The Sec. 42 tax credit program is more than 20 years old. It would be nice to think our compliance challenges were behind us, but that's not the case. Here are the top challenges owners and property managers still face.
Households over income
It's still the math that trips most properties up at move-in—inadequate documentation and missing information on verifications.
Have someone check all of the documentation and then double-check the math before approving a family for movein. If someone isn't reviewing each move-in application before the management agent hands out keys, it can return to haunt the project later.
Over the past two years, our understanding of Sec. 42 compliance has changed dramatically. Some rules we used to believe were written in stone simply vanished, leaving us stunned. Others that we never knew were there suddenly became visible. And that's just at the federal level. States also have adapted their policies, and there are plenty of variations of which to keep track.
Stick with the rules as they have been applied in the past until you have written guidance from the state and owner/agent. Remember that the investor may have an opinion as to how the project operates.
Understanding building vs. project
Of all the rules in Sec. 42, this has probably gone through the most signifi cant transformation. In the good old days, if any household wanted to transfer to a unit in a different building they had to re-income qualify. This rule began to transform with the publication of Revenue Rule 2004-82 and was then clarified in the 2007 publication of the 8823 Guide.
The transfer of lowincome families between buildings is now permissible for 100 percent lowincome housing tax credit (LIHTC) buildings and permissible for mixed buildings, but subject to a review of the family's most recent recertification. As long as their income was below the 140 percent threshold at that time, the transfer is allowed.
But now that transfer between buildings is permissible, a new question arises. Is that building the household wants to transfer to really a building for tax credit purposes, or is it a project? Only the building's 8609 form can instruct a management agent on that definition. Line 10b makes all the difference as to whether or not families can transfer between buildings in a project. If the owner did not elect to make each building part of a multiple-building project, then each building in the “project” is really its own project (got that?), and of course transfers cannot be permitted between projects.
Get copies of the 8609s for each building in the project and determine the building's status based on line 10b or conservatively treat each building as its own project and do not allow transfers outside the building unless the family would income-qualify at move-in.
Managing multiple programs on one LIHTC project
The layers of financing for one LIHTC project now number eight or more. Often the intricate details of the program overlays escape the scrutiny of the development team if they are focused on closing the deal without regard for how these multiple programs will work together out in the field. This leaves the bulk of the responsibility on the management agent.
Have someone on the management agent's staff that has worked inside these multiple programs or understands them well enough to monitor the requirements. Read the regulatory agreements.
Look for potential discrepancies or points of conflict and have a plan to deal with them before opening the project. State agencies often offer instruction on various programs.
Ruth Theobald Probst, CPM, HCCP, SHCM is president and CEO of The TheoPRO Group, which specializes in Sec. 42 compliance. In 2008, TheoPRO formed TheoPRO Asset Advisors to enhance the successful operation of Sec. 42 properties. For more information, visit www.theopro.com.