HOUSING TAX CREDIT PROGRAM COMPLIANCE MANUAL

Transcription

1 HOUSING TAX CREDIT PROGRAM COMPLIANCE MANUAL South Dakota Housing Development Authority PO Box 1237, Pierre, SD Phone FAX

2 PREFACE This manual is a training and reference guide for the administration of the Housing Tax Credit (HTC) Program. It is intended to answer questions regarding the procedures, rules, and regulations that govern the HTC projects. The manual should be used in conjunction with, and as a supplement to, Section 42 of the Internal Revenue Code. If a determination is made that any provision of this manual is in conflict with Section 42 of the Internal Revenue Code, the Internal Revenue Code will govern. The laws and regulations governing the Housing Tax Credit (HTC) Program as well as the interpretation of these laws can and do change. Owner and Managers should keep abreast of all changes in the Internal Revenue Code and the Code of Federal Regulations that may affect their properties. This may require consulting qualified legal and tax professionals for advice. Compliance monitoring by South Dakota Housing Development Authority (SDHDA) will be administered through the Asset Management and Compliance Division. The SDHDA contact for the HTC compliance monitoring is Julie Anderson. She can be reached directly at (605)

3 Table of Contents INTRODUCTION... 1 Compliance Period... 1 RESPONSIBILITIES... 2 The Owner... 2 The South Dakota Housing Development Authority... 2 COMPLIANCE PROCEDURES... 3 Record Keeping and Record Retention... 3 Owner Certifications... 4 REGULATIONS... 5 Rent Requirements... 5 Number of Persons Per Unit... 7 QUALIFICATION OF APPLICANTS... 8 The Application... 8 Leasing to Students... 8 Change in Household Composition... 9 General Income Verification Requirements Effective Term of Verification Acceptable Forms of Verification Unemployed Applicants Annual Income Annual income includes: Annual income excludes: Calculating Annual Income Assets Valuing Assets Assets include: Net family assets do not include: Asset Verification Guidelines THE OWNER'S CERTIFICATE OF CONTINUING PROGRAM COMPLIANCE THE COMPLIANCE MONITORING STATUS REPORT THE RANDOM MANAGEMENT REVIEW COMPLIANCE MONITORING FEE NONCOMPLIANCE LIABILITY LEAD BASE PAINT 22 i

4 EXHIBITS Exhibit A - Annual Owner Certification...23 Exhibit B Tax Credit/HOME Compliance Monitoring Status Report...26 Exhibit C Move-in Move-out Report...27 Exhibit D - Tenant Income Certification...28 Exhibit E - Authorized Representative Designation...33 Exhibit F - Under $5,000 Asset Verification...34 Exhibit G - Child Support and/or Alimony Verification (Clerk of Court)...35 Exhibit H - Child Support and/or Alimony Verification (Former Spouse)...36 Exhibit I - Document Viewed or Telephone Information Received Form...37 Exhibit J - Education Assistance Verification...38 Exhibit K - Employment Verification...39 Exhibit L - Military Pay Verification...40 Exhibit M - Pension or Workers Comp Verification...41 Exhibit N - Railroad Retirement Verification...42 Exhibit O - Section 8 Eligibility Verification...43 Exhibit P - Social Security Check Verification...44 Exhibit Q - Social Security Verification...45 Exhibit R - Social Services Verification...46 Exhibit S - Certification of Zero Income...47 Exhibit T - Unemployed Benefits Verification...48 Exhibit U - Veteran's Administration Verification...49 Exhibit V - Student Verification...50 Exhibit W - Asset Verification...51 ii

5 I. INTRODUCTION In 1986, the Tax Reform Act enacted by Congress established a tax credit for low-income rental housing that was directly based on the number of low-income tenants residing in the complex. Section 252 of the Act and Section 42 of the Internal Revenue Code (IRC) govern the Housing Tax Credit (HTC) program which began in 1987 and received permanent authorization with the Omnibus Budget Reconciliation Act of The HTC provides incentive for investment of equity capital in the development of affordable single family or multifamily rental housing. The 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 units that will remain income and rent restricted for an extended period of time. Under Section 42(m)(1)(B)(iii) of the Internal Revenue Code an allocating agency must have a procedure for monitoring compliance with the provisions of the Code and notifying the Internal Revenue Service (IRS) of any noncompliance of which SDHDA becomes aware. The monitoring requirements are effective on January 1, 1992, and apply to all buildings placed in service for which the HTC determined under the Code is, or has been, allowed at any time. The South Dakota Housing Development Authority (SDHDA), as the allocating agency, is authorized by the Code to charge a reasonable fee to cover the costs of compliance monitoring. A. Compliance Period The tax credit program requires fifteen (15) years of continuous compliance, but allows the credit period to be accelerated into ten (10) years. Section 42 provides that each individual state has the power to impose additional requirements over and above the federal standards to better address local housing needs inclusive of extending the period for which the property is kept as affordable housing. Beginning with 1990 allocations (and no later than 1991) state housing credit agencies began the requirement of extended low-income housing commitments, also known as restrictive covenants, that are recorded in local land records when the project places in service. It is important for management to understand that such projects are committed to a 30-year time frame of compliance with tax credit eligibility requirements. In addition, an owner is prohibited from evicting existing tenants for other than good cause, and from raising their rents beyond the tax credit maximum rents, for a period of three (3) years after the compliance period is completed. p:\am-c\docs\manuals\tccompi.doc Page

