Overview of Compliance Requirements at Tax Credit Sites with HOME Funding
Funds from HUD’s HOME program and LIHTCs are often used together to finance affordable rental housing sites. To establish affordable rents in many markets, a site’s rents may not be enough to pay off a conventional mortgage. As a result, the equity raised from tax credits may not be sufficient to provide all of the additional capital required by the site. Often, HOME funds can be used to finance the remaining gap.
If you manage a site that combines these two sources of funds, you must comply with the requirements of both programs. Because the two programs’ requirements can conflict, you need to understand each set of requirements and how to resolve conflicts between the two programs. Otherwise, you risk losing both the owner’s tax credits and the HOME funding.
We’ll look at the major compliance issues involved with managing a blended tax credit and HOME program site. Specifically, we’ll compare income requirements, how income is determined, how annual income recertifications are conducted, rents, the marketing to and selection of tenants, leases, differences in compliance periods, property standards, and inspections. Understanding these issues will help you and your staff feel confident the next time you’re asked to manage a tax credit site that gets HOME funding.
Both programs originated with different legislative histories and purposes. As such, each program has relative strengths and limitations in addressing a variety of local housing conditions or needs.
HOME program. The HOME program was created in 1990 by the Cranston-Gonzalez National Affordable Housing Act. Each year, Congress allocates approximately $2 billion by formula among the states and hundreds of localities nationwide. HOME is the largest federal block grant designed exclusively to create affordable housing for low-income households in the nation. Among other things, HOME funds may be used to provide incentives to develop rental housing through acquisition, new construction, reconstruction, or rehabilitation of non-luxury housing.
LIHTC. Congress created the Low-Income Housing Tax Credit in 1986 as Section 42 of the Internal Revenue Code (IRC) to develop a financial incentive to generate private capital for the development of affordable rental housing. LIHTCs are administered by the Internal Revenue Service (IRS) because they are tax credits, not direct funding, for affordable rental housing development.
Congress gives the states authority to allocate a certain number of tax credits to eligible affordable housing ventures annually. Therefore, while Section 42 of the IRC regulates certain aspects of the LIHTC, each state also establishes certain priorities, policies, and procedures for the allocation of its housing tax credits.
Both the HOME and LIHTC programs have specific income requirements that affect initial and continued occupancy throughout the compliance period. These requirements apply to the HOME-assisted and LIHTC-assisted units of a property. For a particular project, the income requirements will be specified in the HOME written agreement and the LIHTC Use Agreement.
Tax credit program. The tax credit program’s minimum set-aside requirement requires you to rent a certain percentage of all the units at your building or site to households earning no more than a certain percentage of area median gross income (AMGI). For tax credit sites, one of the following must be met:
- 40 percent of units must be affordable to households whose annual gross incomes are at or below 60 percent of AMGI;
- 20 percent of the units must be affordable to households whose annual gross incomes are at or below 50 percent of AMGI; or
- In New York City, 25 percent of the units must be affordable to households whose annual gross incomes are at or below 60 percent of AMGI.
These income targets are the LIHTC minimums for the program. The state allocating agency may impose additional income targeting in its Qualified Allocation Plan (QAP), and owners can propose deeper targeting when applying for the tax credit. The income requirement chosen must be met at initial occupancy and throughout the LIHTC compliance period.
HOME program. The following minimum income targeting requirements apply to the HOME program:
- Low-income occupancy. All HOME-assisted units must be occupied by low-income households, whose annual gross incomes do not exceed 80 percent of AMGI.
- Very low-income occupancy. The project rule requires that, at initial occupancy and throughout the period of affordability, in projects with five or more HOME-assisted units, 20 percent of the households that occupy HOME-assisted units must be very low-income (that is, have annual gross incomes that are at or below 50 percent of AMGI). The units that the very low-income households occupy are called Low HOME Rent units.
On an annual basis, HUD updates and issues the HOME and LIHTC income limits. The HOME income limits are issued for both low-income and very low-income households.
Combining the two rules at initial occupancy. For any property that’s funded by both HOME and LIHTC, there may be some combination of units in the property that carry a variety of designations (HOME-assisted, LIHTC-assisted, or both HOME- and LIHTC-assisted). For each unit type, the income requirement that applies to that unit type must be met. If a unit carries the designation of both programs, it must meet the more restrictive of the two income limit requirements.
For example, suppose a unit is designated as both an LIHTC unit and a Low HOME Rent unit, the tax credit income limit requires that tax credit units be occupied by tenants with incomes at or below 60 percent of AMGI, and the HOME income limit for a Low HOME Rent unit restricts occupancy to tenants with incomes at or below 50 percent of AMGI. For this unit to meet the requirements of both programs, it must be occupied by a household that has an income at or below 50 percent of AMGI because it is the lesser of the two income limits.
