Compliance

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Commercial space isn’t LIHTC basis eligible, but the IRS Code does allow for commercial use at a tax credit site. That commercial space may even be located in the same building where your low-income households live. For example, suppose a 50-unit tax credit building proposes that the entire first floor, except for the lobby to the residential elevators, be set aside for office space, retail shops, and a drug store. This would be acceptable. But the commercial space wouldn’t be included in the basis that’s tied to the credits that can be claimed.

Many contractors and maintenance workers who have been on the job for years believe they know all about the dangers of and the precautions necessary for working with lead paint. Others think lead paint poisoning simply went away years ago. It didn’t.

Tax credit sites tend to operate on tight margins because of the competition to obtain these credits initially and the allocating agencies’ obligation to provide the minimum amount of credit necessary to make a deal feasible. Given these constraints, it’s no surprise that some sites, by the time they've reached the end of their compliance period, have fallen into financial distress. Common reasons include poor property management practices, inadequate financial structures, deficient physical conditions of the site, and a soft rental market.

If applicants fail to meet your tax credit site’s eligibility requirements or if they can’t pass your site’s screening criteria, you don’t want them arguing with you over the rejection, or worse, filing a fair housing complaint. But that can happen if you leave it to your staff to write up the reasons for a rejection each time they send out a rejection letter.

As we wind down 2013 and prepare for a new year, the Insider looks back and reviews the major events and changes that affected the low-income housing tax credit (LIHTC) industry:

It’s not unusual for tax credit sites to be mixed-income, consisting of both low-income and market-rate units. Market-rate units aren’t rent-restricted and may be rented to households of any income. Even so, certain provisions of the tax credit law apply to those units. If you don’t keep those units in compliance with the tax credit law, you’ll risk bringing your entire site into noncompliance.

Here are five rules to help keep your market-rate units in compliance. Follow these rules at every mixed-income tax credit site you manage.

Sometimes tax credit site owners aren’t entitled to claim all the credits they were allocated for a building. This happens when owners don’t lease up as many units to qualified low-income households as they must in the first year of the building’s compliance period. As a result, the building’s first-year “fraction,” which reflects the percentage of the building that’s leased to qualified low-income households, falls short of the target.

Before you rent any unit at your tax credit site to a new household, it’s important to confirm that the rental will comply with the tax credit law. If your rental of a unit won’t comply, the owner’s credits for that unit may be at risk. And if the unit is one you must count to meet or maintain your site’s minimum set-aside, that one noncomplying unit may place all the owner’s credits in jeopardy.

As a tax credit manager, you probably know that you can violate the “transient unit rule” if you rent units to low-income households on a transient basis. The IRS presumes that you’re complying with the rule if your initial leases with households are for a term of at least six months. If one of your households vacates its unit before six months have passed, you won’t be automatically charged with a violation.

To calculate household income at tax credit sites, you’re required to follow the rules set out in HUD Handbook 4350.3 (Occupancy Requirements of Subsidized Multifamily Housing Programs). But because the Handbook was written for assisted sites, applying it to a tax credit site can be a challenge. The tax credit law doesn’t say which rules apply, and it’s not always clear how to follow them. The Handbook also uses certain terms that don’t make as much sense in the tax credit context as they do in the assisted housing context.