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The Goal of this Training The purpose of this training is to provide information for all interested personnel to successfully maintain compliance at tax credit properties and to avoid common LIHTC eligibility errors. Zeffert & Associates www.zeffert.com

H.R.322 Housing & Economic Recovery Act 2008 Introduction What are Tax Credits? The LIHTC program started with the Tax Credit Reform Act of 1986. Owners receive a reduction in tax liability in exchange for providing affordable housing. This is not a deduction a credit is much better. Tax credits are NOT a federal subsidy program like HUD or Rural Development. Tax Credits can be involved in: New construction of a property Rehab of a property and Acquisition of an existing property (only if it is also rehabbed) Retaining Tax Credits In order to retain tax credits, an owner must: 1. 2. 3. Income Limits The Multi-family Tax Subsidy Program ( MTSP ) LIHTC/Bond limits for each county can be found at www.huduser.org/datasets/mtsp.html. The LIHTC/bond MTSP income limits used at a project never go down from one year to the next once a specific property is placed in service. Your minimum set-aside (see below) will determine the maximum limit for your property (50% or 60% of the area median income for the county the property is in). Your state may impose more restrictive limits on some or all of your units ( State Set-asides, see below). New limits must be implemented within 45 days of release. Rural and HERA Special Income Limits Some counties have special limits available to them. These are counties that either: 1. Had their income limits frozen under past HUD hold harmless policies or 2. Are located in rural areas that having income limits that are less than the National Non-Metropolitan limit (note: the rural limits are only available to 9% (non-bondfunded) projects). The process of selecting limits is now considerably more complex. You may use this income limit: If this applies: Last Year s MTSP Limits 1. The published income limits for the project s county went down for the current year. 2. The project was in service prior to the release of the new limits. HERA Special 1. HUD lists this option for the property s county. 2. The project was placed in service in 2008 or earlier. National Non-metro 1. The project isn t funded with tax-exempt bonds. 2. The project is in an area determined by USDA (Rural Development) to be rural. 3. The published limits for the county are less than the National Nonmetro limit Zeffert & Associates www.zeffert.com Page 1

Using Last Year s MTSP Limits: 1. A building is placed in service on 10/30/2012. The income limit for a 1 person household for 2012 is Income Limits $25,000. On 12/04/2012, the 2013 MTSP limits are released and the 1 person income limit is now $24,000. Can the manager use the prior year s limit? Yes No Why? 2. The income limit for a 1 person household for 2012 is $25,000. On 12/04/2012, the 2013 MTSP limits are released and the 1 person income limit is now $24,000. A building placed in service on 2/1/2013. Can the manager use the prior year s limit? Yes No Why? Using HERA Special Limits: 1. Rose Apartments was placed in service on 5/1/2007 and is located in Rose County. This is an area that HUD states the HERA Special income limit option applies to. Can the manager of Rose apartments use the HERA special income limit? Yes No Why? 2. Lily Apartments was placed in service on 9/1/2011 and is located in Rose County. This is an area that HUD states the HERA Special income limit option applies to. Can the manager of Lily apartments use the HERA special income limit? Yes No Why? National Non-metro Limits: 1. Country Apartments, a 9% (not financed with tax exempt bonds) tax credit building, is located in an area that has been determined by the USDA to be in a rural area. Can the manager of Country apartments use the National Non-Metro income limit? Yes No Why? 2. Mountain View apartments, a 4% tax credit building that is funded with tax exempt bonds, is located in an area that has been determined by the USDA to be in a rural area. Can the Manager of Mountain View apartments use the National Non-Metro income limit? Yes No Why? Zeffert & Associates www.zeffert.com Page 2

