Offer Common Area Services without Risking Tax Credits
Offering dynamic community programs at your tax credit site can help to create a positive identity for your property that will attract more prospective applicants and boost resident retention. And the idea of collecting extra fees from program providers or residents to offset your operating costs may seem like an attractive option, especially during tough economic times. However, if those fees involve commercial activities taking place in the common areas included in your site's eligible basis or charging fees for facilities, the IRS may recapture some of the owner's tax credits.
One of the most common mistakes sites make is to bring in amenities for the residents from which the site owner makes some type of revenue, says housing expert A.J. Johnson, president of A.J. Johnson Consulting Services. The following Dos and Don'ts will help you to provide residents with meaningful programs while avoiding noncompliance through inadvertently conducting commercial activities in your site's common areas.
Follow Six Dos & Don'ts
Know What's Included in Site's Eligible Basis
When developing programs for residents, it's important to remember what types of costs cannot be included in the site's eligible basis. According to the Tax Reform Act of 1986 and Treasury Regulation Section 1.103-8(b)(4)(iii), you cannot charge residents for the use of any part of a building's common area that is included in its eligible basis. Typically, that includes the community room, laundry room, pool, recreational facilities, and parking lots, as long as the facility exists to serve the needs of the residents, explains Johnson.
If you are unsure which facilities are included in the property's eligible basis, be sure to check with the owner.
Don't Omit Rooftop Space
Sites often make the mistake of renting a low-income building's rooftop space to local telecommunications companies for mounting satellite dishes or cell phone antennas, says Johnson. And why not, if the roof is not being used for anything?
“The problem is that the roof is included in the building's eligible basis,” Johnson says. “You've now turned the roof into a commercial activity, which needs to be dealt with from an accounting standpoint, and at least a portion of that space may need to be removed from basis.”
Offer Programs to Improve Quality of Life
Programs that provide benefits to residents and improve their quality of life can ultimately help to increase resident retention and establish a positive public image for your site. That can pay off down the line in lower administrative costs to market, certify, and turn over units.
The most popular types of educational and lifestyle programs being offered include: computer labs, after-school programs, job training, literacy workshops, counseling services, exercise and dance classes, bingo, wellness center, cooking and nutritional classes, and beauty salons.
Don't Charge Residents Fees for Commercial Activity
The activities that take place in your community room typically should be offered for free to residents. However, residents can be charged for amenities and services being offered for which they would normally have to go to an outside provider, as long as the site doesn't benefit from it. For instance, you can bring in an outside party to provide an aerobics class or swimming lessons for children. But, Johnson cautions, make sure that operators understand that they may provide their services only to residents, and not to the general public.
While you can't charge fees to residents for use of the common space, how about their guests? For instance, can you charge residents' guests a nominal fee to use the swimming pool? That would be unwise, Johnson says. “If the community charges the guests of their residents a fee, they've turned the pool into a profit center, and it becomes a commercial activity. The pool will need to be removed from the site's eligible basis, which could result in a significant loss of credits to the property.”
Partner with Local Groups to Meet Staffing Needs
To offset the cost of using staff resources to oversee community activities, consider partnering with local groups to provide educational and cultural programs. Reach out to local nonprofit organizations, educational institutions, libraries, clinics, and artists to provide—and operate—programs that will benefit residents.
Don't Charge Program Operators for Use of Space
Allowing a third-party service provider (an individual or a company) to use part of the site's common space to offer services to residents is acceptable. In addition, providers can charge residents a fee for those services.
For example, let's say you want to bring in a beauty salon operator to offer haircutting and styling services to residents. “That's fine,” Johnson says. “It's an optional amenity for residents, so the salon operator can charge them a fee for the service.” However, a mistake many sites make is to charge the provider rent for the space or to collect a percentage of the payments, which turns it into a commercial activity—and will put the owner's tax credits at risk, he warns.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; (757) 259-9920; http://www.ajjcs.net.
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