COVID-19 LIHTC Compliance-Related Issues: Part I

Published by James R. Kroger, Joyce Hsia on Tuesday, May 5, 2020
Journal Cover Thumb May 2020

As the COVID-19 pandemic continues, federal, state and local agencies are working together to mitigate both the health and economic fallout.

Affordable rental housing properties across the nation face difficulties that affect tenants, owners, developers, property managers, lenders and investors. With historic levels of unemployment and many low-income tenants with modest savings, many properties are seeing rents decline and face difficulty covering operating expenses and debt service. With the stay-at-home order from many states, the logistics of certifying tenants has become challenging, especially with seniors and other tenant populations who need to have higher degree of isolation and may not have electronic capability to certify their income.

This is Part I of a two-part article. This month we will focus on the LIHTC compliance issues related to COVID-19.

Major Disaster Area Declaration

President Donald Trump declared a nationwide emergency March 13, so governors didn’t need to request individual emergency declarations. All 50 states, the District of Columbia, five territories and 23 tribes are working directly with the Federal Emergency Management Agency (FEMA) under the nationwide emergency declaration for COVID-19. April 11 marked the first time every state was under a federal disaster declaration simultaneously. In addition, the District of Columbia, the U.S. Virgin Islands, the Northern Mariana Islands, Guam, American Samoa and Puerto Rico are federally declared disaster areas.

In the past, Revenue Procedure (Rev. Proc.) 2014-49 and 2014-50 were for displaced tenants who lost their unit as a result of natural disaster, but with COVID-19, it is a different situation since tenants are required by state or local orders to isolate in their units. These isolated tenants do not exactly match the definition of displaced tenants in Rev. Proc. 2014-49 and 2014-50, but those who are sheltering in place still need the same waiver from completing the required LIHTC certifications. That’s because they, especially seniors, might not be able to meet face to face with the property manage, and many property managers and tenants are not well equipped to process paperwork remotely and electronically.

If the tenants have to move out because they are not providing tenant income certifications (TICs), then they maybe can be deemed “displaced,” have the TIC waived and remain in their units. However, there has not been clear guidance from the Internal Revenue Service (IRS) or state allocating agencies on whether initial certification and recertification will be waived. Recertification is already generally waived by the IRS on 100 percent LIHTC properties, but many state agencies require recertifications for the first anniversary and or second or more. We will discuss how some states are dealing with the certification process later in this article.

There is a second set of tenants in disaster areas: those whose units have not been destroyed by a natural disaster, but who are moving because they can either no longer afford their unit due to loss of employment or who may not be able to remain in their living situation due to fear of spreading the virus to other household members if they work in a hospital or similar situation. Property managers will have a hard time receiving third-party documentation for employment when employers are greatly reducing administrative staff. Therefore, tenants who are moving into LIHTC properties will need relief in Rev. Proc. 2014-49 and 2014-50. Stay tuned for more guidance on this topic in next month’s Journal. See tenant income certification relief requested by the National Council of State Housing Agencies (NCSHA), discussed later in this article.

There is also the question of whether Rev. Proc. 2014-49 and 2014-50 apply when these federally declared disaster areas are currently eligible for public assistance, but not yet individual assistance.  The definition of displaced person depends on the jurisdiction being eligible for individual assistance as defined in the Rev. Procs. The relief for displaced tenants was not yet available as of press time.

Moratorium on Evictions for 120 Days for Nonpayment of Rent

The Coronavirus Aid, Relief and Economic Security (CARES) Act (H.R. 748) mandates a 120-day moratorium on eviction filings and late fees for many multifamily rental properties, including all LIHTC properties. The moratorium on tenant evictions isn’t limited to property owners with federal assistance. Also, many states and localities initiated eviction moratoriums or limitations independent of the passage of the CARES Act.

Between March 27 and July 24 (the 120-day period), owners of properties participating in covered housing programs may not,

  1. make, or cause to be made, any filing to recover possession from the tenant for nonpayment of rent or other fees/charges; or
  2. charge fees, penalties, or other charges to the tenant related to such nonpayment of rent.

Owners also may not require tenants to vacate sooner than 30 days after providing notice or issue a notice to vacate until after July 24.

The starting effective date means it does not affect evictions filed before the emergency declaration. Note that there is no prohibition on declaring a lease default for nonpayment.

Another consideration is properties may be covered by an additional constraint:

  • Many state and local governments have adopted similar or even more restrictive limitations.
  • Some owners will voluntarily agree to not take certain actions as a condition of loan forbearance.

With the CARES Act and each individual state initiating its own eviction moratoriums, it is especially important to check with specific state and local governments on the exact restrictions for evictions.

