Check with State Monitoring Agency Before Charging Rent on Employee Unit
If you have a manager’s unit as part of your original allocation of credits, the manager’s unit is not a considered an LIHTC unit. But it was included in eligible basis, so it’s more akin to common space.
The Guide for Completing Form 8823 states, “the unit is considered a facility reasonably required for the benefit of the project and the resident manager and/or maintenance personnel are not required to be income qualified. If the owner is charging rent for the unit, the IRS may determine that the unit is not reasonably required by the project because the owner is not requiring the manager to occupy the unit as a condition of employment.” In other words, charging rent on an employee unit may risk tax credits.
However, a memo issued on June 2, 2014, from the Office of the Chief Counsel clarified the IRS’s view on charging rent for employee units in an LIHTC building by stating:
Whether or not the owner of the project charges rents, utilities, or both for the units are not relevant in the treatment of the units as facilities that are reasonably required for the project. As such, the fact that the owner of a qualified low-income building charges rents, utilities, or both for units for resident managers or maintenance personnel is not relevant in the treatment of such units as facilities reasonably required for the project. In other words, charging rents, utilities, or both for units for resident managers or maintenance personnel in a qualified low-income building does not make such units residential rental units and not facilities reasonably required for the project. The character and size of the project are, among other things, relevant in determining whether any property, including an employee-occupied unit, is functionally related and subordinate to the project, as indicated by § 1.103-8(a)(3) [PMTA 2014-22].
Although charging rent isn’t relevant in determining whether the employee unit is an exempt unit, keep in mind that the unit still needs to be reasonably required for the LIHTC project. Typically, the owner will need approval from the state agency for the number of exempt units on the property. In addition, any changes to the number of exempt units will often have to be approved by the state agency. PMTA 2014-22 states that charging for exempt units does not disqualify the unit from being considered exempt. An owner would still need to be careful that the employee unit is reasonable required for the project and that the state agency has approved the exempt unit. It is also important to check with your state agency for its interpretation of charging rent on exempt units.