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Gross Rent Floor Allocation and Placed-In-Service Default

Published by Stephanie Naquin on Tuesday, March 6, 2018

Journal cover March 2018   Download PDF

The election of the gross rent floor is a commonly misunderstood concept because there really is no election required. 

The Internal Revenue Service (IRS) automatically provides two rent floors, one at carryover (reservation date for bond developments) under Revenue Procedure 94-57 and one at placed in service under Internal Revenue Code (IRC) Section 42 and 142. Owners do not need to affirmatively elect either one of these dates.

However, if the state agency asks owners to make an election under Rev. Proc. 94-57, owners should elect the carryover rent floor instead of the placed-in-service rent floor, because the placed-in-service rent floor date is already automatic under IRC 42 and 142.

The purpose of the rent floor at carryover date is so that the rents remain fixed that were used for financial feasibility and underwriting by the state agency and the owner near the time the development applied for and received tax credits. 

To understand the role of the gross rent floor, it is important to understand the history and how it conforms to current program guidance. The IRS released Revenue Procedure 94-57 in 1994 to set a rent floor tied into the carryover date so that developments weren’t infeasible based on rents lower than those used by the state agency at time of carryover. It is important to remember that Rev. Proc. 94-57 is specific to the gross rent floor and does not address how to treat fluctuations in income limits for the purposes of determining if a low-income tenant is income eligible under IRC Section 42. 

The Housing and Economic Recovery Act (HERA) of 2008 introduced a new concept of a hold-harmless policy at the building level that is now codified in IRC 42 and 142. At the same time, HUD ceased its internal policy of holding the limits published harmless, starting with the limits effective March 19, 2009.

Scenario #1 with High-Water Mark at Initial Allocation 

In the scenario where the owner affirmatively elected the gross rent floor to take effect at placed in service, there is a potential loss of $125 for every two-bedroom unit, per month, for every month until Year 4, when the income limits published by HUD exceed those in effect at the time of the initial allocation. 

Scenario #2 with High-Water Mark at Placed-In-Service 

In this scenario, even though the gross rent floor election under Revenue Procedure 94-57 was made at the initial allocation of credits, because of the project hold-harmless provision under IRC Sections 42 and 142, the building also automatically gets the benefit of high limit at placed in service and continues to benefit from those higher limits until HUD actually releases exceeds the $37,000. There is no practical benefit to elect the gross rent floor to take effect at placed in service and a uniformed election could have detrimental consequences. 

As always, confer with your allocating agency to determine whether you’re required to make this election. It is strongly recommended that you discuss with a compliance specialist who can walk you through the concept before making the election. 

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