A question that clients often ask regarding moving tenants around on acquisition rehab projects is "Can we claim the credit on both units, even though the resident will only be in the temporary unit until the rehab is done on their apartment". Unfortunately, I cannot give an answer that is fully supported by any regulatory reference. Generally, transient units are not credit eligible, and clearly, the second unit is being used on a temporary (transient) basis. However, the resident is on a lease (so the resident is not transient) and they are being provided with rent-restricted housing on a continuous basis. The owner should be able to obtain a tax credit due to the benefits being provided to the resident. It does not appear to be a fair result if the owner loses credit on both units while still providing affordable housing to the resident. While units swap status in a transfer, this is not a "transfer," so I don’t believe we can rely on the unit transfer rule to preserve the credits.
So, what are your options? (1) Treat the temporary unit as transient and don’t claim the credit on either unit. This is the safest course. (2) Claim credit on the temporary unit for the months the household is in that unit and leave the permanent unit out of the applicable fraction. While this is the more aggressive of the two options, it is the one I would choose if I was the owner.
Ultimately, it is a fairness issue (but the tax code is not always fair). The only way to truly know if this would meet with IRS approval would be to request a Private Letter Ruling (PLR). While this is costly, it may be the only way to resolve the question. It must be noted that a Private Letter Ruling is not precedent and may only technically be applied to the specific case for which it is requested. Having said that, PLRs often provide good indicators of IRS thinking on a specific issue.
My recommendation in these cases is to claim the credit on both units (but not at the same time). If challenged, I would make the argument that this is not a transient unit since the resident has a lease at the property and is being housed at restricted rents. Since the resident is still under lease at the property, and they are being housed on a non-transient basis, the particular unit they are in should not impact the ability of the owner to claim full tax benefits.
I realize this is a pretty aggressive position to take and since I cannot offer legal or accounting advice, owners should consult with their own counsel before deciding on a course of action.
IRS Issues Revenue Ruling on 4 Percent Tax Credit Floor
The IRS has issued Revenue Ruling 2021-20, providing clarity on when taxpayers may claim the fixed four percent credit for properties with tax-exempt bonds. The IRS addressed three separate issues relative to the 4% credit: Does the minimum 4% applicable percentage (4% floor) apply to buildings that are financed in part with a draw-down of tax-exempt bonds that were issued in 2020 but had drawn downs of the proceeds in 2021?Does the minimum 4% applicable percentage (4% floor) apply to buildings that were financed with tax-exempt bonds issued in 2020 but then had a "de minimis bond issue after 2020?Does the minimum 4% applicable percentage (4% floor) apply to buildings that received an allocation of credits in 2020 and a "de minimis additional allocation after 2020? Example #1: Bonds are issued and partly used in 2020, with the remainder of the bond proceeds drawn down in 2021. The amount drawn in 2020 exceeded the lesser of $50,000 or 5% of the issue price, which qualifies the issue as a 2020 issue. The qualified low-income building is placed in service after December 31, 2020.Example #2: Assume the same facts as in Example #1, except that instead of a draw-down of bonds in both 2020 and 2021, the Agency issues bonds in 2020 to finance the construction of the project, and in a subsequent year (e.g., 2021), the Agency issues a different issue of tax-exempt bonds, in a de minimis amount, that the Borrower similarly uses to finance construction of the building.Revenue Procedure 2021-43 states that an issuance of bonds in a year after the initial issuance is not de minimis if the aggregate amount of the post-2020 obligations is at least 10% of the total bond financing for the project. Example #3: In 2020, the Agency and Borrower enter into a binding agreement whereby the Agency will allocate tax credits for the acquisition of an existing building and an additional allocation of credits for the rehabilitation of the building into a low-income building. The allocations of both the acquisition and rehab credit are made in 2020. The allocations were made under 42(h)(1)(E) and was a valid carryover allocation. The owner completes the acquisition and rehab of the building and places the building in service after December 31, 2020. After 2020, but before the building is placed in service, the Agency makes an additional allocation of credits relating to the acquisition of the building. This additional allocation is de minimis and reduces the Agency s ceiling for housing credit dollar amounts for the year after 2020 in which the allocation is made. I.e., this is not an allocation of credits due to an issuance of tax-exempt bonds.Revenue Procedure 2021-43 states that an allocation of credits in a year after the initial allocation is not de minimis if the allocation amount of the post-2020 credit amount is at least 10% of the total allocations for the project. The ruling indicates that the 4% credit floor does not apply in any of the cited examples, even though all the buildings described in the examples satisfy