Common Error: Insufficient Application/Questionnaire Issues Common Error # 1: Insufficient Child Support/Alimony Questions LIHTC/HUD: 4350.3 5-6 F / 5-10 & 11 Exhibit 5-1 / 2 RD: HB-2-3560 Exhibit 6-3 page 6-17 Owners must count alimony or child support amounts awarded by the court unless the applicant certifies that payments are not being made and that he or she has taken all reasonable legal actions to collect amounts due, including filing with the appropriate courts or agencies responsible for enforcing payment. Note: Amounts actually received must be counted, whether court-ordered or not. All the same questions should be asked for alimony as are asked for child support. Do We Need to Count? Sean has a court order to receive $660 a month in alimony, but his ex-wife does not pay and no effort has been made to collect. Yes No Sample Application Questions: Alimony/Child Support Support Payments Zeffert & Associates www.zeffert.com Page 3

Common Error # 2: Insufficient Student Income Questions LIHTC/HUD: 8823 Guide 4-19 & 20 RD: HB-2-3560 6.5 A on page 6-4 Unnumbered Letters of 1-11-07 and 11-3-11 The treatment of educational scholarships or grants is dependent on whether the student is receiving Section 8 assistance. Not Receiving Section 8 Assistance All forms of student financial assistance, no matter how it is used, are excluded from annual income. Financial assistance includes grants, scholarships, educational entitlements, work study programs, and financial aid packages. It doesn t matter whether the assistance is paid to the student or directly to the educational institution. Receiving Section 8 Assistance (also applies for the RD program) All financial assistance received from the following sources in excess of tuition is includable in income. 1. Higher Education Act of 1965 2. Private Sources 3. Assistance from an institute of higher learning (scholarships) Persons who are exempt: 1. Dependents of the household 2. Persons over age 23 with a dependent child in the unit Sample Application Questions: Students Zeffert & Associates www.zeffert.com Page 4

NOTE: LIHTC: Full-time students have a 5-month test for student eligibility. Example: an applicant has been full-time students from January 1 through graduation on May 2 nd. They are full-time students all calendar year. LIHTC eligibility and LIHTC/HUD/RD student income is based on current and projected circumstances. Required NCHFA (North Carolina Housing Finance Agency) Student Certification. Zeffert & Associates www.zeffert.com Page 5

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Common Error: Verification Issues Common Error # 3: Skipping 3 rd -party Verification/ Not Documenting Efforts to collect 3 rd -Party Verification LIHTC/HUD: 4350.3 5-13 / 5-53 to 5-56 Appendix 3 RD: HB-2-3560 6-11.A page 6-15 and 16 4350.3 5-19 / 5-60 to 5-62 Appendix 3 3 rd -Party verification is the preferred method. Because they only provide net income, copies of paychecks are never acceptable. We need gross, not net income. Watch Social Security verifications, as they sometimes list only the net income, and need to be clarified further. If 3rd party verification is delayed for 2 weeks, Include in file: Note why 3 rd- party verification was not obtainable. Date-stamped original request. Follow-up efforts. If a 3 rd party charges, skipping 3 rd -party verification is OK. When using any clarification record document: Name, position and contact info of 3rd party; Your name; Date and time of conversation. Common Error # 4: Expired/Incomplete Verifications LIHTC/HUD: 4350.3 5-17 / 5-58 to 5-60 8823 Guide Chapter 4 RD: HB-2-3560 6-11.A page 6-16 LITHC/HUD days from date received RD: + days Verification Lifespan 1. When an applicant for an LIHTC unit has more than $5,000 in assets, the first $5,000 may be verified through tenant affidavit, and the rest must be verified through 3 rd -parties. True False Methods of Verification 2. What information (if any) will need to be clarified or corrected on the forms on the following pages? A. The Under $5,000 Asset Certification for Cammille Kraft: B. The Certification of Zero income for Juanita Koeppel: C. The Employment Verification for Vera Wahoo: Zeffert & Associates www.zeffert.com Page 7

