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Obtaining Approval for Security Officers at LIHTC Projects

If a multifamily project with Low-Income Housing Tax Credits (LIHTC) is experiencing issues with crime or security or is located in a high crime area, owners may want to house a security or police officer in one of the low-income units. IRS Revenue Ruling 2004-82 permits the provision of units to security officers if the use of the unit for such a purpose is necessary for proper operation of the property. Such units are known as "facilities reasonably required" by the project, and are treated in a manner similar to common areas, such as leasing offices or community rooms.   While the IRS ruling does not require that State Agency permission be obtained prior to converting a unit to a security unit, many states do require that permission be obtained prior to converting a unit to a security unit. This is important since it is often the State Agency (HFA) that determines whether common area is a facility reasonably required by the project.   This memo provides some guidance and advice on the process to follow when seeking HFA permission for a security unit.   Security Unit Basics   Who qualifies as a security officer? While guidance issued recently by the IRS (the "Audit Guide") indicates that security officers should be employed full time at the property, it is not clear that this guidance is indicative of an actual IRS requirement. The Audit Guide goes on to state that the most important indicators of the eligibility of a security unit is the need for the services and that the presence of the security officer meets that need. Generally, it is recommended that the police or security officer work full time (at least 35 hours per week) in law enforcement. In fact, for HUD properties, this is a requirement, and if the officer works less than 35 hours per week in law enforcement, he or she must be removed from the property. The security officer should be screened in the same manner as any other applicant relative to criminal or prior landlord references.   How many units may be set aside as security units? There is no set number, but I recommend no more than 1 percent of the units. However, if the HFA approves a higher percentage due to need, it should be acceptable.   What rent can be charged? The IRS has now indicated that the charging of rent to a security officer will not necessarily indicate that the unit is not a facility reasonably required. In HUD projects, rent must be charged for security units. My recommendation is that no rent be charged for LIHTC security units unless approved by the HFA. When requesting approval for a security unit from the HFA, you should state how much, if any, rent you wish to charge.   Can the security officer be paid for their services? Such arrangements are generally between the officer and the project owner, but should be revealed to the HFA when requesting permission.   Structure of the Request   The request to the HFA should include the following items: Purpose of the Request: State that you are requesting permission to house an over-income officer in one of the low-income units. Conditions Requiring Police Presence: Describe the reasons why a security officer is required for proper operation of the site. For example, show that the site will benefit from the presence of the officer by deterring crime and giving additional security to residents. Describe the Criminal Activities at the Site: Describe the criminal activity at or near the property and how such activity affects the safety of your residents. Attach any local studies or police reports on activities in the area. Officer s Qualifications: Describe the qualifications of the police or security officer that will live on site, and how long you anticipate needing the security unit. Describe the number of years of experience of the officer and any awards or commendations he/she has received. Background Check: Describe how you have checked the background of the officer that will live at the site. Conflicts of Interest: Disclose any family relationship the officer has with the owner or principals of the project. Proposed Lease Arrangement: If you propose to charge rent to the officer, state the amount. Contact Information: Invite HFA staff to call you with questions or to discuss the request. Don t forget to sign the request.

