Expect Shorter Advance Notice for Inspections, Compliance Monitoring in 2022
Section 42 of the Internal Revenue Code requires state housing agencies to conduct on-site inspections of all buildings by the end of the second calendar year following the year the last building in the project is placed in service. In addition, the code says that an agency must also conduct on-site inspections and low-income certification review at least once every three years after the initial on-site inspection.
In February 2019, the IRS issued final regulations for LIHTC compliance monitoring, replacing the temporary compliance monitoring regulations under which state housing agencies have been operating since 2016. The IRS contemplated that state housing agencies would begin to implement the new rules to monitor tax credit sites by early 2021. But the COVID-19 pandemic interrupted the implementation of the regulations and, in July 2020, the IRS had issued a notice easing monitoring requirements in response to the pandemic.
As a result of these occurrences, some requirements applicable today are different from those in place before the pandemic. With the upheaval caused by the pandemic, you may need a refresher on how inspection requirements have changed and what you should expect in 2022.
Minimum Number of Units
The final rule required housing agencies to inspect at least as many units as specified by project size in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart [§1.42-5(c)(2)(iii)]. By requiring agencies to use the reference chart number, the 2019 rules eliminated the option for agencies to use an inspection sample size of 20 percent of the low-income units in a project.
This change in calculation method had the effect of increasing the sample size of low-income units that compliance-monitoring agencies had to inspect for smaller LIHTC projects. There was much opposition to this change because of the increased costs and staffing burdens associated with inspecting more projects, which would ultimately result in increased compliance monitoring fees charged to building owners.
As a result, the IRS acknowledged the concerns and reinstated the 20 percent sample size calculation method as a viable option [REG-123027-19]. So, under IRS regulations, “the minimum number of low-income units that must be included in the random samples on which an Agency conducts physical inspections or low-income certification review is the lesser of the applicable REAC number or 20 percent of the low-income units in the project, rounded up to the next whole number.”
Notice Requirement
The final regulations shortened the reasonable notice requirement to 15 days in advance of when a site will experience a physical inspection or review of low-income certification, down from a 30-day notice requirement under the temporary regulations. A housing agency may notify the owner of the particular low-income units for inspection only on the day of the inspection.
The notice period begins on the date the housing agency informs the owner that a site inspection of a project and low-income units or low-income certification review will occur. Notice of more than 15 days, however, may be reasonable in extraordinary circumstances that are beyond an agency’s control and that prevent an agency from carrying out within 15 days an on-site inspection or low-income certification review.
Extraordinary circumstances include, but are not limited to, natural disasters and severe weather conditions. In the event of extraordinary circumstances that result in a reasonable-notice period longer than 15 days, an agency must select the relevant units and conduct the same-day on-site inspection or low-income certification review as soon as practicable.
‘All Buildings’ Rule
State housing agencies must conduct on-site inspections in units in all buildings in a project, rather than simply applying the minimum unit sample size on a project-wide basis if a project encompasses multiple buildings. The only exception that the IRS made to the all buildings rule is to allow agencies that use the REAC protocol to satisfy the physical inspection requirement to follow the REAC protocol even when it doesn’t require inspections in all buildings.
The IRS notes, “The REAC protocol requires that the inspectors be specially trained in its use. When an Agency is not using that protocol, it may choose inspectors of diverse expertise to conduct inspections. The quality of these inspections may vary across projects and jurisdictions…. In the absence of HUD oversight, requiring that all buildings be inspected serves as a quality control mechanism.”
Random Unit Selection
The housing agency must select in a random manner the low-income units to be inspected and the units whose low-income certifications are to be reviewed. Agencies generally may not select the same low-income units of a site for on-site inspections and low-income certification review, because doing so would usually give prohibited advance notice, unless they are done on the same day.
A housing agency may choose a different number of units for on-site inspections and for low-income certification review, provided the agency chooses at least the minimum number of low-income units in each case. And the agency must select the units for inspections or low-income certification review separately and in a random manner.
REAC Protocol
A housing agency may choose to use the REAC protocol to meet its physical inspection obligation if the inspection is conducted by HUD or a HUD-certified REAC inspector. But the housing agency must still review a project’s compliance with the LIHTC maximum income and rent requirements.