Arkansas Administrative Code › Agency 109 - Arkansas Development Finance Authority › Division 04 - Multi-Family Housing › Rule 109.04.12-002 - 2013 Low Income Housing Tax Credit Compliance Manual

Current through Register Vol. 49, No. 6, June, 2024
SECTION I
- GENERAL INFORMATION
I.A
INTRODUCTION
The Arkansas Development Finance Authority (-ADFAII or the
				-AuthorityII), a public body politic and corporate, with corporate succession,
				was created May 1, 1985 by Act 1062. This act abolished the former Arkansas
				Housing Development Agency that had existed since 1977. The former agency had
				as its sole purpose to sell tax-exempt bonds and use the proceeds to develop
				safe, decent, sanitary and affordable housing for low and moderate income
				Arkansans. All records, funds, properties, obligations, debts, functions,
				powers and duties were transferred to ADFA, which sells both taxable and
				non-taxable bonds and supports programs not only for housing but also for
				economic development, agriculture, aquaculture, export finance, government
				finance, and tourism development.
This Policies and Procedures Manual presents an overview of
				ADFA's policies as they pertain to compliance monitoring for the Low Income
				Housing Tax Credit (-LIHTCII) Program. The procedures are designed to assist
				owners and managers of developments that have received an allocation pursuant
				to the LIHTC Program to ensure that the developments remain in compliance with
				Section 42 of the Internal Revenue Code (-the Codell). The procedures are not
				intended to be all-inclusive. In the event of a conflict or inaccuracy, the
				Code will control. If the development has received a combination of funds from
				other government entities, owners generally follow the most restrictive
				regulations. Owners must be aware, however, that he may have to satisfy the
				requirements of all applicable regulations. For instance, an owner may have
				received funds under a governmental program in which he agreed to rent a
				certain number of units to persons earning 40% or less of the area median
				income. The owner must be sure to satisfy this restriction in addition to the
				applicable LIHTC area median income limit. Employees and officers of ADFA are
				not liable for any adverse consequences that affect the taxpayer or investor
				relative to compliance with the federal tax code. ADFA reserves the right to
				implement additional policies as needed. Also, new rulings or other changes may
				be made periodically. Owners are responsible for compliance with any amendments
				or updates to the federal regulations.
Any questions regarding this Manual should be directed
				to:
Compliance Monitoring Department
Arkansas Development Finance Authority
P. O. Box 8023
Little Rock, AR 72203-8023
Telephone: (501) 682-5900
Telecopy: (501) 682-5859
I.B
BACKGROUND
Congress created the LIHTC Program under the Tax Reform Act of
				1986. The LIHTC Program, governed by Section 42 of the Internal Revenue Code,
				began in 1987. The tax credit is a dollar-for-dollar reduction in tax liability
				to investors in exchange for equity participation in the construction or
				acquisition and rehabilitation of rental housing that will remain income and
				rent restricted for an extended period of time. Tax credits are allocated by
				ADFA for properties located in Arkansas. After ADFA allocates the tax credits
				to developers, the developers typically sell the credits to private investors.
				The private investors use the tax credits to offset taxes otherwise owed on
				their tax returns. The money private investors pay for the credits is paid into
				the projects as equity financing. Equity financing is used to fill the gap
				between development costs for a project and the non-tax credit financing
				sources, such as mortgages, that could be expected to be repaid from rental
				income. In awarding the credits, ADFA attempts to provide sufficient credits to
				ensure the project's financial feasibility throughout the 15-year tax credit
				compliance period. ADFA must consider any proceeds or receipts expected to be
				generated through tax benefits, the percentage of housing credit dollar amounts
				used for project costs other than the cost of intermediaries, and the
				reasonableness of developmental and operational costs. Generally, ADFA will
				compare the proposed project's developmental costs with the nontax credit
				financing, both private and governmental. The difference between the
				development costs and the nontax credit financing is the financing gap. Tax
				credits are used to attract the equity investment needed to fill the gap, but
				are limited to a ceiling.
ADFA is also designated as Arkansas' LIHTC compliance
				monitoring agency. Crucial elements of compliance are ensuring that the
				appropriate number of tax credit units is occupied by eligible households,
				following income eligibility guidelines and restricting rents over a specified
				time period. ADFA also monitors to ensure LIHTC properties are decent, safe,
				sanitary, and in good repair. ADFA is available to provide guidance to owners
				in maintaining continuous compliance with federal and state LIHTC guidelines
				throughout the compliance period.
