Follow Five Dos & Don’ts When Managing Unoccupied Units

Each time you manage a new tax credit site, you start with unoccupied units that you must rent to the right mix of households. And when households later vacate their units, some units may stay unoccupied for a while. Having these unoccupied units at your site can raise compliance issues. If you’re unfamiliar with these issues or handle them improperly, you could put the owner’s tax credits at risk. To help you keep unoccupied units in compliance, we’ll give you five Dos & Don’ts to follow to avoid problems and keep the owner’s tax credits safe.

Don’t Assume Unoccupied Units Count Toward Occupancy Requirements

Not all unoccupied units count toward a site’s occupancy requirements. Be aware that tax credit sites have three types of unoccupied units—empty units (units that haven’t yet been occupied by qualified, low-income households), vacant units (units that were occupied by qualified, low-income households), and unoccupied market-rate units (at mixed-income sites only).

Only vacant units count toward your occupancy requirements. As long as you comply with the vacant unit rule by making reasonable attempts to re-rent the unit—or another comparable or smaller unit at your site—to a new, qualified low-income household, the owner may continue claiming credits for vacant units at your site. Empty units don’t count toward your occupancy requirements because they haven’t yet been qualified by an eligible household, and market-rate units never count—even when they’re occupied.

Keep Vacant Units Ready for Inspection

According to Section 1.42-5(c)(2)(ii) of the Income Tax Regulations, state housing agencies must inspect at least 20 percent of a site’s low-income units when performing site visits by the end of the second calendar year following the year the last building at the site is placed in service and at least once every three years thereafter. And it doesn’t matter whether the units they choose are occupied. The tax credit law requires all low-income units at a tax credit site to be suitable for occupancy, taking into account your local building, health, and safety codes. So if you let a vacant unit (that is, a unit previously occupied by a low-income household) fall into disrepair, you could be courting noncompliance. Therefore, you should apply the same maintenance standards to vacant units that you apply to occupied, low-income units.

Don’t Place Low-Income Household in Just Any Unoccupied Unit

You may put your site owner’s credits at risk if you’re not careful about which unoccupied units you let your low-income households occupy. In the first year of your site’s compliance period, you should rent empty units before vacant units because empty units haven’t yet been qualified as low-income.

For example, at the beginning of your site’s compliance period, you rent an empty unit to a qualified low-income household for a six-month initial lease term. At the end of the term, the household moves out and the unit becomes a vacant unit. You’ve found a new, qualified low-income household for the unit, but you also have a few empty units left at your site. To maximize credits, you should place the household in one of your empty units because the owner is already entitled to claim credits for the vacant unit.

Choosing one unoccupied unit over another can also affect your building’s applicable fractions. If you have a choice between two empty units or two vacant units of different sizes, it’s often best to place households in the larger units, if possible. Remember, a building’s 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). So, a unit’s square footage can be a factor in determining your building’s applicable fractions. Even if you rent enough units to qualified low-income households, it’s possible that the floor space of these units will cause your applicable fraction to fall short, which could reduce the credits the owner is entitled to claim.

Prove Attempts to Rent Vacant Units

When households vacate low-income units, your site’s owner can still claim credits for the units as long as you follow the vacant unit rule. Under this rule, you can continue counting the vacant unit as low-income if you make reasonable attempts to re-rent that unit or another comparable or smaller unit at your site to a new, qualified low-income household.

To make sure sites don’t abuse this rule, the tax credit law requires you to keep good records to prove your reasonable attempts. The tax credit law doesn’t specify exactly what documents to keep, but there are many things you can do to help show that you’ve made reasonable attempts. For instance, it’s a good idea to keep a copy of all advertisements, flyers, and marketing agreements. Also, write a memo to the household’s file that identifies the date that the unit became vacant. Include a short description of how the unit became vacant—for instance, the lease term ended or you discovered that the household had abandoned the unit. And keep copies of your waiting list for your units during the time a unit is vacant.

Keeping good documentation means that if months go by and you haven’t been able to re-rent your vacant unit, your state housing agency will see proof that you’ve been complying with the rule by making reasonable attempts.

Don’t Assume Unoccupied Unit Is Abandoned

Don’t jump to the conclusion that a household has abandoned its unit just because you haven’t seen members of the household for a while and none of the members told you they were vacating early.

Say you haven’t seen a household at your site for a few weeks, and the household’s mail has been piling up. Also, another resident tells you she saw the household leave with large boxes in the middle of the night. In this situation, you’ll want to re-rent the unit to a new household. And if it’s a low-income unit, you’ll need time to find a household that qualifies. But before you consider the unit unoccupied, make sure the unit has been abandoned. Proving abandonment isn’t an exact science, but you should be able to show the IRS, your state housing agency, or a court that you investigated the situation and it’s reasonable to believe that the household left for good.

The best way to do this is to talk with other households, staff members, or the mail carrier to get more information. Also, note whether any rent is past due and check for other signs that the household abandoned its unit, such as whether the household disconnected its phone service or other utilities. Document your findings and show them to your site’s attorney to see whether you have enough evidence to prove abandonment. If your attorney says you do, then you can treat the unit as unoccupied and re-rent it to a new household.

The best way to document your efforts to determine whether a household has abandoned its unit is by using a checklist. For help in putting together a checklist to use at your site, see “How to Prove Abandonment, Decide When to Change Locks” from the February 2012 issue of the Insider.