Download - Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

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Page 1: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation
Page 2: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Recapture and Compliance Exposed

MODERATOR PANELISTS

Warren Sebra Novogradac & Company LLP

Alex Sanchez ROEM Development Corporation

Sarah Kind MidPen Property Management Corp.

Leanne Morford Eden Housing Inc.

Jack Aronson CPP LLC

Page 3: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Tax Return

Developer/ Owner

Investor Tax Liability Section 42

Property Manager

x 10 =

Accelerated Credits

Tax Credit Period

300k

15

0k

300k

300k

300k

300k

300k

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150k

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10

9 8 7 6 5 4 3 2 11

1 Year

12

13

14

15

State Allocating Agency

LIHTCs

$6.92mil

See IRC § 42(f)(2)(B) - Disallowed 1st year credit allowed in 11th year

Page 4: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Allocating Agency

LIHTCs

$6.92mil

Tax Return

Developer/ Owner

Investor Tax Liability

Noncompliance! Form 8823

Section 42

Property Manager

x 10 = • Income • Rent • Suitability for Occupancy

Accelerated Credits

Tax Credit Period

300k

300k

300k

300k

300k

300k

300k

300k

300k

10

9 8 7 6 5 4 3 2 11

1 Year

12

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15

150k

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150k

150k

150k

150k

Page 5: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

LIHTC Certification and Re-certification Requirements

Page 6: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Federal Recertification Requirements

• Elimination of Annual Recertifications of Household Income (Sec. 3010) for Projects that are 100 percent LIHTC

– On July 30, 2008, Section 142(d)(3)(A) of the Internal Revenue Code ("Code") was modified to:

– Eliminate the requirement for annual recertification of household income for existing residents of 100 percent LIHTC (no market units) and Tax Exempt bond financed developments under 142 (d) of the Tax Exempt Bond Code.

– The amendment to the Code does not however change the owner's obligation to certify household income at move-in, nor does it impact Mixed Use LIHTC Projects (those with market rate units).

Page 7: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Federal Recertification Requirements

• Owners must continue to:

– Ensure compliance with the LIHTC student rule

– Monitor changes in household composition to ensure compliance with the “Totem Pole rule” (If at any time no original members remain, the remaining member(s) must now income qualify at the current limits)

– Ensure each next available unit is rented to a LIHTC qualified household (Available Unit rule)

Page 8: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Agency Requirements

Although Congress eliminated the need for Annual Recertifications (for 100 LIHTC Projects) on a Federal level many State monitoring agencies are exercising their authority to implement additional restrictions on LIHTC developments.

Page 9: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Agency Requirements

• Most State monitoring agencies (including CTCAC) have adopted policies which require households to undergo a full recertification upon the households first anniversary of tenancy. This recertification is much like the process completed at move in/initial certification and must include third party verification of income

– These policies for first year tenant income recertifications, often uncover substantial errors in the initial Tenant Income Certifications (TIC) at move-in that could be the result of:

• Tenant error

• Management error, or

• Fraud

Page 10: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Agency Requirements

The error(s) could result in a finding that a resident was "over-income at move-in," thereby making the unit ineligible for tax credits. The financial impact of this noncompliance could be costly for the LIHTC project owner.

Page 11: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Requirements- Continued

• After 1st Year Anniversary Recertification is completed most State Monitoring Agencies (including CTCAC) will require a type of “Self- Certification” by the household for each anniversary year thereafter

– Most Agencies have a short version form to collect the desired tenant provided data

– Again, adherence to Student Rule, changes in household composition, Available Unit Rule etc. need to be monitored

Page 12: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Requirements- Continued

• While failing to comply with any of these additional state requirements (1st Year Recertification and subsequent “Self- Certs” etc.)