Disaster Relief Rules - IRS Revenue Notice 2014-49

Disaster Relief Rules   Revenue Procedure 2014-49 This IRS Revenue Procedure provides temporary relief from certain requirements of 42 of the Internal Revenue Code (the LIHTC Program) for Agencies and owners if certain areas have been impacted by a major disaster. It also provides emergency housing relief for individuals who are displaced by a Major Disaster from their principal residences in certain Major Disaster Areas. This procedure makes some substantive changes to Revenue Procedure 2007-54, which was the last major IRS guidance relative to tax credit properties and disaster areas. Key changes are (1) changes the reasonable restoration period for recapture relief and the tolling period for severely damaged, destroyed, or uninhabitable buildings in the first year of the credit period; (2) in determining qualified basis, uses the building s qualified basis at the end of the taxable year immediately preceding the first day of the incident period as determined by FEMA, rather than at the end of the taxable year preceding the President s Major Disaster declaration; (3) incorporates a temporary suspension of certain income limitations for Displaced individuals; (4) eliminates the need for self-certification of income eligibility; (5) permits an Agency to allow an owner within its jurisdiction to provide emergency housing relief to Displaced Individuals from other jurisdictions; (6) describes the consequences of providing emergency housing relief in the first year of the credit period and after the first year of the credit period; and (7) modifies the safe harbor relating to the amount of credit allowable to a restored building to provide relief in circumstances where the restoration cost is less than the eligible basis cost. The procedure applies when the President has declared a Major Disaster. It applies to Displaced Individuals and to all 42 buildings, including those financed by Tax-Exempt Bonds. It also applies to all Agencies and owners both inside and outside States containing a Major Disaster Area.   Relief for Carryover Allocations If an owner has a carryover allocation of credits for a building in a Major Disaster Area and the incident period for the Major Disaster began prior to the deadline for placing the building in service, the Agency may grant the owner an extension. If the Agency grants an extension (details of this process are explained below), the IRS will treat the owner as having satisfied the 10 percent of basis requirement of 42(h)(1)(E)(ii) if the owner meets the 10 percent requirement no later than the expiration of the Agency extension. If the Major Disaster occurs on or after the date of the carryover allocation, the Agency may grant the owner an extension relative to the placed in service date for the building. In this case, the IRS will treat the owner as having satisfied the placed in service requirement of 42 if the owner places the building in service no later than the expiration of the extension. If either the 10 percent requirement or placed in service requirement is not met by the end of the extension period, the credit will be returned to the Agency.   Procedure to Obtain Carryover Allocation Relief Owners may not receive relief from Carryover Allocation rules unless the Agency that provided the allocation grants the relief. Agencies may make the determination on an individual Project basis or determine that all owners or a particular group of owners in the Major Disaster Area need the relief provided by the revenue procedure. The extension may not be for more than six months after the date the owner would otherwise be required to meet the 10% of total development cost requirement. The extension may not extend beyond December 31 of the year following the end of the two-year period for placing a project in service, but can be for a shorter time period.   Recapture Relief Generally, if, after the first year of the credit period, a building s qualified basis is less than the qualified basis at the end of the prior tax year, credits for the applicable tax year will be reduced and recapture will result for prior tax years. If a building s qualified basis is reduced due to a casualty loss, a building is not subject to recapture if restored within a reasonable period of time. The HFA will determine what is reasonable in the case of a Major Disaster, but the extension may not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. For example, if a major disaster is declared in October 2014, the deadline for restoration of qualified basis may extend no longer than November 2016. In these cases, the qualified basis of the building allowable during the restoration period will be the building s qualified basis at the end of the taxable year immediately preceding the first day of the incident period for the Major Disaster. If the building is not restored within the reasonable restoration period determined by the HFA, the credit amount allowable will be based on the building s qualified basis at the end of each year of the credit period. The HFA must report the failure to restore on IRS Form 8823.   Compliance Monitoring Relief Agencies may extend the compliance monitoring due date for up to one year after a building has been restored and placed back in service. E.g., HFA compliance monitoring due in 2014, but building is down due to a disaster in a federally declared disaster area. Building is restored and placed back in service back in service May 1, 2015. State review will be due no later than May 1, 2016. However, if the State discovers that the building is out of compliance due to a Major Disaster, the Agency must report the noncompliance on Form 8823 and describe how the disaster contributed to the noncompliance.   