Update on Current HUD & LIHTC Issues

Transcription

1 Update on Current HUD & LIHTC Issues May 24, 2016 CAHEC HOUSING CONFERENCE Presented by A. J. Johnson 1

2 Housing Program Trends at the National Level Amendment to the HUD Definition of Tuition, Notice H HUD published Notice H on November 18, 2015, amending the definition of tuition as it relates to both HUD Multifamily Housing programs and Public and Indian Housing (PIH) programs. The new guidance also applies to the Low-Income Housing Tax Credit (LIHTC) Program since that program follows HUD Section 8 rules in the determination of tenant income. However, on LIHTC projects, the rule is only applicable to units occupied by residents receiving Section 8 assistance. The stated reason for the change is to promote consistency across HUD s programs by providing a standard definition of tuition and fees. The Notice was effective on 11/18/15. Background Many institutions of higher education have moved from a traditional tuition-only structure to a tuition and fee structure. o Fees often include, but are not limited to, o student service fees, student association fees, student activities fees, and laboratory fees. o HUD believes the inclusion of many of these required fees within the definition of tuition will increase opportunities for its participants to further their education. The definitional change was brought about by the language contained in Section 215(b) of the Fiscal Year 2012 appropriations legislation, which requires that the amount of any financial assistance an individual receives in excess of amounts received for tuition and other required fees and charges be considered when determining an applicant s or participant s annual income. o This same section of the law states that when a person receives Section 8 assistance, any financial assistance (in excess of amounts received for tuition and other required fees and charges) that an individual receives under the Higher Education Act of 1965, from private sources, or an institution of higher education, shall be considered income to that individual, except for a person over the age of 23 with dependent children. Applicability All provisions of the Notice apply to Project-Based Section 8 and the Section 8 Housing Choice Voucher (including Project-Based Vouchers and Project-Based Certificates). In programs, other than HUD s Section 8 program, that follow the definition of annual income in 24 CFR Part 5 (e.g., Public Housing and LIHTC), the full amount of student financial assistance is excluded from a person s annual income (see 24 CFR 5.609(c)(6)). 2

3 The Amended Definition The Department of Education (DOE) defines tuition as the amount of money charged to students for instructional services that may be charged per term, per course, or per credit. o The DOE further defines tuition and fees as the amount of tuition and required fees covering a full academic year most frequently charged to students. o Examples of required fees include, but are not limited to, writing and science lab fees and fees specific to the student s major or program (e.g., nursing program). o Expenses relating to attending an institution of higher learning must not be included as tuition. o Examples of these expenses include room and board, books, supplies, meal plans, transportation and parking, student health insurance plans, and other non-fixed sum charges. Income Determination For Section 8 programs only, the amount of financial assistance received in excess of tuition and other required fees must be included as income (except as noted above). For all other programs, the full amount of educational assistance is exempted from income. Verification of Tuition & Fees The amount of tuition and fees charged by the school must be verified when determining annual income for Section 8 purposes. Accepted verification methods include: Student s bill or account statement as provided by the school s bursar s office; or Direct contact with the bursar s office. Owners are also encouraged to visit the school s website since many provide an itemized list covering tuition and fees. 3

4 HUD Guidance Regarding Criminal Record Screening On November 2, 2015, HUD issued Notice H , Guidance for Public Housing Agencies (PHAs) and Owners of Federally-Assisted Housing on Excluding the Use of Arrest Records in Housing Decisions. The purpose of this Notice is to inform PHAs and owners of other federally assisted housing that arrest records may not be the basis for denying admission, terminating assistance or evicting tenants. The Notice also makes it clear that HUD does not require use of One Strike policies and that the due process rights of applicants and tenants must be safeguarded. One Strike Policies In most cases, PHAs and owners have discretion whether or not to deny admission to an applicant with certain types of criminal history, or terminate assistance or evict a household if a tenant, household member, or guest engages in certain drug-related or certain other criminal activity on or off the premises (in the case of public housing) or on or near the premises (in the case of Section 8 Programs). PHAs and owners may consider all of the circumstances relevant to the particular admission or eviction decision, including but not limited to: o The seriousness of the offending action; o The effect that eviction of the entire household would have on family members not involved in the criminal activity; and o The extent to which the leaseholder has taken all reasonable steps to prevent or mitigate the criminal activity. When specifically considering whether to deny admission or terminate assistance or tenancy for illegal drug use by a household member who is no longer engaged in such activity, a PHA or owner may consider whether the household member is participating in or has successfully completed a drug rehabilitation program, or has otherwise been rehabilitated successfully. An Arrest is Not Evidence of Criminal Activity that Can Support an Adverse Admission, Termination, or Eviction Decision Before a PHA or owner denies admission to, terminates the assistance of, or evicts an individual or household on the basis of criminal activity by a household member or guest, it must be determined that the relevant individual engaged in such activity. The fact that an individual was arrested is not evidence that he or she has engaged in criminal activity. Accordingly, the fact that there has been an arrest for a crime is not a basis for the requisite determination that the relevant individual engaged in criminal activity warranting denial of housing. United Stated Department of Justice statistics show that in the 75 largest counties in the country, approximately 1/3 of felony arrests did not result in conviction, with about 25% of all cases ending in dismissal. Also, arrest records are often inaccurate or incomplete. 4