– are not reportable issues of Non-Compliance on IRC form 8823 some states (including CTCAC) have implemented fines for non compliance against owners or

– levy penalties against developers on future LIHTC applications/deals

Page 13: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

State Monitoring Requirements- Continued

• Recent announcement from CTCAC during their Workshops this year: – Beginning in 2017, CTCAC will have the authority to levy monetary fines for

compliance violations

– Most findings have a correction period

– Fines may be charged monthly until corrected

Page 14: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Another thought… One last factor that many syndicators/developers need to take into consideration is the likelihood of future Resyndications on these 100% LIHTC Projects.

For existing Households who are “Over Income” at time of resyndication, ownership needs a solid Certification to grandfather the household in with. Often the original move in file may be “weak” or lacking the required supporting documentation and the new investor/owners will need to rely on prior year Recertification files to document eligibility. Definitely something to consider during due diligence.

Page 15: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Another thought continued… See Direction from CTCAC:

• At time of the resyndication, some or all tenants might now be over-income

• A test of all existing households will need be done.

• CTCAC will require a new resyndicated file certification on each household of the project within 12 months of the project receiving its new credit allocation.

• You will be required to start a new tenant file far each household.

Page 16: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Another thought continued… See Direction from CTCAC:

• Treat all households as if you were certifying "new move-in's".

• Use the income limits applicable at the time you are performing this new certification.

• For those households that will still income qualify- new credits can be taken on their unit.

Page 17: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Another thought continued… See Direction from CTCAC:

• For those households that are "over-income" at the time of the income test, you must add to their new tenant file a copy of the CTCAC Resyndication. Clarification Form, the original complete move-in certification from when they initially moved into the project or a complete subsequent recertification showing they were income eligible.

• There will be a new tax credit investor in the resyndicated project, in order for Investor to take tax credits on all the units, all households will need to be certified as tax credit eligible households (either currently still income eligible or over-income grandfathered).

Page 18: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Mixed Use Projects • To reiterate, HERA 3221 only eliminated the need for full Annual

Recertifications at 100 percent Projects.

• LIHTC Projects with market rate units (“mixed use buildings”) must continue to perform full LIHTC recertifications annually on tenants anniversary date

• It is especially important to ensure compliance with the Next Available Unit Rule (over 140% of AMI)

– Additionally, close attention needs to be paid to tenant Transfers, especially those involving transfers to another building within the Project and those households whose income exceeded 140% of AMI at last Recert

Page 19: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Multiple Sources of Gap Financing • HR 3221 only the impacted the Recertfication requirements on LIHTC

and Tax Exempt Bond Projects.

• Other forms of gap financing/programs (i.e. HOME, HUD Project Based Section 8, City Affordability requirements etc.) will likely bring their own set of recertification requirements.

• Always check those Regulatory Agreements & Agencies for their specifics. Some are more stringent. While others only require full recerts every 6th year, some allow a type of Self Certifications or a more relaxed approach with tenant provided documentation.

Page 20: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Multiple Sources of Gap Financing • Best practices lean towards:

– keeping a separate unit/tenant file for each Program. Often each agency has its own requirements regarding forms and acceptable verifications.

– what is required in one program many not be acceptable or permitted in another (i.e. EIV documents). When ever possible verifications for one Program can be photocopied & shared in another file. But ultimately the goal is to remain compliant with each individual funding source.

Page 21: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Avoiding 8823s

Tax Credit Compliance

Page 22: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Applications (originals and updated versions)

• Review applications for the following:

– Minimum of a 2 year housing history

– Applicants listed match the tenants occupying the unit

– Application indicates all sources of income and assets from wages, pensions, IRA’s, 401k’s, etc.

– Real Estate

– Full-Time Student Households

Page 23: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Credit Reports • Review credit reports for the following:

– Mortgages/short sales/foreclosures

– Past and current Employment

Page 24: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

File Documentation 1. Review Bank Statements for additional undisclosed income or assets. 2. No “stale” dated documentation. Confirm that documents that are

submitted are not older than 120 days from certification effective date. VOD’s, paystubs, VOE’s, etc..

3. Review paystubs for: Additional bank accounts, 401K/retirement accounts and Life Insurance that was not already disclosed.

