Combining the Low-Income Housing Tax Credit with Assisted Living Developments
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A.J. Johnson
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06/26/2017
Combining the Low-Income Housing Tax Credit with Assisted Living Developments
Low-Income Housing Tax Credits (LIHTC) may not be used to develop hospitals, nursing homes, sanitariums, life-care facilities, or mobile home parks. The General Explanation of the Tax Reform Act of 1986 (the "Blue Book") states, "Residential rental units must be for use by the general public and all of the units in a project must be used on a non-transient basis. Residential rental units are not for use by the general public, for example, if the units are provided only for members of a social organization or provided by an employer for its employees. Generally, a unit is considered to be used on a non-transient basis if the initial lease term is six months or greater. Additionally, no hospital, nursing home, sanitarium, life-care facility, retirement home providing significant services other than housing, dormitory, or trailer park may be a qualified low-income project." In addition, the Blue Book states, "unlike the requirements for units in projects financed with tax-exempt bonds, certain single room occupancy housing used on a non-transient basis may qualify for the credit, even though such housing may provide eating, cooking and sanitation facilities on a shared basis."
Private Letter Ruling (PLR) 9740007 applied to tax-exempt projects, but gives good guidance on what constitutes assisted living. While a PLR cannot be cited as precedent, they are often indicative of IRS thinking on a particular issue. In this case, the Service stated that a key distinction is whether the facility provides residences for individuals or bed-space in a health care facility. The PLR indicated, "health care facilities may be characterized by certain common qualities:"
They are regulated by the appropriate health department of a state as a health care institution;
They specifically accentuate the availability of immediate medical services to and/or the care of persons being serviced;
The laws of the state and/or the regulations and rules of that states health department specify numerous procedures, measures and standards pertaining to both medical treatment of residents and requirements for the staff; and
The required treatment of the residents/patients is far beyond a landlord/tenant relationship that may limit use by the tenant or may require the landlord to provide amenities such as food and laundry services.
In outlining these elements, the IRS made clear that no individual criteria is determinative; all factors should be considered in determining whether a facility is a health care facility or residential rental property.
In PLR 8945036, the IRS opined that an independent living facility may be residential rental housing as long as it does not provide professional nursing or medical care, except for emergency medical services. In the case of the project subject to the PLR, the facility had common dining, cooking, and recreation areas. Optional services included
Meals, housekeeping, and laundry services;
Assistance in bathing and dressing (as needed);
Local transportation;
Assistance with the taking of medication (if needed); and
General supervision.
No professional nursing care or doctors were provided. This facility was considered by the IRS to be a residential rental development, and not a medical facility.
In another PLR (8944042), the presence of emergency medical services did not prevent the designation of the facility as residential rental housing. Another key element of this PLR was that services other than typical residential services were optional and the rents for residential services were within the Section 42 limits.
Care must be taken when layering LIHTCs with an assisted-living facility, especially with regard to the services offered and whether non-residential services impose a mandatory fee.
The most recent IRS guidance in this area is Revenue Ruling 98-47, which uses a three-building retirement complex as an example of what does and does not constitute residential rental housing.
Two of the buildings provide comprehensive non-housing services, including housekeeping, daily meals, planned activities, regular transportation, and emergency call services. There were no continuous or frequent medical services.
The third building provided all of the same services as the other two, but also provided frequent and continual medical services.
The ruling indicates that the first two buildings are residential rental housing and the third was a health care facility.
Assisted Housing & Rents
Gross rent for LIHTC purposes excludes any fee for a supportive service that is paid to an owner on behalf of a low-income tenant by any government assistance program or a Section 501(c)(3) tax-exempt organization. The program must provide rental assistance and the assistance must not be separable from assistance for other supportive services, not related to housing.
"Supportive Service" defined: any service under a planned program of services designed to enable residents of a residential rental property to remain independent and avoid placement in a hospital, nursing home, or intermediate care facility for the mentally or physically disabled. In the case of Single Room Occupancy (SRO) housing for the homeless, the term includes any service that assists tenants in locating and retaining permanent housing.
A key element with regard to rents is whether the charges are "optional" or "mandatory." Treasury Regulation 1.42-11(b)(i) indicates that a service is optional when the service is not a condition of occupancy and there is a practical alternative.
g., if meal and housekeeping services are offered, residents must be able to refuse and there would have to be cooking facilities for the resident and a nearby grocery store. There would also have to be an onsite laundry for residents or a nearby Laundromat.
Non-optional or mandatory services must be included in the gross rent.
Recommended Documentation
There should be a separate lease and Service Agreement.
The Service Agreement outlines the fees for assisted living services and should make clear that they are optional. It should also have a section where the resident acknowledges that the services are optional.
The lease should cover only the traditional residential services and the cost of those services.
A Discussion of ‘Continual or Frequent Services’
Treasury Regulation 1.42-11(b)(2) states "if continual or frequent nursing, medical or psychiatric services are provided, it is presumed that the services are not optional and the building is ineligible for the credit, as is the case with a hospital, nursing home, sanitarium, life care facility, or intermediate care facility for the mentally or physically handicapped." This language is crucial in that it indicates that even if services are optional, if such medical services are continuous or frequent, the facility will not be considered credit eligible.
The truth is, LIHTCs and assisted housing are not a perfect match. It takes a great deal of careful planning and a full understanding of the market needs to successfully combine the two. Of all the issues to be considered, developers should always keep in mind fees and charges and the types of services to be provided. These are the areas that present the most risk to this type of property in terms of whether it will pass muster with the IRS as a residential rental housing project.