5 The Notice requires that termination of assistance for criminal activity be based on a preponderance of the evidence that the tenant, other household member, or guest engaged in such activity. When PHAs or owners seek eviction, they should be prepared to persuade a court that the eviction is justified based on sufficient evidence of criminal activity in violation of the lease. While an arrest record may not be used to deny housing, PHAs and owners may make an adverse housing decision based on the conduct underlying an arrest if the conduct indicates that the individual is not suitable for tenancy and the PHA or owner has sufficient evidence other than just the arrest. The conduct, not the arrest, is what is relevant for admissions and tenancy decisions. An arrest record may trigger an inquiry into whether there is sufficient evidence for a PHA or owner to determine that a person engaged in disqualifying criminal activity. o Information such as police reports detailing the circumstances of the arrest, witness statements, etc. may be adequate to make a negative housing decision. o Evidence of a conviction for criminal conduct may also be the basis for determining that the disqualifying conduct did in fact occur. Best Practices & Peer Examples The Notice provides suggested best practices and examples of current policies that may be acceptable. Some of those examples are: o Adopting written policies that limit criminal record screening to assessments of conviction records; o Allow applicants to address and present mitigating circumstances regarding criminal backgrounds prior to admission decisions; o Adopt look back periods that limit what criminal conduct is considered during the screening process based on when the conduct occurred and/or the type of conduct; o Adopt admission policies that specify the factors that will be considered when evaluating an individual s criminal record, including: o Whether the offense bears a relationship to the safety and security of other residents; o The level of violence, if any, of the offense for which the applicant was convicted; o Length of time since the conviction; o The number of convictions that appear on the applicant s criminal history; o If the applicant is now in recovery for an addiction, whether the applicant was under the influence of alcohol or illegal drugs at the time of the offense; and o Any rehabilitation efforts that the applicant has undertaken since the time of conviction. 5

6 This Notice is now in effect, and will remain in effect until amended, superseded, or rescinded. PHAs and owners of federally assisted properties must not have any criminal screening policy that uses arrest records as a determining factor in a housing decision. If PHAs or owners have such policies, they should be amended immediately to conform to the requirements of the Notice. Fair Housing Implications (Applies to All Housing Subject to the Fair Housing Act) On April 4, 2016, the HUD Office of General Counsel (Helen R. Kanovsky) issued guidance on the relationship of using criminal records as a screening tool for housing decisions to federal fair housing laws. The essence of the guidance is that reliance on criminal history as the basis for a housing decision may be a violation of fair housing law if it creates a disparate impact for individuals due to a federally protected characteristic. The guidance states "A housing provider violates the Fair Housing Act when the provider's policy or practice has an unjustified discriminatory effect, even when the provider had no intent to discriminate." The guidance goes on to state "where a policy or practice that restricts access to housing on the basis of race, national origin, or other protected class, such policy or practice is unlawful under the Fair Housing Act if it is not necessary to serve a substantial, legitimate, nondiscriminatory interest of the housing provider, or if such interest could be served by another practice that has a less discriminatory effect." Disparate impact cases relating to criminal history will be decided using a three-step approach, as follows: 1. A plaintiff must prove that the criminal history policy has a discriminatory effect, that is, that the policy results in a disparate impact on a group of persons because of their race or national origin. Presenting evidence proving that the challenged practice actually or predictably results in a disparate impact satisfies this burden. 2. If the plaintiff proves discriminatory impact, the second step of the analysis shifts the burden to the housing provider to prove that the challenged policy or practice is justified - that is, that it is necessary to achieve a substantial, legitimate, nondiscriminatory interest of the provider. For example, the protection of other residents and the property could be cited as a reason for such a policy. However, the guidance indicates that that the policy must actually assist in making the residents or property safer. 3. If the housing provider is successful in demonstrating that the criminal history policy is necessary to achieve its substantial, legitimate, nondiscriminatory interest, the burden shifts back to the plaintiff or HUD to prove that such interest could be served by another practice that has a less discriminatory effect. HUD's position here is that an individualized assessment of relevant mitigating information beyond that contained in an individual's criminal record is likely to have a less discriminatory effect than categorical exclusions that do not take such additional information into account. HUD infers that owners and managers should delay consideration of criminal history until after an individual's financial and other qualifications are verified in order to minimize any additional costs that an individualized criminal record assessment might add to the applicant screening process. 6