Page 25: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

File Documentation 4. Taxes are required for all Self Employment applicants, be sure to

review tax returns for any additional undisclosed income or assets. 5. On day of Move-In, prior to the TIC being signed on the effective date,

confirm with the applicant if there has not been any changes in the House Holds income or assets since their certification appointment.

6. 3 Consecutive Months of paystubs

Page 26: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Recertification 1. Confirm VOE has a “Start Date” that coincides with last year’s

information. 2. Confirm any new employment on recertification has a “Start Date”

after move-in. 3. Confirm asset information coincides with last years information.

Page 27: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Other items to look for 1. Elevator Permits 2. Lock-outs at physical inspections 3. Vacant Units (Vacant more than 60 days) 4. Over charged rents 5. Utility Allowances (90 day implementation not met)

Page 28: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Eden’s Company Targets

Page 29: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Overview • In 2011, as part of a broader company-wide performance challenge,

Eden implemented compliance and physical targets.

• The goal was to eliminate any instances of IRS Form-8823 filings.

Page 30: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Compliance Targets • Two or fewer minor file findings during any CTCAC inspection.

• “E-REAC” Program for pre-inspection of all apartments to ensure only minor physical findings.

• Absolutely NO IRS Form 8823’s, corrected or uncorrected.

Page 31: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Pre-Audits • Each year occupancy staff visit all sites due for an annual CTCAC

inspection.

• They review 20% of all files.

• They also review 100% of all files for over-income and gross rent violations.

Page 32: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Sample Internal Audit Forms Full Findings Summary

Page 33: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Sample Internal Audit Forms Income / Gross Rent Audit

Page 34: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Sample Internal Audit Forms Detailed File Report

Page 35: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Physical Pre-Audits • On the physical side, Eden’s facilities department conducts an “E-

REAC” for all sites without direct HUD funding.

• They utilize a similar inspection form and attempt to duplicate the scoring methods as closely as possible.

• The target initial was 85 or better; it has been increased internally to 90 or better.

Page 36: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

No Complacency • Due to significant growth, Eden is currently implementing a 3rd party

vendor to review all move-in and recertification files for an additional layer of protection and consistency.

• Staff additions in Facilities have allowed for even tighter focus on preparations for regulatory inspections, with increased focused on year-round efforts.

Page 37: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Community Preservation Partners

• 3rd Largest Developer Completing Substantial Rehabs in 2016

• Redeveloped over 5,000 units in ~80 properties across the U.S.

• Specific focus on partnering with non-profits, for-profits and government entities

Page 38: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

GP Purchase Recapture Exposure • GP purchases can be a great way to help owners exit assets prior to Yr.

15

• Issues can arise down the line

• These issues can occur when a non-profit or housing authority takes over from the original GP.

• Strong dual indemnities are a good step, but diligence is key

• Deal breaker vs curable non-compliance

Page 39: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

GP Purchase Exposure

• Purchased GP interest of existing 4% property prior to year 15

• Closed in late 2015

• Received notice of non compliance for a period prior to our ownership

• Issue was construction-based not income-based

• Curable issue that did no prevent close

• We successfully resyndicated the asset in 2016

Example Property, California | ~100 Units

Page 40: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation
Page 41: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Occupied Rehab Exposure • Most people don't think of compliance when they are going through

the construction process

• Issues can arise from vacating units or rotating tenants during a rolling rehab.

• This can be an issue given that in-place rehabs a habit of falling behind schedule

• In the event that a resident vacates their unit for more than a month, the project may lose a month of credits.

• This can result in an adjuster which impacts your deferred developer fee

Page 42: Recapture and Compliance Exposed...– Ensure compliance with the LIHTC student rule – Monitor changes in household composition to ensure compliance ... supporting documentation

Recapture and Compliance Exposed

MODERATOR PANELISTS

Warren Sebra Novogradac & Company LLP

Alex Sanchez ROEM Development Corporation

Sarah Kind MidPen Property Management Corp.

Leanne Morford Eden Housing Inc.

Jack Aronson CPP LLC