News

Virtually All HFAs Now Providing Incentives for Preservation Projects

According to a National Housing Trust Survey of state qualified allocation plans (QAPs), almost all State Agencies are now awarding points, providing set-asides, and seeking preferences for preservation in the development of tax credit projects. 16 agencies have included preservation set-asides in their 2011 QAPs, with Florida setting aside a full 50 percent of its credits for preservation projects. Other state set- asides range from ten to forty percent. 26 States and the District of Columbia and New York City provide competitive scoring points for preservation and nine other states provide points for rehabilitation, but don t specify preservation. Agencies in Indiana, Michigan, Missouri, and Oregon have made preservation projects eligible for the 30 percent increase in eligible basis. Developers seeking credits in 2011 should carefully review their State s QAP for requirements relative to preservation. New construction deals in States with a preference for preservation could be at a competitive disadvantage.

IRS Releases Updated 8823 Guide

The IRS has released the third version of the 8823 Guide, designed to assist State Agencies and taxpayers in understanding IRS requirements relative to compliance with the Section 42 Low-Income Housing Tax Credit Program. Changes were not as sweeping as the 2009 version (the Guide was originally published in 2007), but the clarifications that were made are important, especially with regard to utility allowances. Following is a summary of major revisions or additions: The Guide makes it clear that noncompliance corrected within three years of the end of the initial correction period must submitted by HFAs to the IRS to place the building back in compliance. This is an important clarification, in that it places States on notice that corrections made within the three-year timeframe place a property back in compliance, and the States must report this action to the IRS; Clarifies that for tax years ending after July 30, 2008, if all low-income buildings in a project are 100 percent low-income buildings, owners are not required to complete annual tenant income certifications. There was some confusion in the past as to whether or not 100 percent low-income buildings in a mixed-income project could avoid the annual recertification, but this makes it clear that in order to avoid the recertification requirement, each building in a project must be fully low-income; The most significant changes are contained in Chapter 18, Utility Allowances. In the "Out of Compliance" discussion of this chapter, the Guide states that units are out of compliance when "gross rent exceeds the maximum gross rent limit." The examples of noncompliance provided show that a mistake in the calculation of an allowance is noncompliance only if when corrected, the calculation shows that excess rent was collected as a result of not correctly updating or calculating the allowance. Use of an inappropriate utility allowance (e.g., using a local utility company estimate for a HUD regulated building) is also noncompliance. The Guide also directs HFAs to review the most current utility allowance - even if it is dated more than a calendar year after the prior allowance. In this case, the owner discovered and corrected the error; therefore, no noncompliance should be reported. Noncompliance for a rent overcharge due to an error in the utility allowance is corrected in the month the rents are lowered to the correct amount. This is very important guidance, since it indicates that only excess rent charged due to systemic errors (wrong income limits, etc.) cannot be corrected until the January after the year of the violation. o Failing to conduct an annual utility allowance review may be corrected in one of three ways: Retroactive annual review, documenting compliance with the appropriate allowance on the date it should have been updated. In this case, as long as the correct allowance would not have resulted in a rent overcharge, no 8823 is issued; New review using current circumstances. If the new allowance shows that the owner has not charged excess rent as a result of the updated allowance, the owner is in compliance and no 8823 is issued; or If the method used in the first two options shown above shows that the allowance should have been increased, and the increased allowance would have created a rent overcharge, the back in compliance date is the date the rents are reduced to reflect the new utility allowance. If the rent paid, plus the new allowance would not have resulted in rent in excess of the maximum permitted, the owner is in compliance and no 8823 is issued. o If an owner cannot provide documentation of the allowance calculation that satisfies the State, the owner may repeat the annual review using the same method and facts as used for the original review. If the results show the owner to be in compliance, no 8823 should be issued. o Utility allowance noncompliance is reported whenever the rent paid by the tenant plus the correct utility allowance exceeds the maximum gross rent limit. o Noncompliance for a utility allowance should not be reported if, regardless of the error, excess rent was not charged, or the owner corrected the noncompliance prior to the HFA notification of review. All owners should carefully review the revised Guide for applicability to their specific circumstances, but as has been the case with prior editions, many of the charges are beneficial to managers and owners of LIHTC properties.