7 This guidance is enlightening, in that it indicates that HUD is intent or requiring (not recommending) individual assessments, and that owners who fail to implement such a policy will be presumed to have a potentially discriminatory policy. The guidance explicitly prohibits - for all housing providers - a policy or practice of excluding individuals because of one or more prior arrests (without any conviction). HUD states that such a policy cannot satisfy the burden of showing that the practice is necessary to achieve a substantial, legitimate, nondiscriminatory interest. This is also something I recommend in my guidance to clients when creating criminal screening policies; arrest records should not be used in the determination of housing approval only conviction records should generally be considered. The HUD policy is more forgiving with regard to policies that use a record of prior conviction as a reason for declining housing services. However, even a prior conviction policy does not relieve the owner of the requirement to prove that such policy or practice is actually necessary to achieve a legitimate business goal. A policy that denies a person based on any conviction record regardless of when the conviction occurred, what the underlying conduct entailed, or what the convicted person has done since then - will not be acceptable. In other words, a housing provider must show that its policy accurately distinguishes between criminal conduct that indicates a demonstrable risk to resident safety and/or property and criminal conduct that does not. It is clear from this HUD guidance that HUD will consider any criminal screening policy to be discriminatory if it does not (1) take into account the nature and severity of an individual's conviction; and (2) consider the amount of time that has passed since the criminal conduct occurred. Apparently, HUD believes, based on this guidance, that all denials of housing assistance based on criminal convictions, are subject to assessment on a case-by-case basis. HUD does give approval for one blanket exclusion from housing based on a criminal record. A housing provider will not be liable under the Act for excluding individuals because they have been convicted one or more time of the illegal manufacture or distribution of a controlled substance as defined in the Controlled Substances Act. Again, this is only if there has been a conviction for manufacture or distribution - not arrest. o Also, this does not apply for cases involving drug "possession," - only manufacture or distribution. 7

8 Based on this new guidance, owners and managers should carefully examine their criminal screening policies. Such policies should never permit the refusal of housing services based solely on arrest records, and use of criminal conviction records should be limited to crimes relating to drugs, violent crimes, property crimes, and sex crimes. Also, any such policies should have reasonable timeframes in terms of how much of a "look back" is used when determining that a person's criminal history poses a threat to the community. Disparate Impact Supreme Court Ruling On June 25, 2015, the United States Supreme Court issued a landmark ruling on Texas Department of Housing & Community Affairs v. The Inclusive Community Project, Inc. The ruling found that housing policies could be deemed discriminatory based on disparate impact. This means that plaintiffs can prove discrimination in the provision of housing by showing that the effect of a housing policy is discriminatory, even when there is no intent to discriminate. The Court ruled that disparate-impact liability is permitted based on the Law s text, the Law s purpose, and decades of acceptance by every Federal district court and Congress. While affirming the use of disparate impact as a fair housing cause of action, the Court also made it clear that such use is not unlimited. Reasonable housing policies and practices should not be found discriminatory if such policies or practices achieve a legitimate interest or business necessity. Plaintiffs bear the burden of demonstrating a robust causality requirement when accusing a housing provider of disparate impact discrimination. A statistical disparity alone is not enough to demonstrate discrimination unless there is evidence that the policies or practices of the defendant caused the disparity. Defendants also may not be held liable if federal law or local health and safety codes require their practices. Disparate impact occurs when a housing provider implements an apparently neutral policy or procedure (i.e., one that appears to apply to all persons equally) yet can be shown to have a disproportionately negative effect upon members of a protected class. In analyzing cases under the FHA, courts often distinguish between two types of discrimination claims: 1. Disparate Treatment (intentional discrimination); and 2. Disparate Impact seemingly neutral policies or practices that have a disproportionately ill effect on a protected group. 8

9 >>Veins v. America Empire Surplus Lines Insurance Co. June 2015: In June 2015, a CT court refused to dismiss a fair housing case filed by owners of a rental property accusing their insurance company of discrimination for denying them coverage or charging higher premiums because they rented to Section 8 Voucher holders. The plaintiff claimed that in early 2014, the insurance carrier refused to renew coverage because of the number of voucher residents. The landlords, along with a fair housing organization, filed suit. The insurer asked the court to dismiss the case, but the Court refused, allowing the case to proceed. The court ruled that the landlords could pursue fair housing claims against the insurer under both federal and state law. The federal claims accused the insurer of discrimination based on race and national origin based on the disparate impact of it s decisions to deny coverage or charge higher premiums on landlords renting to Section 8 voucher holders. The State law claims were for violation of the ban on discrimination based on source of income, including Section 8 vouchers. Examples of potential disparate impact: **An apartment complex allows only people with jobs. This bars disabled veterans and other people with disabilities who may not be able to work, even though they can afford the apartment. **A city decides to prohibit all housing that would be affordable to working class people. This would effectively exclude most or all people of color in that area. If the city could not show a valid reason for the policy, or if a more fair and effective alternative is available, this could be a disparate impact issue. 9