The process of making income-eligibility determinations for applicants who will reside in a HOME and/or LIHTC unit is substantially the same for both programs. You must determine the household’s annual gross income and compare it to the current income limits for the applicable program. If the applicant’s income is greater than the income limit that applies to that unit, the household cannot occupy the unit.
Income calculations. For both HOME and LIHTC, when determining the tenant household’s income, the following rules apply:
- The income of all adult household members must be included;
- The determination must be based on income that is expected in the next 12 months; and
- For the initial income-eligibility determination, you must examine income source documents to verify the accuracy of the income information that the tenant reports on the application.
Handling assets. There is not an asset limit or “asset test” in the HOME program. However, the LIHTC program requires tenants to certify asset amounts and asset income that are more than $5,000. The HOME program requires all asset income to be verified with source documentation regardless of definition. Therefore, all asset income must be verified for the applicant of any unit that’s counted as both an LIHTC and a HOME unit.
ANNUAL INCOME RECERTIFICATIONS
Each year, the manager of a HOME-LIHTC site must be sure that the tenants of assisted units don’t have incomes that exceed the current income limits. The income recertification requirements for HOME and LIHTC are slightly different.
HOME annual income recertification. The HOME program requires the property manager to recertify each tenant household’s income on an annual basis throughout the affordability period. Initially, and every sixth year during the affordability period, the manager must use source documentation to verify the household’s income. In alternate years, the program administrator can choose one of the following three methods for the owner to use:
- Source documentation;
- Self-certification; or
- Written statement from the administrator of another government program under which the family receives benefits and that examines the annual gross income of the family each year.
LIHTC annual income recertification. Generally, LIHTC requires owners and managers of tax credit sites to reexamine the annual income of a household residing in a tax credit unit on an annual basis as well. However, these reexaminations of income must be performed with third-party source documentation each year.
Under IRC Section 42(d)(3)(A) and IRC Section 42(g)(4), owners of 100 percent tax credit buildings are no longer required to complete annual income recertifications. State agencies, however, have authority to impose additional requirements upon LIHTC projects and may require income recertifications after completing the initial income certification at the time the household moves into the low-income unit.
Annual income recertification for occupant of a HOME- and LIHTC-assisted unit. The site manager must ensure that the occupant of any unit that carries both the HOME- and LIHTC-assisted designation has an annual gross income that meets the income limits of both programs. This would be the lesser of the two income limits.
In addition, the manager must use the most restrictive process of the two programs to determine the tenant household’s income eligibility. This means that for units that are designated as both HOME- and LIHTC-assisted, the manager must examine third-party source documentation of tenant incomes to verify tenant income eligibility, unless there is an LIHTC waiver in a project with 100 percent tax credit units.
For HOME- and LIHTC-assisted units where third-party source documentation is not required by LIHTC, the HOME program administrator can determine what type of documentation is required for income recertification. However, source documentation is required every sixth year during the HOME affordability period.
Over-income tenants. When conducting the annual income recertification, if you determine that a tenant’s income has increased above the income limits for the applicable program, you must take certain steps to restore compliance in the property.
For a unit that is HOME-assisted only, the tenant is considered over-income when his income exceeds the HUD-published income limit for the unit. That is, a tenant who occupies a High HOME Rent unit becomes over-income when the household’s income exceeds 80 percent of AMGI. A tenant who occupies a Low HOME Rent unit becomes over-income when the household’s income exceeds 50 percent of AMGI. When a tenant is over-income, you must adjust the rent.
For a unit that is LIHTC-assisted only, the tenant is considered over-income only when the household’s income increases to above 140 percent of the current qualifying income limit for the unit. LIHTC rules require the rent to remain restricted until that unit is replaced. In other words, if an LIHTC tenant goes over 140 percent, the credit is still available so long as the next available, same or smaller size, unit is rented to an LIHTC-eligible household.
For a unit that’s both HOME- and LIHTC-assisted, the HOME program states that the tenant pays the rent governed by the LIHTC program [24 CFR 92.252(i)(2)]. This means that the tenant’s rent is not increased under the HOME over-income rules, but that the rent is restricted to the LIHTC rent until the LIHTC unit is replaced.
