LIHTC Post-Award Regulatory Considerations

Published by Mark Shelburne on Tuesday, August 25, 2020 - 12:00am

In late summer and early fall, many low-income housing tax credit (LIHTC) allocating agencies complete their review of applications. Soon after celebrating successful outcomes, developers must focus on the various post-award expectations. This time period is arguably the most fraught with potential pitfalls.

This post describes important regulatory realities and the corresponding practical considerations. What follows cannot substitute for guidance from qualified tax professionals and is by no means comprehensive. There are numerous exceptions to the rules and differences between states.

Novogradac & Company LLP will cover these and additional topics in greater depth during the 2020 Credit and Bond Financing for Affordable Housing Virtual Conference “Allocations to 8609” session.

General, Overall Advice

The following themes apply throughout this post.

  • Not surprisingly, almost everything is better and easier when addressed early on.
  • Communicate with all relevant parties frequently, including the LIHTC agency. Doing so is especially necessary for anything new, changed, or problematic (e.g., first time in a state).
  • Certain shortcomings can be difficult or impossible to correct, with disastrous consequences. The worst of these are known as “cliff tests” because failing them means the awarded LIHTCs automatically go over a figurative cliff.

Who Handles

One of the challenges can be knowing who is on point. Most large entities in the LIHTC space define their organizational structure by dividing staff between those responsible for

  • allocation, development, closing, underwriting, and
  • asset management, compliance, operations.

In other words, securing approvals and funding sources versus the work done after buildings place in service. The split makes sense, but can lead to uncertainty about the interim period. Empowering an individual or team to handle post-award tasks may help.

Qualified Allocation Plan (QAP)

One of the first steps to take after receiving an award is to look back at the QAP for:

  • the fees now due, including what is often a six-figure allocation or reservation fee;
  • deadlines, both federal and those specific to the agency; and
  • upcoming documentation to submit.

These provisions do not attract the same level of interest as point scoring criteria, but are crucial. Not complying can result in delays, fines, other penalties, or even losing the award.

Carryover Allocation Agreement

This is a standard form, not-negotiated document (isn’t used in tax-exempt bond transactions). Developers should check for errors and understand the expectations. The most common problems are:

  • invalid address or inadequate legal description, or
  • leaving out a pass-through entity from the signature block.

The first is a federal requirement, and the latter is necessary for any contract to be legally binding.

The LIHTC equity investor’s tax attorney will find anything amiss. Fixing the mistake, if possible, must happen for the allocation to be valid.

4 Percent Rate Lock

The tax credit percentage in August remains at a historic low of 3.07 percent. Despite this disappointing reality, locking the rate may make sense. Doing so removes an element of uncertainty (it could go lower, although not much). If so, be certain to note the timing requirements when executing the agreement.

A minimum 4 percent rate becoming law in 2020 is a very real possibility, but not guaranteed. If enacted, the effective date may not include all recent awards.

Federal Funds

LIHTCs are not treated as federal funds for most regulatory purposes. However other covered sources, such as the HOME Investment Partnerships Program, often provide gap funding. In those cases the owner must follow many, many additional rules, far too numerous to list here.

Of particular note is undertaking “choice limiting actions” prematurely will put the loan in jeopardy. The participating jurisdiction must abide by strict environmental review standards before disbursing federal funds. Otherwise logical steps, like starting site work, may result in the source evaporating and the developer facing penalties.

Gross Rent Floor Election (GRFE)

The GRFE is a truly unique circumstance in LIHTCs where agencies and developers doing nothing is the best approach. If an agency mandates making the election, chose the carryover rent floor instead of placed in service.

10 Percent Test

Within 12 months of the carryover agreement’s effective date (federally, some agencies require it earlier), the LIHTC ownership entity must expend at least 10 percent of the property’s reasonably expected basis (does not apply to tax-exempt bond transactions). This is the first “cliff test” to occur.

Meeting the test is most challenging when there is no land cost (donation or ground lease). Buying materials in advance may be necessary. In all cases the keys are

  • using the proper legal entity to make the purchases, and
  • being ahead of the deadline so as to allow time to correct mistakes.

Extended-Use Agreement or Commitment (EUA)

EUAs are similar to carryovers: standardized/not-negotiated, check for errors and understand the expectations. The document’s terms will bind the real estate for decades, and are enforceable by the agency and tenants, so it needs to be right. The advent of making average income designations raises new considerations along these lines.

The EUA terms will include protections for residents after it terminates; these protections must survive foreclosure by all permanent debt. Also, failure to record the EUA before the end of the first year of claiming LIHTCs is a “cliff test,” but almost never happens.

Placing in Service

All of the property’s buildings must be ready and available for their intended use by Dec. 31 two years after the carryover agreement’s effective date (this does not apply to tax-exempt bond transactions). Agencies may allow developments a third year because of being affected by a declared disaster, including the pandemic. An official certificate of occupancy or certificate of substantial completion (CO) typically provides the evidence of being placed in service.

Securing COs is another “cliff test.” The reason for not meeting the deadline is federally irrelevant. If the construction timeline is not looking good, let the agency know right away. While embarrassing, they may be able to help. Waiting risks:

  • missing out on options (e.g., no remaining board meetings) and
  • souring the relationship (as in, “you knew about this for how long before telling us?”).

Conclusion

The well-earned happiness and pride of receiving an award must necessarily turn into a well-founded concern about avoiding post-award pitfalls. In addition to experience, the key to staying out of trouble is seeking advice from a qualified tax practitioner. Contact a Novogradac professional for assistance.

To learn more about the topics in this post and related matters, register for the 2020 Credit and Bond Financing for Affordable Housing Virtual Conference and attend the “Allocations to 8609” session.