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Questions for Making Average Income Unit Designations
Low-income housing tax credit (LIHTC) allocating agencies have their work cut out in implementing the average income minimum set-aside (AI). The Internal Revenue Code (IRC) leaves many aspects unresolved. One of the most important is Section 42(g)(1)(C)(ii)(I): The provision uses the word “designate” but does not define what it means.
The resulting questions fall in two categories: initially making designations and changes over time. Absent federal guidance (which may not be forthcoming), LIHTC allocating agencies will need to determine answers and develop policies for each.
- Who makes the unit designations? The IRC says property owners (“taxpayers”) are responsible, so LIHTC ownership entities must take some form of action. Most agencies will create processes and may impose constraints on the choices (e.g., permitting only four percentage levels).
- When does it occur? There is no federal answer, but practicalities create a window of time. AI involves matching apartments and area median incomes (AMI), which is fundamentally a matter of conducting market research to learn what mix gives a property the best chance to succeed.
- Therefore, formally making the designations should wait until the market analysis is complete.
- On the other end of the spectrum, owners and agencies should act well in advance of placing in service, as site managers will need to know the AMI/unit mix before starting lease-up.
Considering these constraints, the official designations should occur after submitting the application (based on what it proposes) and long before construction completion. All parties should be aware of the potential desire to change a percentage during this timeframe, especially in an occupied rehabilitation (see the next section).
- How is it documented? The answers will vary. An agency may
- rely on the approved LIHTC application,
- create a stand-alone owner’s certification (provided on a set schedule or upon certain household events), or incorporate into the annual owners certification.
- incorporate designations in the carryover allocation agreement or tax-exempt bond volume letter, and/or
- address in the extended use commitment (note concerns below).
- To what degree of specificity? Unlike the applicable fraction, AI does not take into account the number of bedrooms or square feet (as is true for the other minimum set-asides). Technically the documentation could list simply five units at 80 percent AMI and five units at 40 percent AMI (for example). However, since essentially all agencies’ AI policies mandate an equal distribution of designations among bedroom sizes, the documentation almost certainly will have greater detail. Keeping specifics to a minimum preserves the maximum flexibility going forward, but may limit the ability to enforce. Regardless there is no reason to attach levels to individual apartments.
- What must be in the extended use commitment? From a federal perspective, nothing (same as for the original minimum set-asides). Agencies may decide to include language, but should consider several potential pitfalls.
Changes Over Time
- Could a unit’s designation vary? Another way to characterize this issue is whether the AMI limits are “fixed” for particular apartments or “floating” across a property. Nothing in the IRC specifies either, although implementing AI in properties with unrestricted units very likely will necessitate making changes. Shifting percentages adds complications, but inability to do so could lead to unnecessary noncompliance and other problems. Also, transfers would be very difficult if the AMI levels cannot float.
- Does an over-income household automatically/inherently result in an increase? Nothing in the IRC contemplates such an outcome, and the interpretation is impossible to square with the text. An immediately apparent flaw is what happens with an 80 percent unit, since 90 percent is not an option? Also, why would an over-income household have a different effect than other forms of noncompliance? Instead the agency will issue a Form 8823 if an unqualified household is moved in, as occurs in properties under the other two minimum set-asides.
- When can it change? There also are no federal restrictions. Agencies could simply say never or narrow owners’ choices on timing or frequency, such as how often for a unit, the total number over a period of time, and when during a calendar year. Owners will likely want no additional restrictions added by the agency. Regardless, property owners will need to document having met the minimum set aside annually.
- Is a reason required? Assuming variations are allowed, what serves as a basis? For instance, an agency might allow an owner to raise an apartment’s percentage to avoid noncompliance from having leased to an over-income household. Doing so likely would necessitate lowering another unit’s AMI level, if doing so is possible. Similar to above, owners will likely want the ability to change designations without having to wait for agency approval.
- Who decides? Will owners either request a change or provide notice of it having occurred? The former would be necessary if the designations are specifically enumerated in the carryover or extended use commitment.
Although the questions above may seem daunting, they are all well within the capacity of LIHTC allocating agencies and their partners to resolve. The end result will be part of AI reaching its potential to improve program outcomes.