Buildings in the First Year of the Credit Period If a building is severely damaged or destroyed in a Major Disaster Area during the first year of the credit period, Agencies have the discretion to either (1) treat the allocation as a returned credit to the Agency, or (2) toll the beginning of the first year of the credit period. The tolling period shall not extend beyond the end of the 25th month following the close of the month of the Major Disaster declaration. Owners may not claim any credit during the restoration period. Agencies will report this relief as part of the 8610 process.   Amount of Credit Allowable to a Restored Building Owners will receive no additional credits for the costs associated with restoring a building s qualified basis. If money is spent on rehab and not on restoration, additional credits may be awarded.   Emergency Housing Relief LIHTC projects may be used to house individuals displaced due to a Disaster Area declaration, but only with State Agency approval. This approval must specify the date on which the Temporary Housing Period for the Project ends. This period cannot exceed 12 months from the end of the month in which the President declared the Major Disaster.   Protection of Existing Tenants: No existing tenant whose income is, or is treated as, at or below the 42 income limit may have occupancy terminated solely to provide emergency housing for a Displaced Individual. Rent Restrictions: Gross rents for low-income units that house displaced individuals may not exceed the maximum gross rent that would apply under 42.   Implementation of Emergency Housing Relief The IRS Revenue Procedure authorizes, but does not require, provision of emergency housing relief to displaced persons. Owners are not required to provide such relief, nor are agencies required to permit it. If an owner chooses to provide relief, such relief may be provided for less than the full Temporary Housing Period. If a displaced individual qualifies as low-income under 42, the owner may rent to the individual as a low-income resident or provide temporary housing relief based on the guidance of the Revenue Procedure. Units occupied by displaced individuals will not be considered "transient" units for purposes of 42. Occupancy by displaced individuals may be disregarded for purposes of the available unit rule. However, the rule still applies to buildings where residents qualified under 42 exceed 140% of the applicable income limit. If a project is in the first year of the credit period and a unit is occupied by a displaced individual, the units is treated as low-income for (1) determination of qualified basis; and (2) meeting the elected minimum set-aside test.   Treatment of Units After the First Year of the Credit Period   If a Displaced Individual begins occupancy of a unit during the Temporary Housing Period, but after the first year of the credit period, the unit will retain the status it had immediately before that occupancy. Therefore, if the unit is a low-income unit, a market-rate unit, or a unit never previously occupied, it retains that status while occupied by a displaced individual, regardless of the income of the displaced individual.   Treatment of a Unit Vacated by a Displaced Individual   If a displaced individual vacates a unit before the end of the Temporary Housing Period, the unit retains the status it had prior to occupancy by the displaced individual, even if the next tenant does not occupy the unit until after the end of the Temporary Housing Period.   Income Qualifications when Temporary Housing Period Ends   If a displaced person continues to occupy a unit in a project at the end of the temporary housing period, the status of the unit will be re-evaluated as though the individual moved into the project on the day immediately following the end of the temporary housing period. In other words, if the displaced person is not a qualified low-income tenant, the unit will be considered a market unit on the day after the end of the temporary housing period. If a project falls below the required minimum set-aside as a result of this determination, a 60-day period is allowed for correction.   Emergency Housing Relief - Recordkeeping   For each displaced individual, the following information must be kept in a statement signed by the displaced individual under penalty of perjury: The name of the displaced individual; The address of the principal residence at the time of the major disaster of the displaced individual; The displaced individual s social security number; and A statement that he or she was displaced from his or her principal residence as a result of a major disaster and that his or her principal residence was located in a city, county or other local jurisdiction that is covered by the President s declaration of a major disaster and that is designated as eligible for Individual Assistance by FEMA due to the major disaster.   The owner must maintain a record of the Agency s approval of the Project s use for displaced individuals and of the approved Temporary Housing Period. The owner must report to the Agency at the end of the Temporary Housing Period a list of the names of the displaced individuals and the dates those individuals began occupancy. The owner must also provide the dates the individuals ceased occupancy and, if applicable, the date each unit occupied by a displaced individual became occupied by a subsequent tenant.      