6 II. RESPONSIBILITIES A. The Owner Each owner has chosen to utilize the HTC Program (the "Program ) to take advantage of the tax benefits provided. In exchange for these tax benefits, certain requirements must be met. Prior to issuance of a final tax credit allocation, the owner and accountant must certify as to the total project costs and that all requirements of the Program have been met. Any violation of the requirements of the Program could result in the loss of tax credits to the owner. The owner is responsible for compliance with the Code. SDHDA is assigned the responsibility for monitoring compliance. Any and all financial consequences to the owner as a result of noncompliance, whether identified by SDHDA or by the IRS, will be the responsibility of the owner. The owner is responsible for insuring that the project is properly administered. The owner must make certain that the on-site management team complies with all appropriate rules, regulations and policies that govern the project. B. The South Dakota Housing Development Authority SDHDA allocates tax credits through the HTC Program within the State of South Dakota. Once a final allocation is awarded to a project, the Code requires SDHDA to monitor compliance by reviewing certain records kept by the owners of low-income housing projects. The proposed regulations for inspection of new buildings require that, by the end of the calendar year following the year the last buildings in the project is placed in service, SDHDA conduct on-site inspections of the projects and review the lowincome certification, the documentation supporting such certification, and the rent record for at least 20 percent of the units in the project. The proposed regulations for three year inspections require that, at least once every 3 years, SDHDA conduct on-site inspections of all buildings in each low-income housing project and, for each tenant in at least 20 percent of the project's low-income units selected by the Agency, review the low-income certification, the documentation supporting such certification and the rent record. SDHDA is to notify the owner of a low income housing project in writing as soon as possible if SDHDA discovers on audit, inspection, review, or in some other manner, that the project is not in compliance with the Code. p:\am-c\docs\manuals\tccompi.doc Page

7 The owner has an opportunity to correct noncompliance within 90 days from the date of the notice to the owner. An extension of up to six months may be granted by SDHDA for good cause as determined by SDHDA. SDHDA is required to notify the IRS of an owner's noncompliance no later than 45 days after the end of the allowed time for correction, whether or not the noncompliance is corrected. SDHDA will notify the IRS by filing Form 8823, explaining the nature of the noncompliance and indicating whether the owner has corrected the noncompliance. III. COMPLIANCE PROCEDURES A. Record Keeping and Record Retention Owners are required to keep separate records for each qualified low income building in the project. These records need to be maintained for each year in the compliance period showing the following information: the total number of residential rental units in the building, including the number of bedrooms and the size in square feet of each residential rental unit; the percentage of residential rental units in the building that are low income units; the rent charges on each residential rental unit in the building, including any utility allowances; the number of occupants in each low income unit; the low income unit vacancies in the building and information that shows when, and to whom, the next available units were rented; the annual low income certification of each low income tenant per unit; the documentation to support each low income tenant's income certifications (for example, a third party verification); the eligible basis and qualified basis of the building at the end of the first year of the credit period; and the character and use of the nonresidential portion of the building included in the building's eligible basis under the Code (e.g. tenant facilities that are available on a comparable basis to all tenants and for p:\am-c\docs\manuals\tccompi.doc Page

8 which no separate fee is charged for use of the facilities, or facilities reasonably required by the project). Owners are required to keep all records for each building for a minimum of six years after the due date for that year's federal income tax return. The records for the first year of the credit period, however, must be retained for at least 6 years after the due date for filing the tax return for the last year of the compliance period, bringing the total retention for the first year to 21 years. B. Owner Certifications The certification provisions of the Code require the owner of a low income housing project to certify at least annually to SDHDA that the project meets the following for the preceding 12 month period: the requirements of the test or the test, as applicable, at least 20 percent or more of the residential units in the project are both rent-restricted and occupied by individuals whose income is 50 percent or less of area median income, or at least 40 percent or more of the residential units in the Project are both rent-restricted and occupied by individuals whose income is 60 percent or less of area median income; that there was no change in the applicable fraction of any building in the project, or that there was a change, and a description of the change; the owner has received an annual low income certification from each low income tenant and documentation to support that certification; that each low income unit is rent-restricted as defined in the Code; that all units in the project are for use by the general public and are used on a non-transient basis; that each building in the project is suitable for occupancy taking into account local health, safety, and building codes; that there has been no change in any project's eligible basis under the Code, or that there has been a change, with an explanation of the change; p:\am-c\docs\manuals\tccompi.doc Page

