flat rents within 90 days of HUD s issuance of new FMRs. However, the families rent must not increase by more than 35 percent in a single year as a result of these new flat rent rules. PHAs and owners involved in the public housing program (e.g., RAD, HOPE VI), may obtain further information on this interim rule by contacting Todd Thomas, Program Analyst, Public Housing Management and Occupancy Division, Office of Public and Indian Housing, Department of Housing and Urban Development, 40 Marietta Street, NW, Atlanta, GA 30303. His phone number is 678-732-2056 and his email is Todd.C.Thomas@HUD.gov.

Children For Whom Custody is Being Sought - To Count or Not to Count

Children for Whom Custody is Being Obtained - To Count or Not to Count   When determining income eligibility for Section 8 or Low-Income Housing Tax Credit (LIHTC) properties, HUD Section 8 rules must be followed. The basic HUD guidance in this area is contained in HUD Handbook 4350.3, Chg.4. Since qualifying income limits are based on the number of persons in the household, an understanding of who can and cannot be counted for income limit purposes is critical. Unfortunately, there are differences in who may be counted for occupancy purposes (i.e., the number of bedrooms) and who may be counted for income eligibility. One of those differences involves children for whom custody is being obtained.   When determining family size for income limits, live-in aides and guests must not be counted. However, some individuals not residing in the unit must be counted, including (1) children temporarily absent due to placement in a foster home; (2) children in joint custody arrangements who are present in the household 50% or more of the time; (3) children who are away at school but who live with the family during school recesses (do not count if the student has entered into their own lease for an apartment); (4) unborn children of pregnant women; (5) children who are in the process of being adopted; (6) temporarily absent family members who are still considered family members (e.g., a family member working on assignment in another state); (7) Family members in the hospital or rehabilitation facility for periods of limited or fixed duration; and (8) persons permanently confined to a hospital or nursing home, if the family member chooses to count them.   When determining family size for the size of the unit (i.e., number of bedrooms), all of the above must be counted, as well as live-in aides and children whose custody is being obtained by an adult family member, even though the child is not yet in the unit. However, neither of these categories is counted for income eligibility purposes.

The IRS and Extended Use Agreements

The IRS and Extended Use Agreements   As outlined in 42 (h) (6), all LIHTC properties allocated credits after 1989 must have an extended use agreement (EUA). The agreement is entered into by the taxpayer and the Housing Credit Agency (HCA), and has a minimum term of 30 years (15-years after the close of the 15-year compliance period).   42 provides that a building is eligible for credit only if there is a minimum long-term commitment to low-income housing.   Content of the EUA   Each EUA must have the following elements: The applicable fraction of the building (i.e., the percentage of the building that must be low-income), must be maintained throughout the extended use period; Individuals who meet the income limitation applicable to the building under 42 (whether prospective, present, or former occupants of the building) may enforce the agreement in State Court; Prohibits the disposition to any person of any portion of the building, unless all of the building is disposed of to such person; Prohibits the refusal to lease to a Section 8 voucher holder solely due to the status of the person as a voucher holder; Is binding on all successors of the taxpayer; and Must be recorded pursuant to State law as a restrictive covenant.   Tenant Protections   The EUA must include provisions protecting low-income residents against eviction or termination of tenancy for other than good cause throughout the entire extended use period. In addition, for a three-year period after the termination of the EUA, low-income residents may not have tenancy terminated without good cause and their rent may not be raised above the allowable LIHTC rent limit.   Early Termination of the EUA   An EUA may only be terminated prior to the end of the extended use period for two reasons: Foreclosure (or instrument in lieu of foreclosure); or Failure of the HCA to present a qualified contract for the acquisition of the low-income portion of the building within 12-months of the HCA acceptance of the taxpayer request to find a qualified contract purchaser. A qualified contract must be from a purchaser that agrees to operate the building as low-income for the remainder of the extended use period.   Purchase by Tenant   42 (g) (6) allows a low-income tenant to pay (on a voluntary basis) a small amount to be held toward the purchase of a low-income unit after the end of the 15-year compliance period. This does not negate the EUA. To qualify, the agreement must meet two conditions: All amounts paid are refunded to the tenant if the tenant ceases to occupy the unit; and The purchase of the unit is not permitted until after the end of the 15-year compliance period. Also, any amount paid by the tenant is included as rent for determining whether the unit is rent-restricted under 42.   Since the primary objective of 42 is to promote housing for low-income individuals, and 42 (h) and (i) are designed to promote such housing beyond the compliance period, the EUA satisfies the requirements of 42 even if a tenant holds a right of first refusal to purchase a low-income unit at the end of the compliance period.   Correction Period   If there is a determination that an EUA was not in effect at the beginning of a tax-year, there shall be no penalty if the EUA is recorded within one-year of the date of determination.   Audit Techniques   When conducting an audit of a LIHTC project, the IRS will make the following determinations relative to the EUA: Confirm that the EUA has been properly recorded by examining land records; Review mortgages and other restrictive covenants that have been recorded against the property. This will be done to ensure that the agreements do not include conditions that are inconsistent with 42 requirements; Evaluate whether the EUA contains Code required elements, as noted above, keeping in mind that HCAs may impose additional requirements as part of the EUA. Any requirements in addition to those prescribed by 42 will not be audit issues, but may be enforced by the HCA in state court.   Disallowance of Credit   Noncompliance occurs if: The EUA does not meet the requirements of 42, is not properly recorded or executed; and The taxpayer failed to correct noncompliance relative to the EUA within the one-year correction period. If noncompliance occurs, no credit is allowable for any building governed by the agreement until the taxable year in which the EUA is in effect.   It is important to note that since noncompliance related to an EUA does not result in a reduction in qualified basis, the credit recapture provisions of the Code do not apply.   In a nutshell, the IRS will ensure that an EUA is in existence, properly designed, and recorded. The Service will not enforce the provisions contained within the agreement.

