Recently, the affordable housing industry has seen a surge in acquisition/rehab deals. It is important to know the difference between a straight acquisition/rehab property and a re-syndication.
A property that was not a previous LIHTC property but received tax credits or both tax credits and bonds. Each renter is treated like a new move-in since they were not previously qualified.
Re-syndication is when a project has been through its first 15-year compliance period, and the owner (original or new) elects to apply for a new set of credits. This election will restart their 10-year credit and 15-year compliance period. The property has already been a tax credit property and the owner is placing new credits into service with existing LIHTC residents in place, some of them having lived there for years.
One of the most common questions we receive is, “Can a household be ‘grandfathered’ into the program without having to undergo a new income certification (IC)?”
Under re-syndication with just LIHTCs, it is a possibility. If an owner can demonstrate with a good Tenant Income Certification (TIC), including strong documentation, that they were qualified for the LIHTC program, they are considered qualified at re-syndication. This is up to the owner and the limited partner (investor), as some investors will only participate if all households are initially qualified. An owner has 120 days to initially certify all households, or show all households are certified as of the last certification. Once the 120 days are up, households can continue to be qualified, but they must be treated like a new move-in.
When layered with bonds, all households MUST be initially qualified, and an owner has a year, as of the close of the bonds, to show that these residents are qualified under the bond program. After the one-year deadline, any households that do not qualify will be considered in noncompliance if the property is 100% bond. If it is not 100% bond, the unit must be listed and considered Market Rate. It is a federal rule that the owner of these projects ensures they have bond-eligible households in place within one year of closing.
If a resident was initially certified just before the acquisition and the income verifications are still within 120 days, then the owner can use the same verification, but a new TIC must be completed and signed by the owner and adult household members.
Note: if there is a change of ownership, being “grandfathered” in is only an option for those acquisition/rehab projects under re-syndication. If it is a straight acquisition/rehab (prior to the completion of the 15-year compliance period) and there is a change of ownership, then all households must be initially qualified.
TYPE OF ACQ/REHAB INITIALLY CERTIFY COULD BE “GRANDFATHERED IN”
Straight Acq/Rehab without
BONDs (not a previous LIHTC X
Re-syndication (post 15-year
compliance period) without X
Still within the initial Compliance
Has BONDs X
Another common question we receive is, “How do verifications work when qualifying households under acquisition/rehab with the effective date being the acquisition (purchase) date?” Verifications are good for 120 days from the date of owner’s receipt. If a verification is obtained prior to 120 days before an effective day on the TIC, it wouldn’t be valid as of the effective date even if the resident signed the TIC early. Looking at an example:
• Assume a verification document is obtained in March
• You have the tenant sign the TIC in June (within 120 days)
• But the effective date will be in December (200+ days after the verification)
• You have an expired verification document that will not be sufficient or valid for a December effective date
Verifications need to be within 120 days of purchase date. The whole process (verifications and TICs completed/signed) would all need to be complete within 120 after purchase/acquisition (effective date) to be able to use the purchase date as the effective date. Otherwise, the completion of paperwork/process isn’t done in time and the effective date doesn’t revert to purchase date but becomes the date the TIC is completed/signed.
Many also wonder if the move-in date is when the household moved in or the date the unit became LIHTC certified?
As of now, there is no clear guidance on this for acquisition/rehab deals. Most state agencies will not make an issue over whether an owner chooses to use the original move-in date or the effective date of the certification as the move-in date. This is one of those areas that is grey from a federal standpoint. It is still very important to check with your state agency to see if they have a preference
The income limits that should be used may be initially confusing to these deals. If it is an LIHTC only acquisition/rehab, the income limits may vary. When using old certifications, there may be several. The limits that will be used for old certifications will be the ones in effect at time of their certification. All other households will use the current income limits in effect at time of acquisition. These limits can be used for 120 days after date of acquisition, even if the new limits come out. Once the 120 days has expired, the current income limits will be used.
For LIHTC/Bond or just Bond, the income limits will be based on the limits in effect at time of acquisition. These limits will be used until the next set of income limits has been received (or posted). LIHTC and Bond properties are held harmless from income limit (and therefore rent) reductions. These properties will use the highest income limits used for resident qualification purposes since the project has been in service. Once the new set of limits are known, an owner compares these newly posted limits to the previous year’s limits, to determine which one is higher and which one they will use.
Finally, why are there times when the year of the rent limits do not coincide with the income limits? The IRS allows owners of LIHTC developments to select a gross rent floor (GRF) election for every building in a project, based on when credits were first allocated to that building or the date the building was first placed-in-service. The GRF election is a rent revenue security blanket for the owners so that they do not have to reduce rent limits any lower than the rent limits in place at the time credits were allocated or at the placed-in-service date.
If the Owner elects their GRF to be at allocation, the rents will be based on when a state agency representative executes the Carryover Allocation. If a property does not have a Carryover Allocation, it is the date the Preliminary Determination page is signed by a state allocating representative.
Looking at an example:
• Property allocated credits in 2015 with median income limit of $50,000
• Property placed in service in 2016 with median income limit of $45,000
• GRF is based on the median limit of $50,000
• 2017 the median income limit is $42,000
• 2018 the median income limit is $43,000
In 2018, the income limits will be based on the Placed in Service (PIS) median limit of $45,000 and the rent limits will be based on the GRF election (2015) when the median income limit was $50,000.
As always, it is important to verify all procedures with your state allocating agency prior to implementing any new rules or regulations.