Common Error: Avoiding Common Error # 5: For Full-Time Employment: multiply hourly wages by (40 hrs/wk) 2,080 weekly wages by 52 bi-weekly wages by 26 semi-monthly wages by 24 monthly wages by 12 annual salary by 1 Bad Assumption Example # 1: There are 4 weeks in a month. Verification tells us that Connie is paid $750 weekly. The income limit for his family size is $36,500 Incorrect method: $750 X X = Income Calculation Issues Bad Math Assumptions LIHTC/HUD & RD: 4350.3 5-5 B / 5-4 Weekly Payments Correct method: $750 X = If the first method is used and the household is moved in, the household will be! Bad Assumption Example # 2 Bi-weekly pay comes twice a month. Verification tells us that Jill is paid $1089 bi-weekly. The income limit for his family size is $28,130 Incorrect method: $1,089 X X = Correct method: $1,089 X = If the first method is used and the household is moved in, the household will be! Bi-Weekly Payments Can you spot any errors? Example of changing hourly wage: Certification date, February 1 Employer anticipates: Pay period: weekly 40 regular hours/week 3 OT hours/week OT is at 1-½ time Current hourly rate $9.50/hour Anticipated raise starting March 15 $0.50/hour Manager calculation sheet: February 1 to March 14 (6 weeks) 6 weeks x 40 hours x $9.50 = $ 2,280.00 6 weeks x 3 hours x $14.25 = $ 256.50 47 weeks x 40 hours x $10.00 = $18,800.00 47 weeks x 3 hours x $14.25 = $ 2,009.25 Annual Income = $20,809.25 Raises Zeffert & Associates www.zeffert.com Page 11

Common Error # 6: Social Security Calculation Errors LIHTC/HUD: 4350.3 5-6 I & J / 5-11 & 12 Exhibit 5-1 / 1 RD: HB-2-3560 Attachment 6-A (b)(4) and (c)(13) The full amount of periodic amounts received from social security, annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts. Count amounts BEFORE Medicare or any garnishments are taken out. Delayed SS and SSI payments become assets and are not counted as income. Count amounts AFTER adjustments for past overpayments. Example: Gross amount $450. Actual payment is $397 because of past overpayment. Count $397. Watch for Cost Of Living Adjustment (COLA) that is usually announced in October each year. Examples: 5.8% for 2009, 0% for 2010 and 2011, 3.6% for 2012 and 1.7% for 2013. 1. See attached social security benefit letter for Jed Knight. Jed is moving in moved in on 06/01/2013. Based on the attached letter, what is Jeds s monthly income from social security? Social Security *** REC 2013**8 130055 H8***0BE0 DGY5 CIPQ*AB PQBA (F-DYG ) *** SOCIAL SECURITY ADMINISTRATION Jed I. Knight * Address ******-**** Date: April 12, 2013 Claim Number: ***-**-****A ***-**-****DI You asked us for information from your record. The information that you requested is shown below. If you want anyone else to have this information, you may send them this letter. Information About Current Social Security Benefits Beginning January 2013, the full monthly Social Security Benefit before any deductions is...$724.20 We Deduct $104.90 for medical insurance premiums each month. The regular monthly Social Security payment is... $619.00 (We must round down to the whole dollar.) Social Security benefits for a given month are paid on the following month.(for example, Social Security Benefits for March are paid in April.) Your Social Security benefits are paid on or about the third of each month. Information about current SSI payments Beginning January 2013, the full monthly Social Security Disability Benefit before any deductions is... $ 340.32 Of this amount $100.00 represents periodic payments until the remainder Of the delayed benefits are paid. This is estimated to end on November 15 th, 2014 Zeffert & Associates www.zeffert.com Page 12

