Ask Nine Questions When Taking Over Tax Credit Site Management

Taking over the management of a tax credit site in the middle of its compliance period can be tricky. That’s because the owner or former manager has important information you need to know to manage the site effectively, and you must ask the owner or former manager the right questions to make sure you know how to keep the site in compliance once you take over. And you must double-check to make sure the information you’re given is current. If you don’t have all the information you need or the information isn’t current, you may be putting the owner’s tax credits at risk.

Here are nine questions you should ask the owner or former manager of a tax credit site you’re about to start managing and how to confirm the answers you get.

Question #1: Where Are the Files?

Find out where all the administrative and household files relating to your site are located before you take over the site’s management. Also, make sure the owner or former manager plans to leave the files at that location.

Also check whether your state housing agency has its own procedures for complying with the tax credit recordkeeping rules. The IRS requires the owner to keep files for up to 21 years. This helps the owner prove its compliance to your state housing agency if questions arise at an audit. You must keep each year’s set of files for six years after the deadline (with extensions) for filing the owner’s tax return for that year. However, you must keep your site’s first year’s files—which are the most important—for at least six years after the deadline (with extensions) for filing the owner’s tax return for the 15th year of the compliance period.

How to confirm. Ask the owner or management company for a list of the contents of each file. Then, check the files against this list to make sure everything is accounted for. This way, if you notice that a listed file is missing, you can ask the owner or former manager for its whereabouts.

The owner or former manager may have decided to use electronic storage to save space and money. This could prove an efficient way to make a backup copy of the documents. If electronic documents were made to replace hard copy originals, double check with the state housing agency whether this is allowed. Because your agency must audit your documents, it may insist on seeing the original documents when it visits your site. Also, your agency may want assurances that your electronic documents haven’t been altered or tampered with—and will still be viewable in 20 years despite changing technology.

Question #2: What Are the Minimum Set-Aside and Applicable Fraction?

When you take over a site’s management in the middle of its compliance period, it’s your job to maintain that site’s minimum set-aside for the remainder of its compliance period. Ask the owner or former manager what’s required to maintain the set-aside. For instance, must you continue to rent 20 percent of your units to households earning no more than 50 percent of area median gross income (AMGI)? Also, if the site has more than one building, find out if each building has its own set-aside or if certain buildings at the site are grouped together for this purpose.

Also, find out from the owner or former manager what applicable fraction you must maintain for each building. You may learn that you must rent more units to qualified low-income households than the set-aside requires so the owner can claim all the credits it was allocated. For instance, although you may need to rent only 40 percent of your units to qualified low-income households to maintain the minimum set-aside, you’ll need to rent all your units to qualified low-income households if the applicable fraction is 100 percent.

Although it’s not very common, the owner of the site you’re about to manage may have elected to make the site “deep rent-skewed.” If that’s the case, you’ll need to maintain an additional set-aside throughout the compliance period. Ask the owner if it made this election. The “deep rent-skewed set-aside” is 15-40 and applies only to the low-income units at your site (unlike the minimum set-aside, which applies to all units). So if, for instance, you have 60 low-income units at a deep rent-skewed site, you must rent nine of these units (15 percent) to households earning no more than 40 percent of AMGI.

The newest set-aside option to be aware of is the income-averaging set-aside created by the Consolidated Appropriations Act of 2018. Owners of newly developed LIHTC sites may have elected this set-aside on IRS Form 8609. Specifically, the income-averaging test is fulfilled if: (1) at least 40 percent of the units are both rent-restricted and occupied by individuals whose incomes don’t exceed the imputed income limitation designated by the owner; and (2) the average of the imputed income limitations designated doesn’t exceed 60 percent of average median income (AMI). Also, the designated imputed income limitations must be in 10 percent increments from 20 percent to 80 percent. For example, if a unit is designated as a 50 percent unit, it must be occupied by a household who at initial occupancy has an income equal to or less than 50 percent of AMI and who’s continuously charged rent that’s equal to or less than 40 percent of 50 percent of AMI.

