Five Compliance Differences Between Managing Mixed-Income and 100 Percent Buildings
Every tax credit building you manage is either a “mixed-income building” or a “100 percent building.” If it's a mixed-income building, you can rent units to both low-income and market-rate households. However, if your building is a 100 percent building—or, in other words, your first-year fraction is 100 percent—you must rent all the units in your building to qualified low-income households.
Managing a 100 percent site or building is simpler than managing a mixed-income site. As the U.S. credit market opens up and owners leverage a number of different funding sources for new developments, mixed-income projects will become more common. The mixed-income aspect of a building will make it a more sustainable endeavor for owners than 100 percent buildings, because residents paying market rates subsidize the lower rents, allowing the building to be financially sustainable.
Whether you must rent all of the units in your building to low-income households affects what you must do to keep your building in compliance with the tax credit law, says tax credit expert A.J. Johnson. We'll cover the five aspects of tax credit compliance that are affected by whether the building you manage is a mixed-income building or a 100 percent building.
1. Complying with Next Available Unit Rule
The tax credit law allows low-income units to remain qualified even when a household goes over-income. But to maintain the unit's low-income status, when a household's income exceeds 140 percent of the income limit (or 170 percent in deep rent-skewed units), you must follow the next available unit (NAU) rule. To do this, you must rent the next available unit of comparable or smaller size in the same building to a qualified low-income household.
Mixed-income building. When you manage a mixed-income building following the NAU rule is much trickier than at a 100 percent building. Since you rent to market-rate households as well as low-income households, you must make sure you don't rent the next available unit to a market-rate household by mistake.
100 percent building. In theory, you shouldn't have to worry about violating the NAU rule when managing a 100 percent building, notes Johnson. That's because you must rent every unit in the building—even units that aren't comparable or smaller size—to qualified low-income households, he explains. But it's still possible to violate the NAU rule if you mistakenly determine that a household is qualified and rent your next available unit to that household.
For example, Johnson knew of a 100 percent building where the management company didn't factor in an applicant's overtime pay when calculating his income. This mistake led the company to treat the applicant as eligible when, in fact, he wasn't. As a result, the management company violated the NAU rule and had to re-rent the unit to bring the building back into compliance with the NAU rule and bring its applicable fraction back to 100 percent.
2. Complying with Vacant Unit Rule
If a household moves out of a qualified low-income unit, the tax credit law allows you to continue treating the unit as a qualified low-income unit even though it's vacant. But you must make reasonable efforts to re-rent the unit to an eligible household and make sure not to rent any available units of comparable or smaller size to ineligible households for as long as the low-income unit remains vacant. This is known as the “vacant unit rule” and applies to your entire site—not on a per-building basis.
Mixed-income site. At a mixed-income site (a site that has at least one mixed-income building), you risk violating the rule by, for instance, mistakenly renting a comparable one-bedroom unit to a market-rate household before re-renting the vacant low-income unit.
100 percent site. When you manage a 100 percent site (a site that has only 100 percent buildings), you don't need to worry about the vacant unit rule, says Johnson. That's because you must re-rent all your vacant units to low-income households anyway, he explains.
3. Tracking Your Building's Applicable Fraction
Whether you manage a 100 percent building or a mixed-income building, you must calculate your building's applicable fraction at the end of each year of the compliance period and compare it to your building's first-year fraction.
Mixed-income building. At a mixed-income building, it's vital to keep track of changes in the applicable fraction throughout each year. If the applicable fraction falls below your building's first-year fraction and you can't bring it back up before year-end, the owner won't be able to claim all its tax credits. And if the applicable fraction goes above the first-year fraction, you may need to alert the owner, so that it won't lose the chance to claim additional credits it couldn't claim in the first year. Before you re-rent a unit or transfer a household at a mixed-income building, you must consider how the move will affect the fraction, Johnson explains.
For example, say your building's first-year fraction is 70 percent. In the third year of the compliance period, you allow a low-income household and a market-rate household to switch units. According to the unit transfer rule, the unit that the low-income household moves into will become low income and the unit it moved out of will become market rate. But if the unit that the low-income household moves into is smaller, your building's floor space fraction will decrease. And since the applicable fraction is 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 decrease in your building's floor space fraction will cause your applicable fraction to decrease if the floor space fraction is lower than the unit fraction.
100 percent building. Keeping track of your applicable fraction is a simpler task with a 100 percent building, for two reasons:
You and your staff must keep all units at a 100 percent building low income at all times. The only way you can make a mistake at a 100 percent building that would cause its applicable fraction to fall below 100 percent would be by renting a unit to a household that you mistakenly determined was eligible, explains Johnson.
A 100 percent building's applicable fraction can never be greater than its first-year fraction. By definition, the applicable fraction in any year of the compliance period at a 100 percent building can never exceed the first-year fraction. So, if you manage a 100 percent building, you'll never have to work toward increasing your building's applicable fraction so that the owner can claim additional credits, says Johnson.
4. Meeting Your Site's Minimum Set-Aside
The tax credit law requires each site to meet a minimum set-aside to qualify for the tax credit program. The minimum set-aside is expressed as two numbers (for example, 20-50 or 40-60). The first number tells the percentage of units at the site that must be rented to qualified low-income households. The second number tells the highest income these qualified households can earn, expressed as a percentage of area median gross income (AMGI). For example, a minimum set-aside of 40-60 means that at least 40 percent of the units at a site must be rented to households that earn no more than 60 percent of AMGI.
Mixed-income building. When you manage a mixed-income building, you can rent some of the units in that building to market-rate households without violating the tax credit law. But you must make sure at the lease signing and throughout the compliance period that you don't rent too many units to market-rate households, cautions Johnson. If you do, your site may not meet its minimum set-aside and all the owner's credits for the site will be placed in jeopardy, he explains.
100 percent building. Meeting your site's minimum set-aside shouldn't be a problem when you manage a 100 percent building, says Johnson. The most restrictive minimum set-aside requires renting only 40 percent of the units at your building or site to qualified low-income households. But you have to rent all your building's units to qualified low-income households to maintain an applicable fraction of 100 percent each year. So you'll automatically meet the minimum set-aside. This can make your job a lot easier, because you don't have to worry about the severe penalties, such as the loss of all the owner's tax credits for the site, for failing to meet the minimum set-aside. If you make a mistake in determining that one or two households are qualified low-income households at move-in, the owner would lose credits only on those units.
5. Managing Employee Units
If you want to set aside a unit in your building to house an employee, your options depend on whether your building is mixed income or 100 percent.
Mixed-income building. If you manage a mixed-income building, you have three options for maintaining an employee unit.
Common area. At the time of the original allocation agreement with your state housing agency, the owner of your site may have asked to set aside an employee unit as part of the common area. This would allow the owner to claim tax credits for that unit if the employee is full time [IRS Revenue Ruling 92-61].
Low-income unit. If your employee qualifies as a low-income resident, you can let him or her live in one of your low-income units. Although you can think of this unit as an employee unit, it's really just a low-income unit where an eligible employee happens to live, Johnson explains. If your employee doesn't qualify as a low-income resident, you can't let him live in a low-income unit without your state housing agency's specific approval.
Market-rate unit. You can set aside one of your market-rate units to use as an employee unit. Since market-rate units aren't subject to the tax credit law, you won't risk noncompliance by using one to house an employee, says Johnson.
100 percent building. At a 100 percent building, you can set aside either part of your building's common area or one of your low-income units as an employee unit. However, since a 100 percent building has no market-rate units, you're limited to these two options.
A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajjcs.net.
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