UNIT 12.0 PRESERVATION CHAPTER 12.10 TAX CREDITS AND SUBSIDY LAYERING The Table of Contents 12.10.1 Purpose.. I-1 12.10.2 Applicability.. I-2 12.10.3 Definitions and Acronyms... I-2 12.10.4 LIHTC s and Transfers of Ownership... I-3 12.10.5 Previous Participation (HUD-Form 2530) Requirements I-4 12.10.6 Subsidy Layering Reviews ( SLR ).. I -4 12.10.7 Contract Renewals.. I-5 12.10.8 Rehabilitation and the Uniform Relocation Act (URA). I-5 12.10.9 Tax Credit Transactions and M2M. I-5 12.10.10 Deferred Developer Fees I-6 12.10.11 Prorated Surplus Cash Calculation. I-6 12.10.12 Prepayment Submission Requirements. I-6 12.10.13 Combining LIHTC and Project Based Section 8 I-6 12.10.14 For Further Information I-10. 12.10.1 Purpose A. The purpose of this section is to provide uniformity, continuity and guidance in reviews of projects that receive funds from more than one government source, which is referred to as subsidy layering. Chapter 14 of the Multifamily Accelerated Processing (MAP) Guide provides specific references and instructions for FHA processing and underwriting for Low Income Housing Tax Credit (LIHTC) transactions. Additionally, the Office of Multifamily Housing Development has established LIHTC Coordinators in Hubs/Program Centers in an effort to guide local program users through the various programs. 12.10 Tax Credits and Subsidy Layering 1 February 21, 2014
B. There are many benefits to adding LIHTC to both FHA-insured and HUD-subsidized properties. Below are several examples: 1. Compared to market rate rental housing, LIHTC projects generally have lower debt service payments, lower vacancy rates, and lease up more quickly due to lower rents, and strong potential for economic return. 2. LIHTC s have been effectively utilized to preserve multifamily units in HUD s inventory, as they can be used to raise equity for the rehabilitation of FHA-Insured and HUD-subsidized properties. Owners may get a developer fee when they do a LIHTC transaction. 3. Owners of LIHTC properties may include certain LIHTC compliance fees in Section 8 budgets. 12.10.2 Applicability This Section pertains to all FHA-insured and HUD-subsidized projects that receive funds from more than one government source. As a general rule, this guidance is applicable to properties which require Use Agreements. 12.10.3 Definitions and Acronyms Compliance Period: This pertains to the 15-year period that LIHTC properties must follow all LIHTC regulations to avoid tax credit recapture. This period commences with the first taxable year of the credit period. Extended Use Period: IRS section 42 (H) (1) establishes that buildings are eligible for credits only if there is a minimum long-term commitment to low-income housing. The Land Use Restriction Agreement (LURA) is the required document that will provide evidence of this commitment. HFA: Housing Finance Agency or Housing Finance Authority. IRC: Internal Revenue Code. LIHTC: (Often pronounced Lie-Tech ): Low Income Housing Tax Credits created under the tax reform act of 1986, that offer a dollar-for-dollar tax reduction for affordable housing investments. LIHTC s are obtained in two ways: [Name of Chapter] I-2 [Completion Date]
9 percent credit allocations are competitively awarded by the individual state allocating agency. Federal law requires that states give priority to properties that serve the lowest income families and are structured to remain affordable for the longest period of time. 4 percent credit allocations are obtained in conjunction with private activity bond volume cap allocations for projects to be financed with tax exempt bonds. Bond allocations are state allocated and usually available on a competitive basis LURA: A Land Use Restriction Agreement is the recorded document that defines the restrictions imposed on a property by the state allocating agency: The LURA runs with the land, not the ownership. Syndicator: A tax credit or equity syndication connects private investors seeking a strong return on investments with developers seeking cash for a qualified LIHTC property. 12.10.4. LIHTC s and Transfers of Ownership A. LIHTC transactions generally involve either new construction, or acquisition and rehabilitation of existing properties. This generally requires one transfer but in the case of nonprofit buyers it sometimes involves two stages of ownership transfers. In such cases: 1. The first stage is often a transfer to a nonprofit owner; 2. The second stage is often a transfer from the nonprofit to a General Partnership or an LLC with a nonprofit as General Partner (in the case of a General Partnership) or managing member in the case of an LLC. The LIHTC investors who obtain interests later are limited partners or members. B. All transfers of ownership, for both FHA-insured and/or HUD-subsidized properties, must be reviewed by HUD staff. This may require a full Transfer of Physical Assets (TPA), or a modified TPA, in conjunction with a Housing Assistance Payments contract Assignment and Assumption. C. Items to be reviewed will include, but are not limited to: 1. Capacity of proposed management agent 2. Proposed relocation plan, if any [Name of Chapter] I-3 [Completion Date]
