IRS Notice 2021-12 Extends LIHTC Deadlines, Raises Questions

Published by Mark Shelburne, Thomas Stagg on Thursday, January 21, 2021 - 12:00am

On Jan. 15, the Internal Revenue Service issued Notice 2021-12 granting relief for various low-income housing tax credit (LIHTC) requirements. First, the notice provides straightforward extensions of time. Beyond that, the other aspects of the guidance are similar in what each purport to implement, yet also create new uncertainties.

Postponed to Sept. 30, 2021

Notice 2021-12 effectively defines a period of the 18 months between April 1, 2020, and Sept. 30, 2021. The following are allowances for events occurring during that time:

  • Any deadlines for the 10% test or 24-month minimum rehabilitation expenditure are now at the end of the extension period.
  • Owners do not need to recertify households and LIHTC allocating agencies are not required to conduct compliance monitoring inspections or reviews during the extension period.
  • Any period to correct noncompliance set by an agency is now at the end of the extension period.
  • An amenity or common area being temporarily unavailable or closed due to the pandemic (not other noncompliance) during the extension period does not result in a reduction of eligible basis.
  • For purposes of providing emergency housing, medical personnel or other essential workers qualify as “Displaced Individuals” under Rev. Proc. 2014-49 or -50 during the extension period.
  • An agency may hold a qualified allocation plan public hearing via teleconference (accessible by a toll-free number) instead of being in-person during the extension period.

First LIHTC Year

Notice 2021-12 Section IV(E) states as follows:

“For purposes of §42(f), if the close of the first year of the credit period with respect to a building is between April 1, 2020, and June 30, 2021, then the qualified basis for the building for the first year of the credit period is calculated by taking into account any increase in the number of low-income units by the close of the 6-month period following the close of that first year.”

Typically, if all of the LIHTC units are not leased by the close of the first year of the LIHTC period, an owner must choose to either defer the first year of the credit period or take what is called 15 year or 2/3s LIHTCs on the units leased up in the following years. 

  1. The language above allows a property that is not fully leased up at year end to avoid 15-year credits on units leased in the following six months.  In order to qualify for this relief, the close of the first year of the credit period must occur between April 1, 2020, and June 30, 2021.

    The effect of Section IV(E) changes the date to be fully leased to avoid 15-year credits from Dec. 31, 2020, (for calendar year taxpayers) to June 30, 2021. The additional six months could make an important difference in an owner’s decision of when to start the LIHTC period and potential equity timing adjusters.  Unless there are other factors at play, such as the timing of the investor joining the partnership, it is likely any property fully leased by June 30, 2021, would chose to start the LIHTC period in 2020.
     
  2. Another factor in the first year is a property must meet the applicable minimum set-aside (40% at 60%, 20% at 50%, or average income). Ideally, it would be possible to interpret Notice 2021-12 to allow more time to meet the minimum set-aside. While understandable to make that connection, Section IV(E) modifies only Section 42(f), whereas Section 42(g) defines the minimum set aside. Based on this, it appears this guidance does not extend any relief to projects that are not meeting the minimum set-aside and those projects will need to either defer the first year.
     
  3. Less clear is what the change means for calculating the LIHTCs generated in the first year. Normally, the amount of LIHTCs generated in the first year is calculated using a weighted average based on the number of months each unit is qualified. The notice does not provide any guidance on how the lease up extension impacts the first-year credit calculation, if at all. In the absence of clarity, the conservative approach will be to do the math the same as before, considering only units qualified in 2020.

Placing in Service

Absent another form of relief, owners of properties with carryover allocations of 9% LIHTCs from calendar year 2018 must have placed the buildings in service by Dec. 31, 2020. Under well understood, long-standing federal law, failure to do so automatically results in termination of the allocation.

Therefore, the effect of the following statement in Notice 2021-12 is unclear: “if the deadline for a low-income building to be placed in service is the close of calendar year 2020, the last day is postponed to Dec. 31, 2021.” (emphasis added) As suggested by the inaccurate verb tense for something issued on Jan. 15, 2021, the opportunity to extend the deadline seems to have passed. As such, the question is whether the notice is attempting to revive the terminated allocations?

Casualty Losses

If a building’s reasonable period to restore a casualty loss ends on or after April 1, 2020, Notice 2021-12 extends the period to one year from the original end date, but not beyond Dec. 31, 2021.

The LIHTC agency may require a shorter extension or not permit one at all. (The allowance does not apply to losses from a pre-pandemic Major Disaster.)

So long as the owner restores the building by the end of the extended restoration period, the building’s qualified basis is the same as at the taxable year immediately preceding the first day of the casualty.

Conclusion

Owners and equity providers uncertain of how Notice 2021-12 applies to their property should contact a Novogradac professional.