The IRS has identified an issue relating to developer fees in their 2009 audits that is resulting in a reduction in eligible basis for a number of properties. Developer fees are generally includable in eligible basis provided that the fee is reasonable, as determined by the Housing Finance Agency allocating the credits. However, if any of the payment of the fee is contingent on performance of the property, that part of the fee is considered to be for successful property management and is an operational cost not included in basis. This raises a concern for properties where the last equity payment is withheld pending a successful rent-up. When this happens, the IRS considers that payment to be a management fee, which is not includable in basis.
If you are involved with any properties where part of the fee is withheld pending lease up or a determination that the residents are eligible, be sure this part of the fee is not included in basis. This should be reflected by the project accountant on the final cost certification for the property.
In the Federal Register dated October 15, 2009, HUD published a proposed rule deferring changes to the definition of annual income and noncitizen regulations. Originally, the definition of income was due to change from “anticipated” income to “current” income, projected forward for 12-months. This change was slated to take effect on January 31, 2010, but HUD is proposing to remove that change from the final rule. As proposed, the final rule will only require the implementation of the EIV income verification system on January 31, 2010. The change in income definition and the rule requiring all Section 8 residents to have social security numbers in order to receive assistance are being tabled. If they are considered at a later date, it will be by separate regulation. So, for the foreseeable future, ‘anticipated’ income is still required to be determined for assisted housing programs, including the Low-Income Housing Tax Credit Program.
Federal law requires employers – including apartment owners and managers – to post signs explaining legal information to their employees. Failure to post the signs can cost up to $10,000 per violation. Following is an update, in effect as of August 30, 2009, of the signage required to be posted at apartment properties and management companies.
1. Federal Minimum Wage Sign – this sign must be posted by anyone with one or more employees. The sign must show the new minimum wage of $7.25 per hour that went into effect on July 24, 2009. A copy may be obtained at www.dol.gov/elaws/posters.htm or by calling 866-487-9243.
2. Equal Employment Opportunity Sign – this sign must be posted by anyone with 15 or more employees. To obtain this sign, contact the Department of Labor at the number noted above. The latest version of the sign is August 2008.
3. Job Safety & Health Protection Sign – this sign must be posted by anyone with one or more employees. The latest version of the sign says “OSHA 3165-12-06R” in the lower right hand corner and may be obtained from 800-321-6742.
4. Employee Polygraph Protection Act Sign – this sign must be posted by anyone with one or more employees. This sign was last updated in June 2003 and may be obtained from the Department of Labor.
5. Family & Medical Leave Act Sign – this sign must be posted by anyone with 50 or more employees so probably won’t affect individual properties, but may be required to be posted at main offices of management companies. The latest version is January 2009 and may be obtained from the Department of Labor.
Change 3 to HUD Handbook 4350.3 was issued on June 23, 2009, and the changes will take effect on August 1, 2009. The major changes to the LIHTC program as a result of the changes are as follows:
- Live in Aide: HUD has not removed the requirement that a live-in aide not be obligated for support of a household, meaning that as long as all other conditions for a live-in aide are met, a spouse may not be a live-in aide.
- Student Income: HUD clarified that grants and scholarships should only be counted for students receiving Section 8 assistance and makes it clear that exclusion of such income, for anyone other than a Section 8 recipient, is mandatory. While this applies to HUD programs only, it makes clear that student financial assistance should not be counted for a LIHTC resident unless they also receive Section 8.
- Income of Foster Children & Adults: The unearned income of foster children under age 18 will now be counted as income. Also, both the earned and unearned income of foster adults will be counted as income.
- Pensions: Expanded excluded income to anyone with a pension of any type when part of the pension is paid to a former spouse by court order. This previously applied to only federal pensions.
For information regarding all the changes, please contact us.
A surety bond, instead of a security deposit, attracts and retains renters while protecting owners from bad debt.
SureDeposit is a major provider of this service, with more than 1.5 million units under contract.
New renters may choose to pay a one-time, non-refundable premium to purchase the bond. The price is 17.5% of the bond amount, sold in $250 increments.
It can also be used at lease renewal so that residents may convert their deposits to a bond, getting a good deal of cash back.
This is not an insurance policy – it is a performance guarantee. The bond covers the renter for the entire time they lease at the community and, like a security deposit, can be transferred to another community within an owner’s portfolio.
If a tenant fails to meet their lease obligations, SureDeposit pays the owner and pursues the tenant for collection. Claims are paid within 20-days.
The SureDeposit website is www.suredeposit.com.
The IRS has issued guidance through a Chief Counsel Advisory (CCA 200913-12) with regard to the claiming of credits by a tax credit property that has suffered a casualty loss. The CCA confirms that §42(j)(4)(E) of the IRC provides relief from recapture in the event of a casualty loss, if the building is restored within a reasonable period of time (no more than two years after the end of the calendar year in which the casualty loss occurs.)
In such an event, credits may not be claimed for any year in which the building is not in service at the end of the tax year. There is an exception to this for buildings in a Presidentially Declared Disaster Area.
To illustrate this issue, assume a building burns down in September 2008 due to a lightening strike. The building was first placed in service in 2002 and the first year of the credit period was 2003. The building must be restored and placed back in service no later than December 31, 2010. If this does not occur, the owner will claim no credits for 2008 or 2009, and must pay back 1/3 (recapture) of the credits claimed for the period 2003 – 2007. If the building is restored by the December 31, 2010 deadline, the owner will claim credits for 2010 (but not for 2008 or 2009, unless in the federal disaster area.) In this example, there would be no recapture of credits for prior years.
