Exempt units, such as Management units and Security units, are very common in LIHTC and other projects. They help maintain safe, decent and sanitary living arrangements for everyone. Since these units are an integral part of the LIHTC program, the IRS allows all exempt units that have been deemed necessary for the project, to be included in the eligible basis; however, they are excluded from the applicable fraction. This is so it does not affect how much credit the project can generate.
In most cases, exempt units are approved at time of application. For those projects that determine they are needed after the time of application, most state agencies have a process that must be adhered to prior to considering one or more of your units exempt.
A gray area in regard to these units has been whether or not rent can be charged. The IRS issued a Program Manager Technical Assistance (PMTA) memo that stated, “The general-public use requirement of 1.42-9 does not apply in the case of units for resident manager or maintenance personnel in a qualified low-income building because the units are not residential units but facilities reasonably required for the project.” This guidance clarifies that charging rent for an exempt unit is not a factor in determining if a unit or units can be considered exempt.
With this guidance it is still important that an owner show that the exempt unit is reasonably required for the project. There are many factors involved in making this determination and typically, it will need to go through your state agency. An owner should check with their agency to determine whether or not their policies call for charging rent on these units.
There is no state in the U.S. where a minimum wage worker working full time can afford a one-bedroom apartment at the fair market rent.
(National Low Income Housing Coalition).
And you still think that Davis-Bacon work is not a necessity? Davis-Bacon does more than help with prevailing wages on projects, it is about Protecting the American Standard of Living.
The Davis-Bacon Act helps improve local economies by generating the prevailing wage law benefits to the community. “When working in a community, 2.4 times the amount spent on local construction goes into local shops and restaurants and pays the local taxes.” (Bac Web) “Additional economic benefits include: funding for building trades health and pension plans, training programs, immunizing the employees, an upward track for minority members of community to advance into higher-paying occupations.”(Bac Web)
Does the Davis-Bacon Act impede or improve labor markets? This is a huge debate for many. The facts themselves show it improves labor markets, but some Construction Professionals think it hinders their ability to perform the job by submitting payrolls weekly and trying to stay compliant during construction. Davis-Bacon promotes investment in human capital within the industry. “Construction is a competitive natured job/career. Construction workers are trained for their skill, it often takes years of schooling and apprenticeship to gain proper experience. With our innovative and evolving world of technology, these skills are being challenged and re-trained periodically. Workers have to be paid fairly to keep up with training and to do a great job that follows regulations. Davis-Bacon ensures the proper functioning of labor markets by grounding the industry’s competition in fair wages: making contractors compete.” (Bac Web).
Are you ready for a Davis-Bacon project now? Contact First Housing to discuss training, set up a Pre-Construction Conference, or assist you with project compliance administration. We have Experienced Professionals ready to answer the questions you may have. Email us today at firstname.lastname@example.org.
Already have a Davis-Bacon project started and need a poster, order online at http://www.dol.gov/whd/regs/compliance/posters/davis.html
Bac Web. 2015. http://www.bacweb.org/legislative/prevailing_wage/DavisBacon%20Q&A.pdf
National Low Income Housing Coalition. 2016. http://www.nlihc.org/
Department of Labor. 2016. www.dol.gov
Many LIHTC properties are nearing or have already reached completion of the 15th year of their compliance period, and are not aware of their role or the Internal Revenue Service’s role. Though the IRS requires LIHTC properties to have an extended use period of an additional 15 years past the 15-year compliance period, noncompliance issues are no longer submitted to them. The State continues to monitor the property and they are bound to the regulations and the requirements as stated in the LURA.
As stated in the IRC 42(h)(6), there are a number of requirements under the extended use agreement, including:
1. The applicable fraction for each building shall never fall below what is stated in the agreement.
2. The owner must not dispose of the building until the affordability period has been completed.
3. The units must remain rent and income restricted.
For a full listing and explanation of the requirements, please visit the Internal Revenue Code Ruling.
Throughout the extended use period the State will continue to conduct file reviews and onsite inspections. If a noncompliance issue is found, Form 8823 is not submitted to the IRS; however, owners are still responsible for the compliance of the property, as not doing so could jeopardize the relationship with the State.
During the entire 15-year extended use period, initial certifications still need to be completed in their entirety, including completed TICs and third-party verifications for income and assets. Some states will also require annual recertification.
It is important to be in constant communication with your state agency throughout the affordability period, including the extended use period, as they may add on additional requirements and/or relax some of the requirements. Please also note that if there are other programs attached, there may be different monitoring requirements which will need to be adhered to, some of which may be more stringent.
On Thursday, February 25, 2016, the IRS published the revised Treasury Regulations for monitoring compliance with the Low Income Housing Tax Credit. This was published in the Federal Register, along with IRS Revenue Procedure 2016-15.
One of the changes involves how units are chosen for a Physical Inspection. The regulations provide greater flexibility regarding the minimum number of units an agency must inspect, including both physical and file inspections. It also gives an agency the right to forego the “same unit” rule, which required agencies to conduct both physical inspections and low-income certification reviews on the same units.
The minimum number of units that must be inspected is the lesser of 20 percent of the low-income units in the project or the number of units listed in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart, which is found in the Revenue Procedure 2016-15. Prior to this regulation, the IRS set the minimum number of units to undergo an inspection to a minimum of 20% of all units in the project.
In the past, agencies were to conduct a physical and file inspection of the same unit. The IRS has now decoupled the physical inspection from the tenant file inspections, allowing a little more leniency in how the onsite inspection is completed.
The IRS regulation has also provided the state agencies an opportunity to use the REAC protocol when conducting a physical inspection as long as it satisfies the following, as stated in Revenue Procedure 2016-15.
• Both vacant and occupied low-income units in the project are included in the population of units from which units are selected for inspection;
• The inspection complies with REAC’s procedural and substantive requirements, including the use of REAC Uniform Physical Condition Standards inspection software;
• The inspection is performed by HUD REAC inspectors; and
• The inspection results are sent to HUD and reviewed and scored within HUD’s secure system without the involvement of the inspector, and HUD makes the inspection report available.
Many states are currently reviewing this material internally and making their own policy decisions. Please check with your state agency before making any changes.
References: Revenue Procedure 2016-15
NCSHA February Blog