Average Income Final Regulation - The Available Unit Rule

person A.J. Johnson today 11/04/2022

A short time ago I posted an article providing an overview of the new IRS final regulation on the Average Income Set-Aside. I promised to post a series of articles detailing some of the more complex elements of the final regulation and this is the second in that series. In this article, I will review the Available Unit Rule on Average Income projects.

When Congress added the Average-Income Set-Aside, it also added a new next available unit rule (AUR) for the AI test. Under this new rule, a unit ceases to be a low-income unit if two slightly different disqualifying conditions are met:

  1. The income of an occupant of a low-income unit increases above 140% of the greater of (i) 60% of AMGI or, (ii) the imputed income limit designated by the owner for the unit; and
  2. A new occupant whose income exceeds the applicable imputed income limitation occupies any other residential rental unit in the building that is of comparable or smaller size.

If the vacant unit was a low-income unit prior to becoming vacant, the unit must be occupied by a tenant who qualifies under the imputed income limit.

If the vacant unit was a market unit prior to becoming vacant, it must be designated with an income limit that will enable the project to continue to have an average imputed income of no more than 60%.

There is no major change to the AUR in the final regulation, but the language specifies that if a low-income resident has income in excess of 140% of the 60%, 70%, or 80% limit, and the next available unit in the building that is comparable or smaller in size to the over-income unit is a market unit, it must be designated with an income limit such that the average of all imputed income designations of residential units in the project does not exceed 60% of the AMGI.

Also, if multiple units are over-income at the same time, and there is a mix of low-income and market-rate units, the owner need not comply with the AUR in any specific order. Renting any available comparable or smaller vacant unit in the building to a qualified tenant maintains the low-income status of all over-income units until the next comparable or smaller unit becomes available.

A Deep-Dive into the AUR on Average-Income Projects

  • For purposes of the AI set aside, a low-income unit will be considered "over-income" if the household’s income is:
    • More than 140% of the 60% AMGI if the unit’s designated income limit is 20, 30, 40, 50 or 60 percent; or
    • More than 140% of the unit’s designated income if the unit’s income designation is 70% or 80%.

IRS Guidance Relative to the AUR on AI Projects

  • IRS Final Regulation: If multiple units are over-income at the same time, the owner need not comply with the AUR in any specific order.
  • Renting any available comparable or smaller vacant unit to a qualified tenant maintains the status of all over-income units as low-income units.
    • E.g., assume a 20-unit building with nine low-income units (three units at 80% of AMGI, two units at 70% of AMGI, one unit at 40% of AMGI and three units at 30% of AMGI).
    •  Two units are over-income, one a 30% income three-bedroom unit and another a 70% two-bedroom unit.
    •  The next available unit is a vacant two-bedroom market unit.
    • Renting the vacant two-bedroom unit at either the 30%- or 70%-income designation will satisfy both the minimum set-aside of 40% and the average test of 60% or less.
    • This is the case even if the 30% unit was the first unit to exceed the 140% income level.
  • An Over-Income unit ceases to be a qualified low-income unit if any unit in the building of comparable or smaller size is occupied by a new household whose income exceeds the designated income limit of that unit - based on the designation that unit had prior to becoming vacant.
  • If the unit that becomes vacant is a market unit, the owner must designate the income of the next available unit such that the project continues to meet the Average Test.
  • E.g., Household A lives in a 30% designated unit and B lives in a 70% designated unit.
  • A’s income exceeds 140% of the 60% AMGI, or B’s income exceeds 140% of the 70% AMGI - the AUR is now applied to the BIN.
    • The income of both households goes over the 140% level at the same time.
    • Assume the BIN has two market units, four 30% units, and four 70% units. The Average Test is 50%.
    • A market unit is rented at the 30% AMGI, maintaining four 30% and four 70% units - the 30% over-income unit now becomes a market unit, and the Average Test is still 50%.
    • But - what if instead of renting the market unit to a designated 30% household, the owner rents the unit to a designated 50% household and makes the 30% over-income unit a market unit?
      • Result: There are now two market units, one 50% unit, three 30% units, and four 70% units (one of which is over-income). The Average Test is now 52.5% - the project still qualifies under the Average Test but has one less 30% unit.
      • The AUR requirement is met but this could be a LURA violation.

The preceding example is why many HFAs may not allow mixed-income projects to select the AI Minimum Set-Aside.

Summary

Clearly, the additional complexity relative to the AUR on Average Income properties should give owners pause prior to developing mixed-income buildings with the Average-Income set-aside. However, with good management and tracking procedures, any difficulties can be overcome, and the benefits of a mixed-income project realized. One final word of warning though; as the example above illustrates, owners may be able to replace lower designated units with higher designations when complying with the AUR. While this would increase cash flow due to higher rents, it could very well run afoul of the property LURA (extended use agreement) which may stipulate a required number of units at each income level. At the very least, before taking such a step owners should confirm that no state requirements would be violated and that investors are on board with the change.

