Why Tax Reform Caused a Concern for LIHTC Artists’ Properties

Published by Mark Shelburne on Thursday, December 21, 2017 - 12:00am

One of the many unexpected areas of concern during tax reform was the fate of low-income housing tax credit (LIHTC) properties serving artists. Explaining the reason why involves a description of recent history and the applicable rules.

General Public Use

Under Treasury Regulation § 1.42-9, a unit generates LIHTCs only if it is available for use by the general public (GPU). There are four ways to be out of compliance. First, properties must be rented “in a manner consistent with housing policy governing non-discrimination,” as specified in HUD’s occupancy requirements (Handbook 4350.3).

However, even if an owner does not discriminate, a unit will be ineligible if it is:

  • available only to members of a “social organization,”
  • “provided by an employer for its employees,” or
  • more of a life care or other similar facility than housing.

The regulation has no further catch-all language; these are the only expectations under GPU beyond HUD’s requirements.

Failing one of the four criteria means the unit does not count as low-income for determining the applicable fraction. Widespread noncompliance, such as a leasing policy applied to all apartments, may mean not meeting the necessary minimum set-aside (“40 at 60” or “20 at 50” tests). Inability to meet the minimum set-aside invalidates a property’s entire LIHTC allocation.

Occupational Preferences

In 2007 the IRS issued guidance that giving a preference based on occupation violated GPU, regardless of whether the housing was provided by a particular employer. As a result, owners of LIHTC properties serving artists, farmworkers, and other professions faced a serious risk. The potential outcome of losing LIHTCs was an unacceptable surprise considering what had been legal opinions of the preferences complying with the regulation.

Efforts to dissuade the IRS from its position were unsuccessful, but the Housing and Economic Recovery Act of 2008 (HERA) provided an opportunity for relief. The law added Section 42(g)(9) to the Internal Revenue Code. Under the provision a property does not fail GPU “solely because of occupancy restrictions or preferences that favor tenants”:

(A)  with “special needs,”

(B)  in a group specified under a federal or state program, or

(C)  “who are involved in artistic or literary activities.”

This legislation overruled the IRS guidance and removed the threat to properties’ LIHTC allocations.

Artists and Veterans

Nearly a decade later the subject came up again in tax reform. A last-minute amendment to the Senate bill stated Section 42(g)(9)(C) would read: “who are veterans of the Armed Forces.” The surrounding text did not specify deleting anything, but since there can be only one subsection (C), the artistic/literary allowance would have been replaced.

The amendment’s effective date applied it to all properties, even retroactively to those developed based on the HERA allowance. Technically, owners could have been subject to the IRS reviving its prior interpretation of GPU and jeopardizing LIHTCs.

Although a part of the Senate-enacted version of tax reform, to the relief of many in affordable housing the concept did not survive conference with the House. Whenever Congress takes an action there may be consequences, in this case a possible regulatory challenge against policies favoring certain occupations. If it were enacted, it could chill LIHTC investing, which is premised on being very low-risk.

As for veterans, the need for a change in Section 42 was unclear. As noted above, there are only four specific ways to violate GPU, none of which apply to a preference for those who served in the armed forces. The population also can be seen as a group specified in a federal or state program and thus covered under the existing allowance. As with artists, there are many properties serving veterans all across the country, with examples in California, Indiana, Massachusetts, Michigan, Minnesota, Missouri, Pennsylvania and Washington.