10 HUD Advanced Notice of Proposed Rule Making (ANPR) - Strengthening Oversight of Over-Income Tenancy in Public Housing February 3, 2016 HUD is considering a rule to ensure that households in public housing continue to need housing assistance after admission. This potential rule was prompted by a HUD Office of Inspector General (OIG) report stating that of 1.1 million families in public housing that were examined, 25,226 were over the qualifying income limit some significantly. Comments on this ANPR are due at HUD no later than March 4, Background The Housing Act of 1937 is the primary statute governing public housing. The Act provides that public housing units be rented only to families who are low-income at the time of their initial occupancy. Public Housing Agencies (PHAs) must undertake periodic reviews of household income. The Act does not require eviction of families whose income exceeds the income limits after move-in. On July 21, 2015, HUD s OIG issued an audit report indicating that a number of households had income significantly in excess of the maximum income limits, although they income qualified at move-in. In one identified case, a Nebraska millionaire occupied a $300 per month public housing unit. Current regulations do not prohibit a family from continued occupancy due to an increase in income after move-in. An increase in income may be minimal or temporary, and HUD believes that such increases should not be the basis for termination of public housing assistance. The purpose of this ANPR is to solicit comments on how to structure policies to reduce the number of households with incomes significantly in excess of income limits when those income limits have been exceeded for a sustained period of time. HUD s position is that any changes that would require the termination of tenancy for over-income families should be enacted with caution so as not to impede a family s progress toward self-sufficiency. Since November 26, 2004, PHAs have had the authority to terminate the tenancy of overincome families. However, they were not required to do so and had a good deal of discretion as to whether or not to terminate tenancy. While the 1937 Act did not require termination of tenancy for over-income residents, it did not prohibit PHAs from doing so. HUD indicates that many factors should be considered in developing these policies, including local market conditions, community stability, the source and duration of increased income, and whether the resident is elderly or disabled. 10

11 HUD is considering revising its regulations in a way that would continue to give PHAs discretion on when to evict or terminate the tenancies of over-income families but narrow that discretion by providing circumstances that would require a PHA to terminate tenancy or evict an over-income family. It is clear from the wording of the ANPR that the two main areas for which HUD is seeking input are (1) how to define income that significantly exceeds the limit, and (2) how to define a sustained period of time with excess income. Another area of concern is what a reasonable period of time to find alternative housing would be. HUD is not considering an alternative in the exceptions to eviction or termination of tenancy for families over the income limits if the family has a valid contract for participation in a Family Self-Sufficiency (FSS) program. Also, a PHA will not be able to evict a family that is over the income limit if the family is currently receiving the earned income disallowance. In developing the final rules for the program, HUD will have to avoid being too restrained in their approach to higher income residents. HR 3700, the Housing Opportunity Through Modernization Act, sailed through the House on a vote, and is expected to receive strong support in the Senate. Once passed, it is very likely that President Obama will sign it. Part of this legislation places limits on how long higher income families may remain in public housing. If Congress feels HUD is circumventing Congressional intent through regulation, additional statutory requirements could easily be imposed. The legislation, if signed into law as expected, will also prohibit families with net assets in excess of $100,000 from living in public housing. At least for now, the law will apply only to public housing not Section 8, Section 515 or the Low-Income Housing Tax Credit (LIHTC). However, history has shown that once rules for public housing are changed, they eventually are applied to other affordable housing programs. One amendment that was adopted as part of the Bill keeps the $480 dependent deduction and increases the elderly/disabled deduction from $400 to $525. The changes outlined here are likely to become law and regulation in Based on the current mood in Congress regarding regulatory reductions and cost cutting, 2017 may well be a year of change for the affordable housing industry. 11

12 HUD Streamlining Rules On March 3, 2016, HUD published in the Federal Register a new rule on Streamlining Administrative Regulations for Public Housing (PH), Housing Choice Voucher (HCV), Multifamily Housing (MFH) and Community Planning & Development (CPD) Programs. The Department of Housing & Urban Development Appropriations Act, 2014, made several changes to the United States Housing Act of HUD published notices implementing these changes on May 19, 2014, and June 25, A HUD proposed rule on January 6, 2015, codified the changes in regulation. This final rule makes changes to the January 2015 proposed rule, and will be effective on April 3, Background The 2014 Appropriations Act made changes to the 1937 Act, such as allowing for biennial physical inspections of certain assisted properties and permitting alternative inspection methods; codifying the definition of extremely low-income (ELI); capping utility allowances at the lesser of unit size on the voucher or the size of the unit leased by the family. The rule affects the public housing program, the Housing Choice Voucher Program, some CPD programs and the following MFH programs: Ø Project-based Section 8; Ø Section 8 Moderate-Rehabilitation; Ø Rent Supplement; Ø Section 202 (both PAC & PRAC); Ø Section 811 (both PRA & PRAC); Ø Section 236; Ø Rental Assistance Program (RAP); and Ø Section 221(d)(3) and (d)(5). 12

