LIHTC Compliance Normalcy Returns Oct. 1–Are You Ready?

Published by Michael Novogradac on Monday, August 2, 2021
Journal Cover Thumb August 2021

Since the COVID-19-related declaration of a national emergency in March 2020, property owners and their managers have lived in a changed world due to Internal Revenue Service (IRS) guidance that temporarily changed regulations for low-income housing tax credit (LIHTC) compliance.

Normalcy–at least with regard to LIHTC compliance–returns Oct. 1.

After more than 500 days without mandated physical inspections, tenant reviews and other elements of property management compliance, standard practices will return in a few months. Property owners and property managers should be preparing now.

Whether it’s getting ready for a physical inspection and tenant review or being current with the latest requirements for their state, property owners and their managers should get a head start to ensure properties are compliant, ensuring that LIHTCs are not at risk.

Following are seven tips for owners to discuss with their property managers to follow after this extraordinary period:

1. Be Calendar-Aware

The first step for property managers is to identify whether their property will be inspected and their tenant files reviewed in the final quarter of 2021. Those activities were suspended by IRS Notice 2020-53 (and subsequently extended by IRS Notice 2021-12), but that suspension ends Sept. 30. States are required to conduct physical inspections and tenant file reviews beginning Oct. 1, although some have already begun doing so, which is their prerogative.

The simplest method to see if a property will be inspected in the final quarter of 2021 is to check whether the last inspection or review was done in the final quarter of 2018. Treasury Regulation 1.42-5 requires state agencies to conduct on-site inspections and review tenant income certifications at least once every three years. However, those reviews don’t need to be in the same month, just the same year, so it could be in October, November or December, or sooner at the state agency’s prerogative. For example, a property that had a physical inspection in December 2018 must have another one in the final quarter of 2021, but the inspection could be sooner. Treasury Regulation 1.42-5 also requires state agencies to conduct inspections by the end of the second calendar year following the year the last building in the project is placed in service, so properties with the last building placed in service last year can expect an inspection the last quarter of this year or sooner.

In considering the calendar, also consider three additional issues:

  • Treasury Regulation 1.42-5 requires that state agencies provide no more than a 15-day notice of inspection, which isn’t much time, so owners and managers need to be ready ahead of time.
  • While states are required to conduct physical inspections and tenant file reviews for properties that were inspected and reviewed in the final quarter of 2018, they are not limited to those properties. If a property was scheduled for an inspection or review during the pandemic–particularly if there were issues in a previous visit–a state can reschedule it now in an effort to catch up.
  • Properties that have buildings that receive a Form 8823 (which informs the IRS of noncompliance) have until the end of the year to take corrective action. That means final-quarter noncompliance leaves a very short period for correction, even more reason to ensure compliance.

2. Prepare for Physical Inspections

Over the course of the pandemic, physical inspections were largely put on hold and property managers were encouraged to have as little physical interaction with tenants as possible. As a result, much routine maintenance was put on hold.

Inspections return starting Oct. 1 and when a state inspects a property, an inability to perform routine maintenance during the pandemic is not an excuse for noncompliance. Be prepared, since corrective actions to ensure compliance for a unit or multiple units in a property may take time (especially in parts of the country where there are issues finding people to work in construction).

Consider having a compliance expert walk through the property to ensure there are no overlooked issues. A reminder from the earlier section: Property inspections can take place at any time in the quarter, so be ready before Oct. 1.

3. Review Tenant Files

After 16 months, tenant files will resume being reviewed by state agencies. Property managers should prepare by doing an in-house review or having a third party review files.

The state review doesn’t only involve tenant files. The state agency may also review other tenant-related issues for a property, such as how the property is marketed, tenant-selection plans, policies and procedures. Property managers should ensure that all those elements are updated and in compliance with federal and state requirements. An outside review is helpful here, too.