Once you’ve identified an income-eligible occupant for a unit, you must determine what rent to charge. Within a given property, a number of rent limits might apply to different units:
- HOME-assisted units must use either High HOME rent limits or the Low HOME rent limits (for at least 20 percent of the units in projects with five or more HOME-assisted units). High HOME rent limits are based on the lesser of the Section 8 Fair Market Rents, or 30 percent of the adjusted income of a family whose income equals 65 percent of AMGI. Low HOME rent limits are based on 30 percent of the tenant’s actual adjusted income; or 30 percent of the annual gross income of a family whose income equals 50 percent of AMGI (this is the HUD-issued Low HOME Rent); or if a site has a federal or state project-based rental subsidy and the very low-income tenant pays no more than 30 percent of his or her adjusted income toward rent, the maximum rent allowable under the project-based rental subsidy program.
- LIHTC units must use rents based on 30 percent of either 50 percent or 60 percent of AMGI, depending on the use restrictions imposed on the site.
Combining the two rules. The rent limit that applies to a specific unit is based on the unit type. If a unit carries the designation of both programs, it must meet the more restrictive of the two rent limit requirements.
HUD updates and issues the HOME income and rent limits on an annual basis. The HUD-issued rent limits are adjusted for different localities and for each bedroom-size unit from zero (efficiency) to six bedrooms. For LIHTC, state credit agencies compute the rent limits based on the HUD-issued income limits for the jurisdiction. In addition, you must deduct any tenant-paid utility allowance (using the applicable utility allowance) from the rent limits of each program in order to determine the maximum rent that can be charged for the unit.
Also, it’s important to note that the rent structure must be approved by the HOME program administrator and documented in the written agreement.
> Rent increases. Under both programs, owners can raise rents up to the new rent limits (minus any tenant-paid utilities) that apply to the unit. Rent adjustments for occupied units are subject to the terms of the tenant’s lease.
Under HOME, the HOME program administrator must approve all rent increases in HOME-assisted units, in accordance with an approval process prescribed by the program administrator and documented in the written agreement between the program administrator and the owner.
> Rent decreases. The rent limits for either of these programs might decrease, depending on area market conditions or increasing utility costs. Both programs offer some financial protection to owners to ensure that rents don’t drop below the rent limits established early in the project.
- The HOME program doesn’t require the owner to decrease rents below the HOME rent limits that were in effect at the time of project commitment.
- Similarly, LIHTC establishes a floor rent that keeps the applicable LIHTC rent limits from dropping below the current year. Since income limits cannot drop below the current year, neither can rents.
Project-based rental assistance. Both the LIHTC and HOME programs make certain exceptions to the rent limits for units with project-based rental assistance where tenants pay no more than 30 percent of their income for rent and tenant-paid utilities. And neither program makes an exception to its rent limits when a unit is occupied by a tenant who has a tenant-based rental subsidy, since this subsidy is portable with the tenant. The following rent limit rules apply to units with a project-based rental subsidy:
For a unit that is HOME-assisted only:
> High HOME Rent unit with project-based assistance. The lesser of the project-based rent or the High HOME Rent may be charged when the tenant household is low income, but not very low income, or if the tenant pays more than 30 percent of his income toward rent.
> Low HOME Rent unit with project-based assistance. The project-based rent may be charged (even if it’s higher than the Low HOME Rent) for any unit that meets three conditions:
- Receives state or federal project-based rental assistance;
- Is occupied by a very low-income tenant;
- Tenant household pays no more than 30 percent of his adjusted monthly income toward rent.
LIHTC-only unit. The rent for each unit is established so that tenant monthly housing costs, including a utility allowance, don’t exceed the applicable LIHTC rent limit. The LIHTC Program restricts only the portion of the rent paid by the tenant, not the total rent. As a result, rental assistance programs can be used to raise the total rent above the LIHTC rent limit. The maximum rent cannot exceed the greater of the LIHTC rent limit or the rent limit established by the rental assistance program. When there is rental assistance, the tenant portion cannot exceed the LIHTC rent limit, less the utility allowance.
For a unit that’s both HOME- and LIHTC-assisted, the following rent limits apply:
> High HOME Rent unit. The most restrictive rent of the three programs applies to the unit. That means the rent limit is established at the lesser of the High HOME Rent, the LIHTC rent, the project-based rental assistance program rent.
> Low HOME Rent unit. The rent cannot exceed the project-based rental assistance program rent limit.
It’s important to note that both HOME and LIHTC have floor rents that prevent rent limits over time from falling below initially approved rent limits, and these may need to be taken into account when determining applicable rent limits annually over the compliance period.
MARKETING & TENANT SELECTION
Both the HOME and LIHTC programs impose certain requirements related to fair housing, marketing, and tenant selection policies and procedures. In addition, HOME requires program administrators to approve marketing and tenant selection procedures. HOME also imposes affirmative marketing requirements to sites with five or more HOME-assisted units. When combining these sources of funds, the requirements of both programs must be met.