13 Major Changes Made by the Final Rule Affecting Multifamily Housing Programs Ø Definition of Extremely Low-Income (ELI): The 2014 Appropriations Act changed the definition of ELI to mean a very low-income family whose income does not exceed the higher of 30% of Area Median Income (AMI) or the poverty level. This final rule adds the term very low-income to the definition of who is eligible under the ELI definition. This means that households with income between 30% and 50% of AMI will be eligible as ELI. [No action is required by owners since HUD will reflect this in the published program income limits]. Ø Use of Actual Past Income: the proposed rule would have required owners to use one definition of annual income (either actual past income or projected income) for all families in a program. Comments to the proposed rule objected to the use of past income due the difficulty in determining proper rent based on past income and correlating current expenses such as child care and medical expenses to past income. Given the concerns to the proposed rule, HUD has decided not to adopt the use of actual past income in the final rule. This means that owners and PHAs will continue to project income using guidance currently in place. Ø Streamlined Annual Reexamination for Fixed Incomes: The proposed rule permitted PHAs and owners to conduct streamlined income redeterminations for fixed-income households (once every three years). The final rule revises this provision to provide PHAs and owners with the option of conducting a streamlined income redetermination for any fixed-income source, regardless of whether a family or individual also has a non-fixed source of income. This means that the regulation no longer requires a family to have 100% of its income from fixed sources. The final rule also adopts an expanded list of fixed income sources. In addition to pensions and retirement, income from annuities or other retirement benefit programs, insurance policies, disability or death benefits or other similar types of periodic receipts will all be considered fixed income. If a family member receives an income from any of these sources and the income consists solely of periodic payments at reasonably predictable levels, the income source may be considered fixed. The regulation still requires verification of medical expenses and other deductions from gross income for fixed-income families. Procedures currently in place may be used for such verifications. HUD will not adopt the use of self-certification of medical expenses and other deductions due to the risk of improper payment of subsidy. The final rule makes clear that a full examination of income must be conducted upon admission to a program. PHAs and owners that choose to adopt the streamlined income redetermination, a full reexamination of family income must be performed at least every three years. Owners should also remember that non-fixed income, such as employment, will still require annual verification. 13

14 Ø Family Declaration of Assets Under $5,000: The final rule will permit the Public Housing and Housing Choice Voucher programs to accept family affidavits when assets are $5,000 or less. At admission, all assets of a family will be verified as is the current practice. The final rule also requires a PHA to obtain third party verification of all assets every three years. o While this rule currently applies only to public housing and HCV programs, the Office of Multifamily Housing Programs, which operates various rental assistance programs (including Section 8), will issue an interim final rule to expand this provision to multifamily programs. In addition to the changes outlined above that impact the MFH programs, a number of changes are specific to public housing and the Housing Choice Voucher Program. A brief description of those changes follows: Ø Utility Reimbursements: PHAs will have the option of making utility reimbursement payments quarterly, rather than monthly for reimbursements of $45 or less per quarter. If the PHA opts to make the payments on a quarterly basis, the PHA must institute a hardship policy. This change is optional and PHAs may continue to make UA reimbursements monthly. Alternative reimbursement methods such as debit cards may be used, but no fees may be required of a tenant as a result of the alternative method. PHAs may also continue to make payment directly to the utility company. It should be noted that HUD is exploring the possibility of expanding this option to MFH programs. Ø Public Housing Rents for Mixed-Income Families: the final rule permits PHAs to accept a tenant s self-certification of compliance with community service requirements. HUD is requiring PHAs to review a sample of self-certifications and validate their accuracy with using third party verification procedures. Ø Biennial Inspections and Use of Alternative Inspection Methods: PHAs may conduct HQS inspections on a biennial rather than an annual basis. Alternative inspections (e.g., LIHTC or HOME inspections) may also be relied on if HCV units are included in the population of units forming the basis of the sample. HUD approval for any alternative method is required. Ø Housing Quality Standards (HQS) Reinspection Fees: The final rule states that a reinspection fee may be charged only if an owner stated that a deficiency had been fixed and the deficiency is found during reinspection to still exist or if a reinspection conducted after the expiration of the timeframe for repairs reveals that the correction has not occurred. Ø Exception Payment Standards for Providing Reasonable Accommodations: the final rule allows a PHA to approve a HCV payment standard of not more than 120% of the FMR without HUD approval if required as a reasonable accommodation. Ø Family Income & Composition: the final rule eliminates the requirement that s voucher agency conduct a reexamination of income whenever a new family member is added. This rule already exists for Public Housing. o Note: MFH programs must continue to conduct interim recertifications when there is a change in household composition. 14

