IRS Releases Major LIHTC Program Guidance – July 1, 2020

On July 1, 2020, the IRS released an advanced copy of proposed regulations concerning low-income housing tax credit (LIHTC) housing finance agency (HFA) monitoring requirements and Notice 2020-53, which provides COVID-19 related relief to issuers, owners, operators, and tenants of tax credit properties. Following is a detailed discussion of both documents.

Low-Income Housing Tax Credit Compliance-Monitoring Regulations – Proposed Rule

This document contains proposed regulations relating to the compliance monitoring duties of housing finance agencies (HFAs) under §42 of the Internal Revenue Code. These proposed regulations would relax the minimum compliance monitoring sampling requirement for purposes of physical inspections and review of tenant files that were published in the Federal Register on February 26, 2019.

The 2019 regulation required HFAs to inspect no fewer units than the number specified for projects of the relevant size in HUD REAC inspections. This increased the sample size for smaller projects and decreased it for larger projects. All QAPs were to be amended to incorporate these new requirements no later than December 31, 2020.

This proposed regulation is the result of comments provided by industry groups, including HFAs, and trade groups (including the National Council for State Housing Finance Agencies). A major concern of the HFAs was that the 2019 regulation ended Agencies’ ability to use samples of 20 percent of the low-income units in a project when the applicable REAC number is larger. The 2019 requirement increased the number of units that HFAs must examine, increasing Agency costs for additional staff and related expenditures.

The IRS implemented the 2019 regulation in order to ensure an increased statistical confidence that results from the use of the REAC numbers to determine sample sizes for smaller projects. However, the Service agrees that the magnitude of the increased costs and burdens on HFAs outweighs any benefit that may have been derived from the 2019 protocol. For this reason, the IRS is proposing to return to the sample-size requirements that applied under Temporary Regulations issued in 2016. Thus, under the proposed regulation, the minimum number of low-income units that must be included in the random samples of units and files to be reviewed is the lesser of the applicable REAC number or 20% of the low-income units in the project, rounded up to the next whole number.

Example of Impact

• The 2019 Regulation required a minimum of 18 units to be reviewed (files and physical) for a 50 unit project;
• The proposed regulation would require a ten file/unit review.

Proposed Applicability Date

This proposed regulation would apply after the date the regulation is published as a final regulation in the Federal Register. However, HFAs may rely on the proposed regulation beginning on February 26, 2019, until December 31 of the calendar year following the year that contains the date these regulations are published as final regulations.  For example, if the final regulation is published in November 2020, and changes from the proposed regulation, HFAs will be able to use the requirements outlined in the proposed regulation until December 31, 2021.

IRS Notice 2020-53, COVID-19 Relief for LIHTC Projects

In response to the COVID-19 pandemic, this notice provides temporary relief from certain requirements under §42 of the Internal Revenue Code and §§142(d) and 147(d) of the Code for properties with tax-exempt bonds.

Background

On March 13, 2020, the President issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing COVID-19 pandemic. This emergency declaration instructed the Treasury Department “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate…” The emergency declaration applies to all 50 states, Washington DC and the five territories.

Revenue Procedure 2014-49 provides temporary relief from certain requirements of §42 for Agencies and Owners of LIHTC projects. Revenue Procedure 2014-50 does the same thing for properties financed with tax-exempt bonds.

Prior Relief Actions

On April 9, 2020, the IRS issued Notice 2020-23, which provided certain relief to low-income housing projects and postponed due dates until July 15, 2020, with respect to certain tax filings and payments, certain time-sensitive government actions, and all time-sensitive actions listed in Revenue Procedure 2018-58 that were due to be performed by April 1, 2020, but before July 15, 2020. These time-sensitive actions include, among others:

• The time to show that 10% of project basis has been established;
• The 24-month rehab period; and
• Annual Owner Certifications to the HFA.

Scope of Relief Granted in This Notice

• The 10% Test for Carryover Allocations: If the last day for an Owner of a building with a carryover allocation to meet the 10% test is on or after April 1, 2020, and before December 31, 2020, the last day for the owner to meet the 10% test is postponed to December 31, 2020.
• The 24-Month Rehabilitation Expenditure Period: If the 24-month minimum rehabilitation expenditure period for a building originally ends on or after April 1, 2020, and before December 31, 2020, the last day for the owner to incur the minimum rehabilitation expenditures is postponed to December 31, 2020.
• Reasonable Period for Restoration or Replacement in the Event of Casualty Loss: If a low-income building has suffered a casualty loss and the reasonable period to restore by reconstruction or replacement ends on or after April 1, 2020, and before December 31, 2020, the last day for the Owner of the building to restore the loss by reconstruction or replacement is December 31, 2020.
• Reasonable Restoration Period in the Event of Prior Major Disaster: if a low-income building, due to a prior Major Disaster, has suffered a casualty loss that would have reduced its qualified basis and if the reasonable restoration period determined by the Agency for the building ends on or after April 1, 2020, and before December 31, 2020, the last day for the owner of the building to complete the repair and restoration is December 31, 2020.
• The 12-Month Transition Period to Meet Set-Aside for Qualified Residential Rental Projects: the last day of a 12-month transition period for tax-exempt bond projects that ends on or after April 1, 2020, and before December 31, 2020, is postponed to December 31, 2020.
• The §147(d) Two-Year Rehabilitation Expenditure Period for Bonds Used to Provide Qualified Residential Rental Projects: If a bond is used to provide a qualified residential rental project and if the two-year rehabilitation period for the bonds ends on or after April 1, 2020, and before December 31, 2020, the last day of that period is postponed to December 31, 2020.
• Grant of Relief Pursuant to §1.42.13(a):
  • Income Recertifications: An owner of a low-income building is not required to perform income recertifications in the period beginning on April 1, 2020 and ending on December 31, 2020. The owner must resume the income recertifications as due after December 31, 2020.
    • E.g., a recertification that is due on November 1, 2020 does not have to be performed. The next recertification will be due on November 1, 2021, keeping in mind that HFAs may have their own requirement in this area.
  • Compliance Monitoring: An agency is not required to conduct compliance monitoring inspections or reviews in the period beginning on April 1, 2020 and ending on December 31, 2020. The Agency must resume compliance monitoring inspections or reviews as due under 1.42-5 after December 31, 2020.
  • Common Areas & Amenities: If an amenity or common area in a low-income building or project is temporarily unavailable or closed during some or all of the period from April 1, 2020 to December 31, 2020, in response to the COVID-19 pandemic, and not due to other §42 noncompliance, this temporary closure will not result in a reduction of the eligible basis of the building.
  • Emergency Housing for Medical Personnel & Other Essential Workers: If individuals who are medical personnel or other essential workers (as defined by State or local governments) provide services during the COVID-19 pandemic, then, for purposes of providing emergency housing from April 1, 2020 to December 31, 2020, for both LIHTC and tax-exempt bond projects, HFAs, Owners, and Operators of low-income housing projects may treat these individuals as if they were Displaced Individuals under Revenue Procedures 2014-49 or 2014-50.

Effective Date: this Notice is effective as of July 1, 2020

Owners and operators of LIHTC and tax-exempt bond projects should consult with their HFAs or Issuing Agencies in order to determine if any requirements in addition to those outlined in this Notice will be implemented.