HUD Clarifications Regarding Completion of Utility Allowances

I sent a memo to clients on June 29, 2015, regarding HUD Notice H 2015-04, which was published by HUD on June 22, 2015. This Notice outlined revised HUD requirements relative to the Methodology for Completing a Multifamily Housing Utility Allowance (UA). Since then, HUD has provided clarifying information regarding the Notice. Some of the most relevant guidance follows: The Notice was effective on June 22, 2015. However, the requirement to implement the methodology outlined in the Notice depends on the anniversary date of the HAP Contract for the property. If the anniversary date of the Contract is on or before December 19, 2015, the owner may follow the new methodology, or follow the existing methodology. If the contract anniversary date is after December 19, 2015, the methodology outlined in the Notice must be followed.   When requesting approval of a UA, the owner/agent (OA) must submit all backup information required to demonstrate how the new allowance was calculated. This may include: Copies of tenant data received from utility providers; or Copies of printouts showing a summary of monthly data if the tenant was able to obtain data online from the utility provider for the previous 12 months, or ten months (at a minimum); or If the O/A obtained actual monthly utility bills from a tenant, the O/A may provide a spreadsheet summarizing the average of the monthly bills. The actual bills do not need to be submitted but must be retained in the tenant file for the term of tenancy plus three-years and will be subject to HUD or Contract Administrator (CA) review. A combination of the three methods noted above may be used.   If only ten months of utility information is obtained, an average of the ten months should be used to determine the allowance. Partial months should not be used.   No unit should be used in the UA sample if at least ten months of utility information cannot be obtained. If using the HUD provided UA Worksheet that was attached to the Notice, and owners are using less than 12-months of information (e.g. ten months), no value should be entered for the months during which the unit was vacant (do not enter $0). There is an unprotected version of the worksheet available and if this is used, the formula may be changed so that the average is calculated only on non-zero months.   HUD does not require that estimated amounts for certain appliances (e.g., air conditioning or in-unit washes/dryers) be removed from the total utility bill. No agency, CA or HUD office should impose such a requirement.   Once the average cost for a unit type has been derived in dollars and cents, the final result should be rounded to the nearest dollar (>=>50, round up; <=.49, round down).   When selecting sample units, no unit that has been vacant for more than two months of the prior 12-months may be used in the sample. At least ten months full of data is required for each unit.   If a property has multiple floor plans for units with the same number of bedrooms, and they appear on the rent schedule as different unit types, they must be treated as different unit sizes in the sample.   HUD has stated that the UA analysis covers only units that receive a UA, but goes on to say that only HUD-assisted units may be included in the analysis. Additional guidance will be required for this since some LIHTC properties may have HUD-assisted and non-HUD-assisted units, all of which require a UA. When requesting tenant permission for release of information, O/As may use the HUD Sample form, an owner generated form or a form required by the utility company.   If utility rates increase my 10% or more in mid-year, owners must update the allowance. For example, if electric rates increase by 15%, the 15% increase will be applied only to electric costs (not gas, propane, etc.). The following evidence may be submitted in support of the change: Utility bills from the month prior to the rate change and the first month after; or Other verification of the increase from the utility provider.   While the Notice states that tenants receiving assistance under the Department of Health & Human Services Low-Income Home Energy Assistance Program (LIHEAP) must report this assistance as income and it must be counted as income, HUD has confirmed that assistance from this specific program is excluded income; the Notice is incorrect on this issue.  

