LIHTC Income Averaging

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1 LIHTC Income Averaging 2018 Tuesday, August 21, :45am 12:00pm Moderator: Sarah Tirrell, JLL Valuation & Advisory Services Presenting Sponsor

2 Housing Credit Income Averaging Garth Rieman Director of Housing Advocacy and Strategic Initiatives NCSHA Presenting Sponsor

3 Housing Credit Income Averaging Established in omnibus spending and tax bill, 2018 Allows new Housing Credit minimum set-aside election Allows persons earning up to 80% of area median income (AMI) to qualify for Housing Credit units Average income for qualified units in a property must not exceed 60% of AMI At least 40% of units in a property must be affordable to eligible households

4 Housing Credit Income Averaging Income and rent rules apply to designated income/rent levels of units, not actual tenant incomes Designated income/rent levels may only be set at 10 percent increments beginning at 20% of AMI (20, 30, 40, etc.) Income averaging applies to rent limits as well as income limits

5 State Implementation NCSHA does not believe states have a legal obligation to allow income averaging NCSHA encourages states to provide guidance on their income averaging policy, in Qualified Allocation Plan or other documents States may charge higher compliance monitoring fees for developments that elect income averaging

6 Potential IRS Guidance NCSHA and others have submitted a list of recommendations and questions to the Internal Revenue Service (IRS) for guidance. IRS has published a new 8609 form to reflect income averaging option.

7 Eligibility Issues Housing Credit developments that have already made a minimum setaside election may not revoke them. Owners cannot switch from one set-aside system to income averaging. States may not modify Housing Credit extended-use agreements after year 15 to allow income averaging. Income averaging can apply to tax-exempt bond-financed (4%) deals, but these properties must also follow bond set-aside elections (i.e., 20 at 50 or 40 at 60).

8 Implementation Issues Process for designating units at specific income levels under income averaging still uncertain Handling the next available unit rule also uncertain States are likely to have flexibility Noncompliance will be reportable on Form 8823

9 State Implementation Many states are anxious to allow income averaging and face substantial interest from owners and other stakeholders. Several states have already provided guidance on implementation. Including CA, CT, GA, IN, OH, PA, WA

10 State Implementation: Common Themes Project sponsors must create a plan and document investor and funder consent HFAs considering whether to establish application scoring criteria Importance of market studies showing sufficient demand at each income targeting level Treat multi-building developments as a single property Address compliance issues

11 State Implementation Questions Whether to allow properties to change unit designations in the future. How to address economic feasibility issues. Impact on mixed-income opportunities.

12 Garth Rieman Director of Housing Advocacy & Strategic Initiatives, NCSHA (202)

13 Compliance Issues Mike Celkis, CPA Partner, CohnReznick LLP Presenting Sponsor

14 Mike Celkis, CPA Partner, CohnReznick LLP (512)

15 Income Averaging in Oklahoma Sandra McGougan, HCCP, HCM-HF Housing Development Programs Compliance Supervisor Oklahoma Housing Finance Agency Presenting Sponsor

16 Sandra McGougan, HCCP, HCM-HF Housing Development Programs Compliance Supervisor Oklahoma Housing Finance Agency (405)

17 Opportunities and Challenges Jim Rice, CPA Owner, Arzon Development Company Presenting Sponsor

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21 Opportunities and Challenges Best Uses Developments with higher gap higher rents justify higher debt Higher income areas where low to moderate income residents can afford higher rent levels Applicants on assistance, project or tenant based, that use ADJUSTED income - especially Elderly residents with a lot of medical bills might be over 60% AMI but have very little adjusted income Resyndication of affordable properties where existing resident rents may have increased

22 Cautions Violation of the 60% AMI average development income will cause loss of credits on all units over 60% (not just the OI unit) If minimum of 40% of units don t meet 60% AMI, development will lose ALL credits. More than ever, developers should be cautious about targeting only minimum requirements ALLOW A BUFFER) No federal requirement for distribute unit sizes to meet 60% unit test but credit calculation will still be based on smaller of unit or floor space

23 Cautions Contd. Bond units must meet BOTH 60% Average Income and 40/60 or 20/50 bond election Developments with market units will require annual recertification to meet next available unit rule The AUR test is the GREATER of designated income layer or 60% AMI so any layers below 60% receive an additional buffer

24 Other Thoughts OHFA has been progressive in rollout of new set aside and should be commended. However Federal rules do not require equal distribution of unit sizes but state reserves right to do so seems congress intent was to allow more debt to spread limited credits Increase in monitoring fees Agree with authorizing in QAP but urge delay in implementation compliance is harder but with software, should be very little additional monitoring effort required

25 Oklahoma Resyndication Prohibition Encourage additional consideration of ban on resyndication properties - IRS says set-aside election on 8609 is irrevocable true but only for that ENTITY, resyndication will be an entirely new entity Existing qualified resident income may have increased After the 15 years minimum wait period, area market mix may no longer reflect original set aside elections Similar to bonds, and failing a more liberal interpretation, original set aside such as 40/50, could be met in addition to the income averaging

26 Jim Rice, CPA Owner Arzon Development Company (405)

27 LIHTC Income Averaging 2018 Tuesday, August 21, :45am 12:00pm Moderator: Sarah Tirrell, JLL Valuation & Advisory Services Presenting Sponsor