Fair housing. Both HOME and tax credit projects are subject to the federal Fair Housing Act. This means that managers of HOME- and LIHTC-assisted housing are prohibited from discriminating on the basis of race, color, religion, sex, familial status, national origin, and disability, in all aspects of the rental housing program administration and management. Owners and managers cannot discriminate in the leasing of units, in establishing terms and conditions of property rentals, or in advertising the availability of rental housing units. Additional state and local fair housing laws may also apply.
Marketing. Owners of HOME- and LIHTC-assisted rental housing and their managers must conduct marketing and advertising activities in accordance with applicable fair housing laws. HOME imposes additional requirements related to affirmative marketing of HOME-assisted units, and additional marketing restrictions on units that are accessible in accordance with the requirements of Section 504. These additional requirements apply to projects that are funded with both HOME and LIHTC.
> Affirmative marketing. HOME program administrators must develop affirmative marketing procedures for properties with five or more HOME-assisted units. Affirmative marketing procedures ensure that special outreach and advertising efforts are made to communicate the availability of HOME-assisted housing to those groups or individuals who might otherwise be unlikely to apply for it. Affirmative marketing should be made part of the site’s overall marketing activities. Generally, HOME program administrators require owners and managers to propose affirmative marketing procedures as part of written marketing and tenant selection procedures for the project.
> Marketing accessible units. Managers of sites with accessible units that are built in accordance with Section 504 requirements must develop procedures to ensure that information regarding the availability of accessible units reaches eligible individuals with disabilities. Reasonable, nondiscriminatory steps must be taken to make sure that available, accessible units are offered:
- First, to a current occupant of the site who might require or benefit from the accessibility feature(s) of the unit;
- Second, to an eligible qualified applicant on the waiting list who requires the accessibility feature(s) of the unit; and
- Last, to a nondisabled person on the waiting list.
A nondisabled tenant may rent an accessible unit only when the manager has made all reasonable efforts to attract a tenant with a disability, and has followed the above steps.
Tenant selection. Although the LIHTC program doesn’t have any specific requirements about tenant selection, under HOME, the owner must establish written tenant selection procedures. These procedures describe the methods and procedures for taking applications and screening tenants for any HOME-assisted property, including HOME-LIHTC sites.
Also, as a result of the 2013 HOME Final Rule, HOME-units must be occupied by income-eligible households within 18 months of site completion. For the units that remain vacant six months following completion, the HOME program administrator must identify and develop an enhanced marketing plan and report this information to HUD. (The Final Rule applies to sites for which HOME funds are committed on or after Aug. 23, 2013.)
The HOME and LIHTC Programs impose certain lease requirements for the purpose of protecting tenants’ rights. Generally, the HOME program imposes more restrictive requirements, and these must be followed for units that are both HOME- and LIHTC-assisted. As a general practice, these requirements would be followed across all units in the site operating under both programs.
Required lease provisions. The following HOME lease requirements, in accordance with 24 CFR 92.253, must be met for all HOME-LIHTC units:
- Every tenant must have a written lease.
- The lease for a HOME-assisted unit must explain the HOME rent requirements and clearly state the rent amount, applicable utility allowance (if any), whether or not there is project-based assistance, and under what circumstances rents may be adjusted. It should also clearly state the LIHTC requirements.
- The lease term must be for at least 12 months, unless there is mutual agreement between the owner and the tenant. This is more restrictive than the LIHTC six-month requirement.
- Services or program participation requirements (such as “clean and sober” programs) cannot be mandated through the lease document.
- The HOME program administrator must approve the lease form.
Prohibited lease provisions. The HOME program also expressly prohibits the use of certain lease provisions (which may not be allowable under state or local tenant-landlord law as well). Therefore, leases for units that are assisted with both HOME and LIHTC may not include the following provisions:
- Agreement to be sued;
- Agreement regarding seizure of property;
- Agreement excusing the owner from responsibility;
- Waiver of notice;
- Waiver of legal proceedings;
- Waiver of a jury trial;
- Waiver of right to appeal a court decision; or
- Agreement to pay legal costs, regardless of outcome.
The LIHTC program permits the manager to impose a requirement for tenants to participate in certain services or tenant programs. This is not permitted under the HOME program. Therefore, no tenant of a unit funded with both HOME and LIHTC can be required to participate in any services or tenant programs.
Both the LIHTC and the HOME programs have periods after development during which requirements related to rent limits, tenant income limits, tenant lease protections, affirmative marketing, and property standards apply.
