Ask Five Questions to Get Key Info for Meeting Site's Minimum Set-Aside

As a tax credit manager, meeting your site’s minimum set-aside is the most important goal. If you meet the set-aside, the owner of your site will be entitled to claim its tax credits. If you don’t meet the set-aside, your site won’t qualify for the tax credit program, which means the owner won’t be able to claim any of the credits it was allocated. And unlike many other types of noncompliance, failure to meet the minimum set-aside isn’t correctable. This means that one mistake can cost the owner the tax credit deal it thought it made—and leave you without a job.

To avoid this costly mistake and meet your site’s minimum set-aside on time, you must get certain key pieces of information when you begin managing the site. We’ll tell you the five questions you should ask the owner, to get the information you need to meet the site’s minimum set-aside.

1. How Many Units Must Site Set Aside as Low-Income?

To meet your site’s minimum set-aside, you must know what percentage of its units you must rent to qualified low-income households. The minimum set-aside is expressed as two numbers separated by a hyphen (for instance, 20-50). The first number tells this percentage. So, if your site’s minimum set-aside is 20-50, you must rent 20 percent of your units to qualified low-income households.

The owner may want you to set aside more units than is required to meet the minimum set-aside. Owners often have a target for each building’s first-year fraction that’s higher than the minimum set-aside. Meeting this target enables owners to claim all the credits they were allocated for their buildings.

2. What Makes Unit Count as Low-Income?

You must also ask what the second number in the site’s minimum set-aside is, so you’ll know what makes a unit count as low-income. The second number of the minimum set-aside (the number after the hyphen) tells the highest income a qualified household in a low-income unit can earn, expressed as a percentage of HUD area median gross income (AMGI). So, if your site’s minimum set-aside is 20-50, then a unit counts as low-income if the household occupying that unit earns no more than 50 percent of AMGI.

The set-aside must be either 20-50 or 40-60. (If your site is located in New York City, your set-aside can be 25-60 instead of 40-60.) Owners normally commit to a set-aside on their application for tax credits. Your site’s owner must formally elect its set-aside when it files Form 8609 (line 10c).

You should also ask the owner if your site will be deep rent-skewed. If it is, you’ll have to meet a special set-aside for only your low-income units. In that case, you’ll need to meet the “deep rent-skewed set-aside”—in addition to your site’s minimum set-aside. The deep rent-skewed set-aside is always 15-40, and it applies only to low-income units. So to meet the deep rent-skewed set-aside, you must rent 15 percent of all low-income units at your building or site to households earning no more than 40 percent of AMGI.

Assuming you meet your minimum set-aside, your site will still qualify for the tax credit program if you don’t meet the deep rent-skewed set-aside. But your site won’t qualify for deep rent-skewing.

3. Will Set-Aside Be Met per Site or Building(s)?

If you manage a multi-building site, the owner has the option of meeting one set-aside for the entire site or a different set-aside for each building or combination of buildings at the site. If you don’t find out which option the owner has picked, you might think you’ve met the minimum set-aside but in fact cost the owner all its tax credits.

For example, suppose you manage a tax credit site with three buildings and a total of 50 units. Buildings A and B have 20 units each and Building C has only 10 units. Because your minimum set-aside is 20-50, you believe that you must rent 20 percent of your site’s 50 units (that is, 10 units) to qualified low-income households. You rent five units in Building A, four units in Building B, and one unit in Building C to qualified low-income households, believing that you met your site’s set-aside. What you don’t realize is that you must meet a 20-50 set-aside for each building at the site. As a result, Building C doesn’t qualify for the tax credit program. To meet the 20-50 set-aside for that building, you should have rented two units in it to qualified low-income households (20 percent x 10 units = 2 units), not one unit.

The owner must commit to its decision regarding whether to meet the minimum set-aside per site or per building(s) when filing Form 8609 (line 8b) for each building.

4. When Were Buildings Placed in Service?

You need to know whether your site’s buildings were placed in service and what the placed-in-service (PIS) dates are. You can’t start renting units in a building to meet the minimum set-aside until the building’s PIS date arrives. You also need this date to help determine the deadline for meeting the set-aside.

For new construction, the PIS date is the day the first unit in the building is available for occupancy (normally the date you get a certificate of occupancy for the building). For rehabilitations, the PIS date is the end of any 24-month period over which rehabilitation expenditures are aggregated. For acquisitions, the PIS date is normally the same as the acquisition date.

If your buildings haven’t yet been placed in service, talk to the owner about when it wants you to place them in service. Whether to place some buildings in service earlier than others is often a strategic decision that owners make to maximize their tax credits.

State housing agencies enter your buildings’ PIS date on Form 8609 on line 5. And owners, by completing Part II of Form 8609, are certifying that the date the building is placed in service corresponds to the date on line 5.

5. When Is Deadline for Meeting Set-Aside?

You must find out the deadline for meeting the minimum set-aside. The deadline is the last day of the first taxable year the owner claims its credits. This is either the placed-in-service year or the following year. If you mistakenly believe that you have more time to meet the set-aside than the tax credit law allows, you may endanger all of the owner’s tax credits. A state housing agency can’t extend this deadline just because a site’s manager was mistaken.

The owner must commit to its decision regarding the deadline for meeting the set-aside when filing Form 8609 (line 10a) for your buildings. Once made, the owner’s choice is irrevocable.