Six Tips for Avoiding Violations When Using Model Units

You may want to keep a unit at your tax credit site available as a model to show prospects. But you should be careful about which unit you choose to set aside as your model, and what you do with that unit as occupancy changes occur.

To comply with tax credit regulations, you must follow certain rules when choosing and maintaining model units. If you don’t, you will put the owner’s tax credits at risk. We’ll give you six tips to avoid noncompliance when choosing and maintaining model units at a tax credit site. Go over these tips with your management and leasing staff. This way, your office won’t make a mistake that will cause the owner to forfeit tax credits.

Tip #1: Rent Empty Model Unit to Qualified Household During Initial Lease-Up

During your site’s initial lease-up at the beginning of the compliance period, you can use an empty unit as your model. Note that, in the terminology of tax credit housing, a unit is considered “empty” until it’s rented to a qualified household; when that household moves out, the unit is considered “vacant,” not empty.

If you need to count the unit as one of your low-income units, you must find a qualified low-income household to occupy it. Keep trying to rent the unit to a qualified household even though, once you do, you will no longer be able to use it as a model.

If you don’t rent the unit to a qualified household during the initial lease-up, the owner won’t be able to claim any tax credits for the unit that’s being used as a model. And you may have trouble establishing your building’s first-year fraction at or above the owner’s target.

Tip #2: Make Reasonable Efforts to Rent Vacant Model Unit to Qualified Household

After initial lease-up, you may be able to use a vacant unit as your model. If your state housing agency allows you to do this, you must comply with the vacant unit rule, which says that when a low-income unit becomes vacant, reasonable attempts must be made to rent that unit—or the next available unit of comparable size or smaller—to a qualified household before renting other units to households that are not qualified.

This means you must try to rent a vacant unit that’s doubling as a model unit to a qualified low-income household.

Tip #3: Don’t Permanently Convert Low-Income Unit to Model Unit

It’s a mistake to take a low-income unit off the market to use as a permanent model unit during any part of the compliance period. Doing so may prevent you from maintaining your site’s minimum set-aside and the building’s applicable fraction. Removal of even one unit may cause your building’s applicable fraction to fall short of its minimum requirement.

Although removing only one unit won’t necessarily affect a site’s minimum set-aside, bear in mind that you must meet and maintain the set-aside throughout the 15-year compliance period so your site qualifies for the tax credit program. If your site no longer qualifies, the owner will lose all tax credits.

Tip #4: Avoid Violating Available Unit Rule When Using Market-Rate Unit as Model

If you manage a mixed-income site, you may think you can simply use one of your market-rate units as a model without having to worry about jeopardizing the owner’s tax credits. But that may not be true if a low-income household goes over income. In this situation, you must comply with the available unit rule.

Under that rule, if a household’s income exceeds 140 percent of area median gross income (AMGI), the owner may continue claiming credits for the unit. But the owner must rent the next available unit of comparable or smaller size in the building to a qualified low-income household. This process must continue until the percentage of low-income units or square footage in the building (excluding the over-income units) is equal to the required applicable fraction.

For example, say that you’re using a market-rate unit as a model, and a qualified low-income household living in the same building as the model unit exceeds the 140 percent income limit. The model unit is the same size as (or smaller than) the unit with the over-income household. To comply with the available unit rule, you must either:

Continue using the unit as a model. The available unit rule doesn’t require you to stop using the model unit and rent it to a low-income household; or

Rent the model unit to a qualified low-income household. You may choose to do this if you need to maintain your building’s applicable fraction.

However, you cannot rent the model unit to a household at market rent. Doing so would violate the available unit rule.

Tip #5: If Possible, Have Employee Unit Double as Model Unit

In certain situations, tax credit rules let owners and managers set aside a unit for full-time resident managers without affecting the owner’s tax credits. You must use the unit to house an employee who works full-time, performing substantial duties for the site.

Using an employee’s unit as the model unit saves you from having to prepare units as models periodically. But make sure your site employee signs an agreement stating that he must make the unit available to your leasing staff during business hours so they can show it to prospects.

Tip #6: Check Whether State Housing Agency Bans Model Units After Initial Lease-Up

Check whether your state housing agency bans the use of model units after you have leased enough low-income units to meet your site’s minimum set-aside. Some state housing agencies don’t allow owners and managers to set aside any units as models after the initial lease-up.