If a casualty event and full restoration occur in the same year, there is no recapture or loss of credits if the units were restored within a reasonable period, and (1) each unit is occupied by low-income tenants by December 31 of the year, or (2) the owner initiated continual and verifiable measures to rent restored vacant units to low-income tenants immediately upon restoration of the building.
This CCA is significant not only because it confirms the treatment of credits in the event of a casualty loss, but also because it confirms that other than the first year of the credit period, there is no statutory authority for disallowing credits on a monthly basis. By inference, there is also no statutory authority to claim credits on a monthly basis other than in the first year of the credit period.
Recent, informal guidance from the IRS has indicated that for Section 42 purposes, the income of applicants or residents that may terminate will no longer be annualized, as required for HUD programs. For example, if an applicant on a HUD property is receiving unemployment compensation that may terminate in ten weeks, the income will be calculated as if it would be received for the entire year (52 weeks.) The IRS position, for tax credit properties only, is that the income would be calculated only for the remaining ten weeks of the benefits.
While this is informal at this time, it is expected to be part of the revised IRS 8823 Guide, expected to be released by mid-summer 2009. Keep in mind that even if this position is formalized in the upcoming Guide, properties with HUD programs in place, such as Section 8, will continue to annualize the income for HUD purposes.
On May 5, 2009, the IRS issued Notice 2009-44, outlining the requirements relative to sub metering of utilities with regard to the provision of a utility allowance on Section 42 (Low-Income Housing Tax Credit Properties.)
As many of you know, IRS Regulation 1.42-10, revised on July 29, 2008, did not permit the provision of a utility allowances in cases where tenants did not pay the utilities directly to the utility company. This created significant issues for properties that were sub metering certain utilities, most commonly water and sewer. Basically, any charge to tenants for sub metered utilities had to be considered “rent,” which in some cases meant that owners would effectively be subsidizing the utility bills of residents.
Notice 2009-44 has gone a long way to address this problem by permitting a utility allowance for sub-metered utilities, as long as tenants are charged based on actual consumption. The exact wording of the notice is “For purposes of §1.42-10(a) of the utility allowance regulations, utility costs paid by a tenant based on actual consumption in a sub-metered rent restricted unit are treated as paid directly by the tenant, and not by or through the owner of the building.”
Per the Notice, the utility rates charged to tenants for sub-metered utilities must be limited to the utility company rates paid by the building owner or their agent. The IRS has also agreed to permit a reasonable fee for the administrative costs associated with third party billing services; this fee may not exceed $5.00 per unit per month unless state law provides additional restrictions.
This Notice may be put into effect immediately and owners may rely on the Notice for any utility allowances effective on the first day of the building owner’s taxable year beginning on or after July 29, 2008.
The IRS has issued informal guidance stating that owners of existing tax credit properties that are being sold to new partnerships and are obtaining a new allocation of tax credits need not terminate the residency of existing residents whose incomes now exceed the tax credit income limits.
While informal, the guidance is believed to be reliable and will be reflected in the upcoming revised 8823 Guide (expected to be released in mid-Summer 2009.)
A key stipulation is that there be no break in extended use requirements between the old deal and the new deal. What this effectively means is that on the day the prior Extended Use Agreement terminates, the new agreement should go into effect. If there were a break in extended use, all residents in the property with the newly allocated credits would have to qualify as a new resident.
Also, if a resident’s income is above 140% of the current allowable income limit, the available unit rule will be in effect in the first year of the credit period.
This is important new guidance, especially considering the number of tax credit properties that are completing the initial 15-year compliance period and are looking to obtain new credits for new partnerships. It is sound policy and represents the intent of Congress that households who were initially qualified in a tax credit property not lose their housing due to income increases.
Keep in mind that this provision will not apply to households that have vacated and now wish to move back in. Occupancy must be continuous to avoid a requalification.
The concept of the “true and correct,” or “retroactive” statement of fact has a long history in tax law and most other areas of law. Tax and accounting practices recognize three reporting approaches to error correction: (1) retroactive treatment; (2) prospective treatment; and (3) current treatment.
**Current treatment uses current information and is appropriate when a retroactive correction will not impact the results of the error.
**Prospective treatment is not generally appropriate to tax issues.
**Retroactive treatment is used when doing so will reflect a change in circumstances from the current treatment.
In accounting, retroactive corrections are made to deal with a use of an inappropriate principle, mistakes in the application of generally accepted accounting principles, math errors, or fraud/gross negligence in reporting. In these cases, for all affected periods, financial statements are retroactively restated to reflect the error correction.
Such corrections always include a “disclosure note” revealing that the document is a retroactive correction. This is comparable to the “true and correct” statement we use in the LIHTC industry.
The line is drawn based on circumstances. When a retroactive statement will not affect the credits for a unit, it is not necessary, and current circumstances should be used. This is why retroactive recertifications should only be used when necessary to show that the available unit rule has not been violated. For this reason, retroactive recertifications are not recommended on 100% low-income properties.
The IRS both recognizes and accepts retroactive certifications for demonstrating the eligibility of new move-ins and proving compliance with the Available Unit Rule in the case of recertifications. These two uses of the technique are outlined in the 8823 Guide. We generally recommend to clients that the practice be limited to these two circumstances.