Common Error # 7: Incorrect Income Counted for Dependents LIHTC/HUD: 4350.3 Fig 5-2 / 5-7 RD: HB-2-3560 Attach 6-A Unearned and Members Earned Income Asset Income Head, Spouse and Co-Head YES YES Other Adult YES YES Dependent: -Child under 18 NO YES -Full-time Student over 18 YES up to $480 YES (Not head, co-head, or spouse) Dependent 1. John is the head of the household. He works a job with a total Income anticipated income of $25,000. His wife, Kylee, is a full-time student and works a full-time job with an anticipated annual income of $34,000. The manager determines that the household income is $25,480 (John s job + $480 from the adult full-time student Kylee). Is this correct? YES NO If NO, complete below: Head s Earned Income $ Spouse s Earned Income $ Total $ 2. How much earned income is counted annually for minor full-time students? Avoiding Common Error # 8: Not counting non-cash contributions LIHTC/HUD/RD 4350.3 Exhibit 5-1 / 2 Periodic and determinable allowances, such regular contributions or gifts received from organizations or from persons not residing in the dwelling Periodic Allowances - Gifts 4350.3 5-6 G / 5-10 & 11 Exhibit 5-1 / 2 Cash and Non-cash contributions to the household are income to the family. 2 Allowed exclusions: 1. Groceries given to the household (NOT money to buy groceries) 2. Child care paid directly to care provider in behalf of the household All other contributions are counted Do we count? Marla receives the following contributions from outside of the household. Which of these contributions, if any, will need to be verified and included as income? (check the box of which sources will be counted) $100 in cash for groceries; weekly $100 worth of groceries from the food bank; monthly $50 for internet service ( paid directly to the provider) : monthly $100 worth of diapers; monthly Cash & Non- Cash contributions Zeffert & Associates www.zeffert.com Page 13

Avoiding Common Error # 9: Periodic Payment Errors LIHTC/HUD/RD: 4350.3 5-6 P / 5-17 The withdrawal of cash or assets from an investment received as periodic payments should be counted as income The above is still part of the HUD handbook. The following was removed with Change 2 to the 4350.3 in June of 2007, so it no longer applies: unless the family can document that the amounts withdrawn are reimbursements of amounts invested. When a family is making regular withdrawals from an account in which it has made an investment, the withdrawals will count as income only after the amount invested has been paid out. Cam is 60 and begins withdrawing $2,000 a month from his 401(k) Full value of 401(k): $209,059 Cash value: $209,059 Total he has contributed to the asset: $130,050 Periodic Payments What is the anticipated annual income from the withdrawals? Avoiding Common Error # 10: Reverse Mortgages are Counting Payments from Reverse Mortgages Loans for seniors taken out against the equity in a home. These loans may be paid to the senior in installments or in lump sums. In either case, these are NOT income as they are the proceeds of a loan. o Such a loan does not require monthly payments be made by the senior to pay it back, but before the homeowner can permanently move out of the property, or at their death, the loan must be paid off. The value of the property must be reduced by the outstanding loan secured by the home. EXAMPLE Jill owns a home that she has been receiving monthly payments on it from a reverse mortgage. She has received payments totaling $50,000. Her monthly payments from the mortgage will total $10,000 in the year following move-in. The market value of the home is $100,000. Reasonable costs to sell the home are determined to be 10% of the market value. What is the cash value of the home? $40,000 (FMV)$100,000 - $50,000 (payments received) - $10,000 (cost to sell) Zeffert & Associates www.zeffert.com Page 14

Carlos and Corina are applying for an apartment that has a 2 person 60% income limit of 28,000. Carlos and Corina each receive $10,000 annually in gross social security payments and have a joint non-interest bearing checking account with a 200.00 six month average. They also own a home that they have been receiving monthly payments on it from a reverse Reverse Mortgage mortgage. Their total payments have totaled $100,000. Their monthly payments from the mortgage will be $1000 per month in the year following move-in. The market value of the home is $200,000. Reasonable costs to sell the home are determined to be 10% of the market value. They have no other income or assets. The manager determines that the household income is $32,000 ($20,000 Social Security + $12,000 from the reverse mortgage) which is over the income limit and rejects Carlos and Corina. Was the manager correct? YES or NO If no, what is the gross annual income? Fill out the TIC portions below Zeffert & Associates www.zeffert.com Page 15

Avoiding Common Error # 11: Imputing Asset Income on Market Value Use the greater of the actual income received or the imputed income. Only impute income if the assets exceed $5,000. If net assets are $5,000 or less, use the actual income received. Imputed income: actual CASH value of all assets X the current HUD Passbook Rate (Currently 2%) 1. Jacob owns a home. It has a Market Value of $100,000 and Jacob has an outstanding mortgage of $110,000. The manager determines the income counted from this asset is $200. ($100, 000 X 2% (HUD passbook rate) Is this correct? YES NO Common Error # 12: Calculating Asset Income on Cash Value LIHTC/HUD: 4350.3 5-7 A-C / 5-21 &22 RD: HB-2-3560 6.10.B page 6-13 An asset has Market and Cash value The market value is the amount another person would pay to acquire the asset. Important note: actual income is based on Market value. The cash value is the market value less the cost to turn the asset into cash. Asset Income 1. See verification below. If these are the households only assets, what is the total value of the assets for tax credit purposes? Asset Income Zeffert & Associates www.zeffert.com Page 16

