LOW-INCOME HOUSING TAX CREDIT,MULTIFAMILY BOND
HOME PROGRAMS
COMPLIANCE
HANDBOOK
The Maryland Department of Housing and Community Development pledges to foster the letter and
spirit of the law for achieving equal housing opportunity in Maryland.
September 18, 2006
LIHTC, MBP and HOME Programs Compliance Handbook
TABLE OF CONTENTS
TABLE OF CONTENTSi
PURPOSEiii
ACRONYMSiv
Chapter 1BACKGROUND AND OVERVIEW
1.1 Background 1
1.2 Responsibilities3
Chapter 2 QUALIFYING THE PROJECT
2.1 Credit Allocation4
2.2 Eligible Basis4
2.3 Applicable Percentage4
2.4 Qualified Basis5
2.5 Management or Security Officer Occupied Units6
2.6 Minimum Set-Aside7
2.7 Form 86097
Chapter 3QUALIFYING HOUSEHOLDS
3.1 Household Determination9
3.2 Student Eligibility9
3.3 Anticipated Tenant Income10
3.4 Assets11
3.5 Assets Disposed of For Less Than Fair Market Value11
3.6 Income Requirements12
3.7 Rent and Income Limits12
3.8 Utility Allowances12
3.9 Maximum Allowable Rent (Gross Rent)13
3.10 Section 8 Rents14
3.11 Additional Fees14
3.12 Minimum Lease Requirements14
3.13Certification of Income15
3.14Recertification of Income15
3.15 Timing16
3.16 Special Waiver of Annual Recertification16
Chapter 4 OWNER’S RESPONSIBILITIES
4.1Record Retention18
4.2Compliance Certification18
4.3Record Keeping20
4.4 File Management20
4.5Next Available Unit Rule21
4.6Affirmative Fair Housing Marketing Plan22
4.7Fair Housing and Equal Opportunity, and Health,
Safety, and Building Code Violations22
4.8Documents to be Submitted for Review23
4.9Correction Period23
4.10 Transfer of Ownership23
Chapter 5REVIEW PROCEDURES
5.1General24
5.2Compliance Period24
5.3Noncompliance25
5.4Procedures for Desk Review25
5.5Procedures for On-Site Monitoring Reviews27
5.6Assistance through Other Programs 28
5.7Annual Monitoring Fee29
5.8Corrections to Documents29
5.9MFHRetention of Documents29
Chapter 6HOME PROGRAM
6.1HOME Funds with LIHTC30
6.2Rent Limitation for HOME30
6.3Period of Affordability31
6.4Tenant Eligibility31
6.5Occupancy Requirements for HOME-Assisted Units31
6.6Fixed HOME Units vs. Floating HOME Units31
6.7Rent Requirements32
6.8Income Eligibility32
Chapter 7TAX EXEMPT BONDS WITH LIHTC
7.1Tax Credit Only Projects33
7.2Tenant Eligibility33 7.3 Loan Terms 33
PURPOSE
The purpose of this handbook is to set forth the guidelines and procedures for monitoring compliance of properties funded by the Low Income Housing Tax Credit (LIHTC), Multifamily Bond (MBP) and HOME programs in the state of Maryland. The Maryland Department of Housing and Community Development (DHCD) has developed this handbook to be a source of information for owners, developers, management companies and on-site management personnel as well as for DHCD staff in the monitoring of compliance with these programs.
The laws and regulations governing the LIHTC, MBP and HOME programs as well as the interpretation of these laws can and do change. This handbook has not been reviewed or approved by the Internal Revenue Service (IRS) or the United States Department of Housing and Urban Development (HUD) and should not be relied upon for interpretation of federal law or regulations. DHCD encouragesproject owners to consult with qualified legal and tax professionals for advice and attendance at available training seminars.
Compliance with the requirements of federal laws and regulations governing the LIHTC, MBP, and HOME programs is the responsibility of each project owner. DHCD is responsible for administering these programs under certain provisions of federal law and this handbook is provided to assist property owners in managing their properties in accordance with federal law. However, this handbook is not a complete statement of the law. Any representation by DHCD in this handbook or any interpretation of these laws by DHCD is not binding on the IRS or HUD. DHCD neither represents nor warrants to any owner, investor, property manager or other program participant how the IRS or HUD will interpret or apply any provision of federal law in any instance. DHCD strongly recommends that participants in the LIHTC, MBP, and HOME programs become familiar with the relevant State and federal laws and regulations and consult with their tax advisors, legal counsel, accountants, or financial advisors regarding their participation in these programs.
