News

Nonprofit Material Participation Requirements

Section 42 (h) (5) of the Internal Revenue Code requires that Housing Finance Agencies set aside at least ten percent of their annual allocation for use by non-profit entities. This "non-profit pool" is available only to Qualified Nonprofit Organizations and for-profit entities are precluded from obtaining credits from this pool. One of the most confusing requirements relating to the nonprofit set-aside is the "material participation" stipulation. A qualified nonprofit organization must materially participate in both the development and operation of the project throughout the 15-year compliance period. IRC 469(h) defines material participation as activity that is regular, continuous, and substantial. The IRS applies the following guidelines to determine if the participation is "material." Is the activity a principle business or activity of the nonprofit? Is there involvement in the actual operations of the activity? Services provided must be integral to project operations. Simply consenting to someone else s decisions or periodic consultation with respect to general management decisions is not material participation. Participation must be maintained throughout the year. Periodic consultation is not sufficient. Regular on-site presence at operations is indicative of material participation. Providing services as an independent contractor is not sufficient. Meeting this "material participation" requirement should not be an issue when the nonprofit is the sole general partner and also manages the property. However, it the partnership has one or more for-profit general partners, the nonprofit partner could have less participation in the partnership, which will attract scrutiny from the IRS. Also, if the management agent is a for-profit entity and operates the property without regular, continuous and substantial oversight from the nonprofit, questions could be raised relating to material participation. Nonprofit developers of LIHTC projects that receive an allocation of credits from the nonprofit pool should be diligent in ensuring constant and meaningful participation in project operations. Keep in mind that from a tax standpoint, the nonprofit material participation requirement only applies to deals that receive credits from the nonprofit set-aside. Projects that receive points on their tax credit application for the participation of a nonprofit in the deal and an award of credits from other than the nonprofit set-aside are not subject to the material participation requirements from the standpoint of tax law. However, there may be an HFA requirement for material participation in these cases, and any such requirement should be outlined in the project s extended use agreement.  

RHS and HUD Merger Potential

During a recent hearing before a House Financial Services panel, a representative of the Federal Housing Administration (FHA) and Housing & Insurance Subcommittee Chair Blaine Luetkemeyer (R-MO) argued that the Rural Housing Service (RHS) should be moved from the Department of Agriculture to HUD. A focal point of the hearing was a study by the General Accountability Office (GAO) that was very critical of RHS operations. RHS Director Tony Hernandez argued that the GAO findings were not accurate and that differences in who is served by RHS vs. FHA make a merger problematical. He also outlined several steps that RHS is taking to improve its programs, but the committee Chair was not swayed and clearly favors merging RHS into HUD. We'll be paying attention to what happens down the road, but this was clearly a shot across RHS's bow.

Good Cause Evictions - New IRS Guidance

The IRS issued a Chief Counsel Advice (CCA) memorandum on March 26, 2015 on the subject of Noncompliance Resulting from Conflicting Program Requirements in the Low-Income Housing Tax Credit program. The memorandum was issued in order to change the advice given in a CCA issued August 20, 2007. The 2007 memorandum provided guidance to IRS agents in situations where an owner of a 42 building implements policies or procedures that result in not renewing a tenant s lease in a 42 low-income unit when the tenant s income rises to a certain income threshold that violates other program requirements (e.g., a state, local, or other federal program). Since the 42 program permits occupants to remain in occupancy if their income exceeds the income limits for the tax credit program, the CCA determined that requirements of other programs that require an occupant to vacate the premises due to an increase in income would conflict with the requirements of 42. The CCA determined that if an owner follows the conflicting rules of other programs, the project would not be in compliance with 42 and no credit would be permitted.   This advice was of significant concern to the tax credit industry when it was issued, and while informal IRS guidance since then has indicated that violation of the rules of other programs may provide "good cause" for removal of an occupant in a tax credit project, until the issuance of this new CCA, no formal guidance existed.   Under 42(h)(6)(B)(i), a project s extended use agreement must prohibit the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit. This new CCA states "A building can still be a qualified low-income building under 42(c)(2)(A) if an owner does not renew the lease of a tenant when the tenant s income exceeds the applicable income limitation under 42(g)(1), even though 42(g)(2)(D)(i) or (ii) would allow the unit to continue to qualify as a low-income unit on renewal. However, unless good cause exists to not renew a lease, an owner is required to continue the tenancy of a tenant in a low-income unit who upon initial occupancy satisfied the applicable income limitation." This means that an increase in income above the applicable income limitation, by itself, is not good cause to end the leasing of the unit to the tenant. The CCA goes on to say that IRS agents do not need to determine whether good cause existed when an owner fails to renew the lease of any tenant. However, an appropriate party (e.g., the tenant or housing credit agency) can enforce the extended use agreement to the extent there is a question of whether there was good cause for non-renewal of a lease. Good cause should be determined under state or local law, and the fact that a local, state, or other federal program s requirements conflict with 42(g)(2)(D)(i) or (ii) may be relevant for this determination.   The current CCA recommends that the August 20, 2007, memorandum be withdrawn and instead IRS agents should determine that an extended low-income housing commitment satisfying the requirements of 42 is in effect at the end of the taxable year(s) at issue. As long as the extended use agreement is in effect, and the agreement meets the requirements of 42, credit is allowable. However, if the State Agency determines that good cause did not exist for removal of a resident, a credit loss and recapture could result.   As a result of this CCA, it now appears that State HFAs may consider the requirements of other programs as well as state or local law, when determining whether or not there was good cause to remove an occupant from a 42 unit. My advice is that prior to terminating occupancy by a resident due to the requirements of another program or state or local law, owners should confer with the State HFA to determine whether or not it will permit such termination, without reporting it to the IRS.