Definition of a Parent for the Section 42 Student Rule

Section 42 (i) (3) (D) states that certain students do not disqualify a unit from being low-income for LIHTC purposes. Five exceptions are outlined in the Code, one of which states "A unit shall not fail to be treated as a low-income unit merely because it is occupied entirely by full-time students if such students are single parents and their children and such parents are not dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof) of another individual and such children are not dependents (as so defined) of another individual other than a parent of such children..." While persons other than a parent may claim a child as a dependent, 152 does not define such persons as parents. For example, a grandparent may claim a child as a dependent, but they are not deemed a "parent" for tax purposes. For this reason, I recommend following a relatively narrow definition of "parent" with regard to the single parent exception under 42 of the IRC. The most common definition in legal circles is "the lawful and natural father or mother of a person. The word does not mean grandparent or ancestor, but can include an adoptive parent. The definition has recently be expanded in many circumstances to include same-sex relationships, if the parties have full parental rights under the law. It generally will include an individual who, in law, has custody, guardianship or access rights in regards to a child and who may have corollary obligations to financially support a minor, typically by way of child support. Based on the ambiguity of this issue, and the fact that the IRS has provided no specific guidance regarding the definition of a "parent" under 42, I recommend that owners and managers of LIHTC properties use a strict definition of "parent" for purposes of the tax credit student rule. While owners may decide to use an expanded definition if approved by the Housing Credit Allocating Agency, there is no guarantee that the IRS, in the event of an audit, would approve the expanded definition.

HUD Clarification on HOME Rental Requirements

HUD recently provided guidance on components of the HOME program that have raised questions. Following are the clarifications that apply to the use of HOME funds with multifamily housing. HOME funds cannot be used in public housing units that receive Public Housing Capital and Operating funds under Section 9 of the Housing Act of 1937. The HOME authorizing statute specifies that HOME cannot be used to provide assistance to units that receive public housing operating funds. For example, a PJ cannot provide HOME funds to a local public housing agency (PHA) to rehabilitate a public housing project that it owns and operates with HUD Operating Funds.   While HOME funds cannot be used for public housing units that receive HUD Operating Funds, HOME funds can be used in an affordable housing project that also contains public housing units, provided that the units are separately designated and HOME funds are not used in the public housing units. In these cases, all development funds must be allocated to maintain the separation of units. In these cases, the project must have fixed (not floating) HOME units and must have separate waiting lists and rent structures for the HOME units and public housing units.   The prohibition against using HOME funds for Section 9 public housing units should not be confused with the use of HOME funds for units assisted under the HOPE VI (Section 24) program. HOME funds may be used for HOPE VI-funded public housing units, provided there is no Capital Fund assistance used. Units developed with both HOME and HOPE VI funds are eligible to receive Operating Funds until Section 9. These units may receive Capital Funds for rehabilitation or modernization only if the 20-year period of affordability required by the HOME program has expired.   HUD provided clarification of the two specific deadlines for the initial lease-up/occupancy of HOME rental units: >Within six months of the date of project completion, income eligible tenants must occupy every HOME-assisted rental housing unit. If a unit is not leased up, the PJ must submit marketing information to HUD and. if appropriate, submit a new marketing plan; and >Within 18 months of the date of project completion, if any housing unit is not yet rented to an income-eligible tenant, the PJ must repay HOME funds invested in the unoccupied HOME unit(s). Project completion means that the title transfer requirements and construction work have been performed, the project complies with all HOME requirements, and the final drawdown of the HOME funds has been disbursed. These occupancy deadline and marketing requirements apply to projects to which HOME funds are committed on or after August 23, 2013.   HUD has made a technical correction to the 2013 Final HOME Rule with regard to the determination of a project's utility allowance. This corrected delayed the effective date of the utility allowance requirement until January 24, 2015. Effective on that date, any project with HOME funds committed on or after January 24, 2015 will have to use a PJ provided utility allowance that was developed through the use of the HUD Utility Schedule Model or based upon actual utilities used at the project. This requirement does not apply to the PJ's entire rental portfolio; only those projects with funds committed after this date.   PJ's have three options in setting the imputed rate to be used in the calculation of income from assets when the total cash value of a household's assets exceed $5,000. The PJ may use (1) the passbook rate used by the local PHA; (2) the passbook rate published by HUD's Office of Multifamily Housing as described in Notice H 2014-15; or (3) a rate established by the PJ. Once the method is established, it must be used for all HOME participants.