I.C
CREDIT PERIOD AND
			 COMPLIANCE PERIOD
Generally, owners must place the projects in service within two
				(2) years of carryover allocation or return the credits to ADFA for
				reallocation to other projects. Once a development is placed in service, it is
				generally eligible for the tax credit every year for ten (10) years. To
				continue generating the credit and avoid recapture, an LIHTC building must
				satisfy specific tax credit compliance rules for fifteen (15) years. In cases
				where 100% low-income occupancy is not achieved during the first tax credit
				year, (for example, either due to unqualified tenants or inability to find
				qualified tenants to qualify units) there will be possible increases in
				qualified basis in subsequent years. In such cases, excess qualified basis
				shall have the percentage equal to 2/3 of the applicable fraction applied, thus
				extending the tax credits claimed over the 15-year compliance period. The tax
				credits may be generated annually on a building-by-building basis beginning
				either with the taxable year in which the building is placed in service or, at
				the election of the taxpayer (owner), the succeeding taxable year.
For buildings placed in service in 1987, the credit was taken
				at annual rates of 9 percent (for the 70 percent value credit) and 4 percent
				(for the 30 percent value credit). Three types of credit are available for
				low-income buildings placed in service after 1987. The first type of credit is
				a 9 percent annual credit for the cost of a new building or qualifying
				rehabilitation costs, without a federal subsidy. The second type of credit is a
				4 percent annual credit for the cost of a new building or substantial
				rehabilitation built with a federal subsidy. The third type of credit is a 4
				percent annual credit for the cost of buying an existing building for which
				substantial rehabilitation expenditures are also incurred. Although the 9
				percent and 4 percent credits are called 9 percent and 4 percent, the figures
				are actually estimates. The IRS sets the figures each month based upon
				fluctuating interest rates. A project can qualify for one of the three credits
				or a combination of the credits.
Low income housing tax credit amounts are based on the cost of
				a building and the portion of the project that low-income households occupy.
				The cost of acquiring, rehabilitating, and constructing a building constitutes
				the building's eligible basis. The portion of the eligible basis attributable
				to low-income units is the building's qualified basis. Generally, the qualified
				basis excludes the cost of land. Developers are urged to consult legal counsel,
				as other costs may be excluded.
Low-income housing tax credit projects that use federal
				subsidies generally receive a smaller credit. If federally subsidized loans are
				used to finance substantial rehabilitation or new construction, either the
				eligible basis of the building must be reduced or the 30% credit must be used.
				Federally subsidized loans include below-market federal loans and tax-exempt
				financing.
The compliance period for any building is the period beginning
				on the first day of the first taxable year of the credit period of such
				building and ending fifteen (15) years from such date. Beginning in 1990, ADFA
				implemented the Land Use Restriction Agreement (
-
LURAII), which
				extended the compliance period for an additional fifteen-year period. The LURA,
				recorded in the real estate records of the county in which the development is
				located, is a binding agreement of the owner and any successors to maintain
				specific occupancy and affordability requirements for the development.
Projects placed in service before the use of the LURA (1987,
				1988, 1989,) must comply with the 15-year compliance period only. In reference
				to those projects, ADFA will review the IRS form 8609 to determine the year the
				owner claimed the tax credits. If there is no completed copy of the IRS form
				8609 available, ADFA staff will ask the project owner to confirm the credit
				year. Upon determining that the 15-year compliance period has expired, ADFA
				will notify the owner that the compliance period has ended and that ADFA will
				no longer conduct physical or tenant file audits.
After the initial 15-year compliance period, ADFA will continue
				to monitor developments with extended use agreements. ADFA intends to enforce
				the terms and agreements set forth in the Land Use Restriction Agreement and
				Declaration of Restrictive Covenants for the Low Income Housing Tax Credits
				(
-
LURAII) and ADFA's Compliance Monitoring Policies and Procedures
				Manual for the LIHTC Program. ADFA will not modify any of the Section 42
				requirements. Owners will be allowed specific time periods, as deemed
				appropriate by ADFA, to correct items of noncompliance.