3. APPS/ HUD form 2530 ( not required for Nonprofit Board members, except for those who serve as officers of the Board) 4. HUD form 9832, Management Entity Profile 5. HUD form 9839 A, B or C 6. Narrative statement including the following a. Proposed staffing for the project and b. Resident Complaint Resolution Procedures 7. Marketing and leasing plan and plan for temporary relocation during repair work, and 8. Exhibits required under MAP Guide Chapter 10.2. 12.10.5. Previous Participation (HUD-Form 2530) Requirements A. All principals of the ownership and management agent must file a HUD form-2530. 1. Passive investors are not required to file a HUD form 2530, but can use a certification in lieu of the 2530 /APPS filing. Passive Investors have very limited authority, which is essential to maintaining the favorable tax treatment of their investments. 2. A syndicator or direct investor may use the Identification and Certification of Eligible Limited Liability Investor Entities in lieu of a form 2530, attached as Exhibit ##. Tax Credit investor partners may also arrange for the advance TPA approval of the removal and substitution of a general partner or managing member under certain specified circumstances. The agreements for this are also attached in Exhibit ##. If a syndicator is creating a new General Partner (GP) or Limited Liability Company (LLC) managing member, or if it has any ongoing role in the project as part of the GP or LLC managing member entity, the form 2530 is required. 12.10.6. Subsidy Layering Reviews( SLR ): A. Capital Subsidies: Projects containing LIHTC in conjunction with other public capital subsidy sources are subject to subsidy layering. Subsidy layering reviews prevent overfunding of a project s development costs when multiple sources of governmental funds are committed to the project. B. Operating Subsidies: Project based Section 8 is also considered a public source of funds when used in conjunction with other debt. If the Section 8 rents are above market, the Subsidy Layering Review must be conducted to ensure no more debt is capitalized than is needed to complete the project. [Name of Chapter] I-4 [Completion Date]
C. The Housing and Economic Recovery Act and Chapter 14-3 of the MAP Guide provide that mortgages insured under Title II of the National Housing Act are not considered a source of public subsidy for Subsidy Layering Review purposes. Accordingly, projects financed exclusively with LIHTC and FHA insured mortgages do not require SLR. However the review is still required for Housing Finance Agency (HFA) or Government Sponsored Enterprises (GSE) risk-sharing mortgages. A review of Sources and Uses of funds along with a certification is required. Certain State HFAs have executed a Memorandum of Understanding (MOU) with HUD to transfer the subsidy layering review responsibility to the HFA, in which case HUD review is not necessary. 12.10.7 Contract Renewals Lenders involved in LIHTC properties that have project-based Section 8 HAP contracts, generally require the ownership to secure a 20 year term. See Section 8 Renewal Policy Guide for contract renewal options and contract terms that are available to the owner. 12.10.8 Rehabilitation and the Uniform Relocation Act (URA) A. Properties with rental assistance must comply with the Uniform Relocation Act (URA) and residents must remain in place except for temporary relocation lasting no more than 30 days. 1. Documents required for URA include a detailed management plan addressing site staffing, a work and relocation schedule, and a plan and budget for relocation of residents with funds for an escrow account. 2. Owners, agents, and HUD staff should communicate to ensure that a Real Estate Assessment Center inspection does not occur during rehabilitation. 12.10.9 Tax Credit Transactions and M2M A. If any junior Mark- to- Market (M2M) debt (Mortgage Restructuring Note/MRN, or Contingent Restructuring Note/CRN) is present, the owner or lender must request a waiver of the Due on Sale provision in the note(s) and approval of subordination of the M2M debt to any new loans. (See HN 2012-10 Guidance for Assumption, Subordination or assignment of Mark to Market (M2M) Loans) [Name of Chapter] I-5 [Completion Date]
