2. Guest Speakers: Susan Westbrook, NCHFA Kevin Rayfield, Dixon Hughes Goodman LLP Lisa Lemos, Mosaic Development Group Beverly Patrone, RLJ Management Moderator: Yolanda D. Law, CAHEC

3. REGULATORY VIEW: Effects of Credit Delivery Decisions on Long Term Compliance By Susan Westbrook

4. 3 Decisions Made That Affect Credit Delivery and Long Term Compliance:
Minimum Set-aside
When credit stream begins
Multiple building set-aside

5. Decisions are reported to IRS on Form 8609, but are made long before the form is filed!

6. Minimum Set-aside
Determines the highest income and rent level allowed on the affordable units
Some developers select 20% of the units to be affordable at 50% AMI in an effort to deliver credits faster; however, this limits ALL affordable units on the property at the 50% income and rent limits.
Even if all units will be subject to the 50% income and rent limits, we suggest selecting the 40/60 minimum set-aside on form This gives a ‘cushion’ prior to reporting to the IRS.

7. When Does the Credit Period Begin?
Owner has the option to begin claiming credits during the year when the property places in service, or they can delay claiming credits until the year following PIS.
Timing of the PIS date is a key factor. The earlier in the year PIS happens, the easier it is to claim credits in the first year and avoid the 2/3 rule. If the property places in service in Nov or Dec, it can be difficult to get all units rented and avoid the 2/3 rule.

8. What Is The 2/3 Rule?
The IRS understands the time value of money. The tax credit program accelerates the delivery of credits and allows the investor to take 15 years of credits over 10 years, to make the investment more appealing. Let’s say the developer has promised to deliver credits in 2017, but the property doesn’t place in service until 11/15/2017. By year end, only 40 units out of 50 are rented. The 10 units that don’t get rented until 2018 are not allowed to accelerate the credits on the tax return. Instead the credits are taken over the full 15 years.

9. How Do You Define a “Property”?
A property is defined by the owner’s election for item 8.b. on the An 8609 is issued for every building. Item 8.b. asks: Is this building part of a multiple building project? If the answer is “No”, each building must be treated as a stand-alone property. Instead of Sunshine Apartments, you have Sunshine Building 1, Sunshine Building 2, etc. If the answer is “Yes”, you have one property made up of multiple buildings.

10. What Difference Does This Election Make?
If 1 or 2 buildings place in service in Dec, and all other buildings will not receive a Certificate of Occupancy until the following year, the investor may insist on treating each building as a separate property in order to begin the credit stream, and avoid the 2/3 rule issue for buildings not yet in service. There are long term negative consequences of this decision for management. There are short-term, but expensive consequences, for not delivering credits when promised. (Credit adjustors paid to the investors)

11. Example of Lease-Up:
The development is comprised of 100 units in 5 buildings. The owner has selected the 40/60 Minimum Set-Aside. All units are intended to be low-income. What is the minimum number of units that must be rented to a low income household for the owner to begin claiming credits?

12. Example of Lease-Up:
When the owner treats the building as part of a multiple building project?
40 units anywhere in the property (All 100 have to be rented to avoid 2/3 rule.)
When the buildings are treated as separate buildings?
8 units in each building (All 20 units in a building have to be rented in order to avoid 2/3 rule in that particular building.)

13. Long Term Ramifications of Item 8.b. Election:
Households transferring from one “property” to another “property” must be low income.
If the owner elects not to treat the building as part of a multiple building set-aside, then each building is a property and you can’t move a household from one building to another unless they are income qualified as of the move.
If a head of household (“hh”) needs to move to another building, management must move the hh out of one building and move them into the other building, completing a full income certification.

14. Long Term Ramifications of Item 8.b. Election:
For a 100% Low Income property where the owner elects to treat the building as part of a multiple building set-aside, then a hh can ‘transfer’ from one building to another regardless of their income level at the point of the transfer.
For a Mixed Income property (with Market Rate units) where the owner elects to treat the building as part of a multiple building set-aside, then a hh can ‘transfer’ from one building to another IF their income level is less than 140% of the income limit at the point of the transfer.

