First-Year Fraction vs. Minimum Set-Aside
The “first-year fraction” is the “applicable fraction” for the first year of the compliance period. The applicable fraction is the percentage of a building that’s treated as low-income use and generally eligible for the tax credits as of the close of that year of the compliance period. Once you’ve calculated your first-year fraction, you must maintain this figure as your applicable fraction for each year of the compliance period.
To calculate the applicable fraction, take the lesser of the “unit fraction” (the number of low-income units divided by the building’s total units) and the “floor space fraction” (the floor space of the low-income units divided by the total floor space of all units). The first-year fraction is a goal to achieve for each building, not for each site. If the applicable fraction for one of your buildings during any year drops below the first-year fraction, that building will fall into noncompliance.
The “minimum set-aside” is a percentage that determines the minimum number of units at your site or building that the owner must rent to qualified low-income households. The minimum set-aside has nothing to do with square footage. It’s always based on the number of units—not the floor space. And unlike the first-year fraction, the minimum set-aside applies to your site as a whole, unless the owner elected otherwise on its IRS Form 8609.
Potential danger. The minimum set-aside and the first-year fraction are similar goals you must achieve and maintain throughout the compliance period to keep the owner’s tax credits safe. Because both goals have to do with making sure the right number of units are occupied by low-income residents, managers may mistakenly believe that the two goals are the same. But you must meet both the minimum set-aside and the first-year fraction. Managers who think in terms of only one number may end up meeting only one of the goals, and their sites may fall into noncompliance.