Chapters 2, 3, 4 and 5 of this handbook apply to all LIHTC projects. If the project also has financing from HOME or MBP, refer to Chapter 6, HOME Program, and Chapter 7, Tax Exempt Bonds with LIHTC, for additional requirements and guidance.
ACRONYMS
Area Median Gross Income ..………………………………………………………. AMGI
Building Identification Number ………………………………………………………BIN
Community Development Administration …………………………………………. CDA
Cost of Living Adjustment …………………………………………………………… COLA
Extended Low Income Housing Covenant ………………………………………….ELIHC
Internal Revenue Code ……………………………………………………………….. IRC
Internal Revenue Service …………………………………………………………… IRS
Low-Income Housing Tax Credits …………………………………………………. LIHTC
Maryland Department of Housing and Community Development……………….DHCD
Multifamily Bond Program ……………………………………………………………..MBP
Multifamily Housing Programs …………………………………………………………MFH
National Council of State Housing Agencies ………………………………………… NCSHA
Qualified Allocation Plan ………………………………………………………………. QAP
Qualified Project Period ………………………………………………………………… QPP
Public Housing Authority ……………………………………………………………..PHA
Rural Development Service………………………………………………………..RDS
Single Room Occupancy ……………………………………………………………..SRO
Temporary Assistance to Needy Families ………………………………………… TANF
U. S. Department of Housing and Urban Development …………………………..HUD
Maryland Department of Housing and Community DevelopmentCDA Multifamily Programs
September2006Page 1
LIHTC, MBP and HOME Programs Compliance Handbook
CHAPTER 1: BACKGROUND AND OVERVIEW
1.1 Background
The Community Development Administration (CDA), an agency in the Division of Development Finance within the Maryland Department of Housing and Community Development (DHCD), was created in 1970 by the Maryland General Assembly in response to a growing shortage of affordable housing throughout the State, particularly for people with limited incomes, the elderly, individuals with disabilities, and people with special needs. As Maryland’s housing finance agency, CDA funds programs with proceeds of taxable and tax-exempt revenue bonds and notes, State general obligation bonds, State general funds, revolving funds of prepayments and repayments of previously made loans, and federal subsidies. CDA provides rent subsidies for low-income tenants and operates federal and state housing programs that reduce the cost of developing or rehabilitating owner-occupied homes and rental properties.
Low Income Housing Tax Credits
In 1986, Congress enacted the Tax Reform Act creating the Low Income Housing Tax Credit Program (LIHTC). The LIHTC Program is authorized and governed by the Tax Reform Act of 1986 as amended, codified as Section 42 of the Internal Revenue Code (IRC). The Act, among its various purposes, encouraged the construction and rehabilitation of housing for low and moderate-income individuals and families. In August 1993, Congress passed the Omnibus Budget Reconciliation Act of 1993, which permanently extended the LIHTC program. In December 2000, Congress increased the Tax Credit Cap to $1.50 per resident for 2001 and $1.75 per resident for 2002. The Cap after 2002 is indexed for inflation. Also in 2000, for the first time, Congress required regular site inspections by the housing credit agency to monitor compliance with habitability standards applicable to the project. While the statute does not specify frequency, IRS regulations mandate site visits at least once every three years.
The tax credit is a dollar for dollar reduction in tax liability to the owner(s) of a qualified affordable housing development for the rehabilitation, acquisition, or construction of income- and rent-restricted housing.
HOME Program
The HOME Program was created by passage of the Cranston-Gonzalez National Affordable Housing Act of 1990. HOME provides federal financial assistance to cities, counties, and states to facilitate their ability to best meet local housing needs. HOME funds are used to leverage other sources of funds, such as LIHTC and tax exempt bonds, to increase the availability of affordable housing. When the HOME Program is used in conjunction with LIHTC or otherprograms, the housing units must meet the more restrictive occupancy and rent restrictions of the programs in order to comply with all program requirements.