Under this new option, the income average isn’t based on individual households’ incomes. Instead, owners designate unit income limits, and compliance with the income-averaging provision is based on the designation for the unit and not the household’s actual income. For example, a family with an income at 68 percent of the area median could move into a unit designated as a 70 (or 80) percent AMI unit.

Only the 70 percent designation (or 80 percent) counts in determining compliance with the 60 percent income-averaging test. The actual income of the households isn’t tracked and averaged on an annual basis for purposes of the income-averaging test. As it relates to meeting the minimum set-aside, an owner would have to ensure that at least 40 percent of the units have rents and incomes at the various designated unit income limits to achieve an average affordability of 60 percent.

How to confirm minimum set-aside. Ask for a copy of IRS Form 8609 for each building at the site. Owners must elect a minimum set-aside (for instance, 40-60) on line 10c of this form. If the site you’re starting to manage has more than one building, you must also check whether each building must meet its set-aside separately or when combined with other buildings at the site. Look at line 8b of this form to confirm the answer you got.

How to confirm applicable fraction. To make sure you maintain the correct applicable fraction for each building, ask the owner to justify each applicable fraction. In the first year of a building’s compliance period, owners choose a target for their building’s applicable fraction (known as the “first-year fraction”) that’s high enough to entitle the owners to claim all the credits they were allocated for their building. After the first-year fraction is established, the same applicable fraction must then be maintained each year to ensure that the owner can continue to claim all its credits. (However, if you learn that the first-year fraction fell short of the owner’s target, the owner may want you to maintain a higher applicable fraction to make up for its lost credits.)

Question #3: Did Owner Make Additional Promises to Agency in Return for Credits?

Maintaining the minimum set-aside and applicable fraction are a tax credit manager’s two most important occupancy goals during the compliance period. But you must also be sure to find out whether the owner made any extra promises to your state housing agency in return for its tax credit allocation.

For instance, if the owner agreed to meet an additional set-aside for a special population group—such as for elderly, homeless, or disabled residents—you’ll need to maintain that set-aside after you take over. Or if the owner agreed to set aside specific units for special groups, you’ll need to continue to set aside those units.

How to confirm. The owner’s promises should appear either in its application for tax credits or in the extended use agreement it signed with your state housing agency. So compare the answers you get from the owner or former manager with the information in these documents. And if the owner agreed to set aside specific units for special population groups, ask the owner for a development map that shows where each special unit has been assigned.

Question #4: Does Site Participate in Other Housing Programs?

Don’t assume that the tax credit site you’re about to manage gets no additional funding. Instead, ask the owner or former manager if the site is getting assistance from other government housing programs or lenders, or through grants. For instance, the site may also get funding through the HOME Investment Partnership Program (commonly known as “HOME”) or the RD Section 515 program. If your site gets assistance, then you probably must comply with an additional set of requirements.

To comply with two or more sets of requirements, follow the more restrictive requirement in each situation. If you’re not sure how to meet certain requirements, ask the owner or former manager to show you what it has done to comply.

How to confirm. Ask the owner or former manager for the documents relating to these other programs. These documents, which should include a regulatory or financing agreement, should spell out the requirements you must meet in return for the extra funding. Differences between the tax credit program and other housing programs most often arise when it comes to minimum set-asides, rent restrictions, household income, and the length of the compliance period.

Question #5: What Compliance Violations Has Site Gotten, and Have They Been Corrected?

Ask the owner or former manager to tell you about all tax credit violations the site has gotten. Also ask whether there are any violations that haven’t been corrected. If there’s an outstanding violation, discuss what action you must take to fix the violation by the deadline. For instance, if the owner or former manager charged a household more rent than the tax credit program allows, but hasn’t yet lowered the rent to the appropriate level and refunded the overage to the household, you’ll need to do this.

Also, make sure you know how long you have to fix a violation. The tax credit law requires agencies to give sites a “reasonable period” of time to fix violations, and the rules clarify that the correction period can be up to 90 days. If you don’t think you can correct a violation by the deadline, the rules let you apply for an extension of up to six months.