Determining the Cash Value of and Income from Annuities

Determining the Cash Value of and Income from Annuities   There is some confusion among managers of affordable rental housing regarding how to determine the value of and income from annuities. Part of the confusion is the result of a lack of understanding about how annuities differ from investment accounts in terms of how they are handled for Section 8 and tax credit purposes. This article with describe what an annuity is and how is should be treated for housing purposes for properties governed by the requirements of HUD Handbook 4350.3, Chg. 4.   What is an Annuity?   An annuity is a contract sold by an insurance company designed to provide payments, usually (but not always) to a retired person, at specified intervals. Many annuities are "life" annuities, meaning that they continue to pay out as long as the owner is alive. Generally, a person who holds an annuity from which he or she is not yet receiving payments will also be earning income. In most instances, a fixed annuity will be earning interest at a specified fixed rate similar to interest earned by a Certificate of Deposit (CD). A variable annuity will gain or lose income based on market fluctuations, similar to a mutual fund. Most annuities will charge surrender or withdrawal fees if the owner closes the account and withdraws the balance. In the case of an early withdrawal, there will also usually be tax penalties. Depending on the type of annuity and the status of the annuity, different questions need to be asked of the verification source, which will normally be the applicant's insurance broker.   Income After the Holder Begins Receiving Payments   When verifying an annuity, owners should ask the verification source whether the holder of the annuity has the right to withdraw the balance of the annuity. If there is no right of withdrawal, the annuity is not treated as an asset, but should be documented in the file. In most cases, when the holder has begun receiving annuity payments, the holder can no longer convert it to a lump sum of cash. In this situation, the holder will receive regular payments from the annuity that will be treated as regular (not asset) income, and no calculation of income from assets will be made.   Calculations When an Annuity is Considered an Asset   When an applicant or tenant has the option of withdrawing the balance in an annuity, the annuity will be treated like any other asset. Management must determine the cash value of the annuity in addition to determining the actual income earned.   Management needs to verify the following information with the insurance agent: The right of the holder to withdraw the balance (even if penalties are involved); The basis on which the annuity may be expected to grow during the coming year; The surrender or early withdrawal penalty fee; and The tax rate and the tax penalty that would apply if the family withdrew the annuity. The cash value will be the full value of the annuity, less the surrender (or withdrawal) penalty, and less any taxes and tax penalties that would be due. The actual income is the balance in the annuity times the percentage (either fixed or variable) at which the annuity is expected to grow over the coming year. Even though the money will be reinvested into the annuity, it is still considered actual income).   The imputed income from the asset is calculated only after the cash value of all family assets has been determined. Imputed income from assets is calculated on the total cash value of all family assets.   Management should keep in mind that unlike designated retirements accounts (IRAs, 401ks, Keoghs, etc.), even though regular payments are being made from an annuity, if the holder still has access to the balance in the account, the annuity is treated as an asset. In such cases, the payments are counted as regular income, the cash value of the annuity is an asset, and income earned on the annuity is asset income.  