"Indepent Living" Requirement Discriminatory

As if to put an exclamation point on its requirement that the ability to live independently not be a condition of apartment living, HUD has reached a conciliation agreement with Huntington Management, operators of five "independent living" properties known as Oakmont Senior Communities in Michigan. The agreement settles allegations that Huntington fired an employee at one of the properties because she raised fair housing concerns about the company s policy of monitoring the health of applicants and residents. This agreement is the first HUD enforcement action against senior properties in Michigan. The former employee, who will receive $35,000 in compensation, worked with the Fair Housing Center of Metropolitan Detroit (FHCMD), a non-profit fair housing organization that receives HUD funding, to file the complaint. After the woman s complaint, fair housing testers with the organization found the properties were regularly and uniformly collecting medical data on applicants and residents and engaging in "gate-keeping" practices. These practices included not permitting residents who had to leave their units for hospital stays to return to their units if the were deemed by management to be not "independent" enough. In addition to compensating the former employee, Huntington must alter its policies to no longer require residents returning from hospital stays to undergo a "gatekeeping review" or provide medical information.   This case is a reminder to operators of all multifamily properties - whether family or senior - that it is discriminatory to require that residents be able to live independently. Owners should limit their requirements to those required to ensure compliance with the lease, and nothing else.

HUD Stiffens Tenant Appeal Process Regarding Tenant Organizations

On September 14, 2014, HUD issued Notice H 2014-12 (Implementation of Tenant Participation Requirements in Accordance with 24 CFR Part 245). This Notice outlines available sanctions and monetary penalties as enforcement mechanisms when owners and managers violate HUD requirements relative to Tenant Organizations.   Tenants Right to Organize Tenants at HUD properties have the right to establish and operate a tenant organization in order to address issues relating to the project. To be a legitimate tenant organization, the organization must be: Established by the tenants; Meet regularly; Operate democratically; Represent all residents; and Be independent of owners and management. There is no requirement for a specific structure, written bylaws, elections or resident petitions. Activities that owners must allow include: Distribution of leaflets in lobbies, common areas, and under tenant doors; Posting of information on bulletin boards; Initiation of contact with tenants; Conducting door-to-door surveys to determine interest in establishing a tenant organization and to offer information about the organization; Offering assistance for tenants to participate in tenant organization activities; and Convene tenant organization meetings on site without attendance by management representatives.   Enforcement Process HUD enforcement activity will be undertaken when a tenant or tenant organization files a written complaint with HUD alleging a consistent pattern of violations of HUD requirements or one violation that caused serious harm to tenants or the public. Evidence supporting the complaint is required and may be: Signed statements from tenants who have observed violations of HUD regulations relating to tenant participation or other program obligations; Documents from owners expressing opposition to tenant organizing activities; Documents denying the use of facilities for purposes of organizing or holding meetings; or Any other documents that support the complaint. If the HUB director finds no reasonable cause, the case will be closed. If the case remains open, the parties will be brought together for conciliation. If agreement is reached, a conciliation agreement will be entered into and signed off on by the HUB director - if it serves the public interest. The choice to participate in conciliation is voluntary by all parties. If an agreement is entered into and breached, the case may be re-opened and enforcement pursued. If conciliation is unsuccessful, an investigation will be conducted. If there is no reasonable cause, the case will be closed. If it is determined that a violation did occur, written notice of the violations will be sent to the owner. If the owner fails to respond or address the issue in an acceptable way, a referral will be sent to the Enforcement Department and the owner will be flagged in APPS (Active Partners Participation System). If the Complainant (tenant or tenant organization) disagrees with the no reasonable cause finding, they may request reconsideration by sending a letter to the Office of Asset Management. All parties will then be asked to submit additional evidence and the HUB director will make a final decision. If the finding of no reasonable cause is affirmed, no further action will be taken. If reasonable cause is found, enforcement action will be pursued. I make the following recommendations relative to dealing with tenant organizations at HUD-assisted properties: Do not discourage the formation of tenant organizations (you are not required to encourage or recommend the creation of such organizations); Do nothing to make the formation of such organizations difficult; Agree to meet with the organization at reasonable times to discuss community activities; Do not deny the use of community facilities to the organization at reasonable times and frequency; and Do not discuss the affairs or concerns of individual tenants with the organization.    

Employee and Security Units - IRS Audit Guide (October 2014)

The recently released final Section 42 Audit Guide provides some interesting guidance relative to the treatment of employee and security units in a LIHTC project. The Guide confirms that the cost of such a unit is includable in eligible basis, but is excluded from the applicable fraction (essentially making the unit common area). Three key elements are required in order to utilize a unit as an employee or security unit: The services to be provided by the person living in the unit are necessary services; The services could not be properly provided unless the person lives on site; and The employee or security officer is working full-time at the site.   #3 alters to some degree assumptions that have been made in the past regarding security officers. Many security units are occupied by professional law enforcement officers (e.g., police officers, deputy sheriff, etc.). In these cases, the officer is not a full-time employee of the site and may only be on site during certain hours (when they are not engaged in their actual employment). If the IRS intention is to require that such units truly be occupied by persons who are full-time to the site, it will make the utilization of a unit for security purposes very difficult.   The Guide also points out certain elements that are not relevant to an IRS audit, including:   Payment of rent, utilities or both by an employee or security does not preclude the unit being considered an employee unit; Units can be "switched," meaning that the unit initially identified as an employee unit can be switched to another unit; and Employee/security units can become low-income units.   #2 and 3 do not apply to single-family homes with tax credits since those buildings will not have received an allocation of credits.   #1 above presents the most obvious potential change to industry practice - that of not charging employees who reside in employee units. This indicates that the IRS gives more weight to the need for the unit and the services provided than whether or not the employee or security officer is charged for rent or utilities. Even with this guidance, the charging of rent or utilities for an employee unit is still not recommended unless specifically approved by the State Housing Finance Agency.   Issues identified in the Guide as being possible noncompliance relative to employee/security units include:   The services provided by the resident are not required by the project. An example would be an employee who provides non-housing related services to the residents (examples may be found in IRS Regulation 1.42-11); The employee does not provide services that are specific to the project or provides services to multiple projects. This is the case even if the employee is an income-qualified tenant if the unit is designated as an employee unit. This is because the unit is not available to the general public.   Clearly there are issues presented here that may impact current operations at LIHTC projects. Owners and managers should review their current policies relative to employee or security officer units and ensure that those policies meet with HFA approval. Examples of areas that could now present problems with regard to employee units are Security officers who are not full-time to the property; Employees managing a multiple properties - even if in close proximity to each other; and Charging rent or utilities that are not approved by the State HFA.  

