Project-based voucher program’s final rules take some by surprise

In this issue: New Department of Housing and Urban Development (HUD) final rules affecting Sec. 42: rent restrictions for project-based voucher units and the student rule. Also, is there a change in Sec. 42 utility allowances pending?

Q Can you explain HUD’s new project-based vou-cher program’s final rule on Sec. 42 rents when both programs are combined? I cannot make sense of this no matter how hard I try.

– Pulling My Hair Out

A Dear Pulling: You might note that part of my last name is “bald.” I understand how you feel. Frankly, this final rule has taken a number of tax credit professionals by surprise. When you get to the bottom line of the rule, you will see how the bottom line of tax credit projects tied to these units suffers a reduction in the rent that HUD will pay.

First of all, we want to emphasize that the following rent restrictions apply only to project-based voucher (PBV) units. You may have other types of HUD units on your tax credit project that are not affected by this final rule. For those who do have PBV units, this final rule changes the way low-income housing tax credit (LIHTC) and Sec. 8 PBV rents interact and places a lower rent limitation on units that are LIHTC/PBV. Be sure you know which of your HUD/Sec. 42 units are affected.

HUD used to permit PBV units to pay a higher rent than the tax credit rent for units that were Sec. 42/PBV as long as the tax credit rent was equal to or lower than the HUD rent (which could be higher than fair market rent by up to 110%). If the tax credit rent was lower, HUD could pay a higher rent.

This final rule changes HUD’s position and now confirms that higher rent will no longer be paid on these units – that if the tax credit rent is less than HUD’s rent, HUD will only pay up to the tax credit rent, and no additional rent will be paid.

Here is an example of the change:

The last thing tax credit owners need in these days of increasing costs and paralyzed income limits is to lose this higher rent. Tax credit projects that have housing assistance payments under the PBV program are typically on a multiple-year contract. HUD is applying this new rule to projects underwritten and financed after Oct. 13, 2005.

HUD has surprised the tax credit industry by not putting this rule through its normal notification process. The Sec. 42 industry is reviewing the manner in which this rule has been delivered and its impact.

Speaking of surprises from HUD, the following is a reprint from TheoPRO’s Weekly On-Line Compliance Advisor and notifies the industry of a change in how student financial assistance income is calculated for tax credit units. This rule became effective Jan. 30, 2006. Read on …

Q Can you tell us how you see HUD’s new final rule regarding students and how it interacts with the student rules of Sec. 42?

– Out with the new, in with the old?

A Dear Out: Yes. This new rule was published Dec. 30, 2005, and in short, does not impact Sec. 42 properties for student eligibility unless a Sec. 8 property is combined with Sec. 42. It does, however, redefine how income from student financial assistance is to be counted for income-qualifying purposes for both Sec. 8 and Sec. 42 programs. It will also necessarily change verification procedures for both programs.

Here’s how the new rule works:

Qualification for Sec. 8 subsidy

A Sec. 8 family member cannot receive Sec. 8 assistance if the individual:

• Is enrolled as a student at an institution of higher education
• Is younger than 24
• Is not a veteran
• Is unmarried
• Does not have a dependent child
• Is not individually otherwise eligible for Sec. 8 assistance or does not have parents who are eligible for Sec. 8 assistance

Why has HUD implemented this rule? Because too much Sec. 8 subsidy has been provided to traditional college students who truly have another means of receiving assistance. In short, too many students, not otherwise qualified for Sec. 8, were benefiting from subsidy. Beginning Jan. 30, if a person who applies for Sec. 8 subsidy is a full-time student and falls into the above categories, he or she will not be eligible for assistance. This rule will also affect recertifying households.