15 Ø Earned Income Disregard {EID} (applies to public housing, HCV ([not projectbased vouchers], Section 811 Supportive Housing Program, HOME, and HOPWA): The final rule will provide tenants with the ability to start and stop employment and still retain the benefits of the EID. However, these residents may only receive the benefit for up to 24 consecutive months from the date of initial increase in annual income. If an individual becomes eligible to receive the EID, the 24-month period will not stop if the circumstances that triggered the EID cease; however, if the individual experiences an event that would again provide an EID benefit during the 24-month period, the individual will be provided the rent incentive. This change is retroactive to families that began the 24- month period prior to the final regulation. These are fairly extensive changes to current regulations, especially for public housing agencies administering the HCV and public housing programs. HUD will be updating applicable Handbooks to incorporate these changes into the various programs, but in the meantime, program participants should review the final rule and begin establishing procedures implementing the required changes. Changes are minimal for the MFH programs (such as project-based Section 8) and virtually non-existent for the Low-Income Housing Tax Credit Program (which follows the guidance provided by HUD Multifamily Housing). Smoke Free Public Housing - HUD Proposed Rule, November 17, 2015 On November 17, 2015, HUD published a proposed rule in the Federal Register that would require all public housing agencies (PHAs) that administer public housing to implement a smoke-free policy. The rule proposes that no later than 18 months from the effective date of the final rule, each PHA must implement a policy prohibiting lit tobacco products in all living units, indoor common areas in public housing, and in PHA administrative office buildings. The smoke-free policy must also extend to all outdoor areas up to 25 feet from the housing and administrative office buildings. The comment due date for the proposed rule was January 19, The proposed rule would apply to all public housing, other than dwelling units in mixedfinance buildings. For example, projects developed under the Rental Assistance Demonstration (RAD) program that mix public housing and Low-Income Housing Tax Credits (LIHTC) would not be subject to the rule. PHAs may, but would not be required to, further restrict smoking to outdoor dedicated smoking areas outside the restricted areas, create additional restricted areas in which smoking is prohibited (e.g., near a playground), or, alternatively, make their entire grounds smoke free. PHAs would also be required to document their smoke-free policies in their PHA plans, a process that requires resident engagement and public meetings. The prohibition on lit tobacco would also be included in a tenant s lease, which may be done either through an amendment process or as tenants renew their leases annually. 15

16 Many PHAs are aggressively fighting this proposed rule, citing burdens on existing residents especially seniors. It will likely be some time before HUD issues a final rule on this issue, but PHAs should begin preparing to make public properties nonsmoking. There is little doubt that this rule will become final; it is just a question of when. 16

17 Low-Income Housing Tax Credit Issues Tax Extenders Congress has passed and the President has signed the Protecting Americans from Tax Hikes (PATH) Act of The legislation includes a number of permanent (as opposed to temporary) extensions of expiring tax provisions. Included in these is a permanent extension for the minimum lowincome housing tax credit rate for non-federally subsidized buildings - (the 9%) credit. It also extends the military housing allowance exclusion for determining whether a tenant in certain areas of the country is low-income. 131 of the Act makes the 9% tax credit for new LIHTC projects and rehabilitation expenditures permanent. This does not apply to the acquisition cost of existing projects or projects that use tax-exempt bond financing. These projects must still use the floating 4% tax credit percentage. This amendment is retroactively effective as of January 1, of the Act extends permanently the exclusion of the military housing allowance from income for LIHTC purposes for certain areas of the country. Excluded areas include any county which contains a qualified military installation to which the number of members of the Armed Forces assigned to the units based out of such qualified military installation increased by 20% or more as of June 1, 2008 over the personnel level of December 31, 2005 and also includes any adjacent counties. The affected military installations have to have at least 1,000 members of the Armed Forces assigned to it. Developer Fee Issues Developer fees are under intense scrutiny by the IRS. IRS guidance in this area states that the developer fee should be allocated based on associating the services provided with an asset includable in eligible basis. Examples of services likely to be performed by the developer, which are not includable in eligible basis, include securing undeveloped land, forming the partnership or syndicating the partnership to investors, and securing the credit allocation. None of these are directly related to the construction of the depreciable asset, so may not be included in eligible basis. Holding a portion of a developer fee until rent-up is achieved is generally not considered a cost relating to the construction of the asset, and also would be excluded from basis. *Fees not likely to be paid will not be includable in eligible basis. If left unpaid, the IRS would make recapture an issue; a lot would depend on the point at which the IRS actually audited the issue. 17

