Managing LIHTC and HOME Programs: Three Key Discrepancies
If you manage a tax credit site that has funds through the HOME Investments Partnership (HOME) Program, then you know that you must meet the compliance requirements for both programs. But what happens when the two programs' requirements differ? How do you know which rules to apply?
We asked two leading tax credit compliance experts to review the top areas of conflict between tax credit and HOME requirements, and explain how to resolve them and stay in compliance.
Income-Targeting and Occupancy Requirements
One of the key areas in which tax credit and HOME program rules vary is income-targeting and occupancy requirements. The tax credit program's minimum set-aside requirement directs owners to rent a certain percentage of all the units at their building or site to households earning no more than 50 percent or 60 percent of the area median income (AMI).
The HOME program requirements apply only to the HOME-assisted units at a site, explains tax credit consultant Elizabeth Bramlet. “For HOME purposes, most sites have low HOME and high HOME units. If a site has five or more HOME units, at least 20 percent of the HOME units must be occupied by households that have an annual income of no more than 50 percent of the AMI.”
High HOME units are generally set at 60 percent of the AMI, she says. “Every participating jurisdiction (PJ) has to meet an income-targeting requirement where at least 90 percent of households who live in HOME-funded rental housing or who receive HOME-funded rental assistance have income below 60 percent of the AMI,” she explains. “The overall income limit for the HOME program is 80 percent of AMI.” Site owners and managers should check their HOME regulatory agreement for the specific requirements provided by the PJ.
What is the rule of thumb for resolving differences between the two programs' income requirements? “If you have tax credits and HOME, don't go above the 60 percent-of-income limit, even in the case of a high HOME unit that would allow 80 percent of income,” says housing expert A.J. Johnson.
PRACTICAL POINTER: Usually, you can operate tax credit and HOME programs independently, says Johnson. But when there is a conflict in the rules, which should you follow? “Always follow the strictest,” he says. “Generally, that means you're following the rules of both programs.”
Properly adhering to tax credit and HOME program rent requirements is a major source of confusion for tax credit managers. Under the tax credit program, the rent for low-income units cannot exceed 30 percent of the annual income for a household whose annual income equals either 50 percent or 60 percent of median income (depending on the minimum set-aside test elected by the owner), minus the household's utility allowance.
HOME rent limits are published by HUD each year. The HOME program has two rent levels, as described in HUD's 2009 Compliance in HOME Rental Projects: A Guide for Property Owners:
High HOME rents are the maximum rents that can be charged to low-income households in high HOME units. These are based on the lesser of:
The Section 8 fair market rents (FMRs) for existing housing; or
30 percent of the adjusted income of a household whose annual income equals 65 percent of median income.
Low HOME rents are the maximum rents that can be charged for low HOME units. Low HOME rents are based on one of the following:
30 percent of the tenant's monthly adjusted income; or
30 percent of the annual income of a household whose income equals 50 percent of median income (the HUD-issued low HOME rent); or
If a property has a federal or state project-based rental subsidy and the tenant pays no more than 30 percent of his adjusted income toward rent, the maximum rent may be the rent allowable under the project-based rental subsidy program.
The HUD-published HOME rent limits include utilities. When a tenant pays directly for utilities, the site owner or manager must subtract a PJ-approved utility allowance to determine the maximum rent that can be charged for the unit.
Which rent requirements do you follow? Site managers must determine the maximum allowable rents for both programs, and then charge the lesser of the two, says Bramlet.
“When managers operate a HOME property with tax credits, it's a good idea to develop a rent matrix where they can see the maximum allowable HOME rent for the high and the low HOME units, and the maximum allowable tax credit rent for each of the different unit types,” adds Johnson.
Available Unit Rule
A third area in which the tax credit and HOME program requirements differ is the available unit rule. In the tax credit program, if a household goes over 140 percent of its income limit, the site manager must rent the next available unit in that building to a tax credit-eligible tenant. The requirements under the HOME program are significantly different, says Bramlet. “If a low-income tenant has an income greater than 50 percent of the AMI, but less than 80 percent of median, the unit becomes a high HOME unit.” In this case, the site manager has three options, she says. The manager:
May increase the resident's rent to the high HOME rent, when legally allowed to do so;
May not increase the resident's rent above the LIHTC rent if it is a LIHTC unit; or
Must maintain the correct percentage of low HOME units by implementing the available unit rule. For a property with fixed HOME units, the owner must rent the next available HOME unit to a low HOME resident. For a property with floating HOME units, the owner is required to rent the next available comparable unit to a low HOME resident.
“If a low HOME or high HOME resident's income rises above 80 percent of the median, then they're no longer eligible for the program,” Bramlet says. The tenant does not have to leave, but the unit is considered temporarily out of compliance. In this case, if the HOME units are fixed, when a HOME unit becomes available, regardless of bedroom size, it must be rented to either a low HOME or high HOME applicant, as needed to maintain the property balance of low/high HOME units.
If the HOME units float, the next vacant, comparable unit in the project must be designated as a HOME unit and rented to either a low HOME or high HOME applicant, as needed to comply with the site's HOME regulatory agreement.
Elizabeth Bramlet: Affordable Housing Consultant, Liz Bramlet Consulting; (800) 784-1009; email@example.com.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; (757) 259-9920; http://www.ajjcs.net.
Qualifying for a High HOME/Tax Credit Unit
To be a high HOME/LIHTC unit, the resident must qualify at the lesser of the high HOME or tax credit income limit, and pay the lesser of the high HOME rent or tax credit rent, according to Elizabeth Bramlet. The following example is from her book, Tax Credit Housing Handbook: A Guide for Property Owners and Managers:
Stuart applied to live in a high HOME/LIHTC unit. The high HOME income limit is $34,000. The LIHTC income limit is $32,500. The maximum HOME rent is $950. The maximum LIHTC rent is $900. The manager can approve Stuart to live in the unit if his income is not more than $32,500, but may charge him no more than $900 in rent for that unit.
Fixed and Floating HOME Units
When a site has HOME funds, the HOME units may be fixed or floating, as described in the HOME regulatory agreement, according to the Tax Credit Housing Handbook. For a property with fixed units, the HOME units remain the same for the entire period of affordability. For a property with floating units, the HOME units may float to those units listed as comparable to the original HOME units listed in the HOME regulatory agreement.
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