Familial Status Case - Issue of Separate Sex and Bedrooms, April 2015

On April 30, 2015, HUD entered into a Conciliation Agreement with Piilani Gardens, LLC regarding alleged familial status discrimination at Piilani Gardens Apartments in Kihei, Hawaii.   Piilani Gardens is a family project, but two of the 18 buildings in the project were advertised as being "adult friendly," meaning that families with children were not permitted in those buildings. If families in the "adult friendly" buildings have children, they were required to move to a building that permitted children.   Rule #4 of the community s Rules and Regulations stated: "There is no playground for children on the complex. Tenants must supervise their children while they are in the common areas. Tenants are responsible for any damage to the premises caused by children."   On December 14, 2012, the complex published a notice outlining ten problems relating to children, and stated: "In the future, if your child/children are observed breaking more plants/tree branches and/or damaging more Piilani Gardens Apartment property, you will be fined and assessed the cost of the damages caused by your child/children."   On July 15, 2013, an agent of the property told a tester that separate bedrooms are required for children of different sexes. An ad posted on Craigslist on May 5, 2014, stated "Ground floor, adult only building $1505 per month. Heated water and 2br/2ba 800 ft; 2 apartments available May 15."   HUD filed a complaint against the property on July 10, 2014, alleging discrimination based on familial status.   The owners denied violating the law and stated that they were advised by the County Department of Housing and Human Concerns, which operates the HUD funded Housing Choice Voucher Program, that if there were a family with two children of different sexes, then a three-bedroom voucher was required so that each child of different genders would have separate bedrooms. They also stated that once they learned that this was no longer a requirement, they stopped informing applicants or tenants of the separate bedroom requirement.   The owners denied that the Craigslist ad was posted by the property. They also agreed to settle the case in order to avoid the cost of judicial proceedings, but admitted not guilt. The agreement requires the following:   Owners will adopt and follow a new Housing Non-Discrimination Policy and Procedure Statement and provide copies of the policy to all employees; All employees are required to undergo live fair housing training from a reputable fair housing organization. The training will include instruction on non-discriminatory treatment of families with children; Tracking of the applications of all families to ensure that families with children are not being discriminated against and to provide a report to HUD every three months; Rule #4 of the Resident Rules and Regulations will be amended to state "Tenants are responsible for the conduct and behavior of all household members, visitors, and guests while they are anywhere on the property. Tenants are responsible for any damage to the premises caused by any household member, visitor, or guest.;" Families with children may no longer be prohibited from any buildings and all current tenants at the previously "adults only" buildings will be notified of the change; The owners may not require nor communicate a requirement that children of different sexes living at the property sleep in or have separate bedrooms; and The Owners must contract with a third-party to provide oversight to the terms of the agreement.   This Conciliation Agreement points out once again the dangers faced by housing operators if they implement rules that discriminate against families with children, including the requirement that children of different sexes have separate bedrooms. Owners and managers of multifamily housing properties should be aware that even if local housing agencies require separate bedrooms based on sex, it is a discriminatory practice. If you are told by a local housing agency that they will not issue vouchers for units where children of the opposite sex must share a bedroom, I recommend you lodge an objection with the agency and clearly document that the policy is not a policy of the property.