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The U.S. Department of Housing & Urban Development (HUD) normally publishes annual income limits in early April of each year. However, complications with calculating the limits due to COVID-19 will cause a delay in the release of the limits in 2023. According to HUD, the limits will be released on or about May 15, 2023. HUD normally uses American Community Survey (ACS) Data from three years prior to the income limit release to determine family median incomes and income limits. However, the Census Bureau did not release the 2020 one-year ACS data due to data collection difficulties because of the COVID-19 pandemic. For this reason, HUD will use 2021 ACS data to determine the 2023 median income and income limits for low-income housing tax credit (LIHTC) properties. Why is this important? Owners of LIHTC properties will have to wait a little longer than usual to determine the income and rent levels available to them for 2023. While increases in income limits nationally are expected to be less than in prior years, most areas should still see some increase in limits, which will allow for a modest increase in rents in 2023.

Virginia Housing Looking for Compliance Staff

Virginia Housing (formerly Virginia Housing & Development Authority) has three positions open in Compliance & Asset Management. If interested, you may access the position descriptions at https://us63.dayforcehcm.com/CandidatePortal/en-US/VHDA. Virginia Housing (VH) is one of the premier Housing Finance Agencies in the nation and I have had the privilege of working with them for more than 40 years. The Agency provides an excellent work environment and has a comprehensive benefits program, including medical, dental, vision, and prescription drug coverage. VH also has both long- and short-term disability plans and various options for retirement plans. If you (or someone you know) are looking for an excellent opportunity on the public side of the affordable housing field, I encourage you to check out the open positions at VH and consider applying.

Rural Development Suspends Interim Recertification Requirements for COLA Recipients

On November 10, 2022, the Rural Development Service released an Unnumbered Letter granting a temporary exception to tenant recertification requirements. On October 13, 2022, the Social Security Administration announced there will be an 8.7% increase in Social Security and Supplemental Security Income (SSI) benefits in 2023. This will increase the average SS payment by more than $140 per month starting in January. The RD Section 515 program requires that tenant households be recertified at least annually or when household income changes by $100 or more per month. Since the increase would require recertifications for most Social Security recipients, the Agency is temporarily waiving the recertification requirement for tenants whose household income, regardless of income type, has increased by more than $100 but less than $200. Accordingly, during the Exception period, tenants will not be required to recertify unless their household income changes by $200 or more per month. This temporary waiver will be in place for all of 2023 and will expire on December 31, 2023. During the period of the waiver, tenant households must be recertified at least annually or whenever a change in household income of $200 or more per month occurs. The requirement that borrowers must recertify for changes of $50 per month if the tenant requests that such change be made, is still in effect. Keep in mind, the exception does not waive the requirement for the annual renewal certifications. Owners will receive a copy of this notice from RD. Once received, the notice must be posted in a conspicuous location at the property and a copy of the notice must be provided to all tenants.

