Part one of this article outlined four significant areas

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1 News, Analysis and Commentary On Affordable Housing, Community Development and Renewable Energy Tax Credits June, Volume III, Issue VI Published by Novogradac & Company LLP The Complexities of LIHTC Unit Qualification and Credit Delivery in an Acq/Rehab Deal - Part Two By Kimberly Taylor, HCCP, Housing Development Center Part one of this article outlined four significant areas of concern related to the complexities of a low-income housing tax credit (LIHTC) acquisition/rehabilitation (acq/rehab) transaction: understanding relocation, having an effective team, unit qualification and tax credit delivery. Part two reviews the complexities of two actual LIHTC acq/rehab deals, paying close attention to those four areas during the predevelopment, rehab and lease-up phases. Sample Property #1 Sunrise Apartments (fictional name) is a 94-unit, six-story, 100-year old building located downtown in a large city. It has an existing U.S. Department of Housing and Urban Development (HUD) contract for all 94 project-based Section 8 units. It supports a senior and disabled population and is 100 percent occupied at the time of acquisition. All residents incomes were considerably below the tax credit maximum income limit for this property so there was no danger of permanent relocation of any residents. The new owner has a large existing portfolio consisting of all HUD programs Section 8, 202 and 811 and it self-manages all of its properties, including this LIHTC property, which is the owner s first tax credit project. LIHTC acquisition occurred November 9, 2010 with a plan to begin construction immediately. Issue #1 Self-Managing the Relocation For this property, the construction plan was an extensive 14-month, floor by floor rehab that required residents to move out of their units for five to six months. Transferring residents to onsite units was not an option because the noise and debris from construction would have been dangerous for the sensitive population. Most of the population is older than 65 and many were in fragile states and upset about having to relocate from their units for such a long period of time. The owner assumed responsibility for finding temporary apartments for all of its residents as each floor was being prepared for the rehab. The owner soon learned it needed help! It wanted its residents to be temporarily relocated downtown so that their lives would not be disrupted more than necessary, but in a busy downtown metropolitan area, there were very few apartment vacancies. There also were issues with existing leases, temporary leases that needed to be worked out with new landlords and moving costs associated with 94 residents. It is necessary to understand relocation rules associated with the funding sources (i.e. Uniform Relocation Act required) on a property. It is also important to understand what it takes to temporarily relocate residents and to be in constant communication with the construction and lease-up teams to ensure proper timing for all moves. Don t underestimate how much time and money it takes to manage the relocation of residents. And even if there is a solid team in place for the lease up, a relocation expert may need to be consulted on how best to manage all of the complexities. Issue #2 Knowing the LIHTC Investor s Credit Delivery Schedule As mentioned previously, this property was acquired in November The safe harbor rule states (reviewed at length in part one of this article) that income certifications for existing residents need to be completed within 120 days before or after the acquisition date essentially a 240-day window to complete all paperwork. continued on page 2

2 novogradac journal of tax credits continued from page 1 The issue is more complex when relocation is required and when it is unclear (until just before closing) when the first year for tax credit delivery is planned. In this scenario and for this property, the state allocating agency wanted the owner to complete all income certifications within the 240-day window. However, resident relocation was to begin the week after closing, so all income certifications needed to be completed within 120 days prior to closing. This practice is meant to protect all residents so that if, for example, one household was qualified prior to acquisition, then relocated off site for six months, then returned and its income increased above the income limit, it would be allowed to remain in its unit because it had qualified at acquisition. None of the residents at this property were in danger of their income increasing above the maximum income limit. The investor decided to elect as the property s first tax credit year, meaning that no units would be delivering credits until January 1,. By that date, the rehab would be almost complete and only one floor would remain to be occupied. The investor advised the owner to complete income certifications for all residents as they returned to the property, qualifying all units again before the one-year anniversary of the residents initial files. For example, Ms. Smith in unit 101 originally moved into Sunrise Apartments in May 1994, when Sunrise was a project-based Section 8 property only. The initial LIHTC certification paperwork to determine her eligibility was completed in October 2010, one month before acquisition. Smith was relocated off site the first week of December 2010 while her unit was rehabbed; she moved back on July 1,. Her initial LIHTC paperwork was completed again, which satisfied the investor requirement. The lesson here is to have a complete understanding of the requirements of both the state allocating agency and the property s LIHTC investor. Begin the conversations with funders early so there is no confusion about what needs to be done. Novogradac Journal of Tax Credits Editorial Board PUBLISHER Michael J. Novogradac, CPA MANAgINg EDITOR Alex Ruiz EDITOR Jane Bowar Zastrow TECHNICAL Editors Robert S. Thesman, CPA James R. Kroger, CPA Owen P. Gray, CPA Thomas Boccia, CPA Daniel J. Smith, CPA ASSIGNMENT EDITOR Jennifer Dockery STAff Writer Jennifer Hill CONTRIBUTINg WRITERS Colette Alpen Frank Buss Benjamin Cook Brandi Day Mike Hannon Jon E. Krabbenschmidt Jim Kroger CARTOGRAPHER David R. Grubman PRODUCTION Alexandra Louie Jesse Barredo James Matuszak Peter Lawrence Diana Letsinger Scott A. Lindquist Forrest David Milder Ruth Theobald Probst Craig Staswick Kimberly Taylor Novogradac Journal of Tax Credits Information Correspondence and editorial submissions: Alex Ruiz/ Sample Property #2 Sunset Apartments is a 40-unit, 17-year old, six-building residential community located in a rural community. It exited a 15-year partnership with a tax credit investor, is in its extended use period from the first allocation of tax credits and received a new second allocation of tax credits for the rehab. It is a family property in an area with very few affordable housing communities and was 100 percent occupied at the time of acquisition. All households incomes were tested prior to acquisition. The owner has a varied portfolio of affordable housing communities and uses a thirdparty property management company to manage the portfolio. LIHTC acquisition occurred October 10, with a plan to begin the extensive rehab of the buildings exteriors and light rehab on the interiors within a month after closing. continued on page 3 Inquiries regarding advertising opportunities: Emil Bagalso / Editorial material in this publication is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding the low-income housing tax credit or any other material covered in this publication can only be obtained from your tax advisor. Novogradac & Company LLP All rights reserved. ISSN X Reproduction of this publication in whole or in part in any form without written permission from the publisher is prohibited by law. 2

