Anyone affiliated with a multifamily housing property that is part of a new markets tax credit (NMTC) transaction–perhaps as property manager, owner or even the allocatee of qualified low-income community investment funds (QLICIs)–is likely aware of a requirement that 20% of the units must be occupied by rent- and income-restricted households. But what exactly does this mean? In this article, we will cover the basics of this affordable unit requirement.

Beginning with the calendar year 2017 allocation round, an allocatee that uses its QLICIs to finance the development or rehabilitation of housing units must have at least 20% of the total housing units financed maintained as affordable housing units.

Before we cover what exactly “affordable” means, let us discuss from where the requirement is coming. The underlying language for the requirement can be found in the allocation agreement. Subsequently, this requirement will often be included within the loan agreement between the owner and the community development entity (CDE). In such loan agreements, there may often be language which defines affordable housing units and the related requirements from the CDE to maintain these units. Some CDEs may even include annual reporting requirements for the owner pertaining to these affordable units.

To satisfy these affordable requirements, 20% or more of the total units must be both rent-restricted and occupied by qualifying low-income households. These restrictions need to be maintained throughout the seven-year NMTC compliance period. When defining these restrictions, the program’s guidance mirrors, and in some cases even directly references, Internal Revenue Code (IRC) Section 42 and the U.S. Department of Housing and Urban Development (HUD) Handbook 4350.0 REV-1. Now, let’s peel back these two requirements.

A rent-restricted unit is one where the maximum monthly rent does not exceed one-twelfth of 30% of the adjusted income of a family whose annual income is equal to or less than 80% of the area median income (AMI), as determined by HUD, with adjustments for the number of bedrooms in the unit. Like the specifications of IRC Section 42(g), these adjustments are based on 1.5 persons per bedroom and include a reduction for any utility allowances that were provided by the property manager.

Novogradac provides a free Rent and Income Limit Calculator© to make those calculations at
www.novoco.com/resource-centers/affordable-housing-tax-credits/rent-income-limit-calculator.

For a unit to be considered occupied by a qualifying low-income household, the family occupying the unit must have calculated family income less than or equal to 80% of the AMI as determined and adjusted annually by HUD. The owner must make a good-faith effort to verify that the income provided by an applicant, in an income certification, is accurate. To do this, the property’s management should take any of the following steps:

1. obtain an income verification form from the applicant’s current employer,
2. obtain pay stubs for the most recent pay periods,
3. obtain an income tax return for the most recent tax year,
4. obtain an income verification for any Social Security income, or
5. obtain other forms of independent verification if the applicant is unemployed and has no such tax return.

Tenants must be certified as of the later of the date the QLICI is made or at move-in. Owners/allocatees must document maintenance of the rent restrictions for the seven-year NMTC compliance period. This can be achieved by requalifying the household’s income annually during the seven years and adjusting the unit’s rent as applicable. This applies to the initial qualifying tenant and each subsequent qualifying tenant occupying the unit.

It is also important to remember that the student rules mirror IRC Section 42 as well. That means units occupied by nonqualified student households will not qualify as affordable units, unless certain exceptions apply. IRC Section 42 guidelines describe nonqualified student households as a unit comprised entirely of full-time students where no residents file a joint tax return.

Considering all the basics covered above, it is clear to see how compliance monitoring for NMTC housing properties mirrors certain aspects of low-income housing tax credit (LIHTC) properties. Understanding the various requirements for a NMTC property is important to ensure at least 20% of the units are qualified and maintained affordable units. Experienced consultants can help property owners, property managers and CDEs with their understanding of these concepts.