NCSHA Updates Recommended Practices in LIHTC Administration

The prior version was released in 2017.

The National Council of State Housing Agencies (NCSHA) represents the state-level allocating agencies that administer the LIHTC program. From the early days of the program, NCSHA has maintained “Recommended Practices for Housing Credit Administration.” The first version of the document was cited by the General Accounting Office (GAO) in its 1997 report to Congress on the LIHTC program, and it helped give Congress confidence in states administering the program.

NCSHA recently released the seventh edition of its Recommended Practices in Housing Credit Administration. To produce this edition, a task force of state housing finance agency executive directors representing 21 large and small states with urban and rural areas in all geographic regions of the country helped develop and compile the recommendations. Collectively, the states represented allocate more than two-thirds of LIHTC authority annually.

With this new edition, the task force revised 23 of the existing 45 recommended practices and added one covering tenant protections. We’ll highlight some of the new and expanded guidance in the latest version of NCSHA’s Recommended Practices in Housing Credit Administration.

Tenant Protections

The latest recommendations include a new one on housing credit tenant protections. While LIHTC sites are subject to federal fair housing laws and applicable state and local landlord/tenant requirements, the IRS has never issued formal guidance on application of these requirements at the project level.

According to NCSHA, state allocating agencies can support tenant protections, along with federal, state, and local housing rules, by requiring or incentivizing owners and property managers to implement basic tenant protection policies in LIHTC sites, consistent with the tenant protections explicitly required in developments funded by other federal housing programs.

The recommendations say allocating agencies should require or incentivize owners and property managers to implement the following tenant protection policies at LIHTC sites:

• Tenant selection plan guidelines that include procedural protections for tenant screening and admissions and that align with applicable federal guidance limiting the use of criminal records and prior eviction judgments;
• Rental agreements with tenant protections, including fair lease and occupancy rules; meaningful language access for tenants with limited English proficiency; good cause eviction requirements or comparable eviction prevention policies; and grievance procedures for resolving landlord/tenant disputes;
• Notification to tenants at initial occupancy about basic LIHTC tenancy requirements such as applicable income limitations and rent calculations;
• Fair and transparent policies relating to any fees charged to tenants;
• A limitation of one rent increase per certification period per household;
• A minimum of 60 days’ notice to tenants of any applicable rent increase;
• A minimum of 90 days’ notice to tenants of any rent increase in excess of 5 percent of the existing rent, with a provision allowing tenants to terminate the lease with no penalty or fees in such circumstances;
• Notification to tenants of the three-year vacancy decontrol period upon termination of the extended use agreement due to qualified contract; and
• A minimum of 12 months’ notice to tenants of an expiring extended use period.

Sustainable Development

The recommendations say state allocating agencies should encourage sustainable development and green building practices through a variety of Qualified Allocation Plan (QAP) policies. Also, in developing site development priorities for new construction, allocating agencies should consider the risk certain locations present in terms of exposure to natural disasters.

As the frequency and impact of devastating natural disasters increases, studies have shown that affordable housing developments in many states are particularly vulnerable to such impacts due to location. Accordingly, some allocating agencies are considering a potential site’s exposure to natural disasters and the resulting impact of such locations on residents, construction costs, and feasibility of developments.

Also, according to NCSHA, an increasing number of states are now adopting holistic approaches to sustainable development, some of which include reference to state green building mandates or industry green building standards such as the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) criteria, Enterprise Community Partners’ Green Communities program, the National Association of Home Builders’ Green Building Standard, and others. However, while many green building and sustainable development initiatives generate cost savings over the long term, NCSHA points out that others may add costs that are inconsistent with allocating agencies’ cost containment strategies and should therefore be evaluated to determine whether the benefits of the green building initiative justify additional costs to the project.

Utility Allowance

To provide flexibility for owners to utilize the optimal utility allowance for each development and to encourage utility allowances that accurately reflect anticipated utility consumption, NCSHA recommends agencies to allow the following:

• Permit Housing Credit developments to select from all utility allowance options available under IRS regulation;
• Specify requirements for application of alternative utility allowances (such as agency estimate, utility company estimate, HUD Utility Schedule Model, or energy consumption model) in both new developments and existing developments that seek a change in utility allowance; and
• Facilitate use of the energy consumption model utility allowance option by specifically allowing a third-party energy and water consumption analysis prepared by a licensed engineer, another qualified professional, or the agency itself.

This edition of the recommended practices added the third option to take advantage of benefits created by recent federal legislation on renewable and energy efficiency tax credits. The federal government has authorized various renewable and energy efficiency tax credits and eliminated a previous requirement to reduce LIHTC eligible basis by the amount of certain energy tax credits. To maximize the benefit of these resources, NCSHA says LIHTC sites should have the option to use the energy consumption model utility allowance.

Extended Use Agreements

The newest recommendations discuss extended use agreements and the contentious issue of the right of first refusal when investors indicate their intention to opt out of the LIHTC program and convert the site to another use. LIHTC program regulations give qualified nonprofit organizations a right of first refusal to purchase LIHTC projects and maintain rent restrictions if, at the end of the 15-year compliance period, the owners request permission to sell or convert the project to another use. NCSHA recommends allocating agencies to require extended use agreements to:

• Specify whether a development was allocated LIHTC under the nonprofit set-aside, to make clear that the current owner (and any new owner) during the compliance period must continue to qualify under that set-aside;
• Identify all requirements imposed on the development material to the award of LIHTCs including, for example, income restrictions, rent skewing, affordability period, reserve levels, amenities and services, and accessibility;
• Require all mortgage liens on the property be subordinate to the low-income use restrictions, except in the event of valid foreclosure;
• Require owners to notify the allocating agency of any transfer of ownership, qualified contract request, or right of first refusal activity; and
• Require owners to notify tenants and the local government in which a property is located at least 12 months in advance of the expiration of a property’s long-term use restrictions and consider appropriate enforcement mechanisms for this requirement.

According to NCSHA, as the LIHTC portfolio ages, allocating agencies have found that requirements to provide notification of ownership transfers, qualified contract requests, right of first refusal activity, and expiration of a property’s long-term use restrictions are useful tools for ensuring continuing compliance and facilitating the preservation of affordability in the LIHTC stock.