15. Case Scenario 1:
Plaza Apartments, Phase I, is a 100% Low Income property with 8 buildings where the owner selected to treat each building as a stand-alone property in order to deliver credits to the investor.
In year 12, after all credits are claimed, Bob Jones, who lives in a 3rd floor walk-up apartment in Bldg 1, is in a car accident and needs to move to a 1st apartment. His income has increased to above the current income limit. The only available 1st floor unit is in Bldg 5.
Can you move him to the 1st floor unit in Bldg 5? No

16. Case Scenario 1 Consequences:
If you refuse to move him per IRS requirements, you risk a Fair Housing lawsuit for failure to grant a reasonable accommodation. If you move him, the IRS will recapture the previously claimed tax credits. Which is worse: a Fair Housing lawsuit, or recapture of tax credits?

17. Case Scenario 2:
Plaza Apartments, Phase II (which is right beside Phase I), is a 100% Low Income property with 8 buildings where the owner selected to treat each building as a multiple building property
In year 12, after all credits are claimed, Cindy Lou, who lives in a 3rd floor walk-up apartment in Bldg 1, is in a car accident and needs to move to a 1st apartment. Her income has increased to above the current income limit. The only available 1st floor unit is in Bldg 5.
Can you move her to the 1st floor unit in Bldg 5?
Yes

18. Case Scenario 2 Consequences:
There is no risk in moving the household because no tax credit rules have been violated.

19. Additional Rules Related to Transfers:
One household cannot qualify two units, even if the buildings are treated as stand-alone properties. The IRS has indicated that they want states to report when an owner selects to treat buildings as stand-alone properties, and then they move a qualified hh from one building to another, in an attempt to qualify units faster.

20. MANAGEMENT PERSPECTIVE: MAXIMIZING CREDITS THROUGH EFFECTIVE LEASIING By: Lisa Lemos & Beverly Patrone

21. Effective Lease Up Management & Maximizing First-Year Credits
Remain in constant contact with your team
Provide your management team and CPA documents to
empower them, including:
Final tax credit application
Amended and Restated Operating Agreement
Loan Agreements (not just the TC loan agreements, ALL the loan agreements)
Any schedules related to anticipated credit delivery

22. Advise your management team early on as to expectation for lease up, set a goal date for 100% qualified occupancy, and copy the management team on the construction schedule updates
The construction schedule is key to this - have management get an early jump on staffing, training, marketing, etc.
Participate in devising documents and drafting of marketing materials (pamphlets, flyers, etc.)

23. Review lease up reports on a weekly basis
Be willing to concess the rents, or offer a one month free rent promotion, to fill units
Have regular (weekly or bi-weekly) teleconferences with team players to determine if benchmarks/goals are being met or not and adjust accordingly
Keep up to date – attend annual TC training and get outside training as well

24. Review the rents set in the TC application to the current limits
Little known fact is Treas. Reg. § (c)(1) states,
“The building owner is not required to review the utility allowances, or implement new utility allowances, until the building has achieved 90 percent occupancy for a period of 90 consecutive days or the end of the first year of the credit period, whichever is earlier.”

25. Timing of release of buildings is important;
Remember that the building must be “in service” for a full
month to count as “low income qualified”, that means:
If you place in service on 6/1 and a unit is leased to a low-income-qualified household (at the proper rent level) on 6/30, than the month counts
If you place in service on 6/1 and a unit is leased to a low-income-qualified household (at the proper rent level) on 6/2, than the month does not count. When would that unit be counted toward the first year applicable fraction in that scenario? 7/1.

26. Acquisition/Rehab Rules
Households occupying units prior to acquisition:
If initial tax credit income certification is completed within 120 days after acquisition, the effective date is the acquisition date. Use income & rent limits effective on acquisition date.
If tenant income certification is complete more than 120 days after acquisition, the household is treated as a new move-in. Use income & rent limits effective on effective date of TIC.

27. Acquisition/Rehab Rules
Households who move in after acquisition, but before the first year of the compliance period:
The income certification is completed using the income and rent limits in effect on the move-in date.

28. Acquisition/Rehab Rules
Test for Purposes of the Next Available Unit Rule:
Within 120 days before the beginning of the first year of the credit period, income of existing households must be “tested”.
The “test” consists of confirming with the household that sources & amounts of income on the initial tenant income certification are still current. It is not necessary to complete third party documentation.
If household is over-income based on the current income limits, apply the next available unit rule.

