In February 2019, the IRS published a final regulation on how State Housing Finance Agencies (HFAs) must monitor for compliance with the requirements of the Low-Income Housing Tax Credit Program (LIHTC). On July 1, 2020, the Service released a proposed regulation, changing one of the requirements of the 2019 guidance. The proposed regulation relaxes the minimum compliance monitoring sampling requirement for purposes of physical inspections and file reviews but did not modify any of the other requirements of the February 26, 2019 regulation.
Provisions of the regulation that have not been modified are:
1. The “all-buildings” rule is retained in the final regulation except for properties that undergo REAC inspections. The IRS is concerned that HFAs may not all have inspectors as well-trained as the HUD-approved REAC inspectors and is therefore requiring a physical inspection of all buildings when the property is not undergoing a REAC inspection.
2. The “reasonable notice” timeframe: The final regulations shorten the reasonable notice requirement to a 15-day notice that a project will experience an upcoming physical inspection or file review. Also, as noted in the regulation, under the REAC protocol, HUD or HUD-certified REAC inspectors randomly select low-income units for inspection on the day of the inspection; HFAs are now required to do the same.
3. Treatment of scattered site or multiple buildings with a common owner and plan of financing. While a number of industry practioners recommended that in the case of scattered site or multiple buildings with common ownership and financing, the HFA be able to treat the project as a single project for compliance monitoring purposes – regardless of whether or not the owner made the multiple building election on the IRS Form 8609, the final regulation does not adopt this regulation. For compliance monitoring purposes, a project will be defined in accordance with Section 42 – an HFA cannot deem separate buildings to be a project if the 8609 multiple building project election has not been made.
4. All HFAs are required to amend their Qualified Allocation Plans (QAP) to include the requirements of this final regulation. On the date the QAP is amended, Revenue Procedure 2016-15 will be considered obsolete. QAPs must be amended no later than December 31, 2020.
5. Random Selection Requirements: Agencies generally may not select the same low-income units of a low-income housing project for on-site inspections and file reviews, because doing so would usually give prohibited advance notice. The HFA must select the units for inspections or low-income certification review separately and in a random manner.
6. Meaning of Reasonable Notice: the 15-day notice period begins on the date the Agency informs the owner that an on-site inspection of a project and low-income unit file review will occur. Notice of more than 15-days, however, may be reasonable in extraordinary circumstances that are beyond an Agency’s control and that prevent an Agency from carrying out within 15-days an on-site inspection for file review. Extraordinary circumstances include, but are not limited to, natural disasters and severe weather conditions. In the event of extraordinary circumstances that result in a reasonable-notice period longer than 15-days, an Agency must still select the relevant units and conduct the same-day on-site inspection or file review as soon as possible.
7. Use of the REAC Protocol: In order to use the inspection requirements relating to the REAC protocol, the inspection must satisfy the following requirements:
(i) Both vacant and occupied low-income units must be included in the population of units from which units are selected for inspection;
(ii) The inspection complies with the procedural and substantive requirements of the REAC protocol, including the requirements of the most recent REAC Uniform Physical Condition Standards (UPCS) inspection software, or software accepted by HUD;
(iii) The inspection is performed by HUD or HUD-Certified REAC inspectors; and
(iv) 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.
8. HUD Inspections that comply with the requirements of the REAC Protocol: the number of units required to be inspected under the REAC protocol satisfies the requirements of the final regulation concerning the number of low-income units the Agency must inspect. Also, the manner in which the low-income units are selected for inspection under the REAC protocol satisfies the requirements of the final regulation.
9. File Reviews for HUD Inspections that comply with the requirements of the REAC Protocol: An Agency that conducts physical inspections using the REAC protocol is not excused from following the requirements of the final regulations in selecting the files for review.
10. Circumstances under which the same files and units may be chosen for inspection: If an agency chooses to select the same units for on-site inspections and file reviews, the Agency must complete both the inspections and file reviews before the end of the day on which the units are selected.
It is important to note that the final regulation does not include a provision for desk audits of files. The regulation states that the Agency may review the low-income certifications wherever the owner maintains or stores the records (either on-site or off-site).
While HFAs may now inspect the lesser of the applicable number of units in the REAC chart or 20% of the low-income units in the project (rounded up to the next whole number), the rest of the 2019 regulation remains in place. If not done already, HFAs must amend QAPs to reflect these changes no later than December 31, 2020.