Q&A on Tax Credit Site Leases

When managing a tax credit site, you may be confused about what you can and can’t do when it comes to creating a lease for your low-income households. For instance, you may be unsure whether you can give households a one-month lease without putting your site owner’s tax credits at risk. Or you may not know the right language to include in your lease before a household signs it, so you’ll be able to collect the maximum rent from the household or get it to cooperate with your compliance efforts.

We’ll give you the answers to commonly asked questions about leases at tax credit sites. Review these questions and answers with your leasing staff to help you manage your site more efficiently and keep the owner’s tax credits safe.

Listing Household Members on Lease

Q Must we list all household members on the lease?

A Yes. You must list every member of a low-income household somewhere on your lease. This way, it’s clear which people you’ve approved to live in the unit as household members.

But not all household members must sign the lease. Most tax credit managers require the household head, co-head, and/or spouse to sign, and some managers set a policy requiring everyone age 18 and older to sign. Either policy is okay and doesn’t violate the HUD Handbook. But even if you don’t require all household members age 18 and older to sign the lease, you still must get all such members to sign the household’s certification forms [HUD Handbook 4350.3, par. 3-11(A)].

Listing Live-In Aides on Lease

Q Some of our low-income households have a live-in aide in their unit. Should we list the live-in aide on the lease?

A No. A live-in aide isn’t a household member, so you mustn’t list an aide on a lease. A live-in aide is “a person who resides with one or more elderly persons, near-elderly persons, or disabled persons, and who is determined to be essential to the care and well-being of the person(s), is not obligated for the support of the person(s), and would not be living in the unit except to provide the necessary supportive services” [Handbook 4350.3, par. 3-6(E)(3)(a)].

You also mustn’t count an aide’s income when certifying and recertifying your households [Handbook 4350.3, fig. 5-2]. But you must consider aides when complying with occupancy requirements [Handbook 4350.3, par. 3-23(E)(6)(d)].

Setting Initial Lease Term

Q Do I need to set a minimum initial term for leases at tax credit sites?

A Yes. Unless you manage single-room occupancy units (commonly known as “SROs”) or other transitional housing, the initial lease term must be at least six months.

The tax credit law bans renting units on a short-term (or transient) basis. This is known as the “transient unit rule.” Generally speaking, the IRS will presume a site is in compliance with this rule if the initial term of the site’s leases is at least six months.

Also, keep in mind that this rule doesn’t apply to the initial lease term for a unit. It applies to the initial lease term for each household that occupies a unit. For example, suppose in the first year of the compliance period, an owner rents a low-income unit to a household for an initial lease term of six months. The household renews their lease for one year and then moves out. The owner finds a new qualified low-income household for the unit. In the lease, the owner must give the new household an initial lease term of at least six months.

Using Special Leases

Q When we’ve managed Section 8 sites, HUD required us to use a special Section 8 lease. Is there a special “tax credit lease” that we must use when renting our low-income units?

A No. Certain housing programs, like the project-based Section 8 program, do require you to use a special lease or lease addendum. But the tax credit program doesn’t have such a requirement. You must still make sure that your lease complies with state and local landlord-tenant law (just as you would at conventional or other affordable sites). You should consult your attorney if you’re not sure whether your lease complies.

Including Lease Clauses to Boost Management Efficiency

Q We’re about to manage our first tax credit site. Does the tax credit law prevent us from including lease clauses that would help us manage the site more efficiently?

A No. Many smart tax credit managers include clauses in their lease to help them manage their site more efficiently, and nothing in the tax credit law prevents this practice. For instance, it’s a good idea to include a clause that bars households from subletting their units, because sublets could trigger noncompliance. And you should include clauses that give you the right to raise your rents to the maximum when, for instance, utility allowances decrease mid-lease.

It’s a good idea to run each such lease clause by your state housing agency to check that the clause won’t be a problem. And always consult your attorney before including any new lease clause to check that your clause doesn’t conflict with state or local landlord-tenant laws.

For a checklist of common clauses you should consider adding to your lease to help you run your site more efficiently, see “Essential Addendums and Clauses to Include in Your LIHTC Leases,” Insider, Summer 2018 Special Issue.