Understanding the LIHTC General Public Use Requirements and Recent Changes

By Caitlin Jones & A. J. Johnson
April 2, 2009 6 min read

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By A. J. Johnson

Tax Credit Advisor, February 2009: The Housing and Economic Recovery Act of 2008 (H.R. 3221), signed into law on July 30, 2008, made one change to the low-income housing tax credit (LIHTC) program that was somewhat surprising and unexpected. This was a “clarification” to the program’s general public use requirements.

What Is “˜General Public Use’?

To be eligible for the housing credit, a residential rental project must be available to the public such that the general public may avail itself of the use of the property.

The earliest indication of Congressional intent regarding the general public use requirement is in the congressional Joint Tax Committee’s written summary of the original LIHTC statutory provisions. This document, The General Explanation to the Tax Reform Act of 1986, said the general public use rules are violated anytime the general public is denied access to LIHTC housing. This position was affirmed by the IRS in Revenue Notice 89-6.

A “residential rental project” is defined in IRS Regulation 1.103-8(b)(4)(i), which says such a project must be available for use by the general public and may not be used on a transient basis. IRS Regulation 1.42-9 further indicates that U.S. Department of Housing and Urban Development (HUD) Handbook 4350.3 (or its successor) should be used as guidance for issues relating to general public use in the LIHTC program. This regulation cites, as an example of a violation of the general public use rule, a residential rental unit that is provided only for a member of a social organization or provided by an employer for its employees. The regulation also notes that a residential rental unit that is part of a hospital, nursing home, sanitarium, lifecare facility, trailer park, or intermediate care facility for the mentally and physically disabled isn’t considered to be for use by the general public, and isn’t eligible for the housing credit.

Based on IRS guidance, units not available to the general public may be included in the eligible basis of an LIHTC project, but aren’t treated as low-income units for purposes of determining a building’s applicable fraction. As a result, this will result in a smaller qualified basis and smaller credit amount.

IRS Regulation 1.42-5(c)(1)(v) expands the definition of a residential rental project to include a non-discrimination requirement. A violation of the federal Fair Housing Act (42 U.S.C.A. ¤3601-3619), therefore, is also a general public use violation.

The IRS’ Guide for Completing Form 8823 (page 12-1), issued in January 2007, expanded the category of prohibited practices under the general public use rule to add occupational targeting. The Guide states, “Residential rental units either designated for a single occupational group, or through a preference for an occupational group, also violate the general public use requirements.” It should be noted a number of LIHTC program participants contended this new occupational restriction was not supported by statute or legislative history.

HUD Definitional Issues

Since the IRS incorporates HUD guidance into the definition of general public use under the LIHTC program, an understanding of HUD’s position is necessary. To avoid violating HUD prohibitions in this area, the following requirements must be met:
n No minimum or maximum ages for residents, unless required for normal project operations (e.g., elderly project), or required by state or local law; n No discrimination against particular socio-economic classes (e.g., welfare recipients, single parent households, etc); and, n No priority given to members of sponsoring organizations.

HUD’s rules clarify that owners may give preference to certain groups, such as homeless or disabled individuals. Housing units that are set-aside for such groups is not considered to be in violation of general public use rules.

Acceptable Preferences

Preferences clearly prohibited include giving priority in the rental of LIHTC units to members of social organizations or to employees of a project sponsor, as well as preferences that violate fair housing law. In the 8823 Guide, the IRS indicated that it would not be acceptable to set-aside units for certain occupational groups (e.g., military, school teachers, etc.). However, preferences may be given that don’t violate the LIHTC program’s public use requirements or fair housing laws. Acceptable are preferences for the:
n Homeless n Disabled n Families with children

H.R. 3221 liberalized the LIHTC’s general public use requirements further. According to an explanation of this by the Joint Committee on Taxation (document JCX-630-08, July 23, 2008), the act clarified that a project that complies with the Fair Housing Act and doesn’t restrict occupancy based on membership in a social organization or “employment by specific employers” shall not fail to meet the LIHTC program’s general public use requirements solely because of occupancy restrictions or preferences that favor tenants who: (1) have special needs; (2) are members of a specified group under a federal or state program or policy that supports housing for such a specified group; or (3) are involved in artistic or literary activities. This amendment applies to all LIHTC buildings, regardless of when placed in service.

The term social organization isn’t defined in the federal tax code or IRS regulations.

While the new law purports to “clarify” the meaning of general public use, it has actually muddied the issue, and raises new questions about permitted preferences. For example, if a state housing credit agency’s LIHTC program is designed to give preference to first responders, such as police and fire personnel, can a tax credit property do so without violating the public use rule against giving preference to a certain occupational group? In addition, what defines an “artistic or literary activity”? Does belonging to a reading group qualify as a literary activity? Or must one actually have to write for a living? Similarly, how is “artistic” defined? Do members of the performing arts qualify? Or just painters and sculptors?

H.R. 3221 did little to add clarity to the definition of general public use; additional guidance from the IRS will be needed. Until the IRS issues such guidance, developers should be wary of developing projects that give preference to groups other than those for which priority may clearly be given (e.g., homeless, disabled, seniors, etc.). One possible option for developers is to request a private letter ruling from the IRS for a proposed project and proposed tenant preference or set-aside. In all cases, though, professional advice and guidance should always be sought in these situations.

A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, VA-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, ajjohn@cox.net.