Jen Brewerton Vice President of Compliance, Dominium Compliance in a Post Income-Averaging World Jen Brewerton Vice President of Compliance, Dominium

Compliance with Income Averaging Compliance Best Practices Income Averaging: Know the rules Establish project scope with the team who will implement it Forecast potential issues over the long haul Advocate

Compliance with Income Averaging Best Practices Before Award: 1) Know the Rules! Play to the ref! Know the IRS/Federal Rules Know the new law that impacts the Rules (Consolidated Appropriations Act of 2018) Know the State Housing Finance Agency’s interpretation of the rules Know the syndicator’s interpretations of the rules and expectations Know how the rules play out with a potential property and market

Compliance with Income Averaging IRS/Federal Rules Section 42 of Internal Revenue Code 8823 Audit Guide (revised January 2011) IRS Section 42 Audit Technique Guide (last updated Aug. 11, 2015) Treasury Regulation 1.42 Revenue Rulings, Procedures and Notices Treasury Decisions Rules require states to come up with their policies

Compliance with Income Averaging What does the new law say?

Compliance with Income Averaging Minimum Set-Aside 20/50 = 20% of units in a project to be restricted to 50% 40/60 = 40% of units in a project to be restricted to 60% Income Averaging = Set Aside at least 40% of units in a project to be rent restricted with income limits designated at 20% to 80% that on average are at or below 60%

Compliance with Income Averaging Minimum Set-Aside Interpretation Owner must designate at least 40% of units in a project to be rent restricted with income limits designated at 20% to 80% that on average are at or below 60% Version 1: 10 units, owner must designate 4 units that average 60% Version 2: 10 units, owner must designate 4 units, minimum, and the PROJECT must average 60% (so average of the 10 units, not 4) Bottom line: State will tell you (suggest meet both

Compliance with Income Averaging Minimum Set-Aside Multiple Years Two buildings, 1 project (8609 8b election) Building A is 10 units, all at 40% and Places In Service 2018 – qualifies all units Building B is 10 units all at 80% and Places In Service 2019 – qualifies all units Did we meet the Minimum Set-aside in 2018? Yes, 50% of project qualified at average under 60% Building B 2018 and Building A 2019? No, did not meet 40% average at 60% (we think)

Compliance with Income Averaging Minimum Set-Aside Versus Applicable Fraction 2. Applicable Fraction Has not changed Is by Building, Minimum Set-Aside by Project 100% Applicable Fraction still means 100% of the building is LIHTC 90% Applicable Fraction includes market units Minimum Set-Aside is exclusive of the Applicable Fraction

Compliance with Income Averaging Next Available Unit Rule Building-based rule Explained in Treasury Regulation §1.42-15 If a unit goes above 140% at 50%/60% depending on Minimum Set-Aside, must lease NAU to 50%/60% household Example: 60% Income Limit is $10,000 $10,000 x 140% = $14,000 If a previously qualified household’s income increases to $15,000 at recert, the household becomes “OI” and the next unit must be leased to an eligible household

Compliance with Income Averaging Next Available Unit Rule Under the new rule, the 140% threshold at recertification is the greater of: 60% of AMI, or the applicable designated income limit for the unit Translated: Units at 20%, 30%, 40%, 50% and 60% all only go OI if recert shows household above 60% x 140% (otherwise can keep designation) 70% x 140% and 80% x 140% become OI

Compliance with Income Averaging Income Averaging for Mixed Income Next Available Unit Rule If 70% goes above 140%, is 70% OI (biggest change) – next available unit leased to a 70% 10 units, 1 market, what if multiple units go OI? Don’t know for sure (assume lowest, and remember due diligence)

Compliance with Income Averaging Does all this Next Available Rule conversation sound complicated? Then don’t have market units on an Income Averaged property!

Compliance with Income Averaging Example: Next Available Unit Rule per page 166/167 of the IRS Section 42 Audit Technique Guide (last updated Aug. 11, 2015) is that the NAUR does not apply to 100% Properties

Compliance with Income Averaging Implications for Income Averaging Next Available Unit Rule for 100% Properties Remain in compliance even if you accidentally move-in an ineligible household (as long as you can show due diligence) Makes Income Averaging WAY less scary for 100% properties Are not FEDERALLY required to recertify annually State agencies trump, so advocate!

Compliance with Income Averaging Best Practices Before Award: Establish project scope with the team who will implement it Meet with state Bring your compliance team (3rd party hard) Forecast potential issues over the long haul Advocate for flexibility: Example: Bonds Dominium Example

Compliance with Income Averaging Dominium Example: 206 Units, Senior, 100% LIHTC with Tax Exempt Bonds in Colorado Met with state multiple times Confer with Bond Issuer Carefully select syndicator $10,000,000 award if spread units, $8,000,000 if tailor high set-asides to large 2 bedrooms, state wants spread State wants 58% income average instead of 60% to be “safe”, at loss of $1,000,000 to project Risk low, remember due diligence!

Compliance with Income Averaging Advocate Flexibility with State Agencies! No fixing units at State level (remember those LURA locked set-aside mixes from 15 years ago?) Minimal restrictions of the rules (example, 58% averages) Don’t require full recertifications (show the numbers for staffing) Allow multiple funding (Bonds, HOME, PBS8) Remember: We’ve been dealing with various set-asides at the state level for a very long time, we can do this!

Compliance with Income Averaging Final Best Practices: Get the right Software Many major software companies are not ready Get the right staffing Consider the short and long haul Develop compliance policies Train, train, train!

Questions? Jen Brewerton Jen.Brewerton@dominiuminc.com (763) 354-5518