18 Nonprofit Set-Aside IRC 42(h) (5) provides that a portion (at least 10%) of each state's annual credit ceiling be set aside for allocation to projects involving qualified nonprofit organizations. In any one year, states may not allocation more than 90% of their allocated credit to projects other than projects under the nonprofit set-aside. The Qualified nonprofit must own an interest in the project and materially participate in the development and operation of the project throughout the compliance period. Projects allocated credit under this section must maintain at least 75% of the units as affordable. Once it has been determined that a taxpayer received a credit allocation from the nonprofit set-aside, audit issues include determining whether the nonprofit is a qualifying nonprofit entity and satisfies the requirements for its tax-exempt purpose (one of which must be the fostering of low-income housing), whether the nonprofit has maintained an ownership interest, whether the nonprofit materially participated in the project development and is participating in the on-going operation of the project. One of the most confusing requirements relating to the nonprofit set-aside is the material participation stipulation. A qualified nonprofit organization must materially participate in both the development and operation of the project throughout the 15-year compliance period. IRC 469(h) defines material participation as activity that is regular, continuous, and substantial. The IRS applies the following guidelines to determine if the participation is material. 1. Is the activity a principle business or activity of the nonprofit? 2. Is there involvement in the actual operations of the activity? Services provided must be integral to project operations. Simply consenting to someone else s decisions or periodic consultation with respect to general management decisions is not sufficient. 3. Participation must be maintained throughout the year. Periodic consultation is not sufficient. 4. Regular on-site presence at operations is indicative of material participation. 5. Providing services as an independent contractor is not sufficient. Meeting this material participation requirement should not be an issue when the nonprofit is the sole general partner and also manages the property. However, it the partnership has one or more for-profit general partners, the nonprofit partner could have less participation in the partnership, which will attract scrutiny from the IRS. Also, if the management agent is a for-profit entity and operates the property without regular, continuous and substantial oversight from the nonprofit, questions could be raised relating to material participation. Nonprofit developers of LIHTC projects that receive an allocation of credits from the nonprofit pool should be diligent in ensuring constant and meaningful participation in project operations. 18

19 Keep in mind that from a tax standpoint, the nonprofit material participation requirement only applies to deals that receive credits from the nonprofit set-aside. Projects that receive points on their tax credit application for the participation of a nonprofit in the deal are not subject to the material participation requirements from the standpoint of tax law. However, there may be an HFA requirement for material participation in these cases, and any such requirement should be outlined in the project s extended use agreement. The taxpayer may be subject to disallowance of the entire annual credit if noncompliance with 42(h) (5) (B) occurs. However, the recapture provisions of 42(j) are not applicable. Utility Allowance Final and Temporary Regulations The IRS published Final and Temporary Regulations relating to Utility Allowances for Low-Income Housing (LIHTC) properties in the March 3, 2016 Federal Register. The final regulations clarify the circumstances in which utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company. The regulation extends the principles of the Submetering rules to situations in which a building owner sells to tenants energy that is produced from a renewable source and that is not delivered by a local utility company. Background On August 7, 2012, the IRS published a Federal Register notice of proposed rulemaking that provided that utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company and thus do not count against the maximum rent that the building owner can charge. In these cases, the owner could establish a utility allowance in accordance with the IRS utility allowance regulation for submetered utilities. This final regulation adopts the 2012 proposed regulation and extends those rules to the provision of energy that the building owner acquires directly from renewable sources and then provides to low-income tenants (e.g., solar energy sources). Submetering 1. Actual-Consumption Submetering Arrangements and Ratio Utility Billing Systems (RUBS) a. The 2012 proposed regulations defined an actual-consumption Submetering arrangement for utility allowance purposes as not including a ratio utility billing system (RUBS). The regulations precluded an arrangement such as RUBS from qualifying as an actual consumption Submetering arrangement. However, the regulation did not prohibit the use of RUBS for low-income housing credit projects. However, any amount paid by a tenant for utilities using RUBS must be included in gross rent. The final regulations follow this approach and continue to define an actual-consumption metering arrangement as not including RUBS. 19

