In this issue: When Sec. 8 rents are less than LIHTC rents; mixing and matching utility allowances; delivering on the promises made.

Q The fair market rents for Sec. 8 are considerably lower than the Sec. 42 rents in our market area. What can we do about this? Whose rents rule?

– In Limbo

A Dear In Limbo: It is interesting how much time we spend discussing how to get the additional subsidy from a public housing authority (PHA) when the fair market rents are higher than the tax credit rents. And yet, it is often enough true that fair market rents can be lower. What do we do in this case? Do we have to accept the lower rent and rent to Sec. 8 families?

It is very clear that Sec. 42 prohibits owners and managers from refusing to rent to Sec. 8 families as a matter of policy. Does this mean that we must rent to Sec. 8 families if we cannot achieve the Sec. 42 rent?

The answer as a general principle is no, we are not required to rent Sec. 42 units at less than the Sec. 42 rent, subject to the following considerations:

Most tax credit properties are subject to setting aside a certain number of units to families at less than the maximum federal set-aside rent (either 50% of the area median gross income [AMGI] for properties with the 20/50 set-aside or 60% of AMGI for properties with the 40/60 set-aside). If you have these lower rent and income restrictions (such as 40%, 30%, etc.) you may well need Sec. 8 families to fulfill those requirements).

Before determining a policy on this matter, make certain to consider the “achievable” tax credit rent in relation to the Sec. 8 fair market rent. For instance, if the maximum tax credit rent is $75 higher per month than the Sec. 8 rent, make certain you are collecting the higher rent before you turn away Sec. 8 based on a lower rent limitation. If the Sec. 42 non-subsidized renter in such a case is not paying the full tax credit rent – if your asking rent before the subtraction of utility allowances is $75 or lower than the stated maximum – then turning away Sec. 8 families who would be paying comparable rents could cause problems.

Remember that the Housing Choice Voucher Program restricts the rent the Sec. 8 family can pay during the first year to 40% of their income.

After the first year, the family may be asked to pay the difference between the Sec. 8 and Sec. 42 rent. Eventually, it’s possible to raise these rents up to the full tax credit rents.

Some tax credit properties have occupancy challenges, in which case owners might damage their cash positions if they refuse Sec. 8 based on the lower fair market rents. Understand the impact before you proceed.

Q I am the general partner on a tax credit project. We are establishing our initial utility allowances and must keep our costs down in order to achieve the best cash flow for the property. Can we check both the PHA and the local utility company rates and interchange them based on which is the most advantageous on a cost basis?

– Rockin’ Hard Place

A Dear Rockin’: An excellent question, an intelligent strategy, but the answer is no. The entire unit must use either the local utility company rate estimates or the PHA’s.

The Code references for this question are Internal Revenue Service (IRS) Notice 89-6 (published in 1989) and Treasury Regulation 1.42-10 (published in 1994).

Here’s the issue: Once a written utility company rate estimate has been obtained, it must be used. You can request this information verbally instead of in writing, but if you use it you will need written proof. This action of receiving the utility rate from the local utility company in writing will require you to use local utility company rates.

Notice 89-6 says, “If the utility estimates provided by the local utility companies differ from the utility allowances provided by the PHA, the utility company estimates shall be used in calculating the gross rent limitation. If the utility estimates provided by the local utility companies are higher for one or more rent-restricted units, the building owner must adjust the rents of any rent-restricted unit where failure to do so would result in a violation of the gross rent limitation.”

The Notice goes on to explain that Department of Housing and Urban Development (HUD) or Rural Development (RD)-based units are exceptions to this rule and that those units would use the appropriate HUD or RD utility allowance.

Treasury Regulation 1.42-10 supports this by declaring under (b)(4)(ii), “However, if a local utility company estimate is obtained for any unit in the building

in accordance with paragraph (b)(4)(ii)(B) of this Sec., that estimate becomes the appropriate utility allowance for all rent-restricted units of similar size and construction in the building.” (Refer to the use of the word “unit” in this sentence as guidance that the IRS intends that the utility source be used for the unit. This would suggest that it is not permissible to use different sources of utility allowances in the same unit.)

On the basis of both of these provisions, the utility allowance must come completely from one source. Check with your state housing finance agency and appropriate accounting and legal professionals before proceeding.

Q We are interested in developing a tax credit property. As we look at the application form from the state, we see a number of additional ways to get “points.” We are assuming this means that we must choose some of these additional items in order to get a tax credit award.

How important is it to follow through on what we take points for? Does the state housing finance agency have a way to track this and what can happen if we don’t perform? We have been told that the IRS will not take credits away if we fail to comply with state requirements so we want to understand if there is truly any adverse impact if a project does not perform consistently with the state requirements.

– Adverse to Adversity

A Dear Adverse: We are glad you are adverse to adversity. Failing to deliver on the special state requirements as promised in the restrictive covenant with the state can have the following adverse implications:

• The state can issue an 8823 on all buildings that fail to comply under line 11q “Other Non-compliance”;

• The state can sue for specific performance;

• The state can refuse to work with the developer in the future

A state housing finance agency representative will visit your project at least once every three years (early in that time frame for a new project). You should have a copy of the restrictive covenants available and be able to prove that the project is complying. We see only one possible exception to this:

If a project has been built under a restrictive assumption that is not achievable in the marketplace, you may ask your state agency for permission to amend the covenants.

It is better to work through issues with them than to surprise them with noncompliance later.

Good luck!

Have you got a compliance question that is keeping you up at night? Contact [email protected] and get it answered. All questions presented in this column and in TheoPRO’s Weekly On-Line Compliance Advisor are real questions, and all are answered by Ruth personally. See for more information.