Tips for Combining LIHTC with MF Project-Based Section 8
Multifamily Hub - Alaska, Idaho, Oregon & Washington
Potential Conflicts to Resolve Prior to the Commitment of Funds
- When considering purchasing or refinancing an existing HUD Multifamily project with project-based Section 8 (i.e. LMSA, NC/SR, 202/8, 515/8, etc.) using Low Income Housing Tax Credits (LIHTCs), please be aware that prior HUD approval is required for the transfer of the property's rental stream to the new ownership entity.
- The Housing Assistance Payment (HAP) Contract must receive approval to be assigned, even if there is no HUD financing remaining on the property.
- Please note: certain Regulatory Agreement or Use Restrictions may remain on a property even after a HUD loan is paid off. Your legal counsel should be aware of this.
Many LIHTC transactions involve two stages of ownership change. (i.e. transfer to a non-profit owner, then transfer to an LLC with a non-profit as general partner or managing member, with LIHTC investors brought in as limited partners or members.) If this is the case, the entirety of the deal needs to be summarized to HUD in the first ownership transaction approval request. If the equity partners have not been identified, the overall timing and intent of the transactions still need to be outlined with specifics. Contact the assigned HUD Project Manager. Please see HUD Memo dated July 11, 2007, Subject: Previous Participation Certificate (PPC) Operating Procedures Limited Liability Corporate Investor, to see if the equity investors may be considered as a Limited Liability Corporate Investor (LLCI) for the purposes of 2530 submission.
- LIHTC rules for the purchase of existing properties require rehabilitation. The HUD project manager must be informed of any substantial rehabilitation plans and projected dates in order to delay any HUD Real Estate Assessment Center (REAC) Physical Inspections that may be scheduled. The HUD Project Manager must be kept up to date on any delays, in order to ensure that inspections are not scheduled while units are off-line or other major repair work is being conducted that could result in an unrepresentative score.
- LIHTC priorities and allocation factors may cause conflicts in the tenant selection plan with Section 8 or Use Agreement requirements. HUD approval is required for any waiver of tenancy requirements. Prior approval is strongly recommended before financing is put in place in order to ensure that underwriting is supportable. Note, HAP Contract and Use Agreement requirements are regulatory. HUD will not waive regulatory requirements without a compelling reason (i.e. preservation of the property, etc.) Owners may want to choose less than 100% allocation in order to help avoid these conflicts.
- Income Targeting:
LIHTCs presuppose certain bands of income targeting. If the bands underwritten on the project do not match the bands on the HAP Contract, the conflict must be resolved. For example, a tax credit property targeting 100% of tenants at 60% of median income under a "Pre" HAP contract would be denying admittance to otherwise eligible program participants between 60% and 80% of median. Original HUD underwriting, with the guaranty of rent through the special claims program, would not have anticipated this portion of the market being excluded.
- HAP Contracts are subject to either "Pre" or "Post" 1981 regulations. Projects with Agreements to Enter into a HAP (AHAP) contract signed prior to 1981 are subject to "Pre" restrictions and after to "Post" restrictions.
- "Pre" HAPs allow applicants up to 80% of Median Income, or Low Income.
- "Post" HAPs allow applicants up to 50% of Median Income, or Very Low Income.
- All HAPs are subject to income targeting requirements that require 40% of new tenants to be at 30% of Median or below. (See HUD Handbook 4350.3, Rev-1, Section 4-5 for details.)
Limitations on Student Housing: Section 8 has certain restrictions on full-time students, including a number of exceptions. These are not identical to the LIHTC student restrictions. Many property management companies managing LIHTC properties prefer to disallow students altogether, or strictly follow the LIHTC rules. This eliminates otherwise eligible potential program participants and requires a HUD approved waiver. Student eligibility for Section 8 housing. See Handbook 4350.3 for details
- Large Family Sizes: The State may give priorities in the allocation factors for housing large families. A tenant selection plan which denies housing to otherwise eligible and suitably sized families for the unit size will require a HUD approved waiver.
- Other State Allocation Criteria should be checked for conflict with the HUD project manager. As HUD rules are subject to change and allocation factors are subject to change, and are not the same from State to State, prior review is strongly recommended.
- HUD Model Lease
- The HUD Model Lease for the particular project must be used, even on LIHTC units.
- A separate LIHTC lease is not allowed. However, HUD may consider a lease addendum for LIHTC projects, following HUD Handbook 4350.3, Rev. 1, Sec 6-12 requirements for lease modification approval.
- A Memorandum of Understanding (MOU) has been executed with the Washington State Housing Finance Commission (WSHFC) and Region X of HUD for the State of Washington only for an approvable rider format. However, each property must still notify HUD to use the lease rider format to be used and the notification to tenants and request for lease modification noted above must still be followed.
- The HUD lease does not allow for eviction for other than good cause. Therefore, a tenant may not ever be evicted for failing to meet LIHTC requirements, such as becoming over-income or a student. Projects may choose to offer such tenants incentives to move voluntarily. However, this may not be paid from Section 8 or FHA project funds.
- Subsidy Layering Review
- Projects obtaining LIHTCs are subject to a Subsidy Layering Review to avoid multiple sources of government income paying for the same benefit.
- For example, units may not receive both Moderate Rehab Section 8 and LMSA Section 8. Project Reserve for Replacement funds shall not reimburse for capital expenses paid by LIHTC equity.
- A review of Sources and Uses of Funds, along with a certification is typically required. See your local HUD Office for details.
- In the State of Washington, a Memorandum of Understanding (MOU) has been executed in which HUD currently accepts the Subsidy Layering Review performed by WSHFC in lieu of the HUD review.
- Enterprise Income Verification (EIV) Data
At the present time, tenant income data obtained from the EIV system to verify tenant income may not be viewed by the LIHTC compliance entity (i.e. State Housing Finance Agency) or organizations other than the owner, agent, PBCA, HUD or TRACS provider. The security agreement with the owners of the databases (i.e. SSA) does not cover parties other than those required for meeting HUD requirements. Therefore, alternate means of documenting tenant files may be needed for LIHTC purposes.