Imputed Rate for Assets Change - Effective February 1, 2015

HUD issued Notice H 2014-15 on October 31, 2014 changing the imputed rate for assets from 2% to .06%.   Beginning on February 1, 2015, HUD will annually publish the passbook savings rate (i.e., imputed rate) to be used for all certifications for affected programs. This replaces the 2% rate with a rate that is more reflective of the national average.   Background 24 CFR 5.609(b)(3) requires that the income of families who receive assistance in a multifamily housing subsidized unit include income from assets. The income from assets will be the actual income earned on the asset, or, if the net value of the assets exceed $5,000, the greater or actual or imputed income. For many years, the imputed rate has been 2%. Since the actual passbook rate has been significantly less than 2% for some time, HUD has decided to lower the rate to .06%.   Applicability The Notice applies to the following programs: Project-based Section 8; Section 101 Rent Supplement; Section 202/162 Project Assistance Contract (PAC); Section 202 Project Rental Assistance Contract (PRAC); Section 202 Senior Preservation Rental Assistance Contracts (SPRAC); Section 811 PRAC; Section 811 Project Rental Assistance Demonstration units under a Rental Assistance Contract (PRA); Section 236; Section 236 Rental Assistance Payments (RAP); and Section 221 (d) (3) Below Market Interest Rate (BMIR). Since the Low-Income Housing Tax Credit Program (LIHTC) is required to follow Section 8 rules relative to the determination of household income, the revised imputed rate applies to LIHTC properties. It also applies to the Rural Housing Service Section 515 Program. This Notice supersedes the information in HUD Handbook 4350.3, Section 5-7.F. The Passbook Savings Rate will be set based on the national average provided by the Federal Deposit Insurance Corporation (FDIC).   Publication of the Rate HUD will publish a passbook savings rate annually through a Housing Program Notice. Owners must use the rate for all move-ins, initial, annual and interim recertifications concurrent with the effective date. HUD may update the rate at any time during the calendar year if, during the year, the national average differs by at least 2% from the published rate. (Unless we run into a highly volatile economic situation at some point, this is a very unlikely scenario).   Interim Recertifications For properties that process interim recertifications due to changes in income, residents with assets in excess of $5,000 may request an interim certification. There is no requirement to notify residents of this change, so it is unlikely that many residents will be aware of the potential impact on their income. For this reason, I recommend that owners and managers review tenant files and notify affected residents. If the reduced rate will impact the rent due from the resident, I recommend an interim be performed, but not before February 1, 2015.    

Citi Bank Loan Program

Developers looking to put together LIHTC deals in California, New York, Illinois, Massachusetts, Delaware, Washington DC, and Florida have a new financing option available to them.   Citi Bank has released guidance for its new affordable rental-housing program - The Affordable Housing Subordinate Loan Program. The program was created as a result of a United States Department of Justice foreclosure settlement involving Federal and state claims relating to pre-2009 sales of residential mortgage backed securities. The program will make approximately $200 million in subordinate loans available for LIHTC properties in the noted States. The funds will be available for new construction as well as acquisition/rehab deals. It is expected that the loans will be made available during the next two to four years. Priority will go to projects in small Difficult Development Areas.   Developers contemplating a deal in one of these states in a small area may want to get some information on the program. Following is the website for the program.   http://www.citi.com/icg/sa/citicommunitycapital/docs/citi_affordable_housing_subordinate_loan_program_description.pdf  

Reduction in Rental Assistance for Section 515 Properties Reduce Pre-Payment Incentives

Federal funding reductions have significantly reduced the amount of rental assistance (RA) available for Rural Development Section 515 projects. As a result of this reduction, the Rural Development Service (RD) issued an Unnumbered Letter in July 2014 limiting the use of RA as an incentive to not prepay a Section 515 loan. RD is now making it more difficult to offer the following incentives to owners wishing to prepay their loans: *An offer of additional rental assistance or an increase in rental assistance; *An offer to make an equity loan; or *An offer of rental assistance to protect rent-burdened tenants. Under the RD guidance, if owners seek incentives not to pre-pay, state Rural Development offices must provide the National Office with justification for using one of the three incentives noted above. The justification must explain why RA is needed to save the project, and why the affordable housing is important to the community. This is one of the latest consequences of the draconian cuts be made to domestic programs by Congress. Owners who are considering seeking incentives to avoid prepayment should be aware that a case will not have to be made that failure to provide incentives will have a negative impact on both the project and the community at large,