IRS Clarifies Local Approval and Preference Regarding LIHTC Developments

The IRS recently issued guidance on LIHTC developments and their compliance with fair housing rules at the local level. Notice 2016-77 relates to allocations of housing credits to projects located in a qualified census tract. A qualified census tract (QCT) is a geographic area defined by the Census Bureau and designated by HUD in which at least 50 percent of households have an income less than 60 percent of the area median gross income or have a poverty rate of 25 percent or more. And Revenue Ruling 2016-29 relates to allocations of housing credits to projects and whether the Internal Revenue Code (IRC) encourages state allocating agencies to reject tax credit site proposals that do not obtain local approval.

Preferences for Developments in QCTs

According to Notice 2016-77, LIHTC developments located in a qualified census tract do not receive preference in a state’s qualified allocation plan (QAP) unless the project’s development contributes to a concerted community revitalization plan. IRC Section 42(m)(1)(B)(ii) requires every QAP to contain three preferences. Under the third of these, the QAP must give “preference in allocating housing credit dollar amounts among selected projects to … projects which are located in qualified census tracts … and the development of which contributes to a concerted community revitalization plan…” [IRC §42(m)(1)(B)(ii)(III)]. 

The IRS points out that in some cases, state or local agencies allocating housing credit dollar amounts have given preference to projects that are located in qualified census tracts without regard to whether the projects contribute to a concerted community revitalization plan. In some other cases, because development of new multifamily housing benefits a neighborhood, the development of a LIHTC project, without more, has been treated as if it were such a plan.

The concern is that merely placing a project in a QCT without a bigger revitalization play may exacerbate concentrations of poverty in the area. Therefore, Section 42(m)(1)(B)(ii)(III) grants a preference to that placement only when there is an added benefit to the neighborhood in the form of the project’s contribution to a concerted community revitalization plan.  

Although the IRS hasn’t issued guidance defining the term “concerted community revitalization plan,” the preference fails to apply unless, not later than the allocation, a plan exists that contains more components than the LIHTC project itself. The Department of the Treasury and the IRS are considering providing guidance to clarify the preference in Section 42(m)(1)(B)(ii)(III), and they’re requesting comments from the public regarding the contents of that guidance. Comments should be submitted by Feb. 10, 2017, and may be submitted electronically via email to Notice.Comments@irscounsel.treas.gov with “Notice 2016-77” in the subject line.

Local Approval Requirements

Revenue Ruling 2016-29 clarifies that under the Internal Revenue Code, state allocating agencies are not forced or encouraged to require local approval for LIHTC developments. The ruling describes a scenario in which a state’s QAP awards points to projects with local support and requires approval from a locality in order to allocate credits to a project. The ruling explains that such a state would be misconstruing the IRC. Section 42(m)(1)(A)(ii) prevents a housing credit dollar amount from being allocated to a building unless the allocating “agency notifies the chief executive officer (or the equivalent) of the local jurisdiction within which the building is located of such project and provides such individual a reasonable opportunity to comment on the project.”

In the example given, the state allocating agency’s QAP contains provisions that strongly favor applications from affordable housing projects that demonstrate affirmative local support. For example, under the point system that agency uses in judging among applicant projects, points are granted to projects that:

• Manifest quantifiable community participation with respect to the project, especially as evidenced by written statements from neighborhood organizations in the area of the proposed project;
• Receive a commitment of development funding by the local political subdivision; and
• Receive community support for the application, as evidenced by a written statement from the state legislator elected from the district in which the project is proposed to be developed.

The state agency interprets IRC Section 42(m)(1)(A)(ii) to require that allocations be made only to proposals that receive the approval of the locality where the proposed project is to be located. Accordingly, it will reject an application if evidence of affirmative local support is lacking, and the agency uses factors such as the ones in its QAP to determine whether or not that support exists. 

In the example state, local approval is much more likely to be secured for proposed LIHTC developments in areas with greater proportions of minority residents and fewer economic opportunities than in higher-opportunity, non-minority communities. And the state agency’s practice of requiring local approval has created a pattern of allocating housing credit dollar amounts to projects in the predominantly lower-income or minority areas, with the result of perpetuating residential racial and economic segregation in the state.

The revenue ruling found the state agency’s interpretation to be inconsistent with the code and general federal fair housing policy. Specifically, the IRS interprets the code to require that each local jurisdiction have a “reasonable opportunity” to comment on any proposal to allocate a housing credit dollar amount to a project within that jurisdiction. This requirement is not the same as requiring the jurisdiction’s approval. And the clear meaning of “reasonable opportunity to comment” is that the jurisdiction has a chance to weigh in, or even object, but not that every objection will be honored.

Also, the state agency’s practice of requiring local approval in the example had a discriminatory effect based on race. Thus, the practice is inconsistent with at least the policy of the Fair Housing Act. The IRS points out that duty to affirmatively further fair housing was firmly established federal housing policy when IRC Section 42 was enacted, and there is no suggestion that Congress intended Section 42 to diverge from that policy. Therefore, the IRS concludes that Section 42(m)(1)(A)(ii) does not require nor even encourage conduct inconsistent with that policy.