20 2. Administrative Cost of Submetering a. The final regulations do not include a requirement to determine actual monthly cost of administering the Submetering program, and they generally permit owners to charge tenants an administrative fee in accordance with a state or local law that specifically prescribes a dollar amount for the administrative fee. The regulation authorizes the Department of Treasury and the IRS to provide for administrative fees in excess of five dollars per month even in the absence of state or local law doing so and to put an upper limit on administrative fees even if state or local law allows higher fees. i. The proposed regulation limited the fee charged per unit to the lesser of (A) five dollars per month; or (B) the owner s actual monthly cost paid or incurred for administering the arrangement. b. If a building owner or its agent charges a unit s tenants a fee for administering an actual-consumption Submetering arrangement, the gross rent includes any amount by which the aggregate amount of monthly fees for all of the unit s utilities under one or more actual-consumption Submetering arrangements exceeds the greater of (i) five dollars per month; (ii) an amount (if any) designated by publication in the Internal Revenue Bulletin; or (iii) the lesser of a dollar amount (if any) specifically prescribed under a State or local law or a maximum amount (if any) designated by publication in the Internal Revenue Bulletin. [This essentially permits owners to charge more for administrative fees than permitted under this regulation, but any charges in excess of those permitted must be included in gross rent]. 3. Energy Acquired Directly From a Renewable Source a. The proposed regulation appeared to preclude applying Submetering principles to electricity generated from renewable sources by the building owner or by some other person from whom the building owner purchases it directly. b. This regulation contains temporary regulations that apply those principles to energy that the building owner provides to tenants after having acquired it directly from renewable sources. i. However, in such cases, charges to the tenants for this energy must be comparable to local utility rates. Charges by the building owner must not exceed the rates that the local utility company would have charged the tenants if they had instead acquired the energy from that company. [E.g., if an owner charges residents for electricity generated by solar power, the amount charged may not exceed the amount the residents would pay for electricity provided by the local utility company]. 20

21 Issues Relating to Utility Allowances Generally 1. Role of Agencies Regarding the Utility Allowance Methods a. A significant change with regard to the state agency role in the final regulations is that Agency approval will only be required for qualified professionals that are not properly licensed engineers [the current requirement is that the agencies approve both qualified professionals and licensed engineers]. i. An agency continues to have the option to review, and take appropriate action regarding, utility estimates based on the energy consumption model or the other optional methods. b. The regulation continues to allow an Agency to approve or disapprove a method or to require certain information before permitting use of an energy consumption model. Also, an Agency should have the ability to review the energy consumption model even when a properly licensed engineer, who is not subject to Agency approval, uses the model. The final regulations specifically authorize an Agency to approve or disapprove use of the energy consumption model or require information about the model before permitting its use, regardless of the type of professional that calculates the utility estimates. 2. Use of Consumption Data for the Energy Consumption Model a. The final regulations remove the requirement that an energy consumption model use the building s consumption data for a particular 12-month period. Instead, the final regulations revise the specific factors used in determining estimates under the energy consumption model to include available historical data. This is due to the fact that the most recent 12 months of utility data (required under the current regulation) may not be representative of actual consumption. 3. Areas With No Public Housing Authorities a. The existing regulations provide that if a building is neither an RHSassisted building nor a HUD-regulated building and no tenant in the building receives RHS tenant assistance, then the appropriate utility allowance for the units in the building is the applicable PHA utility allowance. This creates problems in areas where there is no local PHA. The IRS is requesting comments on how the rules might best address situations in which no PHA exists. 4. Changes in Public Housing Authority Utility Allowances a. The final regulation retains the requirement that if a PHA utility allowance changes, the building owner must use the new utility allowance to compute gross rents of the units due 90-days after the change. i. In other words, the 90-day period ends 90-days after the effective date of the revised PHA allowance. In the regulation, the IRS states that A building owner that checks the PHA utility allowance every 60 days would have at least 30 days in which to adjust rents. 21

22 5. HUD-Regulated Building a. Existing regulations defined a HUD-regulated building as one for which HUD reviews the rents and utility allowances on an annual basis. Since HUD does not review rents and utility allowances on an annual basis for all programs, the final regulations define a HUD-regulated building to mean one in which the rents and utility allowances of the building are regulated by HUD (with no requirement for an annual review). Effective Dates Owners, beginning on or after March 3, 2016 may use the revised regulations. A building owner may apply the regulations to taxable years beginning prior to March 3, 2016, but are not required to do so. They may continue to use the regulations contained in IRS Regulation for taxable years beginning prior to March 3, In effect, if an owner s taxable year began January 1, 2016, they may use the IRS utility allowance regulation published on March 3, 2016 or the regulations in effect prior to March 3, Summary of Major Changes: 1. Owners may submeter units for utilities that owners obtain directly from renewable sources instead of from utility providers. 2. The maximum administrative fee that may be charged for submetering is changed from the lesser of (1) $5.00 per month, or (2) the owner's actual monthly costs paid or incurred for administering the arrangement, to the greater of (1) $5.00 per month; (2) an amount designated by the IRS; or (3) the lesser of a dollar amount specifically prescribed under State or local law or a maximum amount designated by the IRS. If a fee in excess of the permitted amount is charged, it must be included in gross rent. 3. Owners are no longer required to have HFA approval when using a Licensed Engineer in the preparation of a utility allowance (HFA approval for other qualified professionals is still required). Agencies still have the ability to review and take appropriate actions relative to utility allowance estimates prepared by licensed engineers. 4. Removes the requirement when using a consumption model to use data from a particular 12-month period, and instead requires use of available historical data. 5. Eliminates the requirement that HUD-regulated buildings be those for which HUD reviews the rents and utility allowances on an annual basis. The requirement now is only that the building be HUD-regulated. 22