Familial Status Discrimination Case Warns Against Unreasonable Play Area Rules for Children

One of the Questions I often am asked during fair housing training is whether children can be restricted from playing in the common areas of apartment communities. The answer depends on the specifics of the community, but generally, rules relating to children should be clearly related to safety and not to a particular behavior. Owners and managers should be very careful when imposing rules that restrict the areas in which children may play.   A recent court case from Minnesota, United States of America v. Greenbrier Village Homeowner's Association, Inc., Gassen Company, Inc., and Diane Brown, illustrates the pitfalls when imposing overly restrictive rules regarding children.   The lawsuit, brought by the United Stated Department of Justice (DOJ) and settled in March 2015, alleged that Greenbrier and Gassen, along with the property manager, unlawfully discriminated against families with children by having and enforcing rules regarding the use of common areas. Greenbrier has settled with the Justice Department, agreeing to establish a new non-discrimination policy, pay a $10,000 penalty to the United States and pay $100,000 to six families that suffered as a result of the discrimination.   The DOJ alleged that the defendants required children to be supervised at all times when in a common area, prohibited or unreasonably restricted children from using the common areas and selectively enforced common area rules by issuing warnings and violation notices to residents with children, but not to adults engaging in the same activities.   This case should serve as a reminder that policies regarding behavior should not be specific to children or families with children. Also, owners and managers should not require unreasonable supervisory rules for children playing at the property. For example, while a rule requiring that children be supervised in swimming pools or exercise facilities may be acceptable, requiring the same rule for children playing in any common area probably not be considered reasonable.

HUD Notice CPD-15-02, Appropriate Placement for Transgender Persons in Single Sex Emergency Shelters and Other Facilities - February 20, 2015

HUD published Notice CPD-15-02 on February 20, 2015, providing further guidance on the placement of transgender persons in single-sex emergency shelters and other facilities. This guidance is provided in order to clarify the final rule published by HUD on February 3, 2012. That final rule requires that HUD s housing programs be made available to individuals and families without regard to actual or perceived sexual orientation, gender identity, or marital status.   HUD has determined that it is necessary to provide additional guidance on how best to provide shelter to transgender persons in a single sex-facility. While the guidance officially applies only to relevant HUD assisted facilities, it may also assist owners of non-HUD-assisted properties in states or localities that provide fair housing protection based on sexual orientation or gender identity.   The HUD guidance applies to the following programs: Emergency Solutions Grants (ESG); Continuum of Care (CoC); and Housing Opportunities for Persons with Aids (HOPWA)   The Notice also provides guidance on appropriate and inappropriate inquiries related to a potential or current client s sex for the purposes of placing transgender persons in temporary, emergency shelters or other facilities with shared sleeping areas or bathrooms. It should be noted that the guidance does not address the "legality" of single-sex facilities except to point out that all facilities must comply with applicable civil rights laws, including the Fair Housing Act (which bans discrimination on the basis of sex), and HUD regulations.   HUD is relying on guidance from other agencies and for other programs in developing their own guidance. For example, in the Violence Against Women Reauthorization Act frequently asked questions, the Department of Justice stated: A recipient that operates a sex-segregated or sex-specific program should assign a beneficiary (i.e., the individual seeking services) to the group or service which corresponds to the gender with which the beneficiary identifies, with the following considerations. In deciding how to house a victim, a recipient that provides sex-segregated housing may consider on a case-by-case basis whether a particular housing assignment would ensure the victim s health and safety. A victim s own views with respect to personal safety deserve serious consideration. The recipient should ensure that its services do not isolate or segregate victims based upon actual or perceived gender identity. A recipient may not make a determination about services for one beneficiary based on the complaints of another beneficiary when those complaints are based on gender identity.   In the employment context, the Office of Personnel Management (OPM) has issued Guidance Regarding the Employment of Transgender Individuals in the Federal Workplace, which says that "once an employee has begun living and working full time in the gender that reflects his or her gender identity, the employees should have access to restrooms and locker room facilities consistent with their gender identity. While a reasonable temporary compromise may be appropriate in some circumstances, transitioning employees should not be required to have undergone or to provide proof of any particular medical procedure in order to have access to facilities designated for use by a particular gender."   HUD Guidance   Per this Notice, HUD assumes that decisions regarding placement in a single-sex emergency shelter or other facilities will place a potential client (or current client seeking a new assignment) in a shelter or facility that corresponds to the gender with which the person identifies, taking health and safety concerns into consideration. A client s own views with respect to personal health and safety should be given serious consideration in making the placement. HUD also assumes that a provider will not make an assignment based on complaints of another person when the sole stated basis of the complaint is the client s non-conformance with gender stereotypes.       Appropriate and Inappropriate Inquiries Related to Sex   For temporary, emergency shelters with shared sleeping areas or bathrooms, the Equal Access Rule permits shelter providers to ask potential and current clients seeking a new assignment their sex. If the provider is uncertain of the client s sex or gender identity, the provider should inform the client that the agency provides shelter based on the gender with which the individual identifies. There is no basis for a provider to deny access to a single sex emergency shelter or facility solely because the provider possesses identity documents indicating a sex different that the gender with which the client identifies. The provider may not ask questions or otherwise seek information or documentation concerning the person s anatomy or medical history. Nor may the provider consider the client ineligible for an emergency shelter or other facility because his or her appearance or behavior does not conform to gender stereotypes.   Privacy   If a client expresses safety or privacy concerns, or if the provider becomes aware of safety or privacy concerns, the provider must take reasonable steps to address those concerns. Examples include: Addition of a privacy partition or curtain; Provision to use a nearby private restroom or office; or A separate changing schedule To the extent feasible, the provider should work with the design of the facility to provide for bathroom and dressing area privacy. Toilet stalls should have doors and locks and there should be separate shower stalls.   The issue of services to transgendered individuals is evolving. This guidance is useful in assisting providers of affected housing as they navigate this difficult area, but it cannot address all potential circumstances. Training of staff and contractors is essential to ensure full compliance with HUD requirements and with some state and local fair housing laws.