3 Novogradac Journal of Tax Credits Advisory Board Low-Income HOUSINg Tax CREDITS Bud Clarke BOSTON Financial InvESTMENT MANAgEMENT Jana Cohen Barbe Tom Dixon BOSTON CAPITAL Rick Edson HOUSINg CAPITAL AdvISORS INC. Richard Gerwitz CITI COMMUNITy CAPITAL Rochelle Lento DyKEMA Gossett PLLC John Lisella Phillip Melton CENTERLINE CAPITAL Group Thomas Morton PILLSBURy WINTHROP SHAW PITTMAN LLP Arnold Schuster Mary Tingerthal MINNESOTA HOUSINg Finance AgENCy Rob Wasserman PROPERTy COMPLIANCE Sharon Jackman SIG SERvICES LLC Michael Kotin Kay Kay REALTy Michael Snowdon MCA HOUSINg PARTNERS Gianna Solari Solari ENTERPRISES Ruth Theobald Probst THEOPRO COMPLIANCE & CONSULT. INC. Kimberly Taylor HOUSINg DevELOPMENT CENTER HOUSINg and Urban DevELOPMENT Ray Landry DavIS-PENN MORTgage Co. Sheldon Schreiberg PEPPER HAMILTON LLP Monica Sussman NixON PEABODy LLP NEW MARKETS Tax CREDITS Frank Altman COMMUNITy REINvESTMENT Fund Merrill Hoopengardner AdvANTAge CAPITAL Scott Lindquist Matthew Philpott Matthew Reilein JPMORgan CHASE BANK NA Ruth Sparrow futures UNLIMITED LAW PC Joseph Wesolowski Enterprise COMMUNITy InvESTMENT INC. HISTORIC Tax CREDITS Don Holm HOLM LAW Firm John Leith-Tetrault NATIONAL TRUST COMM. InvESTMENT CORP. Bill MacRostie MACROSTIE HISTORIC AdvISORS LLC John Tess HERITAge CONSULTINg Group RENEWABLE ENERgy Tax CREDITS Ben Cook SOLARCITy CORPORATION Jim Howard DUDLEy Ventures Forrest Milder NixON PEABODy LLP Darren Van t Hof continued from page 2 Issue #1 Completing Initial Income Certifications Too Early The owner and property management company were well prepared for this acquisition. The management company checked with the state allocating agency and was advised to use a specific tenant survey to have a solid picture of household incomes. These surveys were completed to determine which households incomes qualify under the income limits at the time of acquisition so that if there were any over-income families, the owner could budget for permanent relocation costs. The company that was already managing the property began the tenant certification process as soon as it knew the forecasted closing date, which was August. Management began the file process in May and all households were qualified by early June. The development team originally planned for the August closing, but due to some unforeseen issues, the closing was delayed two months and the acquisition was official on October 10,. This was unwelcome news since every file was now outdated each file would have to be dated June 10 or later. The lesson here is to be cautious about starting the file process too early. It s important to be prepared, but if the initial certifications are not completed within the allotted time, all of the files will be unusable. Issue #2 Tracking Unit Qualifications for Purposes of Credit Delivery For Sunset Apartments, the majority of the rehab was on the buildings exteriors. The minimal interior rehab being done required that residents be out of their units for a maximum of two weeks. The owner had an organized team in place and stayed in the loop on any changes with the construction schedule. There was a handful of units on the property that were deemed relo units, meaning they were set aside for families that had to relocate for as long as two weeks while their unit was being rehabbed. Even if the household was income qualified by the acquisition date, if they were out of the unit for even one day, while the unit was not suitable for occupancy, then that unit cannot deliver any credits for that month. However, some industry participants believe that you can claim credits in this situation if the unit is suitable for occupancy by the close of the month and either: 1. the unit previously swapped status with a qualified unit (see part one of this article in the May Journal of Tax Credits), 2. a qualified household moves in by the close of the month, even if the unit had never been income-qualified or had previously swapped status with a disqualified unit, or 3. the qualified household that was occupying the unit was relocated off-site and, therefore, the unit is still qualified under the unit vacancy rule. For instance, as demonstrated in the chart on page 40, unit 101 was qualified by acquisition and the credits were being delivered continued on page 4 novogradac journal of tax credits 3

