Dos and Don'ts for Meeting Set-Aside Requirements
Not meeting the minimum set-aside requirement is a common reason that tax credit sites get cited for noncompliance. It's a mistake that has severe consequences: If your building or site fails to meet the minimum set-aside requirement at the close of the first taxable year of the credit period, the noncompliance cannot be corrected, and the owner is prohibited from ever claiming credits for that project. If a minimum set-aside violation occurs after the first taxable year of the compliance period, the project is out of compliance until the minimum set-aside is met again, and the credits that had been allocated may be recaptured. Unlike other types of noncompliance, failing to meet the minimum set-aside during the first taxable year of the credit period is not correctable.
To avoid making a costly mistake, be aware of common trouble points that can result in a Form 8823 issuance and tax credit recapture or having to pay out-of-pocket to relocate unqualified households, according to Christopher Voss, CEO of RightSource Compliance, an LIHTC compliance consulting firm with offices in Arlington, Va., and Minneapolis. Voss offers the following dos and don'ts to help you avoid losing tax credits from noncompliance with the minimum set-aside rule.
Don't Assume Set-Aside Can Be Met on Per-Site Basis
In a tax credit project with multiple buildings, site management may assume that they can apply the minimum set-aside requirement across the entire site, rather than for each building. “With multiple buildings, management companies sometimes will place the majority of their market-rate units in one building and bundle all of their low-income units into another, overlooking the fact that each building is a separate project and the minimum set-aside must be met for each unless they indicated before the close of the first year that they have a multi-building project,” says Voss.
For example, say you have a low-income tax credit project that has two buildings using a 40-60 minimum set-aside. Each building has 10 units, four of which are designated as low-income (40 percent of 10 units). If you rent only three units in one building to qualified low-income households—those with incomes that are 60 percent or less of the area median gross income (AMGI)—you cannot make up the difference by renting out five units in the second building. The building that has three low-income units will not meet the minimum set-aside requirement. “The minimum set-aside is a per-building rule,” Voss says.
Educate Staff on Rules
It is critical to ensure that all site staff members—from the leasing agent to the site manager to the regional office management—are aware of each building's minimum set-aside requirement. If you are uncertain about your site's set-aside requirements, check with the owner. Owners must formally elect the project's set-aside on Form 8609 [line 10c].
Also, be sure to check whether the owner elected to provide housing to households whose incomes are at 40 percent or less of the AMGI [Form 8609, line 10d]. In this case, you'll also need to meet the deep-rent-skewed set-aside by leasing 15 percent of the low-income units in the building to households earning 40 percent or less of the AMGI. (The deep-skewed set-aside applies only to low-income units.)
Don't Downplay Due Diligence When Reviewing Applications
Overwhelmed site staff may fail to take the time to review each application to ensure that the household is qualified for a low-income unit. In a hectic environment, it's easy to miss a source of income or overlook the income of a household member who is about to turn 18. “It's a common occurrence, especially for properties that have a mixture of market rate and tax credit units, or in 100 percent tax credit sites that must meet different levels of income,” Voss says. Site staff often assume that they can update or correct the information later. “But if you wait until after the household moves in, it's too late,” he says. “The household will be over-income for the unit, and you won't meet your set-aside requirement if they remain in the unit at year-end.”
Have Second Party Double-Check Household Applications
You may think that you don't have enough time or resources to have a second party review your applications, but “that's the wrong attitude to have and can lead to costly mistakes,” says Voss.
Having someone double-check your work is critical—whether it's another member of your management staff, someone from the regional office, or a third-party. Take the time to ensure that a second review takes place before you move in a low-income household.
Don't Assume Existing Section 8 Households Are Qualified
Rehabilitated projects with existing project-based Section 8 that want to layer in tax credits offer another common source of confusion that can lead to noncompliance.
“Owners instinctively assume that, if it's a Section 8 project, the residents must not have that much income, so they should be able to qualify for a tax credit unit,” Voss explains. “The reality is that the program enables people who may be making more than 40 percent or 60 percent of the area median income to live in Section 8 housing.” Under Section 8, households cannot be moved out for being over-income; they are simply required to pay market rent.
Because of this false assumption, “projects that receive tax credits to do a rehab tend not to perform due diligence in reviewing existing residents' files to determine whether they will be income-qualified for tax credits. So these sites fail to ensure that they're going to be able to meet their minimum set-aside,” he says.
Be Aware of Community Your Site Is Serving
When electing the minimum set-asides for your project, it's important to understand the community that it will be serving—or trying to serve.
“Be aware of the community's incomes to ensure that the set-asides make sense, and that you'll be able to meet them and get your tax credits,” says Voss.
“In today's market, the competition for tax credits is strong. Some companies are going out of their way to present their project as low income as possible. Many elect to incorporate the deep-rent skewed set-aside for the project, and it becomes a challenge to fill those units.”
These companies often find that they aren't able to find households who qualify at that income level. “And then, if you don't have anyone living in those units after the first year, you're never going to be able to claim those credits for the entire project,” he says.