Amendments to LIHTC Monitoring Regulation, Revenue Procedure 2016-15
On February 25, 2016, the IRS published a proposed rule in the Federal Register that would amend the compliance monitoring duties of a state or local housing credit agency relative to the Low-Income Housing Tax Credit (LIHTC) Program. The Regulation will revise and clarify certain rules relating to the requirements to conduct physical inspections and review low-income certifications and other documentation.
Comments on the proposed regulation are due by May 25, 2016.
Simultaneously with publication of the proposed rule, the IRS issued Revenue Procedure 2016-15.
Rev. Proc 2016-15
This revenue procedure stipulates the maximum number of low-income units in a low-income housing project for which an HFA must conduct physical inspections and low-income certification reviews. The procedure also permits the physical inspection protocol established by HUD for REAC inspections to be accepted by HFAs for purposes of the Section 42 physical inspection requirements.
Background
In order to quality under the LIHTC program, a unit must be (1) rent-restricted; (2) occupied [or last occupied] by a qualified low-income household; (3) suitable for occupancy; and (4) used other than on a transient basis. The suitability of occupancy is determined by taking into consideration local health, safety, and building codes. Failure of one or more units to qualify as low-income units may result in a low-income housing project’s ineligibility for the LIHTC, reduction in the amount of credit, and/or recapture of previously allowed credits.
IRS Regulation 1.42-5 requires an agency to conduct on-site inspections and perform low-income certification reviews (including documentation supporting the low-income certifications and the rent records for the tenants) for each low-income housing project.
The regulation requires an agency to conduct on site inspections of all buildings in a low-income housing project and review low-income certifications by the end of the second calendar year following the year the last building in the project is placed in service, and at least once every three years thereafter.
The regulation stipulates that the IRS may provide alternative means of meeting the review and inspection requirements and may provide exceptions to the requirements. However, the HFA must inspect no fewer than the minimum number of low-income units required by the IRS regulation.
The current regulation requires the HFA to select the low-income units for inspection in a random manner. The manner used for selection must not give advance notice that a low-income unit or low-income certifications for a particular year will or will not be inspected or reviewed. The HFA may give an owner reasonable notice that an inspection and review will occur so that the owner may notify tenants of the inspection or assemble certifications for review.
A major change in the regulation is that the IRS no longer requires that an agency select the same low-income units for on-site inspections and certification reviews. If the HFA chooses different low-income units for physical inspections and certification reviews, the units must be selected separately and in a random manner. An HFA may choose a different number of units for physical inspection and certification review, as long as at least the minimum number of low-income units is chosen in each case.
Regardless of whether there is overlap or non-overlap of selected units, except for reasonable notice, there should be no advance notification of the units to be inspected. The IRS position is that advance notice generally means no more than 30 days. Therefore, if an HFA chooses to select the same units for both physical and file inspections, the physical and file reviews may be done at the same time or separately, as long as both are done within the reasonable notice period. The period begins on the date the HFA informs the owners of the identity of the units for which the physical and file review will occur.
Number of Low-Income Units for Inspection & Low-Income Certification Review
The minimum number of low-income units for which an agency must conduct physical inspections and file reviews is the lesser of: (1) 20% of the low-income units in the project rounded up to the nearest whole number of units; or (2) the minimum unit sample size set forth in the following chart:
# of Low-Income Units in Project # of Low-Income Units or Files to be
Reviewed
1 1
2 2
3 3
4 4
5-6 5
7 6
8-9 7
10-11 8
12-13 9
14-16 10
17-18 11
19-21 12
22-25 13
26-29 14
30-34 15
35-40 16
41-47 17
48-56 18
57-67 19
68-81 20
82-101 21
102-130 22
131-175 23
176-257 24
258-449 25
450-1,461 26
1,462-9,999 27
Inspection Standard
The REAC protocol is among the inspection protocols that satisfy all Section 42 physical inspection requirements. To be acceptable, the inspection must satisfy all of the following requirements:
- Both vacant and occupied low-income units in a low-income project must be included in the population of units from which units are selected for inspection;
- The inspection must comply with all requirements of the HUD REAC, including use of the most recent HUD UPCS inspection software;
- The inspection must be performed by HUD REAC approved inspectors; and
- The inspection results are sent to HUD, the results are reviewed and scored within HUD’s secure system without any involvement of the inspector who conducted the inspection, and HUD makes its inspection report available.
If the REAC inspection is used, the requirement that all buildings be inspected is removed, and the number of units inspected based on the REAC protocol will be acceptable (i.e., does not have to match the 1.42-5 sampling size requirements). Also, the manner in which the units are selected for inspection under the REAC protocol will be accepted.
The Agency will still have to conduct the review of tenant certifications.
Effective Date
The revenue procedure is effective on February 25, 2016. Agencies using the REAC protocol as part of the Physical Inspections Pilot Program may rely on these provisions for on-site inspections and low-income certification review occurring between January 1, 2015 and February 25, 2016.