Income Averaging For the 2019 Raymond James Summit Thomas Stagg Partner Novogradac & Company LLP Thomas.Stagg@novoco.com October 14, 2019 www.novoco.com

Designating Units Formal or informal? Are the designations approved or submitted to anyone (e.g. IRS, state agency)? How (and when) does designation occur? Can units change designations and, if so, how? In mixed income projects, the Available Unit Rule may require market-rate units to become LIHTC

Minimum Set-Aside vs. Applicable Fraction Any credits at all? Project Unit % only 1 How many credits? Individual building Lesser of “unit fraction” and “floor space fraction” 2 3 No change!

[assume one, single-building project at 40-60 set-aside] The minimum set-aside has always been a cliff test: MKT 60% MKT 60% [assume one, single-building project at 40-60 set-aside] FAIL

Where is the cliff with income averaging? 50% 70% AVG: 61.11% 50% 70% AVG: 60%

The minimum set-aside is satisfied! Where is the cliff with income averaging? 50% 70% AVG: 61.11% The minimum set-aside is satisfied! 36% 30% of income limit for imputed household size (1.5 persons x no. of BDR)

Minimum Set-Aside Loyalists Where is the cliff with income averaging? Two camps: 50% 70% AVG: 61.11% Code Literalists Minimum Set-Aside Loyalists 36% 30% of income limit for imputed household size (1.5 persons x no. of BDR)

Where is the cliff with income averaging? Code Literalists: 50% 70% AVG: 61.11% IRC § 42(g)(1)

Where is the cliff with income averaging? Code Literalists: 50% 70% AVG: 61.11% IRC § 42(g)(1)

Where is the cliff with income averaging? Code Literalists: 50% 70% AVG: 61.11% 50% 70% AVG: 61.11% “All units are still designated to have income limits averaging 60% or less.” “At least 40% of units are still meeting their designation.” “The code doesn’t say that being out of compliance makes a unit lose its designation.” still “The minimum set-aside is satisfied.”

Minimum Set-Aside Loyalists: Where is the cliff with income averaging? Minimum Set-Aside Loyalists: Code Literalists: 50% 70% AVG: 61.11% “All units are still designated to have income limits averaging 60% or less.” “At least 40% of units are still meeting their designation.” 36% “The code doesn’t say that being out of compliance makes a unit lose its designation.” still “The minimum set-aside is satisfied.” 30% of income limit for imputed household size (1.5 persons x no. of BDR)

Minimum Set-Aside Loyalists: Where is the cliff with income averaging? Minimum Set-Aside Loyalists: 50% 70% AVG: 61.11% “At least 40% of the units are meeting their designation… “At least 40% of the units are meeting their designation…and the designations of those units used for the minimum set-aside test have income limits averaging 60% or less.” “The minimum set-aside is satisfied.” 50% 70% AVG: 60%

Applicable Fraction… 50% 70% AVG: 61.11%

Minimum Set-Aside Loyalists: Applicable Fraction… Minimum Set-Aside Loyalists: 50% 70% AVG: 61.11% 50% 70% AVG: 60% 50% 70% AVG: 60% 50% 70% AVG: 60% 50% 70% AVG: 60% “Discount unit(s) necessary to bring average of remaining units to ≤60%” 70% 70% FAIL “Claim credits only on units that collectively are meeting the average of ≤60%” Applicable Fraction 8 4 = 40% 80% 10 Floor Space Fraction 1,700 sq. ft. 1,450 sq. ft. = 63.04% 73.91% 2,300 sq. ft.

Applicable Fraction… Code Literalists: AVG: 61.11% 50% 70% AVG: 61.11% “If the minimum set-aside is satisfied… claim credits on all units meeting their designation.” “If the minimum set-aside is satisfied… Applicable Fraction 9 = 90% 10

Applicable Fraction… Code Literalists: AVG: 61.11% 50% 70% AVG: 61.11% “If the minimum set-aside is satisfied… claim credits on all units meeting their designation.” “If the minimum set-aside is satisfied… Applicable Fraction 6 = 60% 10

Minimum Set-Aside Loyalists: Applicable Fraction… Minimum Set-Aside Loyalists: Code Literalists: 50% 70% AVG: 61.11% 50% 70% AVG: 61.11% 50% 70% AVG: 61.11% 50% 70% AVG: 61.11% “If the minimum set-aside is satisfied… “If the minimum set-aside is satisfied… claim credits on all units meeting their designation.” 36% FAIL Applicable Fraction 6 = 60% 30% of income limit for imputed household size (1.5 persons x no. of BDR) 10

Minimum Set-Aside Loyalists: Third camp… Hybrid: Minimum Set-Aside Loyalists: 50% 70% AVG: 60% 50% 70% AVG: 61.11% Minimum Set-Aside Loyalists for the minimum set-aside test for the project 36% FAIL Code Literalists for meeting the applicable fraction(s) for the building(s) Applicable Fraction 4 7 6 = 40% 60% 70% 30% of income limit for imputed household size (1.5 persons x no. of BDR) 10

AVG: 60% AVG: 60% AVG: 60% AVG = 60% 8609 8b Election 50% 70% 50% 70% One project AVG: 60% 50% 70% AVG: 60% 50% 70% AVG: 60% Market Market Market 40% 80% 50% 70% 80% 40% 50% 70% AVG = 60% 8b Election is not an issue since each building can meet the minimum set-aside. However, other 8b issues (transfers, etc.) should still be considered

AVG: 60% AVG: 60% AVG: 60% AVG = 60% 8609 8b Election 50% 70% 50% 70% One project One project One project One project AVG: 60% 50% 70% AVG: 60% 50% 70% AVG: 60% Market Market Market 40% 80% 50% 70% 80% 40% 50% 70% AVG = 60% 8b Election is not an issue since each building can meet the minimum set-aside. However, other 8b issues (transfers, etc.) should still be considered

AVG: 66.7% AVG: 58% AVG: 62% AVG: 56% 8609 8b Election One project AVG: 66.7% 50% 70% AVG: 58% 70% 50% AVG: 62% AVG: 56% Market Market Market 40% 40% 80% 50% 70% Market 80% 40% 50% 70% AVG = 60% 8b Election is an issue since each building can’t meet the minimum set-aside.