Handling Student Rule Changes in HUD’s HOME Rule

Published by Scott Michael Dunn on Monday, December 1, 2014
Journal thumb December 2014

On July 23, 2013, the U.S. Department of Housing and Urban Development (HUD) published a revision to the regulations governing the HOME Investment Partnerships Program. Some adjustments simply codified existing HOME policy and procedures; other provisions represent substantial changes.

In light of substantial overlap of HOME funding at low-income housing tax credit (LIHTC) properties, many LIHTC professionals have paid close attention to HOME issues. Analysis of the new regulations reveals that most of the changes on the operations/compliance side don’t actually conflict with the LIHTC program.

Several of the new provisions, however, require additional work and potential inconvenience on the part of LIHTC personnel to reconcile the two programs. Arguably the most obvious and challenging example is the new provision guiding HOME eligibility for students.

What Changed?
For a variety of reasons, most affordable housing programs have rules that create barriers to certain types of students. For instance, for decades, the LIHTC and tax-exempt bond programs have barred households made up entirely of full-time students who do not meet certain exceptions. This primarily prevents prohibited dormitory and transient use of this housing.

Starting in early 2006, HUD Section 8 project-based and Housing Choice Voucher programs incorporated complex student requirements with an intent quite different from the Internal Revenue Service (IRS) housing programs. The Section 8 rules are designed to prevent any adult students who may possibly be claimed on another’s tax return from getting HUD assistance unless their parents also income-qualify. (See 24 CFR §5.612 and HUD Handbook 4350.3 3-13 A / 3-40 through 42 for a full description of the Section 8 student eligibility rules as applied to multifamily housing.) Leading up to the implementation of these rules, stories appeared in the media involving students who were paying little or no rent and who were adult dependents of wealthy parents.

Paying rent for the offspring of these individuals who had the means to provide housing for their dependents didn’t sit well with many lawmakers and the taxpayers who were ultimately subsidizing the rental assistance. For this reason, the Section 8 student rules were put in place to disqualify most households with even one individual adult full- or part-time student at an institute of higher learning through age 23 who is not living with his or her parents.

With the new HOME regulations, HOME now has adopted the Section 8 student rule, and even changed the definition of low-income households to exclude certain students using the same rule mechanism Section 8 does (24 CFR §92.2). When HUD was collecting comments after the new HOME rule was proposed, many in the affordable housing industry saw a difference between students who happen to live at HOME projects (and who must pay full HOME rents) and those who benefit from rental assistance programs such as Section 8.

Commentators suggested that a conforming rule applying the LIHTC student rules to HOME would also prevent student housing without adding another student rule at HOME projects combined with LIHTCs. Ultimately, however, HUD decided that the Section 8 student rules best support efforts to prevent HOME-funded student housing.

Which Properties are Affected?
The regulation itself says that most of the new provisions are “applicable to projects for which HOME funds are committed on or after Aug. 23, 2013.” (24 CFR §92.3). Thus the rules appear to apply only to recent and future HOME projects.

This makes sense for many of the rules that relate to underwriting and other development processes. However, this application complicates operation-side compliance rules that generally apply to the entire program and that are usually not specific to sets of properties based on age. Upon the release of the new rule, HUD received many requests for clarification on the applicability of certain compliance-related issues, including the student rules. HUD hasn’t officially clarified, but many comments by HUD officials seem to move away from the application of all of the rules to recent and future projects only.

For example, Ginny Sardone, director of the Office of the Affordable Housing Programs at HUD, was interviewed in the video webcast “HOME Final Rule: Overview.” The transcript for that webcast quotes her as saying, “most of the Rule is effective on Aug. 23, 2013, or in the case of project-specific requirements, it’s effective to projects to which HOME funds are committed on or after Aug. 23.” Although not explicitly adjusting the stated scope of the new HOME rule, this seemed to be a move in the direction of applying non-project-specific compliance rules across the HOME program.

The student rules seem to fit the description of a non-property-specific requirement. HUD has promised an applicability chart, which will explicitly delineate each new provision and to which properties they apply. In the meantime, HUD officials speaking at public sessions have repeatedly said that the student rules apply to all HOME properties.

Until HUD publishes the applicability chart or other written guidance, owners and managers of HOME projects should seek explicit guidance from their HOME-monitoring participating jurisdiction (PJ) on how to handle students at HOME projects that were committed HOME Funds before Aug. 23, 2013. What is available explicitly in writing from the regulation supports applying the rule only to newer properties, but many PJs are mandating a more restrictive stand in light of HUD’s statements on the matter.

Implementing the HOME student rule undoubtedly presents some challenges for the operations side of our industry. First, the new rule will add an obvious level of complexity to HOME compliance. This will be amplified for HOME/LIHTC properties, as now households will have two sets of student rules to meet to qualify for HOME/LIHTC units. Households that meet the LIHTC student rules may not meet the HOME rules and visa-versa.

Other than the word “student,” the rules have completely different applications. One type of rule is not more restrictive in whole than the other. Unlike many compliance rules, therefore, we cannot apply one more conservative rule and satisfy both program requirements. Managers at LIHTC properties with Section 8 can attest to the challenges that layering the rules pose.

An additional issue that must be resolved relates to what happens when a household qualifies at move-in, but later becomes student-ineligible. At Section 8 properties, the household loses its rental assistance, but tenancy is not terminated. HOME multifamily housing does not in itself provide any rental assistance, so how to apply this rule is unclear. At conferences, HUD officials have verbally indicated that they intend for the households to be treated in a manner similar to households that go over the 80 percent HOME income limit, with the actions taken depending on if the project is designated fixed or floating HOME. However, they indicate that calculating rent based on adjusted income, as is normally done with over-income households, would not be appropriate. This would actually result in decreased rents for most students rather than the increase experienced because of increases of income.

Until HUD clarifies this important point in writing, HOME personnel will need to seek their PJ’s guidance on this matter.

The new HOME student rule is arguably the most onerous compliance provision of the new regulation, especially for LIHTC properties. However, our seasoned profession regularly demonstrates the ability to reconcile these rules at LIHTC projects combined with HUD Section 8 and RD programs that adopted the Section 8 student rules long before HOME did. LIHTC personnel are used to making complex program requirements work together when combining funding sources.

In light of the many LIHTC projects that may not exist without the funding that HOME provides, there is a clear benefit to applying the extra layer of HOME provisions.

Scott Michael Dunn is the executive vice president of Zeffert & Associates. Zeffert provides a wide variety of services to stakeholders in the affordable housing industry, including HOME PJs, state LIHTC agencies, owners and investors. Scott Michael can be reached at [email protected]