In this issue: Ten steps to guarantee a miserable experience in the first year of the credit period; HUD’s clarification of its new student rule; a reminder about qualifying Hurricane Katrina victims.
Lease-up is not going as well as we expected. The credits promised to the investor in the year the building was placed in service have been delayed into the next (deferred) year and still we have not achieved our lease-up requirements. It’s June – we have until the end of December, and we’re worried. What can we do?
– Frantic, Frazzled and Falling Apart
Dear Frantic: First the good news. It’s June, and you’ve already considered the problem. That’s much better than asking this question in October, with the end of the second year looming ahead like the edge of a cliff. You’ve asked for help before it’s too late.
The following is a list of 10 common problems that affect lease-up or can get a tax credit property into trouble in the first year. If more than one of these is true for your property, get help quickly. (Answer True or False to the following and give one point for each true statement. The higher the score the greater the risk.)
1. I/We have hired a management agent who knew nothing about Sec. 42 when we opened the property. There is no significant money in the budget for training.
2. I/We have told the management agent only the bare essentials about the project. I/We do not believe they need to know how the project was financed, or what we promised the state housing finance agency in order to score enough points. The restrictive covenants, the application for the credits, and the agreements that show the guarantees are privileged information for the owners only. TRUE FALSE
3. I/We have not told the management agent what the lease-up goals are in order for us to meet the expectations of the investor. We do not understand why the management agent is not leasing up more quickly, and we are trying to put more pressure on them to get more units filled quickly. We think they could do a much better job.
4. I/We have offered no incentives yet. We are hoping that we won’t need them. If we don’t get leased up by October, we are planning to eliminate our leasing criteria except for student and income eligibility, and offer whatever amount of free rent it takes to get people to move in.
5. The third-party market study said this project would work. We assumed it would. We have conducted no additional research, although now we are wondering if we should have.
6. Our tax credit property is near a local college and we have filled the units with full-time students without checking for eligibility. We believe the program regulations are too stringent and therefore have ignored them. TRUE FALSE
7. No one but the manager looks at move-in files before the family moves in. In a number of cases, we have allowed families to move in and then checked to see if they are eligible. They have signed an agreement that they will vacate if we find that they are not eligible. TRUE FALSE
8. I/We are offering to families who have already certified units as income qualified to move into never-occupied units so they qualify two units. It is easier than looking for more qualified households. TRUE FALSE
9. I/We do not want to take the management agent’s time away from leasing by requiring them to duplicate first-year records. We do not believe the IRS would really revoke tax credits if the files got lost or misplaced.
10. I/We have decided to ignore what we promised the state housing finance agency in the qualified allocation plan (QAP). We can’t get the property leased up under those requirements, so we are going to set them aside until lease-up is accomplished and deal with them later. TRUE FALSE
Have you been able to identify some areas in which you might be able to improve? Now, look at those areas and come up with just one small step that can start to turn the property around.
It’s easy to get overwhelmed by the challenge, especially if it is late in the game. Don’t look at the score – just look at the next play. Perhaps that next play is to hire a consultant to come in and help deal with the problem. There are experts out there who do just that.
Remember, there is no feeling like coming from behind to win the game. Also, bear in mind that the better the team works together as a whole, the more chance there is for success. Watch for 10 solutions in next month’s column.
On April 10, the Department of Housing and Urban Development (HUD) published an explanation of its recent revision of the student rule. Can you provide a summary of the contents of this document for Sec. 42 owners?
– More Confused Than Ever
Dear More Confused: Yes, but first, please raise your right hand and repeat after me:
“I do so solemnly swear not to use any of these rules on tax credit units that do not have Sec. 8 involved. I will use the Sec. 42 student rules to certify families for Sec. 42 and I understand that those rules have not changed. I will use the new Sec. 8 student rules only for Sec. 8 programs covered by this rule, and if I have both Sec. 8 and Sec. 42, I will then apply both rules.”
Now, let’s proceed. The Supplementary Guidance, published as FR5036-N-02, does help Sec. 8 users to understand this rule. Following are what we consider the most important clarifications:
“The new student eligibility rules only apply to HUD’s Sec. 8 programs.”
- Sec. 8 new construction
- Sec. 8 substantial rehab
- Sec. 8 state agency
- Rural Housing Services Sec. 515
- Loan management set-aside
- Property disposition set-aside programs
- Sec. 202/8 direct loan program
- Housing choice voucher program
- Project-based certificate program
- Project-based voucher program
- Sec. 8 moderate rehab program
The purpose of the rule is “to help ensure that Sec. 8 assistance is provided to those truly in need of and eligible for such assistance.” It bars from receiving Sec. 8 assistance residents who are not otherwise eligible as individuals, whose parents are ineligible, and who are also:
- Full- or part-time students at an institution of higher learning,
- Under age 24,
- Not veterans of the U.S. military,
- Unmarried, and
- Do not have dependent children.
HUD notes that the new rules do not affect students residing in Sec. 8 assisted units with their parents or who reside with parents who are applying to receive Sec. 8 assistance. In such cases, though, “Both the student and the student’s parents must be income eligible to receive Sec. 8 assistance. If it is determined that the parents are not income eligible, the student is ineligible to receive Sec. 8 assistance,” according to HUD. “The law and HUD’s rule focus on a student under the age of 24 who meets the additional eligibility requirement of Sec. 327 of the Act AND who is already residing in a Sec. 8 assisted unit without his or her parents, or who is seeking on his or her own to reside in a Sec. 8 assisted unit,” says HUD.
If a single parent over the age of 23 can prove that he or she has dependent children and has been an independent household for at least one year, HUD allows an exception to the above eligibility rules.
Finally, what action must be taken if it is discovered that there is an ineligible family residing in the unit now that this change in HUD’s student rule as occurred? First of all, assistance is terminated. HUD says, “If the ineligible student is residing in a household other than with the student’s parents, the assistance will be terminated for the entire household. If the ineligible student moves from the unit, the remaining members of the household may again be eligible for Sec. 8 assistance, if available."
Secondly, an owner is not permitted to evict the family. "Owners ... cannot evict or require an ineligible student to move from a unit as long as the student is in complaince with the terms of the lease. Although the student is allowed to remain in the unit, the student will no longer be eligible to receive Sec. 8 assistance."
This rule is available on TheoPRO's Web site. Check www.icomply42.com under What's New. Those of you with both Sec. 8 and Sec. 42 are advised to read this rule carefully.
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 www.icomply42.com for more information.