9 that all tenant facilities included in the eligible basis of any building in the project are provided on a comparable basis without a separate fee to all tenants in the project; that if a low income unit in the project becomes vacant during the year, reasonable attempts are made to rent that unit to tenants having a qualifying income and while the unit is vacant no units of comparable or smaller size are rented to tenants not having a qualifying income; that if the income of tenants of low income units increases above the limit allowed in the Code, the next available unit of comparable or smaller size will be rented to tenants having a qualifying income; and that an extended use agreement as described in the Code is in effect for projects receiving allocations on or after January 1, The Owner is required to submit the following to SDHDA each year of the compliance period as defined in the Land Use Restrictive Covenant: the Annual Owner Certificate of Continuing Program Compliance (Exhibit A), the Compliance Monitoring Status Report (Exhibit B), and the Move-in Move-out Report (Exhibit C). The annual fees for compliance monitoring are due on the anniversary date each project was placed in service. SDHDA will mail a compliance monitoring statement approximately thirty days prior to the projects anniversary date. Fees are to be submitted directly to SDHDA. A. Rent Requirements IV. REGULATIONS For projects receiving credit allocations during the years 1987 through 1989, rent is based 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 projects a one-time opportunity to either maintain the per person rent 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 irrevocable election. The new rent formula only affected new moveins on or after the election date. A copy of the election letter must be provided to SDHDA. Units in projects receiving tax credit allocations after January 1, 1990, must be rent-restricted to comply with the low income set-aside requirements. A residential unit is rent-restricted if the gross rent with respect to such unit does not exceed 30 percent of the imputed income limitation applicable to such unit. The gross rent must include an allowance for tenant-paid utilities. p:\am-c\docs\manuals\tccompi.doc Page

10 Owners will need to get the utility allowance information from local suppliers each year. HUD regulated buildings should use HUD approved utility allowances. Rural Development regulated buildings should use RD approved utility allowances. Conventional buildings should use PHA utility allowances unless utility company data can show alternate amounts. Conventional buildings with Section 8 subsidy through certificates or vouchers should use the PHA Section 8 existing utility allowances for those Section 8 units. Any new allowance must be implemented within 90 days of the change. SDHDA publishes income and rent limits, based on area median income, for projects receiving an HTC allocation and will provide updated limits as they become available. Rent changes, based on updated rent limits, are to be made only at move-in or at time of annual recertification. The amount of rent allowed to be collected by a project receiving an allocation after January 1, 1990, is based on the number of bedrooms in the unit as opposed to the actual family size. For example, the maximum rent for an efficiency apartment with no separate bedroom would be based on the income limit for a one person household regardless of the actual number of persons occupying the unit. Maximum rent is otherwise based on the qualifying income limits for 1.5 persons for each bedroom in the unit. For one bedroom units, assumed to be occupied by 1.5 persons, the maximum rent is determined by using the average of the one and two person income limits. The maximum gross rent for a three bedroom unit, assumed to be occupied by 4.5 household members, is determined by using the average of the four and five person income limits. The maximum gross rent includes the amount of tenant paid utilities inclusive of costs for heat, lights, air conditioning, water, sewer, oil and gas where applicable. Utilities do not include telephone or cable television. Whenever the tenant directly pays utility costs, a utility allowance must be used to determine the maximum unit rent that may be charged. The utility allowance must be subtracted from the maximum gross rent to calculate the maximum tenant portion of rent. p:\am-c\docs\manuals\tccompi.doc Page

11 B. Number of Persons Per Unit There is no regulation governing the number of persons allowed to occupy a unit based on size. It is important, though, to be consistent when accepting or rejecting applications. It is recommended that the owner determine the minimum and maximum number of people that will be allowed to occupy each size unit and put that formula in writing as part of the management plan. To determine the appropriate unit size for a household, owners may consider: all full-time members of the household; children who are away at school but live with the family during school recesses; children who are subject to a joint custody agreement but live in the unit at least 50% of the time; an unborn child or children in process of being adopted; foster children; and live-in attendants. Some commonly accepted occupancy standards are: a maximum of two persons may occupy a bedroom; unrelated adults and persons of the opposite sex (other than spouses) may occupy separate bedrooms; children of the same sex may share a bedroom; and children should not share a bedroom with parents. These principles would result in the following standards: Minimum No. Maximum No. of persons of persons Unit Size in Household in Household 0 BR BR BR BR BR 6 8 p:\am-c\docs\manuals\tccompi.doc Page

12 V. QUALIFICATION OF APPLICANTS Applicants for low income, rent-restricted units should be advised early in their initial visit to the project that there are maximum income limits that apply to these units. Management should explain to the tenants that the anticipated income of all persons expecting to occupy the unit must be verified and included on a Tenant Income Certification form prior to occupancy and that they will be required to have their financial status reviewed annually. A. The Application A fully completed application is critical to an accurate determination of eligibility. The information furnished on the application should be used as a tool to determine all sources of income and assets. SDHDA requires the use of the Tenant Income Certification (Exhibit D). It is recommended that roommates complete separate applications. After the household completes the Tenant Income Certification (Exhibit D), the owner must verify all income and assets. The anticipated earned income of every prospective household member 18 or older must be verified. Unearned income, assets and asset income of all household members, including minors, must be verified. If determined eligible to occupy a low income unit, the owner then executes the Certification by completing Section 8 on the Certification. The Certification along with the lease is to be executed prior to move-in. All occupants in a low income unit must be certified and under lease. Upon each anniversary date of the tenant's move-in, a subsequent Application/Certification must be completed and all resident income reverified. Recertification must be completed within 12 months from the initial certification date or 12 month from the most recent certification. This must be done to determine if the unit is still occupied by an eligible household. A unit does not lose its status as a low income unit solely because of an increase in the household's income. Once a unit qualifies as a low income unit it continues to qualify as such until the tenant's income exceeds 140 percent of the applicable income limit. Even then, the unit remains a low income unit as long as the owner continues to fill vacancies in comparable or smaller units with tenants who qualify as low income tenants and the units continue to be rent restricted. Tenants whose income exceeds 140 percent of median income are allowed to relocate to another unit within the same building. The unit ceases to qualify as a low income unit if any vacancy in a comparable or smaller unit is filled with an income-ineligible tenant. B. Leasing to Students p:\am-c\docs\manuals\tccompi.doc Page