B. This requires a waiver frrom the Office of Affordable Housing Preservation (OAHP) in advance to avoid delays with these transactions. 12.10.10 Deferred Developer Fees A. HUD considers a Deferred Developer Fee to be equity, not debt. However if the ownership entity treats it as debt it is subject to the terms of and limits on secondary financing as described in the MAP Guide. 12.10.11 Prorated Surplus Cash Calculations A. Section 202/811 Capital Advance properties have language in the Regulatory Agreement that requires the proration of surplus cash. For instance, if the PRAC units comprise 40 percent of the units then the surplus cash would be based on a 40/60 split, with 40 percent being deposited to the Residual Receipts account and 60 percent available for distributions. 12.10.12 Prepayment Submission Requirements A. Mortgage notes that contain prepayment lockout restriction may be approved for prepayment no earlier than 30 days prior to the expiration of the prepayment lock out end date. B. FHA insured mortgage should be submitted to MF insurance operations (form 9807) C. Requested to prepay HUD-held should be sent to MF note servicing. D. Request to prepay 202/8 Direct loans are submitted to the MF HUB/ Program center for review and recommendation for approval to HQ office of Asset Management. 12.10.13 Combining LIHTC and Project Based Section 8 A. Income Restrictions and Income Targeting: 1. HAP Contracts are subject to either "Pre" or "Post" 1981 regulations. Projects with an Agreement to Enter into a Housing Assistance Payments (AHAP) contract signed prior to 1981 are subject to "Pre" restrictions and those AHAP contracts signed after 1981 are subject to "Post" restrictions. [Name of Chapter] I-6 [Completion Date]
a. "Pre" HAPs allow applicants up to 80 percent of Area Median Income (AMI), or Low Income. b. "Post" HAPs allow applicants up to 50 percent of Area Median Income, or Very Low Income. c. Exceptions to the above are noted in HUD Handbook 4350.3, Rev-1, Sections 3-7 and 3-8.) 2. All HAPs are subject to income targeting requirements that require 40 percent of new tenants to be at 30 percent of AMI or below. See HUD Handbook 4350.3, Rev-1, Section 4-5 for details. Income restrictions at LIHTC properties are regulated in the recorded Land Use Restriction Agreements (LURAs), which are generally in place for 30 to 45 years. Asset Managers should confirm that there are no conflicts between the income restrictions in the HAP contract and in the LURA, and if a conflict exists it must be resolved immediately. A conflict could arise in an LIHTC property that has a Pre 1981 contract, as that HAP contract allows applicants up to 80 percent AMI; however LIHTC rules limit applicants to 60 percent AMI. LIHTC are all 60 percent. B. Over Income Residents In general, as long as a resident in an LIHTC property is receiving the benefit of a Section 8 rental subsidy, or similar program, the resident s rent and utilities should be determined by the project based subsidy program, even if the gross rent charged is higher than the LIHTC maximum rent. The LIHTC program restricts only the portion of the rent paid by the tenant, not the total rent. As a result, certain rental assistance programs can be used to raise the total rent above the LIHTC rent limit. For example, project-based Section 8 contract rents can exceed the LIHTC limit but tenant-based Section 8 rents cannot. If no subsidy is provided, the tenant may not pay more than the LIHTC rent ceiling. Example, consider a resident in a Section 8 HAP property with LIHTCs. Assume an LIHTC maximum rent of $600 and a Section 8 HAP contract rent of $750. If a resident s Total Tenant Payment (TTP which is 30% of a resident s adjusted income) is calculated to be $650, the resident can be charged the $650, even though it s $50 over the LIHTC maximum rent, as the rent is still being subsidized under the Section 8 program in an amount of a $100 subsidy each month (the difference between the TTP and the contract rent). However, if another resident in that same building has a TTP of $751, that resident would no longer be subsidized under the Section 8 program and would therefore only be charged the LIHTC maximum rent level, which is $600 in this scenario. [Name of Chapter] I-7 [Completion Date]
If a variance exists between the LIHTC rents and the Section 8 contract rent (often referred to as Section 8 overhang ) this should be discussed with the ownership so that they are aware of the maximum rent that may be collected in different situations. In order to maintain the required Debt Service Coverage Ratio (DSCR) required by the lender, underwriting should be based on the more conservative rent level. C. Rent Overrides in TRACS 1. As noted above, if a resident is deemed over income and no longer subsidized by the Section 8 HAP contract, then the resident will be charged the LIHTC maximum rent. The PBCA/HUD staff must override the rent when submitting to TRACS. However, this will typically result in a large number of calculation error messages. The PBCA/HUD staff should reference Section 4.30 in the TRACS 202D MAT User Guide for further details. D. Student Housing Section 8 policy has certain restrictions prohibiting full-time students from receiving subsidy. These restrictions are not identical to the LIHTC student restrictions. Additionally, the exceptions under the Section 8 program for certain students do not match the LIHTC program. Owners and Management Agents should be advised to adhere to the Section 8 student rule policy if there is a HAP contract in place; otherwise, the Owner could be denying assistance to otherwise eligible potential residents. See HUD s student rule FAQs