Q&A on Site Inspections
Most tax credit managers know that state housing agencies must regularly inspect sites for compliance with the tax credit program. The agencies inspect units to make sure they’re suitable for occupancy and look at household files to make sure they’re accurate and complete. But many managers are confused about what these inspections involve.
We’ll tell you the answers to the most commonly asked questions about state housing agency inspections. This way, you can help these inspections go smoothly during your site’s 15-year compliance period.
Q Are we allowed to request a postponement after receiving notice of inspections? For example, if the owner requested that the inspection be postponed for two weeks because the permanent on-site manager had scheduled training during that time period, would this request be granted?
A An owner is out of compliance when requests for a site inspection and tenant file reviews are denied or unreasonably postponed. The IRS, in the Guide for Completing Form 8823, has advised the state agencies that valid reasons for postponing an inspection or tenant file review should be accommodated. However, the IRS says site visits and files reviews should not be delayed more than 45 days, except under unusual circumstances. In your example above, the request would be considered a reasonable request because the permanent manager rather than the temporary manager would be more knowledgeable regarding the day-to-day operations, procedures, and tenant files.
Without inspections, the state agency cannot determine whether the property is physically suitable for occupancy, whether any of the households occupying the units are income-qualified, or whether the rents are correctly restricted. And, since the noncompliance is global in nature, the site would be considered entirely out of compliance.
Under IRC §42(c)(1)(A)(i), the applicable fraction is determined as of the close of the taxable year. If the noncompliance persists and is not corrected by the end of the taxpayer’s taxable year, the applicable fraction is zero. If the applicable fraction is zero, then the qualified basis is zero and no credit is allowable for that year, or for any year until the physical inspection and tenant file review is completed. The taxpayer is also subject to the recapture provisions under IRC §42(j).
Number of Units Inspected
Q Is there a limit to the number of units our state housing agency may inspect?
A No. According to IRS Revenue Procedure 2016-15, state housing agencies must inspect the lesser of 20 percent of your site’s low-income units, rounded up to the nearest whole number of units, or the number of low-income units set forth in the Low Income Housing Credit Minimum Unit Sample Size Reference Chart found in the Revenue Procedure. But your agency can inspect more—or even all—of your units, if it chooses to. In other words, your state housing agency is free to conduct physical inspections or low-income certification reviews on a larger number of low-income units if it believes that to be appropriate.
One important change to note with the issuance of Revenue Procedure 2016-15 is the decoupling of the requirement that your housing agency must both inspect the units and review the low-income certifications in those same units. Because the units no longer need to be the same, a your agency may choose a different number of units for physical inspection and for low-income certification review, provided that the agency chooses at least the minimum number of low-income units in each case.
Notice of Inspection
Q Are we entitled to get a notice of an inspection?
A Yes. Your state housing agency must give you “reasonable notice” of a site inspection, according to the regulations. This way, you can let your residents know about inspections to get their cooperation, and you can make sure all your files are in order.
Your agency mustn’t tell you which units it will inspect. So you should keep all your files in order and all your units in good condition to prepare for upcoming inspections.
Frequency of Inspections
Q How often is our state housing agency required to inspect our site?
A At least once every three years. If you’re just starting to manage a new site, your state housing agency must conduct its first inspection by the end of the second calendar year after the site’s placed-in-service year.
If you manage a multi-building site and your state agency has not adopted HUD Real Estate Assessment Center (REAC) physical inspection protocols, all LIHTC buildings must be inspected by the end of the second calendar year in which the last building at your site was placed in service.
If your state agency, however, has adopted REAC protocols, it does not have to inspect all LIHTC buildings. In the eyes of the IRS, HUD’s oversight of the REAC program substitutes for an all-buildings requirement for inspection.
The frequency of inspections under the REAC protocol is based on inspection scores. But even with an outstanding score, inspections performed under this protocol are required at least once every three years. REAC scores are based on a scale of 0-100 that reflects the physical condition of a property, inspectable area, or sub-area. A passing score is 60 or above, and your most recent score will determine when your next inspection will occur. A score of 90 to 100 means your next inspections will occur in three years; 80 to 89 is every two years; and 79 and below means your site will be inspected every year under the REAC protocol.
Who Performs Inspections
Q Must our state housing agency perform its own inspections?
A No. State housing agencies may either perform inspections themselves or delegate this responsibility to another state or local government agency, to HUD, or even to a private, HUD-approved inspector.
Q Must our state housing agency use local building, safety, and health codes as its standard when performing physical inspections?
A No. Your state housing agency has a choice of which standards it may use when inspecting your tax credit site. Your agency may use local building, safety, and health codes. Or it may use HUD’s Uniform Physical Condition Standards (commonly known as “UPCS”). The UPCS inspection protocol was developed by REAC to ensure that housing is “decent, safe, sanitary and in good repair.” REAC conducts approximately 20,000 annual inspections of rental housing that is owned, insured, or subsidized by HUD using the UPCS inspection protocol.
State housing agencies usually prefer to use HUD’s UPCS standards because they’re the same for tax credit sites throughout the state, which isn’t the case with local codes.
Even if your state housing agency uses the UPCS standards, don’t ignore any local building, safety, and health code violations your site gets. You still must correct all local code violations, and failure to do so could lead to tax credit noncompliance.
Q Is our state housing agency interested in both major and minor local code violations?
A Yes. Tax credit site owners must list all violations of local building, health, and safety codes when filing their annual certification.
Information in Owner Certification
Q Does the owner of our site need to tell our state housing agency about every health, safety, and building code violation we get?
A Yes. Each year, the owner of your site must complete an annual owner’s certification and submit this form to your state housing agency. One item your owner must certify is that each building at your site is “suitable for occupancy, taking into account local health, safety, and building codes,” and that it didn’t get any violations in the past year. If the owner did get violations, the owner must identify them and attach documentation about each one to its certification. This includes state or local inspectors’ violation reports or a statement summarizing the violation.
Exemption for Rural Housing
Q The tax credit site we’re about to manage also participates in the RD 515 program, and the Rural Housing Service (RHS) will be inspecting our site. Does this mean that we could be exempt from state housing agency inspections?
A Yes, you could be. If a tax credit site participates in the RD 515 program and RHS performs site inspections, your state housing agency might not need to inspect your site. This is the case if RHS and your state housing agency signed a memorandum of understanding in which the RHS agrees to report the results of its inspections to your agency. Check with your agency if you’re not sure whether it signed such a memorandum with RHS.