13 Many students are considered to be transient and thus are not HTC eligible. The issue with students is only a concern when everyone in the household is a fulltime student, defined by IRS as taking 12 credit hours a semester or attending school full-time 5 months per year at an educational institution with regular facilities, other than correspondence or night school. The IRS has made it clear that the student status is to be monitored on a tax-year basis. In addition, there is no grandfathering of eligibility because the tenant was not a student when they moved in and later became one. For this reason, tenant student status must be re-verified at annual recertifications to confirm continuing eligibility for students. A household comprised entirely of full-time students may not be counted as qualified households unless the household meets one of the four exceptions: all household member are full-time students, and file a joint tax return; the household consists of single parents and their children, and such parents and children are not dependents of another individual; at least one member of the household receives assistance under Title IV of the Social Security Act (i.e., AGDC assistance); or at least one member of the household is enrolled in a job training program receiving assistance under the Job Training Partnership Act, Workforce Reinvestment Act or similar federal, state, or local laws. TANF is an acceptable Title IV program exception. C. Change in Household Composition All household members must be certified and under lease. In the event the tenant in a set-aside unit later wishes to have an additional person move into the unit, the prospective tenant must complete an Application for Housing. IRS rules require HTC property owners to recertify tenant income eligibility at least annually. IRS does not require interim recertifications. The lease must include the legal name(s) of the parties to the agreement and all other occupants, a description of the unit to be rented, the date the lease became effective, the term of the lease, the rental amount, the use of the premises, the rights and obligations of the parties and signature dates. The initial lease term must be six (6) months on all tax credit units, except for single room occupancy. p:\am-c\docs\manuals\tccompi.doc Page

14 The lease should also inform the tenant that fraudulent statements are grounds for eviction. If a household member vacates the unit, the unit will remain in the category as originally certified. The tenant file should be documented when any household member vacates the unit. Should existing tenant(s) wish to transfer to a different set-aside unit, the tenant(s) must be treated exactly as prospective tenants in a new move-in. Therefore, all application, verification and certification procedures must be completed for the transferring tenant(s) as of the transfer date. A previously qualified tenant whose income now exceeds the applicable income limits may relocate to another low income unit within the same building, as the units will swap status. However, a tenant whose current income exceeds the applicable income limit would not be eligible to move to a tax credit unit in another building. D. General Income Verification Requirements All regular income sources, including asset income, must be verified. Exhibit D must be used as a basis for obtaining third party verification. Exhibit D, with supporting documentation, will be reviewed by SDHDA staff or its Contract Agent during an on -site review. Written verification of income directly from the source (third -party verification) must always be attempted. (See Acceptable...below) Applicants must be asked to sign two copies of each verification form. The second copy may be used if the first request has not been returned in a timely manner. Income verification requests must be sent directly to and from the source, not through the tenant. It is suggested that a self-addressed, stamped envelope be included with the request for verification. When written verification is not possible prior to move-in, direct contact with the source shall be acceptable to SDHDA but must be followed up by written verification. The conversation must be documented in the applicant's file to include all the information that would be included in a written verification. The name and title of the contact, the name of the management representative accepting the information, and the date must be included. Document Viewed or Telephone Information Received Form (Exhibit I) may be used for documentation of a direct contact. Management should give the applicant the opportunity to explain any significant differences between the amounts reported on the application p:\am-c\docs\manuals\tccompi.doc Page

15 and amounts reported on third-party verification in order to determine actual income. The file must be documented to explain the difference. E. Effective Term of Verification Written verifications of income are valid for ninety (90) days prior to move-in and annual recertification. After ninety (90) days, the information may be verbally updated from the source for an additional thirty (30) days. After this time a new written verification must be obtained. Verbal update must be documented in the tenant's file on the Document Viewed or Telephone Information Received Form (Exhibit I) or similar form. F. Acceptable Forms of Verification The annual income for a household receiving housing assistance payments under Section 8 may be verified by obtaining a statement from the Public Housing Authority (PHA). The owner must submit the Section 8 Eligibility Verification (Exhibit O) to the PHA for completion. If the form shows that the tenant's income does not exceed the applicable income limit, the household is eligible to occupy a rent-restricted unit. Acceptable forms of verification for other specific types of income situations are as follows: A. Employment Income lst choice: Employment Verification (Exhibit K) completed by the employer or statement from employer on company letterhead 2nd choice: check stubs or earnings statements showing the employee s gross income per pay period and frequency of income B. Self - Employment Income 1st choice: federal tax return (Schedule C or F) or accountant's statement of net income 2nd choice: current financial statements of the business and a certification from the applicant giving the anticipated income for the 12 months following certification (this method to be used only for the first year of self - employment) C. Social Security lst choice: Social Security Verification (Exhibit Q) completed by the agency providing the benefits p:\am-c\docs\manuals\tccompi.doc Page