the requirement of 42(b)(3) that a building is placed in service after 2020. It should be noted that since the IRS considers the placed-in-service date of a building for acquisition purposes to be the date the building is purchased by the new owner, in example #3 above, the building could not be purchased until after December 31, 2020. Generally, a project without tax-exempt bonds - such as shown in Example #3 - must only meet the post-2020 placed in service test to qualify for the 4% floor for acquisition credits. Properties with tax-exempt bonds must meet two tests: (1) The property must be placed in service after 2020, and (2) the bonds must be issued after 2020. However, the facts presented in Example #3 have led the IRS to the conclusion - based on the Service s interpretation of Congressional intent - that even being placed in service after 2020 may not automatically entitle the acquisition costs of a non-tax-exempt bond project to the 4% floor. This issue is covered in more detail below. IRS Ruling Relative to Example #1: The IRS believes that if the post-2020 draws under the 2020 issue allowed the 4% floor to apply, the result would be a windfall of credits that were not taken into account when the transaction was structured in 2020. Thus, in Example #1, because the loan was issued in 2020, the applicable percentage of the building is determined without regard to the 4% floor. The applicable percentage of the building is the amount determined under 42(b)(1)(B) and (C) for the month that the bonds were issued. The project may not use the 4% floor.IRS Ruling Relative to Example #2: In this example, the post-2020 bond proceeds were from a post-2020 issuance of an exempt facility bond issue. Thus, the situation outlined in Example #2 may qualify a project for the 4% floor, but in order to make this determination, an examination of the effect of the post-2020 bond issuance on project feasibility must be made. Since the law allowing the 4% floor was designed to prevent windfalls, it is necessary to consider whether the de minimis post-2020 issue could create a windfall of tax credits. If the post-2020 issuance is non-de-minimis, any concern over a windfall of credits is lessened. In other words, if the post-2020 issuance is not de minimis, the transaction is less likely to have been entirely structured prior to the enactment of the 4% floor. In addition, a greater portion of the total credits generated by applying the 4% floor to the building would be expected to result from basis financed by the post-2020 issuance.If the de minimis amount of bond financing is fully issued after 2020, the IRS takes the position that this more closely aligns with a building whose only tax-exempt financing was issued prior to 2021 - even if placed in service after 2020. Thus, the IRS rules that only non-de-minimis post 2020 tax-exempt bond issuance qualifies a project for the 4% floor. For projects that do not meet this test, the applicable percentage for the building will be based on the credit percentage in place during the month of the initial bond issuance, or, at the election of the taxpayer, the placed in-service date. IRS Ruling Relative to Example #3: In this example, credits were allocated in 2020 and an additional allocation - of a de minimis amount - occurred after 2020. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, Section 201(b)(1) states that the 4% rate applies to buildings that receive an allocation of housing credit after December 31, 2020, or in the case of tax-exempt bond financed projects ( 201(b)(2)), to projects if the bonds were issued after December 31, 2020. So, a plain reading of the statute indicates that in this example, the project should be eligible for the 4% credit floor. However, the IRS takes a different position. The Service once again makes the "windfall argument. Since the transaction was structured in 2020, and at that time the allocating agency did not take the 4% floor into account, the 4% credit was not needed for deal feasibility.In the Ruling, the IRS acknowledges that the windfall effect with an allocation is less than in a building financed with exempt facility bonds. However, the Service believes that the requirements of 201(b)(1) of the Act manifest the same legislative intent of 201(b)(2) of the Act and should therefore be interpreted consistently. For this reason, the principles that govern de minimis amounts of bonds are equally applicable to de minimis allocations. Therefore, in the example cited here, the 4% floor does not apply to the building described in Example #3, and the credit percentage will be the percentage for the month of the allocation or, at the election of the taxpayer, the month the building was placed in service. To summarize the IRS ruling - Example 1: the 4% floor does not apply to the building, which is financed in part with a draw-down exempt facility bond issue that was issued in 2020 and on which one or more draws are taken after December 31, 2020.Example 2: the 4% floor does not apply to the building which is financed in part with proceeds of an exempt facility bond issue that was issued in 2020 and in part with proceeds of a different exempt facility bond issue that is issued in a de minimis amount after December 31, 2020.Example 3: the 4% floor does not apply to the building which receives an allocation of credits in 2020 and a de minimis additional allocation after December 31, 2020. Owners that anticipate the use of the 4% credit floor for properties being placed in service after December 31, 2020, should carefully review this Revenue Ruling for applicability to their project.
