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September 28, 2010
Melody Poetzsch, Chair
Brian Carnahan, Vice-Chair
The Credential
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What Owners Should Know: Compliance Issues, Year 15 and Beyond

by David Ho, HCCP, Ocwen Loan Servicing, LLC

As a Low Income Housing Tax Credit (LIHTC) property approaches the end of its Compliance Period (Year 15), owners should review the partnership agreement, loan documents, and compliance requirements, and analyze the financial potential of the property in order to make a sound business strategy for the underlying property. For some properties, Year 15 means turning over the partnership interests to a non-profit partner.

However, for other properties, Year 15 means a window of financial opportunities.

  1. Refinance the existing debt — If the yield maintenance period is expiring in the near future, owners should evaluate whether there is an opportunity to refinance the property. In today’s market, owners can refinance at a very attractive interest rate for a well-performing property. Excess cash can be used for major capital improvements and/or distribution. Certain bonds may have a lot of restrictions on how a property is operated and how cash flow is distributed. By replacing them with a conventional mortgage, owners will gain operational and financial flexibility.
  2. Sell the partnership interests or the property and distribute cash according to the waterfall listed in the partnership agreement.
  3. Continue to own and operate the property throughout the Extended Use Period and generate business income for distribution and for subsequent sale.
  4. Submit a Qualified Contract Price application to the state housing finance agency. If a QCP buyer is not identified in one year, the LURA will go away and the current owner can operate or market the property like a conventional property, with a 3-year rent restriction for the existing tenants. This generally is a long process and may cost some money upfront. However, it may be financially rewarding for certain properties.

Unless a LIHTC property has gone through foreclosure or QCP process, the LURA survives after Year 15 even when the property is sold. As such, many people assume the same compliance restrictions continue during the Extended Use Period but, in fact, certain restrictions no longer apply after the Compliance Period. The following are the general highlights of compliance issues after Year 15. They are not a comprehensive list because every LURA is unique, and each housing finance agency may have its own set of requirements. Owners should always consult with their accountants and LIHTC professionals.

A.  Compliance requirements that are still in effect:

  1. Applicable fraction — The applicable fraction of units should stay the same. Owners cannot decrease the number of affordable units within the community. The LIHTC units are to be leased to individuals or families whose incomes are outlined in the LURA as those that are at or below the area median income as determined in accordance with IRC Section 42.
  2. Other restrictions listed under the specific year’s QAP — If the owner received points on those restrictions in order to obtain a credit allocation, the same restrictions remain in force.
    3) All households must be income qualified upon initial occupancy of any LIHTC unit. Tax Credit units must remain rent restricted at the state set-asides, and income restricted at federal set-aside. HOME units must remain rent and income restricted at the state set-asides.
  3. Utility Allowance — It must be updated annually.
  4. Annual reporting — Annual owner’s compliance certificate is still required. This usually includes filling out a number of forms and a detailed rental schedule.
  5. Monitoring fee — Owners will have to continue to pay monitoring fee annually. However, some state agencies waive the fee for those projects that have Rural Development or Project Based Section 8 funding.
  6. Physical inspection — Depending on the state, the frequency of physical inspection may decrease. The number of units to be inspected would still be at least 10%, and up to 100%. If there are findings, owners/agents should respond within 90 days of notification.
  7. File inspection — Depending on the state, the frequency of file inspection may decrease. The percentage of files to be inspected generally is 10%.

B.  Compliance issues that are no longer required:

  1. Annual income recertification of existing tenants is no longer required for LIHTC purposes. However, if a new member is added to the existing household, income certification and third-party verification on the new member must be performed. All income certification and verification for move-in tenants are still required.
  2. The 140%/Next Available Unit Rule no longer applies.
  3. The Vacant Unit Rule no longer applies.
  4. Unit Transfer — Households may transfer between buildings, and it is no longer required to treat them as new move-ins. Therefore, new move-in certification for those households is no longer necessary.
  5. Student Households — Full time student exclusion no longer applies, since that is a Section 42 requirement and generally not a LURA requirement. This can be significant for those projects that are located near colleges and universities.

It is imperative for owners to comply with all restrictions diligently. Although there are no more tax credits during the Extended Use Period, if a property is well located and is properly maintained and managed, it can be financially rewarding.

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David Ho, HCCP
Senior Manager,
Ocwen Loan Servicing, LLC
West Palm Beach, Fla. 

National Association of Home Builders
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