16 2nd choice: most recent award or benefit notification letter prepared and signed by the authorizing agency 3rd choice: Social Security Check Verification (Exhibit P) completed by the manager and tenant D. Railroad Retirement 1st choice: Railroad Retirement Verification (Exhibit N) completed by the firm providing the benefits 2nd choice: most recent award or benefit notification letter prepared and signed by the authorizing firm E. Unemployment Compensation 1st choice: Unemployment Benefits Verification (Exhibit T) completed by the unemployment compensation agency 2nd choice: records from the unemployment office stating payment dates and amounts F. Workers Compensation or other Pension 1st choice: Pension or Workers Comp Verification (Exhibit M) completed by the agency providing the benefits 2nd choice: most recent award or benefit notification letter prepared and signed by the authorizing agency G. Veterans Benefits 1st choice: Veterans Verification (Exhibit U) completed by the agency providing the benefits 2nd choice: most recent award or benefit notification letter prepared and signed by the authorizing agency H. Military Pay 1st choice: Military Pay Verification (Exhibit L) completed by the employer or statement from employer on business letterhead p:\am-c\docs\manuals\tccompi.doc Page

17 2nd choice: check stubs or earnings statements showing the employee's gross pay per pay period and frequency of pay I. Child Support and/or Alimony 1st choice: Child Support and/or Alimony Verification (Exhibit G) completed by the Clerk of Court for court ordered support 2nd choice: Child Support and/or Alimony Verification (Exhibit H) completed by spouse 3rd choice: copy of separation or divorce decree stating the amount and type of support payment schedule and a copy of the latest support check J. Welfare (AFDC) 1st choice: Social Services Verification (Exhibit R) completed by the agency providing the benefits 2nd choice: copy of AFDC budget signed and dated by caseworker K. Recurring Contributions and Gifts 1st choice: certification signed by the person providing the assistance giving the purpose, dates and value of the gifts, or a verification letter from the bank, attorney, or a trustee administering the contribution 2nd choice: certification from the applicant giving the purpose, dates and value of the gifts L. Scholarships, Grants, VA Educational Benefits 1st choice: Educational Assistance Verification (Exhibit J) completed by the school 2nd choice: educational institution's written confirmation (award letter) of amount of assistance and amount designated for rent, utilities, or room and board 3rd choice: copies of latest benefit checks, canceled checks or receipts for tuition, fees, books, and equipment, (if such income and expenses are not expected to change for the next 12 months) p:\am-c\docs\manuals\tccompi.doc Page

18 G. Unemployed Applicants The income of unemployed household members with regular income from any source such as Social Security, pension, recurring gifts, etc., must be verified as covered previously. If a household member is currently unemployed and claiming zero (0) income, the tenant must provide evidence of anticipated income for the certification year by completing a Certification of Zero Income (Exhibit S). Unemployed applicants with no verifiable income may not be counted as low income, but may occupy a market rate unit if permitted by the management plan. The exception to this would be an applicant whose rent is being paid by a government agency; these applicants may be counted as low income. If the household is unemployed and intends to live off income from assets only, a Certification of Zero Income must be submitted. The asset income must be verified as described below. H. Annual Income A determination of annual income must include all of the types of income listed below in the amount anticipated to be received by all adult members (18 years of age and older) of the household in the 12 months following certification. However, the head of household and spouse may never be considered minors. All annual income (as defined in this section) of the head of household and spouse must be counted as income regardless of their age. I. Annual income includes: the gross amount (before payroll deductions) of wages and salaries, overtime pay, commissions, fees, tips, bonuses, and other compensation for personal services of all members of the household, ages 18 and over. (Includes income received from a family-owned business); net income, salaries, and other amounts distributed from a business; the gross amount (before deductions for Medicare, etc.) of periodic Social Security payments. Includes payments received by adults on behalf of minors or by minors for their own support; annuities, insurance policies, retirement funds, pensions, disability or death benefits, and other similar types of periodic receipts; lump-sum payments received because of delays in processing unemployment, Social Security, welfare, or other benefits; p:\am-c\docs\manuals\tccompi.doc Page

19 payments in lieu of earnings, such as unemployment and disability compensation, worker's compensation and severance pay. Any payments that are anticipated during the next 12 months must be included; welfare assistance; alimony and child support; interest, dividends, and other income from assets (including income distributed from trust funds). On deeds of trust or mortgages, only the interest portion of the monthly payments received by the applicant is included; amount by which education grants, scholarships, or Veteran's Administration benefits are intended as a subsistence allowance to cover rent, utility costs, and board of a student living away from home. (No part of a student loan can be included as annual income); and recurring monetary contributions or gifts regularly received from persons not living in the unit. (Excludes rent or utility payments regularly paid on behalf of the family by a government agency.) J. Annual income excludes: employment income of members of the household, (including foster children) that are under 18. Head of household and spouse may never be considered minors. (Unearned income such as Social Security payments on behalf of minors must be included as income); meals on wheels or other programs that provide food for the needy; groceries provided by persons living in or outside of the household; income associated with persons that are living in the unit but are not regular household members, such as payments received for care of foster children or income of live-in attendants; (A live-in attendant is defined as a person who lives with an elderly, disabled, or handicapped individual and is essential to that individual's care and well-being, is not obligated for the individual's support and would not be living in the unit except to provide the support services); the principal portion of payments received on mortgages or deeds of trust; p:\am-c\docs\manuals\tccompi.doc Page