Affordable Housing Investors Council Issues New Underwriting Guidelines

The Affordable Housing Investors Council (AHIC) has revised their guidelines for the underwriting of low-income housing tax credit projects, calling for increased scrutiny of development and management teams. The revised recommendations include the following: Investors should closely investigate developer backgrounds, adequacy of funding sources, operating projections, reserve funding and guarantees, and financing packages; Background checks should be conducted on development team members no sooner than 45 days before closing and updated annually. The checks should look for compliance violations, arrests, and any other information relating to the ability of the development team to protect the interests of the investors; Investors should visit previous projects of new tax credit developers; Experienced developers should be required to have developed at least five affordable housing projects comparable in size and scope to the transaction under consideration; Developers and guarantors should be required to have net worth and liquidity sufficient to cover obligations, with a minimum net worth equal to the greater of $5 million or five percent of total development costs (TDC). Liquid assets should be the greater of $1 million or five percent of TDC; Background and credit checks should also be conducted on property managers. Management companies should also be examined relative to their tax credit compliance procedures and tenant approval policies. The guidelines recommend that property managers have a minimum of ten year experience, including three years of tax credit or other affordable housing management; and General contractors should have experience with similar projects, the financial capacity to handle all work on their table, and a performance bond from a financially sound national bonding company. The new guidance also suggests that other development team members, such as architects, accountants, and lawyers also have tax credit experience. These new guidelines continue the trend of the past few years during which investors have become much more demanding with regard to the LIHTC deals they will enter into, and once in, close scrutiny of management operations is now common.

President Proposes Changes to Section 42

The Obama Administrations fiscal 2012 budget makes changes in the tax provisions that govern the Low-Income Housing Tax Credit Program. One change would permit a 30 percent basis increase for bond-financed preservation projects that were originally financed with federal funds, including tax credits. The President also is encouraging mixed-income projects by allowing owners of mixed-income deals to elect an average income standard. Under this option, at least 40 percent of the units would have to be occupied by residents whose incomes average no more than 60 percent of the area median income (AMI). No low-income unit could be occupied by a household with income in excess of 80% of AMI, and any unit with an income below 20 percent of AMI would be treated as having a 20 percent limit. If adopted, which is by no means assured, this provision would give great flexibility to owners with regard to income limits and would certainly encourage mixed-income development. The fact that these improvements are part of the President s tax package is a very good sign. It could mean that despite all the current discussions regarding elimination of many tax expenditures, the Administration does not intend to seek elimination of the Low- Income Housing Tax Credit Program.

Use Facts to Fight NIMBYism

Developers of affordable housing often face an uphill battle when trying to convince local planning commissions, city councils and community residents that an affordable housing complex will actually be good for a community. A recent report from the National Association of Home Builders provides some additional ammunition when fighting against the often irrational arguments of those opposing affordable housing. All of us who develop housing have faced the "not in my backyard" (NIMBY) crowd, and in most cases, their arguments against the housing are not based on fact. This report provides some important statistics to assist developers in making their arguments. A survey of research from the Center on Housing Policy (CHP) demonstrates that affordable housing development has a positive impact on local economies by providing jobs, attracting businesses and employees to a city, and increasing government revenues. The study highlights the impact of a typical 100-unit low-income housing tax credit development on metropolitan area using various national averages relating to market values and land costs. Some of the statistics from the study are: Construction of the project will create 80 jobs in construction and building supply industries; 42 additional spinoff jobs will be created at local businesses for workers involved with the construction project; and The spending of the residents living at the property will support 30 jobs. In a survey of 300 companies conducted by Harris Interactive, 55% of the firms with more than 100 employees said that there was not enough affordable housing in their proximity. Most of those surveyed believed that such shortages make it more difficult to find and retain qualified employees. The study also cites findings showing that affordable housing does not have an adverse impact on property values, and in many cases, actually enhances such values. For example, between 1980 and 1999, 66,000 affordable housing units were built in New York City at a cost of $2.4 billion. The increase in home values within 2,000 feet of the affordable housing during that same period created an additional $2.8 billion in property tax revenue - a $400 million net gain for the city. A copy of the studies, "Evidence in Brief" and "A Review of the Literature," are available at www.nhc.org.

Connecticut Court Case Good News for Affordable Housing Assessments

The Connecticut Superior Court has ruled that low and moderate income housing must be assessed using an income capitalization approach to value, and not a cost approach. This is good news for owners challenging high assessments of affordable properties, even in other states, since it does provide ammunition for challenges. (St. Luke s Senior Housing, Inc. v. City of New Haven, 2010 WL 5491294 (Conn. Super.), December 7, 2010).

New Cell Phone Application Offers Translation Services

Codetalker (www.codetalkerinc.com) is a new cell phone application that connects users to a live interpreter for a three-way conversation. Interpreter services for more than 175 languages are available, and the service also offers 24-hour turnaround for translation of documents. This is a fee based program with annual memberships or pay-as-you go plans. If you are involved with a property with a variety of spoken languages and non-English speaking residents or applicants, it would be a good idea to check this site out.

Administration Proposes Cutting 538 Funding

The Obama Administration s fiscal 2012 budget includes $95.2 million for Section 515 direct rental housing loans, but no money for Section 538 guaranteed multifamily loans.