NCSHA Request to IRS

NCSHA sent a request to Treasury and the IRS March 23 urging necessary accommodations for the affordable housing industry. The National Association of Home Buildings (NAHB) sent a similar request letter  April 8 to the Treasury and IRS. Some of the requests that are related to LIHTC compliance are listed below,

  • Provide a 12-month moratorium on both physical inspections and tenant file reviews as required by IRS Treasury Regulation 1.42-5. State housing credit agencies should continue to monitor emergency work orders during this time and should be allowed to continue or resume inspections, depending on their assessment of the situation in their state and their ability to do so, but there should be no penalty for states or owners if inspections are not completed during this time.
  • Provide a 12-month moratorium on tenant income recertification requirements. State housing credit agencies should be allowed to continue or resume requiring property managers to conduct recertifications, depending on their assessment of the situation in their state and their ability to do so.
  • Provide a 12-month extension for all open noncompliance corrective action periods. State housing credit agencies should be allowed to reinstate deadlines depending on their assessment of the situation in their state and their ability to do so.
  • Suspend the yet-to-be implemented IRS regulation 1.42-5, which will increase the number of required compliance monitoring physical inspections further than required under current regulations and exacerbate the inspection backlog.
  • Provide guidance clarifying that the temporary closure of property amenities and common-space facilities during the duration of the crisis (with the exception of laundry facilities) will not negatively affect a property’s eligible basis and result in loss of LIHTCs.

Until these provisions are adopted, and without clear guidance from the IRS, LIHTC properties should look to state allocating agencies for any related COVID-19 relief.

Logistics of Property Managers Obtaining TICs and Verification

Certifying and recertifying tenants as well as obtaining third-party verification can be very challenging during the stay-at-home order. We have listed below how some of the bigger states are dealing with this. For additional state guidance, see the COVID-19 resources page at www.novoco.com.

California: For households that will start their 120-day certification/recertification period on or after March 20, management should provide households with a detailed certification/recertification package containing all TCAC required forms and instructions for any additional verification information. An envelope should be provided for tenants to return their forms via mail or through a designated secure drop box in the office that does not require direct contact with management.

Georgia: DCA will not issue findings of noncompliance for late or incomplete recertifications for the period beginning March 1 and going forward, until further notice.

Ohio: New move-ins can be processed with electronic signatures and/or with residents completing the paperwork via phone, mail or drop box, email, etc., following the same process as recertifications, including creation of detailed clarification memos. If a new move-in is not completed in person, management must ensure that all forms, processes and procedures, are thoroughly explained to the new resident. If the move-in inspection form is not completed by both management and resident on the same day, then a clarification memo must be added to the resident’s file to explain how the move-in inspection process was completed.

Texas: TDHCA permits electronic records. Applications, leases, verification of income and assets, and student status can all be completed electronically. Digital signatures on forms (both property management and household) are acceptable. If the property is not set up to complete paperwork electronically, please use appropriate social distancing to get signatures and forms completed.

Washington:  Management can collect forms electronically, by postal mail or by having folks drop off paperwork at the office or another location. It is fine for tenants and managers to sign forms electronically. Keep track of any recertifications that are delayed and complete them when you are able to.

Rent Decreases

As expected, there have been rent decreases, and it’s expected this might increase in May, as well.

  • The National Multifamily Housing Council (NMHC) found a 12 percent decrease in the share of apartment households that paid rent through April 5, in the first review of the effect of the COVID-19 outbreak on rent payments. Sixty-nine percent of households had paid their rent by April 5, compared to 81 percent that had paid by March 5 and 82 percent that paid by the same time last year. May could be even worse if renters don’t get government assistance in time.
  • Los Angeles has a coronavirus eviction ban, but landlords are finding ways to demand rent. Some landlords set up a repayment plan, for example, under which tenants need to turn over any money from a federal stimulus check or from a charity within five days. Others have informed tenants that they must produce pay stubs and bank statements, showing how the coronavirus has hurt their incomes. Still others have told tenants that all back rent is due when the government-declared states of emergency end.

Property Manager Solutions

Property managers are coming up with best practices to deal with the COVID-19 pandemic:

  • avoid rent increases for 90 days
  • create payment plans
  • waive late fees 
  • provide paperwork via email, and receive via email or rent drop box
  • if necessary to meet tenant in person (wet sign documents, cash payment, etc.), use six-foot rule and wear personal protective equipment
  • close amenities except laundry rooms as sanitizing clothing is essential, and have social services available over the phone
  • give renters access to security deposits to pay for essentials
  • identify government and community resources to help secure food, financial assistance, health care and other services
  • communicate to residents that it’s a priority for the industry to partner with them to help them retain their housing

IRS Notice 2020-23, Late TIC Relief if Needed

IRS published Notice 2020-23 on April 10, which allows taxpayers until July 15 to perform specified time-sensitive actions otherwise due on or after April 1 and before July 15.  Although not directly spelled out in IRS Notice 2020-23, as interpreted by NCSHA, the relief allows TICs due on or after April 1 to be submitted as late as July 15. Most property managers will not intentionally delay TICs until July 15, but rather use this IRS guidance as relief in case documentation is delayed. Also, moving in tenants without a TIC can be problematic if a tenant is over-income when the TIC is required by July 15.  Owners would not be able to evict under the CARES Act moratorium until July 25th at the very earliest, likely much later in most cases (additional state and city requirements and backlogs).

This article was drafted as of April 22, 2020, and is subject to change with the rapidly evolving situation with COVID-19, please look for updates in June’s issue.

Topics to be Discussed in June’s Issue

In next month’s issue, we will discuss the following topics and update the topics above as legislation and tax rules change with COVID-19. Please send additional topics to [email protected].

  • Are state unemployment checks (including $600 federal payment) and federal income tax rebates counted as income on TIC?
  • Can noncompliance corrective action periods be extended for 12 months?
  • Does temporary closure of common space (with the exception of laundry facilities) affect eligible basis?