20 scholarships or veteran benefits used for tuition, fees, books or equipment, or student loans, regardless of how they are spent; lump -sum additions to family assets such as inheritances, cash from sale of assets, one-time lottery winnings, insurance settlements under health and accident insurance and workmen's compensation, settlement for personal or property losses; nonrecurring or sporadic gifts; annual rent credits or rebates paid to senior citizens by government agencies; hazardous duty pay to a family member in the military; payments received under HUD-funded Comprehensive Improvement Assistance Program; payments received under Domestic Volunteer Service Act of 1973 (employment through VISTA, Retired Senior Volunteer Program, and Foster Grandparents Program); the value of the allotment made under Food Stamp Act of 1977; payments, rebates or credits received under Federal Low-income Home Energy Assistance Programs (LIHEAP); payments received under programs funded in whole or in part under the Job Training Partnership Act or Workforce Reinvestment Act (employment and training programs for Native Americans and migrant and seasonal farmworkers, Job Corps, veterans employment programs, State job training programs, career intern programs); scholarships funded under Title IV of the Higher Education Act of 1965, including awards under the Federal work-study program or under the Bureau of Indian Affairs Student assistance programs, or veteran's benefits, that are made available to cover the costs of tuition, fees, books, equipment, materials, supplies transportation, and miscellaneous personal expenses. Examples include Pell Grants, Supplemental Opportunity Grants, State Student Incentive Grants, College work-study, and Bryd Scholarships; payments received under Title V of the Older American Act (Green Thumb, Senior Aides, Older American Community Service Employment Program). p:\am-c\docs\manuals\tccompi.doc Page

21 payments made under the crime victim compensation. allowance paid under 38 USC 1805 to a child suffering from spina bifida who is a child of a Vietnam Veteran. K. Calculating Annual Income Owners must convert all verified incomes to annual amounts. To annualize fulltime employment, multiply: hourly wages by 2080 hours; weekly wages by 52; bi-weekly amounts by 26; semi-monthly amounts by 24; monthly amounts by 12. To annualize income from other than full-time employment, multiply: hourly wages by the number of hours the family expects to work annually; average weekly amounts by the number of weeks the family expects to work; other periodic amounts (monthly, bi-weekly, etc.) by the number of periods the family expect to work. Use an annual wage without additional calculations. For example, if a teacher is paid $18,000 a year, use $18,000 whether the payment is made in 12 monthly installments, 9 installments or some other payment schedule. L. Assets Assets, other than necessary personal items, are considered along with verified income in determining the eligibility of a household. M. Valuing Assets p:\am-c\docs\manuals\tccompi.doc Page

22 In computing assets, owners must use the cash value of the asset - the amount the family would receive if the asset was converted to cash. Cash value is the market value of the asset less reasonable costs that were or would be incurred in selling or converting the asset to cash. SDHDA considers 10% as a reasonable basis for the costs of conversion. Example - An applicant owns a home with a market value of $30,000 and a loan against the home of $18,000. The cash value of the asset would be shown as $9,000 ($30,000 less 10% less $18,000). If assets are owned by more than one person, prorate the assets according to their percentage of ownership. If no percentage is specified, prorate the assets evenly among all owners. N. Assets include: cash held in savings and checking accounts, safety deposit boxes, homes, etc. (see pg. 18 for more information); trusts - include the principal value of any trust available to the household. (Do not include irrevocable trusts, i.e. ones that no household or family member can control); equity in rental property or other capital investments. Include the current market value less: a) any unpaid balance on any loans secured by the property, and b) reasonable costs that would be incurred in selling the asset penalties, broker fees, etc.; stocks, bonds, treasury bills, certificates of deposits, money market funds, etc.; individual retirement and Keogh Accounts. Any withdrawals from investments such as IRA s are not counted as income until the actual investment total has been withdrawn; retirement and pension funds: a) while the person is employed, include only amounts the family can withdraw without retiring or terminating employment, b) at retirement or termination of employment: if benefits will be received in a lump sum, include the benefits in net family assets. p:\am-c\docs\manuals\tccompi.doc Page