Court Decision Affirms "Necessity Standard" for Reasonable Accommodations
In Carter v. Murray, 2021, WL 4192055, CIVIL ACTION NO 21-3289 (E.D. PA, September 14, 2021), the U.S. District Court for the Eastern District of Pennsylvania ruled that a tenant was not entitled to a reasonable accommodation of permanent relocation to a unit that was free of carpet fumes and tobacco smoke since the landlord had offered a temporary relocation while repairs were made to remove the offending carpet from the unit. The landlord had also promised to adopt a smoke-free policy for the apartment complex. The suit was brought by Reginald Carter, a resident at Venango House, an apartment building in Philadelphia. Prior to moving in in August 2018, Carter discovered that the apartment was newly carpeted and painted. Because of his lung disease, he asked management to remove the carpet. He was told this could not be done but was offered an uncarpeted apartment in the building. He accepted the apartment, but because the linoleum floors and adhesives were also releasing toxins, he did not move in until October to allow the paint to off-gas. He was also unhappy with dust and parts of an unfinished wall. On May 15, 2019, Carter wrote a letter to the manager, Donna Murray, expressing concerns about the smoking of a fellow resident who smoked and used deodorizers to mask the smell. He requested to be moved out of his unit to allow for repainting and floor replacement. On June 4, 2019, a tenants council meeting was held to address Carter s issues. Carter s lung problems were not brought up at the meeting, but the Council did ask the manager if smoking was going to be prohibited. On December 17, 2019, Carter wrote another letter to Murray in which he stated that he would not allow a contractor to paint his door because of COPD lung disease. He asked that the painting be put on hold until such time as tenants with lung disease could seek exemptions from having their doors painted. The painting was stopped, but no one at the property was asked if they wanted an exemption from the painting of the doors. On January 28, 2020, Carter alleged that an environmental hazard was caused by the improper removal of carpet adhesive in the hallways. He alleged that he was hospitalized twice in 2020 because he "could not walk a block without getting chest, neck, and face pains. He claimed that the "stress of living at the Venango House was a major contributing factor, and that cigar and cigarette smoke from other tenants intensified his breathing problems. In January 2021, Carter emailed Murray and a representative of the management company (Winn Companies) that the smell of paint and new carpeting made his symptoms worse. He complained in February 2021 of cigar smell in his apartment and claimed that due to the racial makeup of the tenancy at Venango House and the fact that management failed to provide 24-hour security and had no central air in the hallways, what was occurring amounted to "murder and institutional racism. On February 22, 2021, Andrew Lund, the Office Manager and Regional Vice-President of the management company, contacted Carter by email about current issues. Carter replied that the smoking issues remained and that he needed permanent relocation instead of a temporary stay at a hotel while repairs were conducted. He alleged that his relocation request was ignored from May 15, 2019 to March of 2021. Carter filed a claim against Lund, Murray and others, alleging constitutional claims for violation of the First and Fourteenth Amendments, claims under the Fair Housing Act (FHA), and state law claims. He requested an order requiring the Winn Companies to relocate him to a place of his choosing at Winn s expense, to remove certain individuals from the tenant council, and to reinstate him as council president. He also sought an order directing the Winn Companies to evict a member of the tenant council with whom Carter had a dispute and to immediately disallow smoking at Venango House The Court dismissed all the constitutional claims. The court also ruled that Carter pleaded no plausible FHA claim for disability. The FHA protects against discrimination based on disability. To state a reasonable accommodation discrimination claim, the plaintiff must plead facts showing (1)accommodations are necessary to afford him equal opportunity to use and enjoy a dwelling; and (2) the defendant refused to make reasonable accommodations in rules, policies, practices, or services. In support of this, the Court cited Vorcheimer v. Philadelphia Owners Association, (a case that those who have taken my fair housing training in 2021 may be familiar with). As stated in Vorcheimer, the element of necessity "requires that an accommodation be essential, not just preferable. A plaintiff must "establish a nexus between the accommodations that he or she is requesting and their necessity for providing handicapped individuals an equal opportunity to use and enjoy housing. The court went on to explain that even if Carter s medical conditions qualified as a disability under the FHA, it did not provide facts alleging the statutory elements of a failure to accommodate claim. In fact, the claim stated that Murray and Lund attempted to resolve Carter s complaints by meeting with Carter and offering relocation to an uncarpeted apartment, and the opportunity to move into a hotel while his floors were refinished. Moreover, Murray and Lund sent Carter an email on March 5, 2021, stating that Venango House would "work toward implementing a smoke-free policy. Thus, the defendants addressed his requests and Carter provided no facts demonstrating a failure to accommodate. For this reason, the court found Carter s disability discrimination claim was not plausible and was dismissed without prejudice. This means that if Carter can address the weaknesses in his case, he may bring it forward again. This case provides another example of fair housing claims relating to reasonable accommodation requests being dismissed when landlords make legitimate offers to meet the requirements relating to the disability - even if the offers do not match the specific demands of the plaintiff.
