HOTMA Implementation Brings Four Major Changes to LIHTC Tenant Qualification

Published by Michael J. Novogradac on Thursday, February 1, 2024

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Major changes kick in this year for how property owners determine whether tenants qualify for affordable housing financed by low-income housing tax credit (LIHTC) equity. 

President Barack Obama signed the Housing Opportunities Through Modernization Act (HOTMA) into law in 2016. Eight years and two presidents later, property owners and managers must implement HOTMA’s substantial changes for the LIHTC tenant qualification. In fact, HOTMA’s changes rank among the most significant ever made to provisions of the law that authorized federal government subsidies to create a permanent public housing program–the United States Housing Act of 1937.

HOTMA’s supporters hoped to streamline administration and ease the burden on public housing authorities (PHAs), private owners of affordable housing and tenants. HUD began publishing notices on changes from HOTMA in early 2017, but the final rule for implementation wasn’t published until January 2023 and the key provisions went into effect Jan. 1.

While there is no mention of the LIHTC in the HOTMA legislative text or in the HUD regulations concerning HOTMA, the rules still affect LIHTC properties. LIHTC guidance found in Treasury Regulation Section 1.42-5 requires that LIHTC “tenant income is calculated in a manner consistent with the determination of annual income under section 8 of the United States Housing Act of 1937 (Section 8).”

Simply put, HOTMA applies to LIHTC properties because it applies to Section 8. However, some tax credit agencies may interpret specific requirements differently or roll out their changes at a different pace, so be sure to check with your tax credit agency.

Here are four major changes:

Student Financial Aid

The change in determining the amount of student financial aid to include as income is significant, since property managers will need to screen all applicants and apply a Byzantine series of rules to determine the correct amount.

However, before we get into the changes from HOTMA, we must first understand the history of student financial aid. Student financial aid has been a been a hot topic in compliance since the Consolidated Appropriations Act, 2006 (2006 Act) changed how student financial assistance is treated in the income-eligibility calculation for households receiving Section 8 rental assistance. Before the 2006 Act, all student financial aid was excluded. The 2006 Act excluded financial assistance for individuals over 23 who have a dependent child. For everyone else, for the purposes of Section 8 rental assistance eligibility, any financial assistance (in excess of amounts received for tuition) that an individual receives under the Higher Education Act of 1965, from private sources or from an institution of higher education is considered income to that individual.  If the financial assistance is less than tuition, then there would be no income for Section 8 households for the financial assistance.

Although LIHTC properties generally follow Section 8 income guidance, the IRS provided guidance that the rules for financial assistance from the 2006 Act would only apply in a LIHTC unit if the household also received Section 8 rental assistance. If the LIHTC applicant/tenant did not receive Section 8 rental assistance, all amounts of student financial assistance were excluded from income for the purposes of LIHTC income eligibility, even if those amounts were in excess of amounts received for tuition.

HUD’s updated HOTMA regulations changed the treatment of student financial assistance. For the purposes of determining if financial assistance is included in income for LIHTC eligibility, the property manager will need to understand the source of the assistance as well as the costs associated with attending the institution of higher education.

The first step in determining if student financial assistance affects income eligibility is dividing the source of financial assistance into two categories:

  • Amounts received under Section 479B of the Higher Education Act (HEA), and
  • Other financial assistance (e.g. grants/scholarships received from institution of higher education, private foundation registered as a nonprofit, the federal government).

Assistance under HEA is excluded from income. If the household is only receiving HEA, you can stop at this step, as no amount of assistance will be included in income. If the household is receiving other assistance, you will need to continue to the next step.

The next step is understanding and documenting the costs associated with attending the institution. Covered costs include tuition, books, supplies (including supplies and equipment to support students with learning disabilities or other disabilities), room and board, and fees required and charged to a student by an institution of higher education.

If the amount of financial assistance exceeds the covered cost, then the excess is included in income. There is one additional wrinkle when calculating the amount of financial assistance for a household that receives both HEA and other financial assistance. You would include both the HEA and other financial assistance when determining if the financial assistance exceeds covered costs. See the following table for more details:

Student Financial Assistance Calculations

Category Treatment in Income Calculation
HEA only: Nothing is included in income.
Other financial assistance: The amount in excess of covered costs is included in income.
HEA and other financial assistance: The amount in excess of covered costs is included in income.

For example, a household has the following:

Student Financial Assistance Calculations

Category Treatment in Income Calculation
HEA: $20,000
Other Financial Assistance: $10,000
Total Financial Assistance: $30,000
Covered costs: $18,000
The amount included in income would be: $10,000

To add another tricky wrinkle to this calculation, the Consolidated Appropriations Act, 2023, includes the same Section 8 income language as introduced in 2006 for students receiving Section 8 rental subsidy. Therefore, if the student is the head of household, co-head or spouse and under the age of 23 without dependent children, the source of the financial assistance is not taken into consideration when determining the excess assistance over cost. Both the assistance received under HEA and other student financial assistance is income, to the extent that it exceeds the cost of tuition and any other required fees and charges. This is true even if the tenant is only receiving HEA assistance. If a future appropriations bill does not include the provision concerning the treatment of Section 8 rental assistance, then student financial assistance rules would revert to the HOTMA rules explained above.