23 If benefits shall be received through periodic payments, include the benefits in annual income; lump sum receipts - include inheritances, capital gains, one-time lottery winnings, settlements on insurance and other claims. (Do not count lump sum receipts that must be counted as income, as stated in Annual Income includes section; personal property held as an investment -. include gems, jewelry, coin collections, or antique cars held as an investment. An applicant's wedding ring and other personal jewelry is not counted as an asset; assets disposed of within two years before effective date of certification/recertification: a) If the cash value of the disposed assets exceeds the actual amount the family received by more than $1,000, include the whole difference between the cash value and the amounts received. Do not include if the difference is less than $1,000. Example: On 6/01/91 a couple gave $2,000 to each of their three grandchildren and deeded a home to their son. The home had a cash value of $40,000 and the son paid his parents $12,000 for the home. $34,000 ($40,000 less $12,000 plus $2,000 x 3) is counted as an asset until such time as the household can certify on an Income Certification form that they did not dispose of any assets during the two years preceding the certification date. (The $12,000 paid by the son may also be counted as an asset, depending on what was done with the payment.) b) Do not consider assets disposed of for less than fair market value as a result of a foreclosure, bankruptcy, or a divorce or separation agreement. c) Do consider: a) assets put into trusts, b) business assets disposed of for less than fair market value. (Business assets are excluded from net family assets only while they are part of an active business.) O. Net family assets do not include: necessary personal property (clothing, furniture, cars, etc.); p:\am-c\docs\manuals\tccompi.doc Page

24 term life insurance policies; assets that are part of an active business. "Business" does not include rental of properties that are held as investment and not a main occupation; assets that are not effectively owned by the applicant - i.e., when assets are held in an individual's name but: a) the assets and any income they earn accrue to the benefit of someone else; and b) that another person is responsible for income taxes incurred on income generated by the assets. Example: Assets held pursuant to a power of attorney because one party is not competent to manage the assets or assets held in a joint account solely to facilitate access to assets in the event of an emergency. assets that are not accessible to the applicant and provide no income to the applicant. Example: A battered spouse owns a house jointly but because of the domestic situation receives no income from the asset and cannot convert the asset to cash. P. Asset Verification Guidelines Checking accounts, savings accounts, certificates of deposit and money market accounts must be third party verified using Asset Verification (Exhibit W) or a similar form. Checking accounts must use the average balance for the last 6 months, while savings accounts, CD's, etc. must use the current balance or value. Other assets such as bonds, stocks, IRA's and retirement funds may be verified by documentation provided by the tenant, such as copies of statements. After arriving at a total value of the assets, if the asset value is $5,000 or less, add the actual amount of income to be derived from the assets to the other verified household income. When assets exceed $5,000, add the greater of 1) the actual annual income to be derived from these assets, or 2) the imputed income using the passbook interest rate (currently set at 2.00%) to the total verified household income. The household's combined total income cannot exceed the applicable low income limits at move-in. VI. THE OWNER'S CERTIFICATE OF CONTINUING PROGRAM COMPLIANCE p:\am-c\docs\manuals\tccompi.doc Page

25 The Owner's Certificate of Continuing Program Compliance (Exhibit A) must be completed and submitted to SDHDA on an annual basis. Non-receipt of any reports by the due date will automatically trigger the filing of a notice of noncompliance to the IRS, as required by the Code. VII. THE COMPLIANCE MONITORING STATUS REPORT A Compliance Monitoring Status Report (Exhibit B) must be completed and annually submitted to SDHDA. This report requests information for each building in the project and data for each tax credit unit. The Report reviews continuous compliance throughout the calendar year. The Report and Instructions can be obtained from SDHDA. VIII. THE RANDOM MANAGEMENT REVIEW SDHDA will conduct on-site compliance reviews of at least 33.3% of the projects each year. It is anticipated that each project will be visited at least once every three years throughout the compliance period. This visit will include a review of some or all tenant files and will include an inspection of the general physical condition of the project. IX. COMPLIANCE MONITORING FEE SDHDA will charge an annual fee of $50.00 per project plus $15.00 per Lowincome Unit to all projects during the compliance period. This fee will be reviewed on an annual basis to reassess its reasonableness and will continue in effect until further notice. Fees are billed one (1) year in arrears. SDHDA will directly invoice each project and all fees are to be paid directly to SDHDA. X. NONCOMPLIANCE If SDHDA does not receive the required certifications when due or if SDHDA discovers on audit, inspection, or review, or in some other manner that the project is not in compliance with the Code, SDHDA will notify the owner as soon as possible. The owner will have an opportunity to supply missing certifications or to correct noncompliance within a specified correction period, not to exceed 90 days from the date of the notice to the owner. At the sole discretion of SDHDA, the correction period may be extended for a period of up to six (6) months if there is good cause for granting an extension. p:\am-c\docs\manuals\tccompi.doc Page

26 SDHDA is required to notify the IRS of an owner's failure to file the Annual Owner Certification on a timely basis, or any noncompliance no later that 45 days after the end of the allowed time for correction, whether or not the noncompliance or failure to certify has been corrected. XI. LIABILITY Compliance under the requirements of the Code is the responsibility of the owner of the project for which the LIHTC is allowed. SDHDA's obligation to monitor for compliance with the requirements of the Code does not make SDHDA liable for an owner's noncompliance. SDHDA will not make any representation other than to the IRS that a project is in compliance. XII. LEAD BASE PAINT SDHDA uses HUD s Uniform Physical Conditions Standards when physically reviewing the property. Therefore, the Lead Base Paint Safe Housing Rule applies to the Housing Tax Credit program. This change was effective June 21, p:\am-c\docs\manuals\tccompi.doc Page