Claiming Credits without an IRS Form 8609 - Guidance from the IRS Audit Guide

Claiming Credits without an IRS Form 8609 - Guidance from the Audit Guide   IRC 42(l)(1) requires that taxpayers complete a certification with respect to the first year of the credit period. This certification is made by completing Part II of the Form 8609 that has been provided by the state agency to document the allocation of low-income housing tax credits. This form must be completed for credits allocated under the state agency allocation and for credits allocated for properties financed with tax-exempt bonds. The form must be sent to the IRS no later than the due date of the first year tax return (including extensions) for which the taxpayer claims credit. The form is submitted to the IRS only one time.   Each year, including the first year of the credit period, the taxpayer must complete and submit IRS Form 8609-A, Annual Statement for Low-Income Housing Credit.   When conducting an audit, the IRS will determine if the operation of the project is inconsistent with the information and elections documented on the 8609.   Critical 8609 Issues > 42(i) (1) (E) states "In the case of a failure to make the certification required... on the date prescribed therefore, unless it is shown that such failure is due to reasonable cause and not to willful neglect, no credit shall be allowable by reason of subsection (a) with respect to such building for any taxable year ending before such certification is made." This clearly places the burden on the taxpayer to show an entitlement to any credit claimed without a state issued 8609.   The IRS Audit Guide states that taxpayers may file amended tax returns to claim credits that they were entitled to but did not claim due to the fact that no 8609 had been issued by the state agency. This is the most appropriate way to handle the claiming of credits when no 8609 has been submitted to the IRS. I.e., once the 8609 is issued by the state and submitted to the IRS by the taxpayer, the taxpayer should amend the applicable prior tax returns to claim the appropriate credits.   What is "Reasonable Cause" for Claiming Credits without an 8609?   The term "reasonable cause" is not defined in the Code, but Treasury Regulation 301.6651-1(c) (1) provides that, to demonstrate reasonable cause, a taxpayer filing a late return must show that he "exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." In other words, the failure to file the form when required was beyond the control of the taxpayer.   A determination of reasonable cause must be based on an evaluation of all the facts and circumstances on a case-by-case basis. The IRS will consider the following factors:   >How long after the end of the first year of the credit period did the taxpayer receive the 8609s from the state agency? How many years has the taxpayer claimed the credit without completing the certification? How did the taxpayer answer question C of Form 8609-A when filing tax returns and claiming credits? (Question C asks if the taxpayer has an original Form 8609 issued and signed by the state agency).   >Did the taxpayer have other problems while noncompliant with the requirement to submit the 8609? If so, how were the problems resolved?   >What reason did the taxpayer give for the delay? To show reasonable cause, the dates and explanations should clearly reflect efforts to timely resolve the problems and expeditiously obtain the 8609s from the state.   >Is the GP a professional specializing in the development and management of 42 properties? If so, they would be expected to know the requirements relative to submission of 8609s.   >Forgetfulness, oversight, or reliance upon another person does not support a determination of reasonable cause.   Taxpayers bear the burden of demonstrating that the failure did not result from a willful neglect and that there was a reasonable cause for failing to complete and submit the 8609(s) by the deadline.   Can the Taxpayer Blame the State Agency?   A taxpayer may argue that delays were caused by the state agency responsible for completing the Forms 8609. If the Agency is at fault, the taxpayer is not subject to credit disallowance or recapture. Taxpayers should keep in mind however, that blaming the State may not be the best option, since a delay in the State issuance of the 8609 may indicate problems with the project itself.   If it is determined that reasonable cause does not exist, or there was willful neglect, no credit is allowable for any tax year before the completion of the 8609. The entire credit will be disallowed for all tax years open by statute, and a portion of credit can be recaptured in years closed by statute or otherwise not examined.   The bottom line - it is strongly recommended that credits not be claimed prior to the filing of an 8609 with the IRS.