IRS Officials Provide Update on Key LIHTC Rulemaking Projects
By Caitlin Jones & A. J. Johnson
7 min read
THE IRS IS CONSIDERING the addition of another optional method for computing utility allowances for low-income housing tax credit (LIHTC) projects, in its forthcoming final rule for utility allowances.
This disclosure was made by IRS officials speaking 1/14/08 on a panel at the HFA Institute conference in Washington, DC sponsored by the National Council of State Housing Agencies. Officials discussed the status of two pending LIHTC rulemaking projects, comments received on the proposed rules, and other recent guidance.
IRS officials on the panel were: Paul Handleman, Acting Branch Chief, Branch 5; Attorney-Advisors David Selig and Jack Malgeri; and Senior Counsel Christopher Wilson.
Handleman indicated the IRS hopes to publish separate final regulations on utility allowances and qualified contract requests by June 30. Both are on the Service’s current “business plan” of priority rulemaking projects for the 12- month period ending 6/30/08. The Service published proposed regulations on utility allowances and qualified contract requests on 6/19/07, soliciting public comments. (For details, see Tax Credit Advisor, July 2007, p. 1.)
Utility Allowance Rule
Under the LIHTC program, the gross rent of a housing credit unit must include the amount of a utility allowance for the cost of any tenant-paid utilities. The utility allowance schedule that must be used to determine the size of a utility allowance for rent-restricted units in LIIHTC buildings depends upon the type of building, but is either that of the Rural Housing Service (RHS), U.S. Department of Housing and Urban Development (HUD), or the local public housing authority (PHA) for the HUD Section 8 program.
As an alternative to the PHA utility allowance, any interested party, like a project owner, may instead request an estimate of the cost of a particular utility service from the local utility company.
The proposed regulation would amend the existing utility allowance rules to establish two new alternatives — on top of the utility company estimate — to the use of the PHA utility allowance. One would allow a building owner to obtain a utility cost estimate from the housing credit agency (HCA) with jurisdiction over the building. The second option would permit the owner to calculate a utility estimate using HUD’s Utility Allowance Schedule.
Selig told conference attendees that taxpayers presently can’t rely on the use of these two proposed alternative methods, since the pending regulation is only proposed. Handleman and Selig said the Service is considering for inclusion in the final regulation the addition of a third option — recommended in some of the comment letters the IRS received on the proposed rule. Under this, an owner could obtain a utility allowance generated by software developed and used by a state-licensed or state-certified engineer.
Under the so-called 8823 guide issued by the IRS in January 2007, until the final regulation is published, owners can utilize certain interim procedures as well. Under these, a project owner that demonstrates to the state HCA that the utility company was unwilling to provide an updated estimate can then fall back to use of the local PHA utility allowance. If the PHA allowance isn’t reasonable, the owner can then work with the HCA to develop a mutually acceptable utility allowance, which the IRS will accept if there is documentation and state agency approval.
Qualified Contract Rule
Malgeri discussed major comments received on the proposed regulation for qualified contract requests.
Under the LIHTC program, after the 14th year of the compliance period an owner can ask the housing credit agency to try to find a buyer willing to purchase the building for a “qualified contract price” and continue to operate it as low-income rental housing. If the agency fails to find a buyer presenting a qualified offer, the owner can eventually sell or convert the project to non-low income rental use.
Malgeri said a prevalent comment received on the proposed rule disagreed with the proposal that the qualified contract price include the appraised fair market value of the land underlying the entire building. He said commenters contended this would boost the qualified contract price and deter qualified contract sales. As a result, Malgeri said, “We are looking at various options for land.”
He also noted many commenters urged that the proposed rule be amended to add uniform minimum qualifications for appraisers, and minimum standards for appraisals, for appraisals connected with qualified contract requests. He cited several “excellent” current resources that HCAs might utilize under the administrative discretion afforded to them by the rule. These include a national registry maintained by the Appraisal Subcommittee of the Federal Financial Institutions Examinations Council of qualified appraisers for federallyrelated transactions, and uniform standards for appraisals in the form of the Uniform Standards of Professional Appraisal Practices (USPAP). He also noted HCAs might wish to check to see if a particular appraiser is or has been on the General Services Administration’s list of “excluded participants,” or HUD’s list of “limited denial participation.”
Emergency Housing Guidance
Malgeri also discussed IRS Revenue Procedure 2007-54, which was issued in July. (For details, see Tax Credit Advisor, August 2007, p. 2.)
Rev. Proc. 2007-54 replaced prior IRS disaster relief guidance to spell out the conditions under which housing credit agencies may allow owners of LIHTC projects within their jurisdiction to provide temporary emergency housing to individuals displaced from their homes by a presidentially declared major disaster. The revenue procedure outlines what procedures owners must follow to admit residents initially and to qualify them after four months if such residents wish to remain.
Malgeri, based on his experience in dealing with various disasters in recent years, including Hurricane Katrina, offered some suggested “best practices” for state HCAs so that they will be prepared to implement Rev. Proc. 2007-54 if the need arises. His advice included that state agencies:
- Engage in advanced planning, by keeping up-to-date information (e.g. vacancies, etc.) on LIHTC properties in their portfolios. Also, to be aware of the requirements of other federal housing programs (e.g., HUD, RHS) in emergency situations, and what such other federal agencies have done in the past.
- Be cognizant of local and state landlord-tenant laws. He warned that temporary tenants may assert that they are entitled to remain in their housing credit unit after the temporary tenancy period even though they don’t meet LIHTC program requirements. “A temporary emergency lease that the owner may want to execute is a good idea,” Malgeri said, “spelling out the temporary nature of the lease, the duration, and the responsibilities of the owner and the temporary tenant.”
- Consider, if they plan to help relocate displaced individuals, the use of a national background check service to assess newly displaced tenants, “as a means of understanding who the tenants are before you place them into other projects.”