Remedies for noncompliance include, but are not limited to, the
				following:
.
Temporary suspension or permanent expulsion from
				participation in the LIHTC, HOME, or any other program administered by
				ADFA;
.
Notification to other lenders or agencies that
				provided funding for the project;
.
Notification to the limited partners,
				syndicators, board of trustees, or any other affiliate of the project;
				and
.
Legal action.
I.D
FOUR TAX CREDIT
			 REGULATION PERIODS
Since the 1986 enactment of the LIHTC, Congress has changed or
				amended the laws governing the program, yet many changes have not been
				retroactive. In some cases, the change in regulations brought forth by a
				technical correction is minor; in others, the effect is substantial. Owners
				must be aware of the differences in regulations and which credit period applies
				to each building or development. The period considered for
				management/compliance purposes is the year in which tax credits were allocated
				by ADFA. Currently, there are four (4) specific credit regulation periods as
				follows:
1. January 1, 1987 - December
			 31, 1989
Properties receiving credit allocations during this period
				based rent on the number of people living in the unit. Rents were subject to
				change whenever the household composition changed. The Omnibus Reconciliation
				Act of 1993 allowed owners of these developments a one-time opportunity to
				either maintain the per-person formula or elect to change to the formula based
				on apartment bedroom size used for 1990 and later allocations. The owner had to
				write to the IRS no later than February 6, 1994, to request this election. Once
				made, the decision to switch formulas or retain the per-person formula was
				irrevocable. The new rent formula only affected any new move-ins on or after
				the election date. A copy of the election letter must be provided to ADFA or
				available during the on-site inspection.
2. 1990
Rent is calculated by number of bedrooms in a unit. This rule
				was not retroactive. Gross Rent Floor was adopted. This rule was not
				retroactive. See definition herein. Extended Low-income Housing Commitment
				required. See Section I.C for further discussion.
3. 1991
AFDC Student Rule exception was retroactive. See Section III.P
				FmHA Overage Rule (not retroactive) is discussed in Section III.F. Extension on
				Initial Compliance with Set-Aside (not retroactive). Minimum Set-Aside
				requirements are discussed in Section III.A.
4. August 10, 1993
Married Students Rule (retroactive). We discuss students in
				Section III.Q.
Single Parent Student Rule (not retroactive).
1987-1989 Rent Change Option (special rule)
Section 8 requirement (retroactive) that states owners cannot
				refuse to lease to
Section 8 tenants.
References: Blue Book, Section 42 of the Code, Congressional
				Laws
I.E
ADDITIONAL
			 REVENUE RULINGS AND LEGISLATION
Two important revenue rulings were later issued that were not
				retroactive.
September 9, 1992
IRS Revenue Ruling 92-61 deals with treatment of staff
						  units as part of the eligible basis.
September 26, 1997
Section1.42-15 Available Unit Rule was adopted as an
						  amendment to the regulations. This rule allows over-income persons in LIHTC
						  units to relocate to another unit in the same building.
The IRS subsequently issued other important rulings, especially
				notable are The Guide for Completing Form 8823, revised October 2009, and the
				Housing and Economic Recovery Act of 2008.
IMPLEMENTATION OF THE TAX CREDIT ASSISTANCE PROGRAM (TCAP) On
				February 17, 2009, the president of the United States signed the American
				Recovery and Reinvestment Act of 2009 (
				Public
				Law 111-5 ). The purpose of the Recovery Act was
				to jumpstart the nation's ailing economy, with a primary focus on creating and
				saving jobs in the near term and investing in infrastructure that will provide
				long-term economic benefits. Title XII of the Recovery Act appropriated funds
				for capital investments in Low-Income Housing Tax Credit (LIHTC) projects. All
				TCAP projects must have LIHTCs. The project must maintain eligible basis and
				comply with all other requirements of Section 42 throughout the compliance
				period. A violation under Section 42 also constitutes a violation under TCAP.
				ADFA staff will monitor TCAP projects in the same manner as LIHTC projects.
				Specific attention will be paid to the individual TCAP Agreements for
				compliance with all the terms thereof.
Owner's breach of any provision of the TCAP Agreement may
				constitute an event that ADFA may, in its discretion, deem a recapture event.
				If so, ADFA will give owner notice and an opportunity to return to compliance.