4 novogradac journal of tax credits continued from page 3 (the unit was available for occupancy and the household was income-qualified). In November, the flooring in the unit was to be replaced, which required that the household relocate temporarily. The family moved to one of the onsite relo units and was out of its unit for four days. Even though the household was out of its unit only briefly and the unit had been incomequalified, it was not delivering credits for the month of November because it was not available for occupancy for the entire month. Credits were flowing again in December since the unit was occupied by a qualified household for the entire month. The lesson here is to track unit qualification along with interior construction and the relocation of households to be sure unit-month tax 210 credit delivery projections are accurate. This chart was also used to track the households that needed new income certifications (from issue #1) yellow cells indicating redo ver. Maintaining a similar chart provides an ideal way of tracking units that can or cannot be counted as tax credit eligible during rehab and provides total unit-month tax credit delivery projections for the first tax credit year. It will ensure the property will deliver all tax credits when planned and will assist the lease-up team with tracking all of the complexities encountered during the construction and lease-up phase. Conclusion There are many issues that arise during acq/rehab lease ups but if owners understan the four main areas Chart A: Tax Credit Delivery Projections and tracking units available for occupancy Page 4-28 of the 8823 Guide provides a good example of units that can or cannot be counted as tax credit eligible during rehab and provides total unitmonth tax credit delivery projections for the first tax credit year Unit August September October 101 LIHTC November Est. Flooring December January February March LIHTC LIHTC LIHTC LIHTC 102 LIHTC Bath Vinyl LIHTC LIHTC LIHTC LIHTC 202 relo unit relo unit relo unit relo unit relo unit LIHTC LIHTC 103 LIHTC LIHTC LIHTC LIHTC LIHTC LIHTC 203 Est. Flooring LIHTC LIHTC LIHTC LIHTC 104 mold unit Both LIHTC LIHTC LIHTC LIHTC 105 mold unit Both LIHTC LIHTC LIHTC LIHTC 106 LIHTC LIHTC LIHTC LIHTC 206 Carpet LIHTC LIHTC LIHTC LIHTC 107 Both LIHTC LIHTC LIHTC 207 Carpet LIHTC LIHTC LIHTC LIHTC 108 Redo Ver LIHTC LIHTC LIHTC LIHTC LIHTC 109 Redo Ver LIHTC LIHTC LIHTC LIHTC LIHTC 209 Redo Ver LIHTC Vinyl LIHTC LIHTC LIHTC 110 Redo Ver LIHTC LIHTC LIHTC LIHTC LIHTC Est. mold units This article first appeared in the June issue of the Novogradac Journal of Tax Credits. Novogradac & Company LLP - All Rights Reserved LIHTC LIHTC LIHTC LIHTC LIHTC of concerns addressed in part one of this article, they can avoid the problems mentioned here. Remember that with a solid understanding of relocation regulations, an effective development/lease-up team, knowledge of the income qualification process with the safe harbor rule and the tax credit delivery schedule, owners can have a trouble-free lease up for the next LIHTC acquisition/ rehab deal. Kimberly Taylor joined Housing Development Center as an asset management project manager in She has worked in the affordable housing industry since 1999, with a focus on asset management and compliance. She can be reached at (503) continued on page 5 4

5 continued from page 4 Notice pursuant to IRS regulations: Any U.S. federal tax advice contained in this article is not intended to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties under the Internal Revenue Code; nor is any such advice intended to be used to support the promotion or marketing of a transaction. Any advice expressed in this article is limited to the federal tax issues addressed in it. Additional issues may exist outside the limited scope of any advice provided any such advice does not consider or provide a conclusion with respect to any additional issues. Taxpayers contemplating undertaking a transaction should seek advice based on their particular circumstances. This editorial material is for informational purposes only and should not be construed otherwise. Advice and interpretation regarding property compliance or any other material covered in this article can only be obtained from your tax advisor. For further information visit novogradac journal of tax credits 5