Initial certifications for new construction, acquisition rehabs and conventional properties adding a layer of credits are vitally important when you’re looking to cash in on low income housing tax credits. They’re also very complex. You need an understanding of nuanced government regulations and compliance processes or you can lose the credits – a big price to pay for lack of oversight.
Big financial benefits in the balance
“It’s all about the money,” says Celeste Slater, RealPage Vice President of Compliance Services (formerly Windsor Compliance). “We are talking about millions of dollars in tax credits. That scares a lot of people. It prevents some affordable housing operators from even getting into this arena. Of course, that exposure can be mitigated. It’s about making sure all the certifications are done correctly because the first year files are the most critical.”
Slater oversees a team of over 100 compliance and reporting partners at RealPage Compliance Services, which provides compliance monitoring services for all types of affordable properties, including Low Income Housing Tax Credit properties (Section 42), tax exempt bond, Section 8, HOME, HUD and Rural Development properties.
Why first-year certifications are so critical
There are a couple of main reasons you can’t afford to overlook those first-year certifications.
Most importantly, the owner and investor group need to ensure that each building and project meets the minimum set aside on or before the IRS deadline. Not doing so eliminates their ability to claim the credits, for which the investor has already spent millions of dollars. The investors are going to want that money back.
But it’s also critical to understand that the IRS wants the owner to maintain the initial files for six years after the compliance period. That’s a long time. It's important that they are correct, that the finals are taken care of and that the initial households are qualified.
Those first-year credits are monthly, not annual credits. Slater says this makes it essential for her group to be working very closely with the owner and the management agent to ensure that the credits are delivered on time and on the investor’s schedule.
Timeliness is essential for low income housing tax credits
What happens if the credits are not delivered on time?
“Nothing good,” says Slater. “Again, it's all about the money. The investor in the partnership agreement has based their numbers on a specific credit delivery schedule. If the units are not delivered to that schedule, there could be financial adjustments. In other words, they're going to want their money back, or they're going to withhold it from future payments. A unit delivered as qualified on the last day of the month allows the partnership to take credits for the entire month, assuming that it was available and occupied for the entire month. If those files or households are just one day late, the partnership has lost a whole month of credits for that unit for the first year. Every single day counts.”
Slater notes that RealPage Compliance Services recommends that clients use some sort of tracker to monitor the timing of the unit qualifications, the set aside, the average income (if that's their election) and occupancy dates.
More complexity with acquisition rehabs
First year files for acquisition rehabs add another layer of complexity. Certification for new construction involves one set of credits. With acquisition rehabs, there are two sets of credits flowing for each building. There is a 4% acquisition credit as well as a rehab credit, which is typically at 9%. The credits flow from the same time period, so that there are not two separate applicable fractions. If you can get the rehab done the same year as the acquisition, you can capture both sets of credits as of the acquisition date. If the rehab can’t be done in the same year as the acquisition date, you can begin claiming both sets of credits only when that rehab is substantially complete.
And it can get worse...
There are further levels of complexity to take in, and they can cause headaches for partners.
Consider tenant income-certification effective dates. Partners are often unsure about the stipulated timing to begin obtaining signatures.
Then there is the IRS Safe Harbor Rule for household qualifications, which states that at least one person from the original household still must be occupying a unit and the household cannot be a full-time student household. The rule stipulates that you can qualify households up to 120 days prior to the acquisition date. However, once you've qualified them, you need to ensure you do a test within 120 days once those credits start flowing to ensure that they still qualify. Often, partners are not aware of this.
The devil is in the details
The clear lesson here is that you must handle multiple details perfectly to capture tax credits. So how do you make sure that the certifications are absolutely correct?
Celeste Slater mentions some of the protocols RealPage Compliance Services follows.
First, the group ensures there a lot of eyes on every file. RealPage sets individual parameters on individual households, each requiring a separate review—and a separate set of eyes to look it over.
Secondly, Slater manages an experienced team dedicated to first year certifications. That includes lease-ups, rehabs and re-certifications. Their sole focus is to review the first-year certifications.
And finally, RealPage Compliance Services sets and closely watches metrics that can determine certification outcomes. For partners, the exact metrics depend on the number of funding layers and assets. If they have, say, $100,000 in assets, RealPage requires a separate review. The same applies at the individual scale. For example, RealPage consistently charts maximum income limits by household. If a household is within $2,500 of the maximum income limit, a separate review is required.
Slater concludes: “We are committed to due diligence for our clients. It's definitely a partnership and working together to make sure that we're all meeting their goals and getting those households qualified as soon as possible. We want to take those extra precautions and ensure that we're assisting our management partners to the best of our ability.”
Watch a RealPage webcast on securing affordable housing property tax credits: Compliance is Key—Initial Certifications on LIHTC Properties.