4. Ensure Services, Amenities are Operational

Crucial COVID-related relief allowed LIHTC properties to have their eligible basis unaffected by amenities that were out of service because of the pandemic. That relief ends after Sept. 30, so those amenities must be operational and in good shape by Oct. 1 to avoid risking removal from eligible basis or qualified basis, which would reduce the eligible credit amount for the property. Remember, reductions in eligible basis are not correctable under IRC Section 42.

Many properties have reopened amenities over the past few months, but even when that’s the case, property managers should ensure that the amenities are in good physical condition. A playground that was closed for more than a year due to the pandemic may have fallen into disrepair. A community room may have appliances that don’t work. A swimming pool may not be fully functional. During the period leading up to Oct. 1, ensure that those amenities are available and in good shape.

Property managers should also ensure that they are offering all supportive services agreed to with the state. The federal tax code is silent on the requirement for supportive services, but many states award credits based on the promise of certain services. During a state inspection, those services may be examined and a failure to provide them can make a property fall out of compliance. Examine those services now.

5. Make Sure You’re Current with State Regulations and Practices

The national emergency declaration was nearly 17 months ago and since then, many states made regulatory changes. Some changed compliance monitoring procedures. Some issued new manuals. Some issued updated guidance.

Property managers should ensure they are up to date on their state’s regulations and accepted practices. During the pandemic, many state agencies allowed electronic applications and signatures to documents. Those requirements may have changed, so property managers should check. Procedures to confirm such things as employment may have also changed during the pandemic and property managers shouldn’t assume the changes are permanent. Now is the time to confirm state regulations.

6. Certify Compliance

Even if the LIHTC development doesn’t face property inspection and tenant review in late 2021, all property managers have an annual requirement to certify compliance to the state agency during the previous 12-month period. 

Those provisions include:

  1. The project meets the applicable minimum set-aside.
  2. There is no change to the applicable fraction of a building(s).
  3. Annual income certifications, with documentation to support that certification, were performed for each low-income tenant at initial occupancy and, when applicable, in subsequent years
  4. Each low-income unit is rent restricted.
  5. All units were available for general use, including the requirement that no finding of discrimination under the Fair Housing Act occurred.
  6. The buildings and units in the project were suitable for occupancy.
  7. There was no change in the project’s eligible basis.
  8. All tenant facilities included in eligible basis were provided on a comparable basis, without charge, to all tenants.
  9. If a tenant became over income, the next-available-unit rule was followed.
  10. An extended-use agreement is in effect.
  11. All low-income units in the project were used on a non transient basis, other than transitional housing or single-room-occupancy units.

Owners are considered in compliance when they submit annual certifications accurately, completely and in a timely manner. Reporting methods differ among states, but this is a critical report. It’s worth getting expert assistance in gathering documents, completing reports and addressing issues that arise.

7. Review Utility Allowances if Needed

Properties that use the public housing authority (PHA) utility allowance implement a new utility allowance for rent due 90 days after the new schedule is made available by the PHA.

Properties that use the utility company estimate, agency estimate, HUD utility schedule model or energy consumption model must review the allowance once a year–so in those cases property managers must have a 2021 estimate. If it hasn’t been done yet, there’s a deadline looming for those properties. The utility allowance must be provided to the allocating agency and be available to all tenants for review for 90 days before implementation. Because the basis on which the utility allowance is established for calendar-year 2021 must be reviewed and implemented by Dec. 31, 2021, the 90-day review period means those actions must be taken by Oct. 1.

Property managers who calculate a utility allowance should consider engaging an expert to examine different models, allowing them to determine which works best for the property.

Conclusion

The pandemic has been a challenging period the resulted in significant changes for LIHTC properties, but beginning Oct. 1 (and earlier in some states), state agencies resume regular compliance enforcement. Property managers may have some catching up on maintenance and tenant files, as well as continuing to comply with federal, state and local regulations.

Wise property managers will start early and will reach out for help to double-check their work.