How to confirm. Your state housing agency must report all compliance violations to the IRS on IRS Form 8823. So ask the owner or former manager for copies of any Forms 8823 that concern your site. Note, too, that your state housing agency must indicate the deadline for fixing a violation when it issues Form 8823.

Question #6: What Fair Housing Lawsuits Has Site Faced?

Although fair housing compliance is part of tax credit compliance, it’s important to ask specifically about any fair housing violations or lawsuits the owner or former manager has been involved with at the site. Hopefully, there are no lawsuits or HUD investigations still pending. But even if all violations have been resolved, try to find out as much as you can about these past violations. This way, you can make sure your staff gets the right fair housing training and takes other steps to prevent similar violations from happening again.

How to confirm. If any lawsuits are pending, get the files for all open cases. You’ll also need to meet with the attorneys handling them. Also, get a copy of the files for any HUD investigations or fair housing lawsuits that have occurred in the past—even if they’ve been settled. By reviewing these files, you can confirm that these cases are no longer pending. And you might also gain insight into how you can increase awareness of fair housing laws at your site once you take over.

Question #7: Are Any Low-Income Households Over-Income?

If it’s a mixed-income site, find out if the income of any low-income household exceeds 140 percent of the income limits (or 170 percent in the case of deep rent-skewed units) as of that household’s most recent annual recertification date.

If a household’s income exceeds the limits to this extent, you must follow the next available unit (NAU) rule to keep the owner entitled to claim its credits for that household’s unit. To follow the NAU rule, you must rent the next available unit of comparable or smaller size in the building to a qualified low-income household. If you do this, the over-income household stays eligible and the owner’s tax credits stay safe.

How to confirm. Don’t just take the owner’s or former manager’s word that it’s been following the NAU rule correctly. Ask the owner or former manager to show you documentation that proves it rented—or has been trying to rent—the next available unit of comparable or smaller size in the building to a qualified low-income household. For instance, ask to see the initial certification forms for any low-income households that moved into the building after the household went over income.

Question #8: Are There Any Vacant Units?

Ask the owner or former manager if there are any vacant units at your site. A “vacant unit” is an unoccupied unit that was rented to a qualified low-income household. The tax credit law lets owners continue claiming credits for vacant units as long as the site complies with the “vacant unit rule.” This rule says that if a low-income household vacates its unit, you must make reasonable attempts to rent that unit to a new qualified low-income household. And you must also rent other comparable or smaller units at your site that become vacant to qualified low-income households.

If there are vacant units at your site, the owner or former manager should already be following the vacant unit rule. You must now be sure to continue following the rule to keep the owner’s tax credits safe.

How to confirm. Ask the owner or former manager to show you that it has been making reasonable attempts to rent its vacant units to new qualified low-income households. Get copies of all advertisements placed in newspapers, magazines, or industry publications, and printouts of any ads placed on the Internet.

Question #9: When Does Compliance Period End, and What Happens Then?

Ask the owner or former manager how many years remain of the compliance period. Although tax credit owners claim their credits in 10 years, they must keep their sites in compliance with the tax credit program’s requirements for five more years. This 15-year period is known as the “compliance period.”

Also, find out what happens when the compliance period ends. After the 15 years, your state housing agency can no longer report your site to the IRS for noncompliance. But this doesn’t mean you’re off the hook. You’ll probably need to continue providing affordable housing at the site for at least 15 more years.

How to confirm. Owners of tax credit sites allocated credits in 1990 or later must sign an extended use agreement with their state housing agency. This agreement is a contract in which an owner promises to its state housing agency that it will continue renting to low-income households and charging restricted rents.

Check the agreement the owner signed to confirm the requirements you must meet after the compliance period ends. The agreement will also say how long your obligations last. It could be 15, 30, or more years beyond the compliance period. Although the owner of your site can’t lose credits during this time, your state housing agency can sue the owner for breach of contract if you don’t follow the provisions of the extended use agreement.