Federal Preemption of State Landlord-Tenant Law

A recent ruling by the Wisconsin Supreme Court reaffirms the constitutional doctrine of Federal preemption. In Milwaukee City Housing Authority v. Cobb, March 2015, the Milwaukee Authority sued to evict a resident because he had violated the terms of his lease by smoking marijuana in his unit. Based on the lease, this constituted a "drug-related criminal activity."   After clear evidence, including testimony from an experienced law enforcement officer, showing that the resident had smoked marijuana in his unit, the PHA notified the resident that he had violated the lease and gave the resident a notice of eviction. The eviction notice did not give the resident the right to remedy or cure the lease violation.   The resident admitted to smoking the marijuana, and even conceded that it was a "drug-related criminal activity." However, he argued that under state law he had a right to remedy or cure the violation in order to avoid eviction. A Wisconsin Appeals Court agreed with the tenant and voided the eviction. The Wisconsin Supreme Court reversed the appeals court s decision, reasoning that federal law preempts the state s right-to-remedy provision. The Court stated that the State law interferes with the objectives of Congress as those objectives relate to drug-free public housing. The state law also conflicted with the method chosen by Congress to meet this intent, i.e., allowing PHAs to evict tenants for engaging in any drug-related criminal activity.   This case is a strong reminder that when a conflict exists between state and federal laws, the provision in the United States Constitution giving deference to federal law over state or local law prevails.

Verification of Social Security and Supplemental Security (SSI) Payments

Verification of Social Security and Supplemental Security Income (SSI) Payments   Managers of affordable housing properties (e.g., Section 8, LIHTC, Section 515, etc.) often struggle with the verification of income from Social Security (SS) or SSI. While verification of such income is required, the Social Security Administration (SSA) has made it more difficult to obtain verification of the income. In fact, the SSA will no longer send income verifications to third parties - such as property managers - that request verification. And, since the gross benefit must be verified, using bank or debit card statements will not suffice, since those statements show "net" deposits - not gross. It is now up to the recipient of the benefit to request and obtain verification of benefits.   The best way to verify income from SS or SSI is with a "proof of income" letter. Benefit recipients may obtain these through their "My Social Security" account. These accounts must be established by the recipient using their own personal information and for their exclusive use. Property managers should not create or use an account on behalf of another person, even if they have been given written permission by that person to do so.   How to Create the Account   Managers may provide information to applicants or tenants to assist them in setting up the accounts. Following is the procedure that should be followed:   Go to socialsecurity.gov;   Click on "My Social Security;"   Click on "Create an Account;"   To create an account, new users must have a valid email address, a Social Security number, a U.S. mailing address, and be at least 18 years old.   Complete the online form.   Once the account is set up, a Benefit Verification Letter may be printed. The letter will be dated and will even verify if benefits are not received. Those who do not want or cannot create an online account may call 1-800-772-1213 Monday - Friday from 7 AM to 7 PM and a letter will be mailed to them within ten days.     When Benefits are Received   When calculating income from Social Security, especially after the annual Cost of Living Adjustment (COLA) has been announced, it is helpful to know when the benefits will be paid to the recipient.   Persons who received or applied for Social Security benefits on or before April 30, 1997, or those receiving both Social Security and SSI, will receive benefits on the third of the month. Those receiving only SSI will receive the benefit on the first of the month. People who applied for Social Security after April 30, 1997 will receive benefits based on their birthday. Those born on the 1st to the 10th of the month will receive the benefit on the second Wednesday; Those born on the 11th to the 20th of the month will receive the benefit on the third Wednesday; and Those born after the 20th of the month will receive the benefit on the fourth Wednesday of the month.   The only SS recipients still receiving paper checks are those who were over age 90 as of March 1, 2013. All others are paid either via direct deposit or a debit card (Express Pay Card).