				ADFA shall have full recourse against applicable parties for the full amount of
				recapture.
IMPLEMENTATION OF SECTION 1602: Grants to states for Low-Income
				Housing Projects in Lieu of Low Income Housing Tax Credits:
The 1602 Program is sometimes called the Exchange Program;
				however, this does not mean that a building that has been allocated LIHTCs must
				exchange these LIHTCs in order to receive Section 1602 funds. The -Exchange
				program! refers to the exchange that takes place at the state level, where ADFA
				exchanges all or part of the State Housing Credit Ceiling (to the extent
				permitted under Section 1602) for Section 1602 funds. The purpose of the 1602
				program is to provide funds to develop low-income housing where there is a
				funding gap. Just as with LIHTC projects, buildings receiving Section 1602
				funds are subject to a 15-year compliance period. ADFA will monitor the
				projects for compliance with the terms and conditions set forth in the extended
				use agreement.
Section 1602 recapture event occurs any time within the 15-year
				compliance period (as defined in Section 42(i)(1) of the Internal Revenue Code
				when the applicable fraction of a building under Section 42(c)(1)(B) falls
				below the percentage of Section 1602 funds that comprise the eligible basis of
				the building (the Section 1602 percentage), or below the minimum set-aside
				elected for the building under Section 42(g)(1), whichever is greater.
				Individual extended use agreements will specify the 1602 percentage.
When a recapture event occurs, the full amount of the Section
				1602 subaward is owed minus 6.67 percent (1/15 ) for each full year of the
				building s 15-year compliance where a Section 1602 recapture event has not
				occurred.
I.F
RESPONSIBILITIES OF OWNERS
Compliance with the requirements of the Code is the development
				owner's responsibility. ADFA's obligation to monitor the development for
				compliance does not make ADFA liable for an owner's non-compliance, nor does it
				alleviate an owner's duty to comply with applicable Code requirements. In
				Compliance with Section 42 of the Code and in accordance with ADFA's Compliance
				Monitoring Policies and Procedures Manual for the LIHTC Program, the owner, by
				accepting the allocation of low-income housing tax credits, is obligated
				to:
(1) Manage the development in
			 accordance with the Code, and all other applicable regulations and
			 agreements;
(2) Ensure that, once
			 the development is placed in service, it is suitable for occupancy by meeting
			 Uniform Physical Conditions Standards (
-
UPCSII) and/or
			 ADFA-approved design standards.
(3)
			 Ensure that the development is continually managed in accordance with all
			 applicable federal, state, local and fair housing laws;
(4) Ensure that the complete records for the
			 first year of the credit period are maintained for a minimum of twenty-one (21)
			 years ;
(5) Ensure that the records
			 for subsequent years are maintained for a minimum of six (6) years after the
			 due date for filing the federal income tax return for that year;
(6) Immediately notify ADFA of the placed in
			 service date, initial credit year, completion of the development, as well as
			 any material changes such as ownership or management that is made at any time
			 during all phases of development; see pages 40 -41 for ownership or management
			 notification requirements;
(7)
			 Furnish to ADFA a
signed
copy of the
completed
IRS form 8609, and make available all such
			 8609 forms to ADFA's staff during any on-site review;
(8) Cooperate with ADFA's staff during
			 compliance reviews;
(9) Furnish a
			 copy of the election request to the IRS, showing change from family size to
			 unit size in determining maximum allowable rents;
(10) Furnish the annual Owner's Certificate
			 of Continuing Program Compliance no later than February 1 of the year following
			 the first credit year and every year thereafter during the compliance period.
			 ADFA will no longer provide copies of forms. The owner is responsible for
			 downloading forms from the ADFA website-
www.arkansas.gov/adfa
. The Owner's
			 Certification, attached hereto as Exhibit B, is an annual requirement for the
			 duration of the compliance period. Tenant data must be submitted electronically
			 via ADFA's computer software. Owners or managers MUST enter tenant data online
			 as events (move ins, recertifications, move outs, etc.) occur. ADFA requires
			 that you update the system no later than the 15 day of EACH month following the
			 event. Your data must be accurate and current.
(11) Assume liability for any instance of
			 non-compliance and to correct such deficiencies as required; and
(12) Notify ADFA of any casualty loss of a
			 unit or building within thirty (30) days of the loss.