The Multifamily Bond Program
In enacting the Tax Reform Act of 1986, Congress also amended and reorganized the tax exempt private activity bond program. In Maryland, this program while commonly referred to as the “Tax Exempt Bond” program is formally known as the Multifamily Bond Program (MBP). Since 1986, most properties receiving MBP financing “automatically” qualify for and receive LIHTC. In addition to CDA, other local governments around the State also finance properties with tax exempt bonds. However, all tax exempt financed projects whether or not financed by CDA through MBP must qualify under the current QAP in order to claim LIHTC.
Therefore, MBP-financed properties are subject to at least 2 regulatory agreements; one each for LIHTC and MBP, or, as applicable, the local tax exempt bond financing program. For MBP compliance purposes, CDA will monitor MBP properties in accord with the most restrictive requirements of the applicable programs. It is important for owners and managers to remember that while there are important similarities between LIHTC and MBP, there also are significant differences including:
- Minimum Set Asides – while both programs use the “20/50” or “40/60” elections to qualify projects, LIHTC generally qualifies projects on a building basis as opposed to a project basis for tax exempt properties;
- Compliance Periods – LIHTC properties must remain affordable for at least 30 years, but tax exempt properties are subject to a “Qualified Project Period” terminating on the later of when no private activity bonds are outstanding, the date when Section 8 assistance (if any) terminates, or the date which is 15 years from when 50% of the units are first occupied;
- Rent Restrictions – tax exempt properties generally are not subject to federal rent restrictions while LIHTC properties are both income- and rent-restricted;
- Over Income Units – tax exempt properties are subject to the “Next Available Unit Rule” on project-wide basis while LIHTC properties generally must comply on a building basis; and
- Tenant Transfers – in tax exempt properties, all tenants transferring among units must be income recertified, but for LIHTC, only transfers between buildings require recertification.
The above list is intended for illustrative purposes only and is neither definitive nor inclusive. As always, owners and managers should consult with qualified legal and tax professionals and attend available training seminars in order to stay current on the many issues affecting all of these programs.
1.2 Responsibilities
The United States Treasury Department through the Internal Revenue Service (IRS) is responsible for the actual administration of the LIHTC program nationwide. Under the provisions of the Internal Revenue Code (IRC) and its implementing regulations, each state is required to designate a housing credit agency to allocate and monitor the credits. The authorization in Maryland from the Governor for DHCD to allocate and monitor tax credits may be found in Executive Order 01.01.1987.26, Section K. Within the Department this function is assigned to CDA.
Section 42 (m)(I)(B)(iii) of the IRC requires housing credit agencies to adopt an allocation plan and to include in their plan a procedure to monitor all LIHTC projects for compliance with the requirements of the IRC throughout the compliance period. CDA’s Multifamily Housing Programs(MFH) unit is responsible for monitoring each project for compliance with the tax credit provisions and for reporting noncompliance to the IRS. Within MFH, the Tax Credit Team is responsible for income compliance monitoring as well as inspections of LIHTC-assisted properties.
HUD administers the HOME Program under regulations found in 24 CFR Part 92. These regulations require that DHCD, as a HOME grantee or participating jurisdiction, monitor all HOME-assisted activities to ensure that the provisions of the HOME regulations are being met. When a project has both LIHTC and HOME funding, MFH will monitor the project for both programs concurrently.
Each owner or sponsor who receives the benefits of the LIHTC, the Multifamily Bond Program (MBP) and/or HOME Program(s) has the responsibility for fulfilling the requirements of the IRC and/or 24 CFR Part 92. In exchange for these benefits, certain requirements must be met which will benefit lower-income residents.
It is the responsibility of the owner to keep MFH informed of all material facts relating to the project, such as the completion of the development and the date the project is placed in service, as well as any change in ownership, management, or rent level.
The management agent and all on-site personnel are responsible to the owner or sponsor for implementing the program requirements correctly. Anyone who is authorized to lease apartment units to tenants should be thoroughly familiar with all federal and state laws, rules and regulations governing certification and leasing procedures. It is also important that the management agent provide information, as needed, to MFH and submit all required reports and documentation in a timely manner.
CHAPTER 2: QUALIFYING THE PROJECT
2.1 Credit Allocation
Among other requirements for claiming LIHTC, aproject (other than those financed by tax-exempt bonds) must receive an allocation of LIHTC from CDA. The LIHTC allocation restricts the maximum amount of LIHTC available for the project. Owners take the credit annually over a 10 year credit period beginning with the tax year in which the project is placed in service or, at the owner’s election, the next tax year. The amount of LIHTC is based on the qualified basis of the buildings in the project.
