| DALLAS- Compliance expert Jeffrey Crozier, a manager with the Austin, Texas, office of Novogradac & Company LLP, offered several basic compliance tips to attendees of Novogradac & Company LLP's Credit & Bond Financing for Affordable Housing Conference on May 19. These tips are designed to help owners and managers of low-income housing tax credit (LIHC) properties maintain compliance with Internal Revenue Code Section 42 requirements. |
| 1. Use the Most Restrictive Rules. |
| Because property compliance rules vary from program to program, a property that is financed through a combination of different programs-such as HOME, tax-exempt private activity bonds or LIHCs-can be troublesome from the standpoint of compliance, said Crozier. "Whenever you use these programs together, you can create a compliance nightmare," he stated. |
| To avoid compliance problems, examine the rules for each program involved and follow the most restrictive compliance rules, Crozier advised. For example, affordability levels are more stringent for 9 percent credit projects than for 4 percent (bond-financed) projects. "It's pretty easy to follow [private activity] bond rules because the tax credit rules usually supercede the bond rules," he told conference goers. |
| 2. Conduct an Income Certification Before Moving in Tenants. |
| One of the stickiest compliance problems is that of over-income tenants. Managers should beware of moving in tenants who fail to meet LIHC income eligibility requirements, warned Crozier. "An tenant that is over-income by $1 is still an over-income tenant," he said. |
| Crozier cited the case of an LIHC household that consisted of a mother and four children. Because the father had died, each of the four children received monthly Social Security payments of $480 each. The property manager had failed to count this income in the income certification; consequently, the household was over-income. |
| To avoid the recapture of tax credits on this unit, the manager would have to evict the over-income household-yet a judge is not likely to favor evicting the household simply because the manager miscalculated the eligible income, said Crozier. "I don't like your chances in front of a judge trying to evict this household," he commented. |
| Two simple strategies can help managers avoid moving in over-income tenants, advised Crozier. First, always conduct an income certification before moving in a tenant, making certain to use the correct income limits. Second, he said, when calculating LIHC rent levels, always drop the pennies and round down. |
| For LIHC tenants who become over-income (defined as over 140 percent of applicable income limits) upon annual recertification, the next available unit rule applies. The over-income tenant is not required to move out, but the manager must rent the next available unit of similar size in the same building to a low-income tenant. Crozier cautioned participants about including a clause in the lease calling for the eviction of over-income tenants. "The program is not designed to kick out people for bettering themselves. Also, an eviction clause can get you in trouble when the economy sours and you need every tenant you can get." |
| 3. Maintain Adequate Documentation. |
| For an LIHC property, tenant files are your backup materials in the event of an IRS audit, maintained Crozier. Property managers who document their tenant income certifications and keep their files safely stored have no reason to fear an audit. "In the case of an audit, you just hand over your organized files," he said. |
| On the other hand, if you have no backup data, you are powerless to challenge an IRS audit, regardless of whether or not you actually have maintained compliance with LIHC requirements, warned Crozier. "I can't stress documentation enough," he said. For LIHC properties, first-year files should be retained for 21 years and all other files for at least six years, with originals and copies stored in separate places. |
| Crozier also cautioned attendees never to attempt to recreate documents. "[The LIHC program] is a federal program and you can get into serious trouble for doing this." |
| 4. Never Select the 20/50 Set-Aside Box on IRS Form 8609. |
| One of the most damaging compliance errors occurs when owners or managers inadvertently select the 20/50 set-aside box on IRS Form 8609. If you select this option, no tenant living in your property can make more than 50 percent of the area median income, said Crozier. |
| For example, one owner checked this box, thinking it was appropriate because 20 percent of his units were set aside for tenants at 50 percent AMI; however, the remaining 80 percent of units were set aside for tenants at 60 percent AMI. As a result of checking the 20/50 set-aside box, 80 percent of the owner's units were out of compliance and he was forced to reduce rents on these units to the 50 percent level, according to Crozier. "This deal went right in the tank," he said. |
| Crozier emphasized that LIHC owners and managers should never select the 20/50 box on IRS Form 8609. The IRS regards such an election as irrevocable, regardless of whether or not it was a mistake, said Crozier. "One little checkmark on the wrong form and you deal's in the ditch," he stated. |
| 5. Respect the Rules of State Compliance Monitoring Agencies. |
| Crozier also emphasized the importance of following the rules of state compliance monitoring agencies. "If the monitoring agency tells you to stand on your head, stand on your head," he stated. |
| Moreover, said Crozier, owners and managers should resist the temptation to blame compliance monitoring agencies when compliance problems arise. "Don't think of the monitoring agencies as the bad guys," he noted. "The agencies must report every instance of noncompliance, no matter how small or how correctible. If they challenge you on something, you probably already should have been doing it." |
| Failing to comply with state agency rules can have grave consequences. For example, in Texas, those who earn more than 30 noncompliance points are no longer eligible to do business with the Texas Department of Housing & Community Affairs (TDHCA), the state's tax credit allocating agency, according to Crozier. |
| Crozier reminded owners and managers to check with their state agency to verify the specific rules of their program. "Always check with your state monitoring agency," he recommended. "Different states have different rules. Don't assume that the rules are the same across states." |
| This article first appeared in the June 2001 issue of Novogradac & Company's Property Compliance Report and is reproduced here with the permission of Novogradac & Company LLP. © Novogradac & Company LLP 2001 - All Rights Reserved. |
| This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further information visit www.taxcredithousing.com. |
