Five Rules to Keep Market-Rate Units in Compliance

It’s not unusual for tax credit sites to be mixed-income, consisting of both low-income and market-rate units. Market-rate units aren’t rent-restricted and may be rented to households of any income. Even so, certain provisions of the tax credit law apply to those units. If you don’t keep those units in compliance with the tax credit law, you’ll risk bringing your entire site into noncompliance.

Here are five rules to help keep your market-rate units in compliance. Follow these rules at every mixed-income tax credit site you manage.

Rule #1: Keep Market-Rate Units Suitable for Occupancy

The tax credit law requires that your buildings be suitable for occupancy, taking into account local health, safety, and building codes.

How to comply. You should review your state housing agency’s standards for inspecting units to learn what else you may need to do to keep the unit suitable for occupancy. Agencies may use HUD’s uniform physical condition standards or local codes as their inspection standards. But even if your agency uses HUD’s standards, you must comply with those standards and fix all local code violations relating to your market-rate units to avoid noncompliance. This may require you to fix electrical, heating, plumbing, or pest problems, or to repair a faulty smoke detector, sprinkler, or appliance. It’s also important to note that your market-rate units must stay suitable for occupancy even if they’re temporarily unoccupied.

Rule #2: Keep Market-Rate Units Open to General Public

The tax credit program requires that you rent your units to the general public.

How to comply. To keep your market-rate units open to the general public:

• Don’t reserve market-rate units for members of certain social groups. For instance, don’t set aside a couple of sunny top-floor units for members of a local political organization.
• Don’t reject applicants for illegally discriminatory reasons. The Fair Housing Act makes it illegal to turn away applicants based on their race, color, gender, religion, disability, national origin, or familial status. Your state or local law may also ban discrimination based on other factors, such as ancestry, profession, or sexual orientation. Housing discrimination laws apply equally to market-rate units and low-income units at tax credit sites. If your state housing agency learns that you violated fair housing law, the agency must report you to the IRS for tax credit noncompliance—even if the violation involved only a market-rate unit.
• Don’t reject applicants because they hold Section 8 vouchers. The tax credit law bars you from doing so. Usually, applicants with Section 8 vouchers would be financially eligible only for low-income units at a tax credit site. But it’s possible that a Section 8 applicant could afford to live in a market-rate unit if market-rate rents are within the public housing authority’s payment standard. The tax credit law’s ban on Section 8 discrimination also applies to market-rate units. So if an applicant shows that he can pay market-rate rent, and you reject him because he holds a Section 8 voucher, you’ll bring your site into noncompliance.

Rule #3: Apply Fair Housing Law to Market-Rate Residents

Complying with fair housing law involves much more than not rejecting applicants for illegally discriminatory reasons. When you manage a mixed-income tax credit site, you must follow fair housing law scrupulously with both your market-rate and your low-income residents. Your state housing agency must report all fair housing violations to the IRS as tax credit noncompliance—even if they concern only market-rate units. This means, for example, that:

• You must use the same standard to decide whether accommodation requests are reasonable and should be granted—whether low-income or market-rate residents make the requests;
• You can’t steer market-rate residents to certain parts of your site based on race, religion, national origin, or for any other illegally discriminatory reasons; and
• You can’t require a criminal background check for all low-income residents, but make exceptions for certain market-rate residents.

Rule #4: Require Residents to Use Market-Rate Units Primarily for Residential Purposes

Your market-rate units, like your low-income units, must be used primarily for residential purposes. It’s okay to have some commercial space at a tax credit site. But market-rate units are included in your site’s eligible basis, which means you must keep them residential.

How to comply. To keep your market-rate units in compliance with this tax credit requirement:

• Rent market-rate units to households—not businesses. This rule seems almost redundant when applied to low-income units. Because you must rent your low-income units to households that earn no more than a certain percentage of area median gross income, it’s clear that you can’t rent them to businesses. But even though your market-rate units aren’t bound by income restrictions, you still can’t rent a market-rate unit to a company. If you do, you’ll violate the tax credit law—because all units at a tax credit site that are part of the site’s eligible basis must be used primarily for residential purposes.
• Be cautious about letting market-rate residents run businesses from their units. If residents run full-time businesses from their units, the units may be out of compliance if they’re not kept primarily residential. However, letting residents conduct some business in their units won’t violate the tax credit law.

Rule #5: Charge Same One-Time Fees to Both Market-Rate and Low-Income Residents

Be sure to charge the same administrative fees to market-rate residents that you charge to low-income residents. You can’t charge market-rate residents higher fees. For instance, if you charge low-income residents a $30 fee for running a credit or criminal background check, you must charge market-rate residents $30 for the same check.