The LITHC amount for a building for each taxable year of the credit period equals the lesser of i) the product of the applicable percentage multiplied by the qualified basis of the building as of the end of the taxable year or ii) the actual amount of LIHTC allocated by CDA.
The LIHTC amount for the first year may be smaller, since it reflects the number of full months that the low-income units are occupied. Any shortfall in the LIHTC amount in the first year may be claimed in the eleventh year. In all circumstances, the amount of annual credit claimed may not exceed the amount of LIHTC allocated to the building by CDA.
For more information on the allocation of LIHTC, please see DHCD’s Maryland Low Income Housing Tax Credit Program: Qualified Allocation Plan (“QAP”), which is available on the DHCD website at in the “Programs” menu, under the “Housing Development” tab.
2.2 Eligible Basis
Eligible basis is a dollar amount based on the owner’s adjusted depreciable basis as of the close of the first taxable year of the credit period. In accordance with IRS regulations, the owner must determine the eligible basis for each building in the project. Adjusted basis excludes certain costs and adjustments to basis required under the IRC.
2.3 Applicable Percentage
The applicable (also referred to as “credit”) percentage is a rate based on federal borrowing rates that will yield a return over a 10-year period, of a present value equal to 70% (for allocated tax credits on new construction or rehabilitation) or 30% (for tax credits awarded for acquisition of existing buildings or federally-subsidized,includingtax-exempt bond, financed buildings), of the qualified basis of the building. Currently (as of September2006), the applicable percentages are8.19% and 3.51% respectively. The IRS adjusts the percentages monthly to maintain the 70% and 30% present values and publishes these adjusted credit percentages for buildings placed in service that month.
2.4 Qualified Basis
The qualified basis of a building is determined on the last day of each taxable year, beginning with the first year of the credit period. The qualified basis is a specified percentage of the building’s eligible basis and LIHTC units. This percentage, called the applicable fraction, is the lesser of:
- The total number of LIHTC units divided by all residential rental units in the building; or
- The total floor space for the LIHTC units divided by the aggregate floor space for all residential rental units.
EXAMPLE
1st Year Applicable Fraction:
Property has 20 units. Total Square Footage = 16,000 sq. ft
Owner has committed to 20% @ 50% set-aside with LIHTC allocation for 10 units.
Year 1:Affordable units occupied = 10
Square Footage = 7,500
Calculations: Unit Fraction = 10/20 = 50.00%
Sq. Ft Fraction = 7,500/16,000 = 46.88%
First Year Applicable Fraction = 46.88%
Applicable Fraction:
- The applicable fraction is calculated to two decimal places;
- The applicable fraction must be maintained at a level equal to or greater than the first year applicable fraction for each building for the entire compliance period; and
- For buildings receiving credits after 1989, the minimum applicable fraction for each building in a project must be recorded in the project’s Extended Low Income Housing Covenant (ELIHC).
It is important to note that the qualified basis at the end of the first year of the credit period determines the qualified basis for the remainder of the credit period. The owner may claim the initial tax credit during the year the project is placed in service or, at the owner’s election, in the following year. Before making the decision of which year to place the project into service, the number of LIHTCunits should be carefully determined.
Additional increases in qualified basis due to an increase in the number of low-income units are possible, but the additional LIHTC is computed at two-thirds of the credit percentage allowable for the initial qualified basis over the remaining compliance period. No recapture occurs on additions to qualified basis, since the applicable percentage used to calculate the additional LIHTC is already only two-thirds of the original credit percentage.
Owners should address questions regarding qualified basis for their projects to their accountants and/or legal counsel.
2.5 Management or Security Officer Occupied Units
Revenue Ruling 92-61, 1992 CB 7 provides that owner or management occupied units, will not be regarded as qualified residential units for the purpose of determining the applicable fraction. However, the units are included in the eligible basis andare considered functionally related and subordinate residential property or “common space.” Owners should avoid housing employees involved with the management or operations at other properties unless that employee provides all of the required services for the property in which the employee is housed.
All owners, especially those with new allocations, need to notify MFHof the status of the owner occupied units. When notifying MFH, during the annual desk review, it is necessary to include the project name, Building Identification Number (BIN), the unit number, the number of bedrooms, the square footage, and the responsibilities to the project of the staff member currently residing in the unit.