How to count income from financial assistance

HUD further states in this final rule (24 CFR Parts 5, 880, 883, [et al]) that the law has been amended so that financial assistance in excess of the cost of tuition must now be included as income for any Sec. 8 family members. Since Sec. 8 income-qualifying procedures affect Sec. 42, it will change how the tax credit program works with income from student financial assistance. Sound vaguely familiar? It should if you’ve been around these programs for more than 10 years. Read on …

Under the rule prior to this change, (HUD 4350.3 as amended in 1995) all forms of student financial assistance were excluded from income. Under this new rule, all types of student financial assistance in excess of tuition are now included as income except for persons older than 23 with dependent children. In actuality, the rule is mirroring the pre-1995 tradition of separating assistance for schooling from other benefits.

Sec. 327(b) of Public Law 109-115 states “For purposes of determining the eligibility of a person to receive assistance under Sec. 8 of the United States Housing Act of 1937 … any financial assistance (in excess of amounts received for tuition) that an individual receives under the Higher Education Act of 1965 … shall be considered income to that individual except for a person over the age of 23 with dependent children.”

As always, student loans are excluded from income.

Remember, Sec. 42 student definitions are not affected by this new rule.

To reiterate, there is no impact on whether Sec. 42 families are to be considered “student” eligible if there is no Sec. 8 subsidy on a unit or a project. If there is Sec. 8 subsidy being received, then both sets of student rules must be applied for the unit to qualify for both programs.

Remember, Sec. 42 income calculations are affected by this new rule.

This new rule requires a change in application and verification forms for both Sec. 8 and Sec. 42. Since the rule now requires income in excess of tuition from student financial assistance to be included, student financial assistance verification forms must be used whenever a family member discloses this source of income during the application process.

Rental applications will need to include “income from student financial assistance” as a source of income; student financial assistance verification forms must ask for amounts being paid in excess of tuition and these amounts must be included as income.

Does this seem rather sudden? It is. This final rule was also excluded from the standard public comment period. However, in this case HUD explains the reason behind the shortcut. The rule states that this is permitted under its good cause exception when prior public notice is “impractical, unnecessary, or contrary to the public interest.”

In this case, HUD is taking care of what is considered a misapplication of program funds. The opinion of the public is considered unnecessary.

When does (did) this new rule become effective? This new rule is to be enforced immediately (no later than Jan. 30, 2006) not only for new households, but “as soon as it is practicable,” for recertifying families.

If you get the sense that HUD is on the move to redefine program standards and limits, you are correct. The industry also awaits Revision 2 to the HUD 4350.3 Handbook. Watch this column for updates.

•••

And now for some better news …

By the time this article is published, the 2006 HUD Sec. 8 income limits should have been posted. We do not anticipate increases in these limits in most areas of the country, based on preliminary data released by HUD. This will continue to place a proportionate restriction on any increase in tax credit income and rent limits.

Over the course of the past year, the Internal Revenue Service (IRS) has expressed its intention to consider a better utility allowance procedure for Sec. 42. As many readers are aware, currently the IRS Code only allows owners to use local utility company rate estimates or PHA (public housing authority) rates. Local utility company rates have been quite difficult to obtain, and PHA rates have been based on older, energy inefficient product. This affects the rent that can be charged to households, for example, the higher the utility allowance the lower the “net rent.” (Net rent is the difference between the maximum tax credit rent and the utility allowance). HUD/LIHTC projects and Rural Development/LIHTC projects are required to use rates as provided by each program respectively.

In February 2005, several affordable housing groups officially requested that the IRS consider a number of alternatives that would permit tax credit properties to access a variety of other methods to calculate utility allowances. Some of the proposed alternative computations proposed were as follows:

• HUD’s pending new utility allowance model, which would provide for adaptations based on unit type and vintage (age of property)

• Actual consumption based on data from submetering and/or direct billing programs

• Energy consumption model estimates provided by certified professionals

• Estimates obtained from interested parties from one or more utility companies or

• Estimates provided by tax credit allocation agencies

While there has been no official word from the IRS, a change in how utility allowances are determined for Sec. 42 could help owners reduce the utility allowances to a more reasonable rate. This could increase the “net rent” that could be charged, adding to a project’s cash flow.

Watch this column for progress on this matter. It could benefit a number of tax credit rental communities.

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.icomply 42.com for more information.