To accurately determine the amount of income to for purposes of qualifying for LIHTC housing, property managers will need add an extra step in determining how to calculate income:

  • Step One: Determine if the student receives Section 8 rental assistance.
  • Step Two: Determine student’s household status (head, co-head, or spouse), age, and if the student has dependent children. 
  • Step Three: Identify the specific sources of student financial assistance.
  • Step Four: Identify and document the covered costs.

From there, the property manager can calculate how much of the assistance, if any, should be included in income for both LIHTC and Section 8 tenants.

As mentioned at the top of this section, the change in determining the amount of student financial aid to include as income is significant and complicated. Owners will want to make sure they have updated their tenant selection plans and train staff on how to identify and calculate student financial assistance.

Child Support and Alimony

Before HOTMA, property managers calculated child support and alimony at the amount determined by a court order, even if the tenant didn’t receive that income. The only way to credit a tenant with less than the court-ordered amount was for the tenant to pass a two-step test: Tenants had to certify that they weren’t receiving the full amount and then prove they were taking every legal action to receive the funds. That meant that in cases where a court ordered the tenant to receive $500 monthly but the tenant only received $100, the property manager had to count $500 in income unless the tenant completed the requisite steps. 

Under HOTMA, the $100 received would count, presuming the tenant can provide a payment history. This is a major change: Instead of the court-ordered child support and/or alimony total, the amount of income is now the amount received.

Calculating Income from Assets

Before HOTMA, property managers included in applicant/tenant income earnings from household’s assets if such assets were $5,000 or more. In that scenario, the higher of the imputed earnings using the passbook rate or the actual earnings from the assets were included as income. 

HOTMA changes:

  • what is considered an asset;
  • the threshold value at which income must be imputed; and
  • how income is imputed.

Assets are now divided into two major categories–real property and personal property–with the latter category further divided into two sub-categories: necessary personal property and non-necessary personal property. 

HUD lists examples of both sub-categories of personal property. Necessary personal property includes vehicles needed for regular transportation, furniture, common appliances, and clothing. Non-necessary personal property includes recreational vehicles that are not needed for day-to-day transportation, bank accounts, expensive jewelry without cultural or familial significance and collectibles.

Necessary personal property is always excluded from income calculations. Real property is always included. Non-necessary personal property is only included if it exceeds $50,000. 

Actual income is used for real property and non-necessary personal property if it is verifiable. Imputed income is only used for included assets without verifiable income. 

This change requires a modification in process for all LIHTC applicants and creates a new calculation for tenants with aggregate assets that exceed $50,000 in value. Considerably fewer residents will also require a property manager to impute income from assets because of the dramatic increase in the level requiring imputation.

HOTMA doesn’t change this much: Actual income from an asset (such as interest income on a savings account) is always considered income to the household and when the total value of combined assets exceeds a certain value, property managers must impute income from assets.

Verification Hierarchy

While HUD prescribes verification requirements for its programs, states historically controlled how to verify income for LIHTC properties, resulting in a broad range of requirements. For example, California has specific workplace income verification requirements, requiring tenants to provide third-party verification and three months of paystubs. In Texas, meanwhile, the state takes a much less formal approach, allowing property managers to use their judgment in verifying employment. Applying the verification options in Texas to an applicant in California would result in the state citing noncompliance, creating a unique complexity. 

Under HOTMA, there is now a specific hierarchy for verification that provides an order using a numerical system, with Level 6 the highest. The verification technique Level 6 is upfront income verification (UIV), using HUD’s Enterprise Income Verification system. That is suitable for HUD programs, but unavailable to LIHTC properties–there was no change made that would allow EIV to be shared with LIHTC operators. 

Next in order is Level 5, UIV using a non-EIV system, such as a work number, an internet-based state benefits system or other similar platform, which LIHTC property managers can use, supplanting the previously preferred traditional third-party verification to Level 3. 

HOTMA’s requirements simplify the standards for income verification, further reducing the burden inherent in this process. States may still have their rules, but HOTMA provides an opportunity for housing finance agencies to examine verification regulations and consider whether technology and changing times make their standards outdated.

Ultimately, the HOTMA changes encourage standardized verification across programs, which will make it simpler for property managers to verify income and assets for their tenants.

Still to Come

HOTMA is a comprehensive change for property compliance and the items listed in this column are only the most notable changes–there are others worthy of consideration that require further education and guidance. Also, HOTMA is one of two major changes for compliance, joining the new NSPIRE standards that largely took effect Jan. 1 and guide inspections and evaluation of HUD-assisted housing.

Property managers should consult with experts in following the new regulations and make 2024 a year of education and updating. State credit agencies should take this opportunity to review their guidance and get in alignment with HOTMA (some have already done so).

One thing is sure: Compliance in 2024 is different, so stay abreast of changes and further guidance from your state. 

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