29. Let’s put it all together:
Property Acquired on 4/1/2016 (not previously tax credit)
TIC effective on 4/1/2016 for all in-place tenants certified as eligible by 7/30/2016
TIC effective on date signed for all in-place tenants certified as eligible from 7/31/2016 forward (Treat as new move-in)
TIC effective on MI date for all new move-ins
Rehab completed by 1/1/2018

30. Acquisition date 4/1/2016 – Rehab completion date 1/1/2018:
Owner can claim credits back to acquisition date of 4/1/2016 if all units are qualified as of this date.
This doesn’t typically happen because:
Units are left vacant to facilitate the rehab
Current tenants are over-income (and property was not previously tax credit)
Investors do not expect credit delivery until after the rehab is complete
Typically, owner plans to begin taking credits as of 1/1/2018
Must complete TIC between 9/3/2017 – 12/31/2017 based on info provided by tenant (3rd party verification not required)

31. Existing Tax Credit Properties receiving a 2nd Allocation during the Extended Use Period:
Property A – Rehab only
(No owner change)
Unit Status
Unit 1
Vacant
Qualified
Unit 2
Unit 3
MI 2005 – OI now
Unit 4
MI 2004 – OI now
Unit 5
MI 2017
Property B – Acquisition/Rehab
Unit Status
Unit 1
Vacant
Not Qualified
Unit 2
Unit 3
MI 2005 – OI now
Qualified
Unit 4
MI 2004 – OI now
Unit 5
MI 2017

32. Federal Minimum Set-Aside
Unit Mix in qualifying units: it matters – why?
Federal Minimum selected set aside (20/50 or 40/60)
Let’s say they selected 40/60 Set Aside…
and have selected “yes” to 8b on Part II of 8609s (“this building is part of a multiple building project…”)
Must qualify whole building in order to count towards the Minimum Set-Aside for first year credits
64 unit deal: 40/60 set aside would be 26 units (rounded)
If 4 buildings are Quadplex (16 units)
And 6 buildings are Eight-plex (48 units)
If management only qualifies the 4 Quadplexes in “Year one”, they will not have met the Minimum Set Aside
Required: 26 units minimum
Reality in this case: 16 units/ 64 units = 25% of the project

33. Federal Minimum Set-Aside
If you didn’t meet the Minimum Set-Aside…
No credits in Year one as promised to the Investor
“Penalty” depends upon the partnership agreement
The equity is reduced
Downward adjuster
Timing adjuster
Owner communicate with your General Contractor—optimize especially on substantial rehabs, so Property Management can qualify the right buildings

34. FINANCIAL SIDE: Impacts to the Bottom Line

35. CREDIT ADJUSTERS
Be very familiar with Exhibit A in the operating agreement
Three types of adjusters: Credit Delivery Adjuster, Timing Adjuster (typically for years one and two of the credit period), and Recapture Adjuster
Credit Delivery Adjuster relates to amount of credits to be allocated to the investor based upon 8609
Timing Adjuster relates to amount of credits allocated to the investor during the lease-up phase and arises when there are delays in the lease-up
Recapture Adjuster occurs if there is an unfortunate credit recapture event during the fifteen year compliance period

36. Example 1: Credit Deliver Adjuster
Facts – Per Exhibit A-4(a)(1) the property is to deliver $1,000,000 in total credits over the LIHTC compliance period to the investor; credit price is 90 cents 8609 only reflects enough eligible basis for the investor to receive credits of $950,000

37. Example 1: Solution
Credit deliver adjuster will be $45,000 ($1,000,000-$950,000 x 90 cents) The reduction in credits will create a $45,000 decrease in equity from the CAHEC Fund and therefore cause the partnership to find an additional source of $45,000 to pay for development costs. Typically, this additional source would be deferred developer fee or general partner loan.

38. Example 2: Timing Adjuster
Facts – Per Exhibit A-4(a)(2) the property is expected to deliver $90,000 in credits to the investor in year 2017 and $100,000 in year 2018; A timing adjuster not to exceed 45% of the expected credits Due to poor lease-up and construction delays, the investor is only delivered $7,913 in credits in 2017

40. Example 2: Solution Timing Adjuster is calculated as follows:
Required credits for 2017: $90,000
Less Delivery Adjuster: ($4,500) (total deliver adjuster divided by 10)
Adjusted 2017 credit delivery: $85,500
Actual 2017 credits delivered: $7,913
Credit difference: $77,587
Adjuster %: %
Timing Adjuster $34,914
Partnership now has a total reduction in equity of $79,914. This will create an increase in deferred developer fee and/or a partner advance to the partnership.

41. The take aways…
To ensure effective management and timely tax credit delivery:
Communicate
Be flexible
Listen to ideas of others
(Management, Syndicators and CPAs are assets)
4) Know your restrictions

42. Questions? Susan Westbrook Kevin Rayfield
Lisa Lemos Beverly Patrone
Yolanda D. Law