for more information. E. Tenant Selection Plans LIHTC priorities and allocation factors may cause conflicts in the Tenant Selection Plan (TSP) with Section 8 or Use Agreement requirements. HUD approval is required for any waiver of tenancy requirements. Prior approval is strongly recommended before financing is put in place in order to ensure that underwriting is supportable. Note: HAP contract and Use Agreement requirements are regulatory. HUD will not waive regulatory requirements without a compelling reason (i.e. preservation of the property, etc.). Owners may want to choose less than 100% allocations in order to help avoid these conflicts. For example: a. Large Family Sizes: The State may give priorities in the allocation factors for housing large families. A TSP which denies housing to otherwise eligible and suitably sized families for the unit size will require a HUD approved waiver. [Name of Chapter] I-8 [Completion Date]
b. Other State Allocation Criteria: HUD Staff should inquire with owners and management agents to confirm there are no conflicts. F. HUD Model Lease 1. The HUD Model Lease for the particular project must be used, even on LIHTC units. 2. A separate LIHTC lease is not allowed. However, HUD may consider a lease addendum for LIHTC projects, following HUD Handbook 4350.3, Rev. 1, Sec 6-12 requirements for lease modification approval. 3. The HUD lease does not allow for eviction for other than good cause. Therefore, a resident may never be evicted for failing to meet LIHTC requirements. In the case of a tenant who has become over-income or a tenant who is a of full-time student, there are no grounds for eviction. Projects may choose to offer such residents incentives to move voluntarily. However, such assistance may not be paid from Section 8 assistance funds or from the FHA project operating expense account. G. Enterprise Income Verification (EIV) Data At the present time, tenant income data obtained from the EIV system to verify tenant income may not be viewed by the LIHTC compliance entity (i.e. State Housing Finance Agency) or organizations other than the owner, agent, PBCA, HUD or TRACS provider. The security agreement with the owners of the databases (i.e. SSA) does not cover parties other than those required for meeting HUD requirements. Therefore, alternate means of documenting tenant files may be needed for LIHTC purposes. H. Compliance and Monitoring After 15 years, Internal Revenue Service (IRS) regulations for tax credit properties expire and state agencies begin to monitor the properties in accordance with the regulations in the extended use period. The IRS does not allow state agencies to report noncompliance to the IRS after the compliance period has expired. Because the tax benefit to the owner is exhausted, the IRS can no longer recapture or disallow credits. Therefore, HUD staff must establish policies and procedures for the monitoring of properties and enforcement for noncompliance during the Extended Use Period. 12.10.14 For Further Information [Name of Chapter] I-9 [Completion Date]
If you have questions or need further information, please consult the LIHTC Coordinator in the Hub/Program Center which serves your area. [Name of Chapter] I-10 [Completion Date]
APPENDIX Identification and Certification of Eligible Limited Liability Investor Entities The Field Office will request from each entity which claims to be a limited liability investor entity the following certification: I, [name of authorized signer], am authorized to certify on behalf of [name of investor entity] to each and every item stated below. I certify that [name of investor entity] is: a. An eligible limited liability investor subject to the Preservation Approval Process Improvement Act of 2007 and as set forth herein; b. Investing in [name of owner/mortgagor entity], which anticipates receiving Low- Income Housing Tax Credits pursuant to Section 42 of the Internal Revenue Code; c. A limited liability company, an investor corporation, an investor limited partnership, an investor limited liability limited partnership; or other similarly eligible entity; and d. An investor with limited or no control over routine property operations or HUD regulatory and/or contract compliance, unless it should take control of the ownership entity or assume the operating responsibilities in the event of the default of the operating partner or upon specific events as set forth in the [name of owner/mortgagor entity] s [operating agreement / partnership agreement / organizational documents]. [Name of Chapter] I-11 [Completion Date]
I further certify that should any of the facts or circumstances that support the certifications above change or the entity for which this certification is made withdraws from participation in the owner/mortgagor, I will notify HUD immediately in writing providing full disclosure and explanation of the change(s). Signed: Date: [Name of authorized signer] [Title] Approved: Date: (Field Office Hub/Program Center Director) [Name of Chapter] I-12 [Completion Date]