2. Charles and Patty Brown have applied for a unit. The Brown family has the following assets: 1. A certificate of deposit of $6,800 at 1%. Estimated cash value after paying penalties is $6,500. 2. A savings account of $4,000 earning.25% interest annually. 3. The six-month average balance in the checking account is $300 (non-interest account). CD Savings Checking Total Cash Value Actual Income Earned Imputed Income Zeffert & Associates www.zeffert.com Page 17

A Few Words of Encouragement We Do this Job Well Recent government reviews of the various programs have been good or show improvement. It is a challenge to learn these programs well, but the more effort something takes, the more gain is realized. These programs are active in all states, and qualified personnel are in demand. Not all jobs provide a certain amount of personal security and are also beneficial to our communities. We strongly feel that affordable housing-related jobs are. Zeffert & Associates www.zeffert.com Page 18

Contract for Deed/Deed of Trust Supplemental Asset Issues 4350.3 5-7 G 7 / 5-35 & 36 Exhibit 5-2 A 10 AKA - Contract for Deed, this is a seller-financed mortgage. To verify, get an amortization schedule: Starting at effective date: Actual Income = Interest Payment for 12 months from certification effective date. Cash and Market Value = Principle Value at the effective date of the certification. Real Estate Rental Income Exhibit 5-2 A 3 Equity in rental property or other capital investments Include the current fair market value less (a) any unpaid balance on any loans secured by the property and (b) reasonable costs that would be incurred in selling the asset (e.g., penalties, broker fees, etc.). Value Determining Real Estate: Annual Income Fair Market Value Annual rental payments - Outstanding mortgage principal - Annual mortgage interest payments - Cost to sell = - Other allowed expenses = Cash Value Annual net income Reverse Mortgages Reverse mortgages are simply loans for seniors taken out against the equity in a home. These loans may be paid to the senior in installments or in lump sums. In either case, these are NOT income as they are the proceeds of a loan. Such a loan does not require monthly payments be made by the senior to pay it back, Zeffert & Associates www.zeffert.com Page 19

HH Mbr # but before the homeowner can permanently move out of the property, or at their death, the loan must be paid off. The value of the property must be reduced by the outstanding loan secured by the home. Imputing Income on Disposed Assets 4350.3 5-7 G 8 / 5-36 to 38 A special rule applies to assets disposed of for less than fair market value in the last 2 years. If the market value of the asset was $1,000 more than the amount received. Disposed asset value = cash value less amount received. Do not count assets lost in foreclosure, bankruptcy, divorce or separation settlements. Although not a new thought, Change 3 reminds us that, when the 2-year disposed of asset threshold ends, imputed income ends as well. At a HUD property, the owner has the choice of annualizing the income, and conducting an interim or only counting the imputed income for the months up until the 2-year limit. LIHTC properties do not have interim option, so the later choice applies. Example: Sybil and Graham moved-in on 01/01/2013 to a property that does not have 100% of the units tax credit. They gave their ranch to their sons on 7/1/2011. The cash value of the farm was: $ 1,200,000. We must count it as if they still owned it until 7/1/2013 The above amount WILL NOT be included on the TIC for the 2014 annual recert. It will, in effect disappear on 7/1/2013. The 2% income must only be calculated until half way through the year. Assuming that they have no other assets, below is a portion of the TIC for their move-in, showing one of the special calculation methodologies that can be used for a correct answer in this case: (F) Type of Asset PART IV. INCOME FROM ASSETS (G) (H) C/I Cash Value of Asset (I) Annual Income from Asset 1 Disposed Real Estate I $1,200,000 $ 0 TOTALS: $1,200,00 $ 0 Enter Column (H) Total Passbook Rate If over $5000 $1,200,000 X 2.00% 12 X 6 = (J) Imputed Income $ 12,000 Enter the greater of the total of column I, or J: imputed income TOTAL INCOME FROM ASSETS (K) $ 12,000 Zeffert & Associates www.zeffert.com Page 20