LIHTC compliance and extended use periods. Generally, the LIHTC program imposes a 30-year period during which LIHTC requirements apply. These 30 years are comprised of a 15-year compliance period and a subsequent 15-year extended use period. It’s important to note that the state allocating agency may make this period longer.
HOME affordability period. The minimum duration of the affordability period for the HOME program is based on the per-unit amount of the HOME investment in the site and the nature of the activity funded. For rehabilitation units, HOME program investments of less than $15,000 per unit requires an affordability period of five years; an investment of between $15,000 and $40,000 per unit requires an affordability period of 10 years; and an investment of more than $40,000 per unit requires an affordability period of 15 years. New construction of rental housing with HOME funds requires an affordability period of 20 years, and refinancing of rental housing requires an affordability period of 15 years.
When HOME and LIHTC are combined. When HOME funds and LIHTCs are combined in a property, the site has to comply with the requirements for each program for the duration of that program’s affordability/compliance period. For the time during which these periods overlap, the property must satisfy both sets of requirements. It generally does this by adhering to the most restrictive requirement in any given circumstance.
PROPERTY STANDARDS & INSPECTIONS
The property standards and inspection requirements for HOME and LIHTC differ, and a HOME-LIHTC site must meet the property inspection and property standards requirements of both programs. The HOME program administrator is responsible for conducting the property inspections of the HOME-assisted units, and the state allocating agency is responsible for conducting the inspections of the LIHTC-assisted units.
The two agencies should share inspection information. There may be some limited opportunities for the two agencies to coordinate inspection activities; this depends on the site, the number of units at the property, and the unit mix.
HOME property standards. These standards apply to HOME-assisted units. However, in a site with floating HOME-assisted units, you should maintain all units in accordance with the applicable property standards since a non-HOME-assisted unit might be designated as HOME-assisted at some later time.
For ongoing occupancy inspections, HOME requires the site to meet state or local housing codes or standards applicable to the housing, or, in the absence of such local codes, Uniform Physical Conditions Standards.
HOME-assisted units that were built to be accessible for persons with mobility or sensory impairments using the UFAS standard, in order to comply with Section 504, must be maintained to that standard during the affordability period.
Additionally, owners of sites that were constructed before 1978 are required to conduct ongoing lead-based paint maintenance. Ongoing maintenance standards are at 24 CFR 35.1355, and include (if the site has not been previously determined to have lead-based paint):
- Visual assessment for deteriorating paint by trained personnel;
- Lead hazard reduction of identified surfaces by trained personnel;
- Clearance of any completed work by certified risk assessor;
- Notification of tenants; and
The program inspector must inspect each HOME site at the time of completion and during the period of affordability to determine compliance with property standards. The 2013 Final Rule specifies the sample size required for inspection of HOME-assisted units. For sites with one to four units, the inspectable items for each building with HOME-assisted units and 100 percent of the HOME units must be inspected. For sites with more than four HOME-assisted units, the inspectable items for each building with HOME-assisted units and at least 20 percent of the HOME-assisted units in each building, but not fewer than four units in each site and one HOME-assisted unit in each building, must be inspected.
The purpose of the property inspections is to ensure that HOME-assisted units, shared common areas, and the building’s exterior meet the applicable HOME property standards throughout the affordability period.
The 2013 HOME Final Rule provided some additional flexibility to HOME administrators. They are now allowed to use a risk-based monitoring system, but inspections must occur no less frequently than every three years. And the first on-site inspection must occur within 12 months of site completion.
LIHTC property standards. At a minimum, the LIHTC property standards must meet local health, safety, and building codes, as well as the Uniform Physical Condition Standards for public housing established by HUD at 24 CFR 5.703. State allocating agencies may impose additional property standard requirements as well.
Under the LIHTC regulations, allocating agencies must inspect:
- All buildings and at least 20 percent of the LIHTC-assisted units in the project by the end of the second calendar year following the year the last building in the project is placed in service. For instance, if the property is placed in service in June 2013, then the allocating agency must inspect it by December 2015.
- After that, all buildings and at least 20 percent of the LIHTC project’s assisted units must be inspected at least once every three years during the compliance and extended use periods.
The LIHTC regulations specify that owners are required to annually certify that, for the preceding 12-month period, each building in the project was suitable for occupancy, taking into account local health, safety, and building codes.
Property inspection requirements for HOME-LIHTC sites and units. Both LIHTC and HOME rules specify a sample of assisted units must be inspected. The LIHTC regulations require a larger sample of LIHTC units be inspected than the sample required by the HOME program. Although it may vary from project to project, and may depend on any state-imposed requirements, in most instances, HOME requires properties to be inspected more frequently than the LIHTC program.