Service Coordinators - A Plus for Affordable Senior Housing

Multi-family properties with federal assistance can benefit greatly from the presence of an on-site service coordinator. These coordinators provide supportive services and act as advocates for vulnerable residents. These coordinators are members of the management team and play a significant role in keeping at-risk residents housed and healthy. According to a report by the Joint Center for Housing Studies at Harvard, during the recent pandemic, 40% of the residents at properties served by Service Coordinators " did not have the food, medicine or household supplies they would need to isolate for a week. It was the service coordinators who handled the procurement and distribution of food, medicine, and household goods for these residents. If you operate a federally assisted site for older adults or the disabled, your property could benefit greatly from a service coordinator - if you do not already have one. In this article, I will provide an overview of HUD s Senior Coordinator in Multifamily Housing Services Program. I will explain the benefits of having a service coordinator on staff, what a service coordinator does, and funding sources for such a position. HUD s Service Coordinator Program HUD established its Service Coordinators in Multifamily Housing Program (SCMF) in 1990. HUD has the authority to use Section 8 funds to employ service coordinators in most HUD-assisted and conventional public housing developments designated for the elderly and disabled. Primary guidance for the program may be found in the SCMF Resource Guide. This guide supplements the HUD Management Agent Handbook 4381.5, REV-2, CHG-2. The resource guide may be found at https://files. hudexchange.info/resources/documents/ Service-Coordinators-in-Multifamily-Housing-Program-Resource-Guide.pdf. Service coordinators provide seven key functions: Proactively engage with residents. The coordinators make it a priority to build relationships with residents through frequent interactions that are formal and informal. Conduct assessments and develop service plans. They conduct annual assessments with residents and use this assessment information to develop plans for making referrals and helping residents obtain services and resources. Develop a property-wide profile. The coordinator will create a picture of resident needs across the housing community and develop responsive, community-wide programming. Establish partnerships with community-based service organizations. Make referrals for support services. Coordinators will also monitor whether residents have followed up on those referrals. Educate and advocate for residents. The coordinator will organize onsite educational events provided by community-based organizations. Coordinate closely with other project staff. The coordinators are active members of the site management team and will meet regularly with other staff to share information and discuss issues that affect the residents. Benefits of Service Coordinators A primary benefit of a service coordinator is linking residents to needed social services. This is an important part of keeping the elderly in their homes and aging in place. These service coordinators are full-time staff members with specialized training in linking residents with the services they need. Services that can be arranged include: home-delivered meals; transportation; public assistance such as Medicaid, food stamps/SNAP, and Medicare Part D prescription drug plan; home healthcare; house cleaning services; and assistance with medical bills or insurance claims. According to the American Association of Service Coordinators (AASC), in 2021, 93 percent of residents with service coordinators continued living independently instead of moving to facilities with higher care levels. This not only provides a significant benefit to residents but also helps prevent costly evictions. Who is Eligible for a Service Coordinator? HUD-assisted housing sites that are designated for older adults and people with disabilities are eligible to participate in the Service Coordinators in Multifamily Housing Program. There are two main funding sources for the Service Coordinators in Multifamily Housing Program: Operating Budget: residual receipts, budget-based rent increases, and debt service savings may be used to fund the coordinator position. The service coordinator becomes a permanent part of the management team, and the cost of the service coordinator program becomes a standard budget expense.Owners must obtain HUD approval to add a service coordinator program to any site s budget, regardless of whether or not an increase in rental rates is proposed.Owners of Section 202 PRAC projects can include a service coordinator program in their operating budget at any time after the project is fully occupied.HUD may approve the use of residual receipts to fund some or all of a site s service coordinator program. Owners with funds in their residual receipt accounts must use all available residual receipts prior to receiving any service coordinator grant funds. HUD Grants: Owners may apply for grants awarded through a HUD-issued Notice of Funding Availability (NOFA). Service coordinator grants are made for an initial three-year term and provide funding for the salary, fringe benefits, and related administrative costs associated with employing a service coordinator. Grants are renewed annually thereafter if no other funding source is available to cover costs. Program Monitoring All service coordinator programs in multifamily housing are expected to adhere to the same requirements as outlined in the SCMF Program Resource Guide. HUD conducts monitoring reviews of service coordinator programs to ensure they serve their intended purpose. The frequency of reviews will depend on the nature of a site s day-to-day operations and service coordinator program activities. Staffing the Positions A site owner will hire a service coordinator through job listings like any other staff. The hiring of qualified professionals is critical to the success of the SCMF program. In general, there should be one full-time service coordinator for every 50 to 100 residents. However, at sites with large numbers of residents with mental health conditions or other high needs, a smaller ratio may be appropriate. What do Service Coordinators Not Do? Provide direct services; Act as recreation or activity directors; Duplicate existing community services; Provide nursing care; Handle resident funds; Manage leasing agents; Provide transportation to residents; Organize or lead resident organizations; or Act of Power of Attorney for residents. Service Coordinator Qualifications Minimum requirements for Service Coordinators include - A bachelor s degree in social work or a degree in psychology or counseling, preferably; however, individuals without a degree but with appropriate work experience may be hired; Two to three years experience in providing social services to families; Demonstrated working knowledge of social services and resources in your area; and Demonstrated ability to advocate, organize, problem-solve, and "provide results for families. Training in cultural competency and bilingual skills are also assets for many service coordination positions, and in larger properties, service coordinator aides are often hired to assist the coordinator. Aides should have appropriate education or experience working with elderly people and/or persons with disabilities. College students working towards a degree in social work, or a health-related field may look to gain hands-on experience and may be able to receive academic credit for an internship or work-study program. Service Coordinator Training Requirements All new-hire service coordinators must have met a minimum of 36 training hours of classroom/seminar time before hiring or must complete these minimum training requirements within 12 months of initial hiring, on age-related and disability issues. Recently completed college courses on aging, mental health, or other relevant topics relating to the needs of the residents may be counted toward the 36-hour training requirement. HUD requires service coordinators to remain current on changing statutes at all levels of government and current practices in aging and/or disability issues. Service coordinators should receive 12 hours of continuing education each year, and fair housing training is a must. Bottom Line Every HUD property that serves the elderly or disabled can benefit from the services of a service coordinator. If your property does not currently have a service coordinator, serious thought should be given to creating the position either through the current project budget or by applying in the next round of HUD funding.

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