Supplemental Information Finding the Correct Current MTSP Income Limits Option # 1 For projects in states where the national non-metropolitan limit is GREATER than the state non-metropolitan limit. If in doubt as to the above, this option will yield accurate results. First Step: Get the current HUD MTSP limits fromwww.huduser.org/datasets/mtsp.htm Does the project have nonallocated tax credits through section 142 bonds? NO NO Is the project in a rural area, as defined by USDA? Link to check: http://eligibility.sc.egov.usda.gov/eligibility/welcomeaction. do?pageaction=sfp&navkey=property@12 YES YES Does the project s county have HERA special limits listed on HUD s MTSP limit sheet? YES NO NO Was a building in the project placed in service prior to 01/01/2009? Does the project s county have HERA special limits listed on HUD s MTSP limit sheet? YES Was a building in the project placed in service prior to 01/01/2009? NO NO YES NO Was a building in the project placed in service prior to 01/01/2009? YES YES Are the HERA special Limits or any MTSP limits since 2009 HIGHER than the National Non-metro limits (listed below for 2012)? YES HH Size 1 2 3 4 5 6 7 8 50% $18,050 $20,650 $23,200 $25,800 $27,850 $29,950 $32,000 $34,050 60% $21,660 $24,780 $27,840 $30,960 $33,420 $35,940 $38,400 $40,860 YES Are the current MTSP Limits HIGHER than the National Nonmetro limits? NO NO USE HIGHEST HERA SPECIAL or MTSP LIMITS applicable to the property since 2008 USE Highest MTSP LIMITS applicable to the property since 2009 USE Highest MTSP LIMITS applicable to the property since 2009 USE CURRENT NATIONAL NON- METRO LIMITS (After confirming with your state agency) Final step: if other programs are on the project (such as HUD, RD or HOME), they each have their own limits. Use the lowest limits for each unit, as applicable. Zeffert & Associates www.zeffert.com Page 21

Finding the Correct Current MTSP Income Limits Option # 2 For projects in states where the national non-metropolitan limit is LESS than the state non-metropolitan limit. If in doubt as to the above, Option # 1 should be used. First Step: Get the current HUD MTSP limits fromwww.huduser.org/datasets/mtsp.htm Does the project s county have HERA special limits listed on HUD s MTSP limit sheet? YES NO Was a building in the project placed in service prior to 01/01/2009? NO YES Was a building in the project placed in service prior to 01/01/2009? NO YES USE Highest HERA SPECIAL or MTSP LIMITS applicable to the property since 2008 USE Highest MTSP LIMITS applicable to the property since 2009 USE Highest MTSP LIMITS applicable to the property since 2008 Final step: if other programs are on the project (such as HUD, RD or HOME), they each have their own limits. Use the lowest limits for each unit, as applicable. Zeffert & Associates www.zeffert.com Page 22

Ask About Online Training! Logon Now! SAFE, ACCESSIBLE, AND AFFORDABLE HOUSING IS A CRITICAL COMPONENT IN GROWING HEALTHY COMMUNITIES Trust Us To Handle Your Compliance Needs With Quality & Reliable Service PROVIDERS OF THE FOLLOWING SERVICES Asset Management Training File Reviews Utility Allowance Calculations Utility Consumption Baselines Accessibility Reviews & Inspections Capital Needs Assessments Energy Audits Accessibility Package Packaged Programs ZEFFERT & ASSOCIATES IS A CONSULTING FIRM specializing in the delivery of asset management and various related services nation-wide in support of the housing industry. Since 1994, Zeffert leverages efficiencies created by existing expertise, information management, and logistical systems to provide high-value services at optimal cost. www.zeffert.com 2321 Weldon Parkway St. Louis, MO 63146 P: 866-760-6000 E: info@zeffert.com