How to Make Sure Next Available Units Are Technically “Available”
In the LIHTC program, if the income of tenants of a low-income unit in the building increases above the limit allowed, the next available unit (NAU) of comparable or smaller size in the building will be rented to tenants having a qualifying income. This is the NAU rule and it applies whenever a household's income rises above 140 percent (or 170 percent at deep rent-skewed sites) of the tax credit program's income limits. In other words, this rule permits units occupied by households whose income exceeds 140 percent of the maximum allowable income (or 170 percent of deep rent-skewed limits) to remain eligible for tax credit purposes, but only if you rent the next available market-rate or rent-restricted unit of comparable or smaller size in the same building to a qualified, low-income applicant [IRC §42(g)(2)(D)].
In complying with the NAU rule, the word “available” has a narrower, more technical meaning than its everyday definition. You would be mistaken to think that a unit is available simply if it's empty or ready to be marketed to new households. We'll go over the basics of the NAU rule and tell you how to determine whether units are in fact available. This way, you'll know whether you need to rent them to qualified low-income households to comply with the NAU rule. And if you determine that a unit isn't available, you'll know you can rent it to a market-rate household, without a problem. Knowing which units are available will help you protect the owner's tax credits when your qualified low-income households go over-income.
NAU Rule Basics
When a qualified low-income household's income rises above 140 percent of tax credit limits (or 170 percent, for deep rent-skewed sites), the owner can continue to claim credits for the unit as long as you comply with the NAU rule. To comply, you must rent the next available unit of comparable or smaller size in the building to a qualified low-income household. This means you can't rent any other units of comparable or smaller size to market-rate households as long as the household is over-income.
The NAU rule also applies if your site has chosen the average-income minimum set-aside option. This is the newest minimum set-aside option created in 2018, as part of the Consolidated Appropriations Act of 2018. The provision allows sites to take LIHTCs on units that have designated an imputed income limitation that allows tenants with incomes at 70 percent or even 80 percent of area median income (AMI) as long as there are additional units with designated imputed income limitations at 30 percent, 40 percent, 50 percent, or 60 percent of AMI so that the overall average for all units doesn’t exceed 60 percent of AMI.
According to the final average-income regulations published in October 2022, the NAU rule at these sites means that if a low-income resident has income in excess of 140 percent of the 60 percent, 70 percent, or 80 percent limit, and the next available unit in the building that is comparable or smaller in size to the over-income unit is a market unit, it must be designated with an income limit such that the average of all imputed income designations of residential units in the project does not exceed 60 percent of the AMGI.
Also, if multiple units are over-income at the same time, and there is a mix of low-income and market-rate units, the owner need not comply with the NAU rule in any specific order. Renting any available comparable or a smaller vacant unit in the building to a qualified tenant maintains the low-income status of all over-income units until the next comparable or smaller unit becomes available.
When Units Aren't Available
Here are four situations in which units that may seem available aren't available for purposes of the NAU rule. Don't rent units in these situations to qualified low-income households to satisfy the NAU rule. Go over each situation with your staff members. This way, if a household goes over-income, you and your staff will know how to identify available units to comply with the rule.
Situation #1: Unit located in a different building. The NAU rule, like most tax credit rules, applies on a per-building basis. So if you manage a tax credit site with more than one building, the next available unit must be located in the same building as the unit with the over-income household.
Situation #2: Binding agreement to rent unit to a market-rate household. Under tax credit rules, the binding reservation exception says that a unit isn’t available to rent when it’s “subject to binding contractual arrangements under local law.” In other words, a unit that's unoccupied isn't available if you've taken a deposit and signed a binding agreement to rent the unit to a market-rate household. You might do this, for instance, if a unit is being renovated and won't be immediately ready for the new occupancy.
For examples, on Jan. 15, a market-rate applicant gives you a deposit for Apt. 3H, an unoccupied unit that's being renovated and won't be ready for occupancy until March 1. On Feb. 1, you recertify the qualified low-income household in Apt. 4H (a comparably sized unit) and determine that the household's income exceeds tax credit limits by over 140 percent, triggering the NAU rule. You needn't rent Apt. 3H to a qualified low-income household to comply with the NAU rule even though it's not yet occupied.
You should ask your attorney about local laws concerning when a contractual arrangement that’s binding on the owner is made with regard to renting apartments. For instance, taking a deposit from an applicant may not be a binding reservation in all states.
Situation #3: Unit abandoned while you search for its household. Sometimes households abandon their units mid-lease without telling the site's owner or manager. If a household abandons one of your units but you're still treating the household as the unit's legal occupant, then the unit isn't available. This means you've decided to hold the household to its lease while continuing to search for its members.
At some point, if you deem that a household has abandoned an LIHTC unit, be sure to keep records to comply with the vacant unit rule. The tax credit program’s vacant unit rule allows you to claim credits for tax credit units even if they’re unoccupied. Write a memo for the household's file that specifies the exact date that you deemed the unit abandoned and vacant. It’s important to know when a unit has been vacated because, although the IRS permits you to continue claiming tax credits for vacant units, you must:
- Make reasonable attempts to rent the vacant unit (or other available units of comparable or smaller size) to another qualified low-income household; and
- Not rent any other units of comparable or smaller size to nonqualified households as long as the unit is vacant [IRC §42(g)(1); §42(c)(1)(B)].
Situation #4: Unit larger than unit with over-income household. An unoccupied unit that's larger than an over-income household's unit isn't available. That's because, to comply with the NAU rule, you must rent the next available unit of comparable or smaller size to a new qualified low-income household. So you can rent an unoccupied unit that's larger to a market-rate household.
For purposes of determining whether a residential unit is comparably sized, a comparable unit must be measured by the same method used to determine qualified basis for the credit year in which the comparable unit became available. For example, an owner may consider a residential unit with the same number of bedrooms (or fewer) and comparable amenities to be a comparable unit.