27 EXHIBIT A OWNER'S CERTIFICATE OF CONTINUING PROGRAM COMPLIANCE To: South Dakota Housing Development Authority, Tax Credit Compliance, PO Box 1237, Pierre, SD, Certification From: To: s: January 1, 20 December 31, 20 Project Name: Project No: Project Address: City: Zip: Tax ID # of Ownership Entity: No buildings have been Placed in Service At least one building has been placed in Service but owner elects to begin credit period in the following year. If either of the above applies, please check the appropriate box, and proceed to page 2 to sign and date this form. The undersigned on behalf of (the "Owner"), hereby certifies that: 1. The project meets the minimum requirements of: (check one) test under Section 42(g)(1)(A) of the Code test under Section 42(g)(1)(B) of the Code test for "deep rent-skewed" projects under Section 42(g)(4) and 142(d)(4)(B) of the Code 2. There has been no change in the applicable fraction (as defined in Section 42(c)(1)(B) of the Code) for any building in the project: NO CHANGE CHANGE If Change, list the applicable fraction to be reported to the IRS for each building in the project for the certification year on page 3: 3. The owner has received an annual Tenant Income Certification from each low-income resident and documentation to support that certification, or the owner has a re-certification waiver letter from the IRS in good standing, has received an annual Tenant Income Certification from each low-income resident, and documentation to support the certification at their initial occupancy. YES NO 4. Each low-income unit in the project has been rent-restricted under Section 42(g)(2) of the Code: YES NO 5. All low-income units in the project are and have been for use by the general public and used on a non-transient basis (except for transitional housing for the homeless provided under Section 42 (i)(3)(b)(iii) of the Code): YES NO HOMELESS 6. No finding of discrimination under the Fair Housing Act, 42 U.S.C , has occurred for this project. A finding of discrimination includes an adverse final decision by the Secretary of Housing and Urban Development (HUD), 24 CFR , an adverse final decision by a substantially equivalent state or local fair housing agency, 42 U.S.C 3616a(a)(1), or an adverse judgment from a federal court: NO FINDING FINDING 7. Each building in the project is and has been suitable for occupancy, taking into account local health, safety, and building codes (or other habitability standards), and the state or local government unit responsible for making building code inspections did not issue a report of a violation for any building or low income unit in the project: YES NO If "No", state nature of violation on page 3 and attach a copy of the violation report as required by 26 CFR and any documentation of correction. p:\am-c\docs\manuals\tccompi.doc Page

28 8. There has been no change in the eligible basis (as defined in Section 42(d) of the Code) of any building in the project since last certification submission: NO CHANGE CHANGE If "Change", state nature of change (e.g., a common area has become commercial space, a fee is now charged for a tenant facility formerly provided without charge, or the project owner has received federal subsidies with respect to the project which had not been disclosed to the allocating authority in writing) on page 3: 9. All tenant facilities included in the eligible basis under Section 42(d) of the Code of any building in the project, such as swimming pools, other recreational facilities, parking areas, washer/dryer hookups, and appliances were provided on a comparable basis without charge to all tenants in the buildings: YES NO 10. If a low-income unit in the project has been vacant during the year, reasonable attempts were or are being made to rent that unit or the next available unit of comparable or smaller size to tenants having a qualifying income before any units were or will be rented to tenants not having a qualifying income: YES NO 11. If the income of tenants of a low-income unit in any building increased above the limit allowed in Section 42(g)(2)(D)(ii) of the Code, the next available unit of comparable or smaller size in that building was or will be rented to residents having a qualifying income: YES NO 12. An extended low-income housing commitment as described in section 42(h)(6) was in effect, including the requirement under section 42(h)(6)(B)(iv) that an owner cannot refuse to lease a unit in the project to an applicant because the applicant holds a voucher or certificate of eligibility under Section 8 of the United States Housing Act of 1937, 42 U.S.C. 1437s. Owner has not refused to lease a unit to an applicant based solely on their status as a holder of a Section 8 voucher and the project otherwise meets the provisions, including any special provisions, as outlined in the extended low-income housing commitment (not applicable to buildings with tax credits from years ): YES NO N/A 13. The owner received its credit allocation from the portion of the state ceiling set-aside for a project involving "qualified non-profit organizations" under Section 42(h)(5) of the code and its non-profit entity materially participated in the operation of the development within the meaning of Section 469(h) of the Code. YES NO N/A 14. There has been no change in the ownership or management of the project: NO CHANGE CHANGE If "Change", complete page 3 detailing the changes in ownership or management of the project. 15. Has there been any health or safety building violation issued by the city or county government? Yes No 16. Has any tenant been evicted for other than good cause? Yes No Note: Failure to complete this form in its entirety will result in noncompliance with program requirements. In addition, any individual other than an owner or general partner of the project is not permitted to sign this form, unless permitted by the state agency. The project is otherwise in compliance with the Code, including any Treasury Regulations, the applicable State Allocation Plan, and all other applicable laws, rules and regulations. I declare and affirm under the penalties of perjury that the information has been examined by me, and to the best of my knowledge and belief, is in all things true and correct. By: Title: Ownership Entity : p:\am-c\docs\manuals\tccompi.doc Page