Progress Still Lacking in Distribution of ERAP Funds
The National Low Income Housing Coalition (NLIHC) has released findings from the organization s latest survey of state use of funding from the federal Emergency Rental Assistance Program (ERAP). As of late September, of the approximately $25 billion made available by the federal government in the first tranche (ERA1) of emergency rental assistance, states have expended or obligated only $8.4 billion (33.7%). While this is still indicative of weak performance by many states, the use of the funds has picked up in recent months. Grantees spent $550 million more in August than they did in July, while from June to July the increase was only $196 million. A total of $46 billion has been provided in ERA1 and ERA2. Percent of the money spent by reporting period is as follows: January - March: 1.1%April: 1.9%May: 3.1%June: 6.1%July: 6.9%August: 9.1% 18 states spent less than 10% of their ERA1 allocations as of the end of August. Several of these did show progress in August, however, especially Florida and South Carolina. The states with the lowest allocations are - Florida: 9%Vermont: 9%Indiana: 9%Montana: 9%Iowa: 9%Rhode Island: 8%Delaware: 7%Idaho: 7%South Carolina: 7%Tennessee: 7%Georgia: 6%Alabama: 6%Arkansas: 4%Nebraska: 4%Arizona: 3%North Dakota: 3%South Dakota: 2%Wyoming: 2% The highest performing states are - New Jersey: 78%District of Columbia: 70%Virginia: 63%Texas: 56%North Carolina: 48%Illinois: 43%Alaska: 43%Massachusetts: 41% Despite noticeable improvement, the overall rate of spending remains too low. States like NJ, VA, and TX have proven that it is possible to get this money to the tenants and landlords who need it. The high performance of these and a few other states calls into question the poor performance of so many others. In some cases, the fault lies with state legislatures or local governments. Congress is also partly to blame for a faulty allocation formula, which provided some grantees with more funding than needed. In some cases, landlords are refusing to participate in the program. But the primary reason for the lack of distribution is that many program administrators are not following clear Treasury guidance and are not willing to adopt proven best practices. These poor performers often do little (if any) outreach, do not hire enough staff to process the applications, and have complex and burdensome application procedures. Very few of the slow spenders allow renters to self-attest eligibility, despite federal guidance that has urged it for months. Less than a third of programs allow assistance to go directly to tenants, despite it being permitted and critical to keeping residents housed when landlords refuse to participate. The best and fastest spending programs are doing all these things. There are signs that some weaker performing states are taking steps to improve - South Carolina and Arkansas are examples. Hopefully, others will follow suit and this important resource will further improve the desperate housing situation that many tenants and landlords are facing.
HUD Provides Fair Housing Funding to 51 Agencies
On November 3, 2021, the Department of Housing & Urban Development (HUD) awarded $13.6 million in American Rescue Plan (ARP) funding to enable 51 HUD Fair Housing Initiatives Program (FHIP) agencies to conduct a wide range of fair housing enforcement, education, and outreach activities related to the COVID-19 pandemic. Among the activities that will be conducted by the agencies is addressing discriminatory practices in underserved communities (i.e., minority neighborhoods). The funds, which were awarded under FHIP s Private Enforcement Initiative (PEI), are the first ARP competitive grants that focus directly on the unequal impact the COVID-19 pandemic has had on communities of color, low-income communities, and other vulnerable populations. Specific activities that will be carried out include responding to housing inquiries, investigating fair housing complaints, conducting fair housing testing, providing legal assistance, conducting education and outreach, and covering costs associated with providing services related to the pandemic. Another $5,757 million in ARP funding will be made available to eligible applicants that did not receive funding in this first round. Organizations in 26 states and DC received funds, ranging from $75,000 to $350,000. The types of organizations that received funding include legal aid agencies, fair housing testing agencies, and educational organizations. New York and Ohio both received six awards while California and Illinois each received four. Other states receiving grants are: AlaskaArkansasArizonaConnecticutDistrict of ColumbiaFloridaGeorgiaHawaiiIdahoIndianaMassachusettsMichiganMinnesotaMississippiMissouriNorth CarolinaNorth DakotaNew HampshireNew JerseyNevadaPennsylvaniaWashingtonWisconsin Housing operators in these states should expect increased fair housing testing and compliance actions during the upcoming 12 months as a result of these grants.