How to Set Aside Employee Units Without Jeopardizing Owner’s Tax Credits
Like many tax credit managers, you might want to set aside a unit for a member of your leasing, management, or maintenance staff. Or you may already be renting to one or more of your employees. The tax credit law doesn’t bar you from renting to employees. In fact, you may have three options for the type of unit you can rent to employees—a market-rate unit, a low-income unit, or a unit that’s considered part of your common area.
But before you let an employee occupy any unit at your tax credit site, you must consider whether the occupancy would affect the owner’s tax credits. If you ignore this consideration, letting an employee occupy a unit at your site could prove costly.
Here are the pros and cons of each unit type that’s an option for employee rentals, as well as some other factors you should consider.
Option #1: Market-Rate Unit
If you manage a mixed-income site and have any market-rate units available, you can rent one of these units to an employee.
Pros. The main advantage of renting a market-rate unit to an employee is that there aren’t any compliance issues involved. Market-rate units aren’t included in your buildings’ applicable fractions. So you needn’t worry about checking whether an employee is eligible to occupy a market-rate unit or certifying and verifying the employee’s income. You also don’t have to keep such an employee unit in compliance with the tax credit program’s requirements for the rest of your site’s 15-year compliance period. If you choose this option, you can rent a market-rate unit to an employee whenever a unit becomes available. And you can charge your employee rent to occupy the unit.
Cons. An employee might not be able to afford the full rent for a market-rate unit. If that’s the case, you may rent the unit to your employee at a lower rent. However, you’ll lose revenue with this option.
Other considerations. Keep in mind that this option is limited to mixed-income sites. Also, if you rent a market-rate unit to an employee, you should still subject your employee to the same screening requirements you apply to other market-rate prospects. For example, say your site’s policy is to run a credit check on all prospects and to rent only to prospects who have at least a certain credit score. You should apply this policy equally to prospects who happen to be employees—that is, you should run the credit check and not rent to an employee who doesn’t meet the minimum credit score.
Option #2: Low-Income Unit
You can let an employee occupy a low-income unit at your site. Because all tax credit sites have low-income units, this option is available to all tax credit managers anytime a low-income unit becomes vacant.
Pros. The owner can claim credits for the employee unit and can charge the employee restricted rent to occupy it.
Cons. To keep counting the unit as low-income, you must first make sure that the employee’s income makes her eligible to occupy such a unit. For instance, if your minimum set-aside is 20-50, you must check whether an employee earns no more than 50 percent of area median gross income (AMGI). And if you must rent certain low-income units to members of a special population group—such as the elderly or homeless—an employee must also meet these additional eligibility requirements to occupy such a unit.
Finally, remember that you might need to fire an employee down the road. If you do, you can’t automatically evict the employee from her low-income unit if she hasn’t violated her lease.
Other considerations. If you decide to rent a low-income unit to an employee, make sure you treat the rental just as seriously as you would any other low-income rental. This means you must perform a full income certification with verifications.
You may also have to take whatever steps are required to keep the unit in compliance with the tax credit program’s requirements for the rest of the compliance period. If your site is a mixed-use site and you discover at the employee’s annual recertification that she earns more than 140 percent of AMGI (or 170 percent if it’s a deep rent-skewed unit), you must follow the next available unit rule to ensure that the owner can continue claiming credits for the unit.
Option #3: Common Area
This option, available to managers of all tax credit sites, allows owners to set aside one or more units for full-time employees as part of their site’s common area (along with areas such as community rooms, swimming pools, and laundry facilities) if at the time of the original allocation agreement with your state agency, the site owner requested that an employee unit or units be set aside as part of the site’s common area.
Pros. Because this type of employee unit is part of the common area, it’s part of your site’s eligible basis and the owner can claim credits for it. And because this type of employee unit isn’t part of your buildings’ applicable fractions, you can let employees occupy this type of unit regardless of their income and their membership in a special population group. You also needn’t worry about keeping the unit in compliance with the tax credit program’s requirements, as you would have to with a low-income unit.
In addition, according to the final version of the Section 42 Audit Technique Guide released in October 2014, units can be “switched,” meaning that the unit initially designated as an employee unit can be switched to another unit. For example, to accommodate a manager’s family size, a vacant unit, last occupied by a nonqualified tenant, is “switched” with a unit currently occupied by a resident manager to accommodate the resident manager’s family size. The manager’s new unit is treated as a facility required for the project and the unit the manager lived in is treated as a vacant residential rental unit not qualifying for the credit.
Also, employee units can become low-income units, in which case the unit will be included in the denominator of the applicable fraction for that year. The unit’s status will be its status immediately before being occupied by a resident manager, maintenance personnel, or security officer.
Finally, the audit technique guide states that managers, maintenance staff, or security officers can pay rent, utilities, or both for units. However, check with your state housing agency to see if a different arrangement was made regarding setting aside an employee unit as part of the common area when the owner obtained its tax credit allocation.
Cons. The IRS imposes some restrictions. The Section 42 Audit Technique Guide identified three key elements required in order to utilize a unit as an employee or security unit:
> Necessary services. The unit can’t be occupied by an employee who doesn’t provide services required by the site. The live-in employee should perform whatever duties are reasonably required to make operations run smoothly at the site. Be sure to consider what’s warranted by the type, size, and/or location of the site, as well as what’s needed in terms of the resident population. As a general guide, a manager who performs management functions such as leasing units, preparing certification paperwork, cleaning, general maintenance, preparing turnovers, collecting rent, etc., and is available to the site on an on-call basis to respond to emergencies will most likely be considered a full-time manager.
> Specificity requirement. The IRS requires that the services provided by the live-in employee be specific for the site in which the employee resides. For example, suppose a management company operates 10 sites within a 50-mile radius. To provide proper supervision for the managers living at the 10 projects, a supervisor makes quarterly visits to each site. The supervisor travels from out of town, stays at the site nearest the airport in a unit held vacant for the supervisor, and then travels each day by car to a different project. Although the supervisor may be a full-time employee for the property management company, the supervisor is not working “full time” on the premises where the employee has temporary lodgings.
> Full-time requirement. The employee or security officer must work full time at the site. For example, suppose a property management company has contracts with three different owners for sites in close proximity and directs the property manager occupying a unit at an owner’s site to manage all three projects. The property manager generally visits each site daily. The unit is not a “facility reasonably required for the project” because the employee is not working full time on the premises where the employee is occupying a unit.
Also, be sure to check with your state housing agency about any of its own restrictions. For instance, your state housing agency may consider an employee to be full time if she works 40 hours a week, or it may say an employee still qualifies as full time if she works only 35 hours.