Arkansas Administrative Code
Agency 109 - Arkansas Development Finance Authority
Division 04 - Multi-Family Housing
Rule 109.04.06-001 - Procedures Manual for the Low Income Housing Tax Credit (LIHTC) Program

The Arkansas Development Finance Authority ("ADFA" or the "Authority"), a public body politic and corporate, with corporate succession, was created May 1, 1985 by Act 1062. This act abolished the former Arkansas Housing Development Agency that had existed since 1977. The former agency had as its sole purpose to sell tax-exempt bonds and use the proceeds to develop safe, decent, sanitary and affordable housing for low and moderate income Arkansans. All records, funds, properties, obligations, debts, functions, powers and duties were transferred to ADFA, which sells both taxable and non-taxable bonds and supports programs not only for housing but also for economic development, agriculture, aquaculture, export finance, government finance, and tourism development.

This Policies and Procedures Manual presents an overview of ADFA's policies as they pertain to compliance monitoring for the Low Income Housing Tax Credit ("LIHTC") Program. The procedures are designed to assist owners and managers of developments that have received an allocation pursuant to the LIHTC Program to ensure that the developments remain in compliance with Section 42 of the Internal Revenue Code ("the Code"). The procedures are not intended to be all-inclusive. In the event of a conflict or inaccuracy, the Code will control. If the development has received a combination of funds from other government entities, owners must follow the most restrictive regulations. For instance, an owner may have received funds under a governmental program in which he agreed to rent a certain number of units to persons earning 40% or less of the area median income. The owner must be sure to satisfy this restriction in addition to the applicable LIHTC area median income limit. Employees and officers of ADFA are not liable for any adverse consequences that affect the taxpayer or investor relative to compliance with the federal tax code. ADFA reserves the right to implement additional policies as needed. Also, new rulings or other changes may be made periodically. Owners are responsible for compliance with any amendments or updates to the federal regulations.

Any questions regarding this Manual should be directed to:

Compliance Monitoring Department Arkansas Development Finance Authority P. O. Box 8023 Little Rock, AR 72203-8023 Telephone: (501) 682-5900 Telecopy: (501) 682-5859

Once a development is placed in service, it is generally eligible for the tax credit every year for ten (10) years. To continue generating the credit and avoid recapture, an LIHTC building must satisfy specific tax credit compliance rules for fifteen (15) years. In cases where 100% low-income occupancy is not achieved during the first tax credit year, (for example, either due to unqualified tenants or inability to find qualified tenants to qualify units) there will be possible increases in qualified basis in subsequent years. In such cases, excess qualified basis shall have the percentage equal to 2/3 of the applicable fraction applied, thus extending the tax credits claimed over the 15-year compliance period. The tax credits may be generated annually on a building-by-building basis beginning either with the taxable year in which the building is placed in service or, at the election of the taxpayer (owner), the succeeding taxable year.

The compliance period for any building is the period beginning on the first day of the first taxable year of the credit period of such building and ending fifteen (15) years from such date. Beginning in 1990 and no later than 1991, ADFA implemented the Land Use Restriction Agreement ("LURA"), which extended the compliance period for an additional fifteen-year period. The LURA, recorded in the real estate records of the county in which the development is located, is a binding agreement of the owner and any successors to maintain specific occupancy and affordability requirements for the development.

Projects placed in service before the use of the LURA (1987, 1988, 1989, and some in 1990) must comply with the initial 15-year compliance period only. In reference to those projects, ADFA will review the IRS form 8609 to determine the year the owner claimed the tax credits. If there is no completed copy of the IRS form 8609 available, ADFA staff will ask the project owner to confirm the credit year. Upon determining that the 15-year compliance period has expired, ADFA will notify the owner that the

compliance period has ended and that ADFA will no longer conduct physical or tenant file audits.

After the initial 15-year compliance period, ADFA will continue to monitor developments with extended use agreements. ADFA intends to enforce the terms and agreements set forth in the Land Use Restriction Agreement and Declaration of Restrictive Covenants for the Low Income Housing Tax Credits ("LURA") and ADFA's Compliance Monitoring Policies and Procedures Manual for the LIHTC Program. ADFA will not reduce any of the Section 42 requirements. Owners will be allowed specific time periods, as deemed appropriate by ADFA, to correct items of noncompliance.

Remedies for noncompliance include, but are not limited to, the following:

* Temporary suspension or permanent expulsion from participation in the LIHTC, HOME, or any other program administered by ADFA;

* Notification to other lenders or agencies that provided funding for the project;

* Notification to the limited partners, syndicators, board of trustees, or any other affiliate of the project; and

* Legal action.

Since the 1986 enactment of the LIHTC, Congress has changed or amended the laws governing the program, yet many changes have not been retroactive. In some cases, the change in regulations brought forth by a technical correction is minor; in others, the effect is substantial. Owners must be aware of the differences in regulations and which credit period applies to each building or development. The period considered for management/compliance purposes is the year in which tax credits were allocated by ADFA. Currently, there are four (4) specific credit regulation periods as follows:

Two important revenue rulings were later issued that were not retroactive.

Compliance with the requirements of the Code is the development owner's responsibility. ADFA's obligation to monitor the development for compliance does not make ADFA liable for an owner's non-compliance, nor does it alleviate an owner's duty to comply with applicable Code requirements. In Compliance with Section 42 of the Code and in accordance with ADFA's Compliance Monitoring Policies and Procedures Manual for the LIHTC Program, the owner, by accepting the allocation of low-income housing tax credits, is obligated to:

After a qualified development has been placed in service, ADFA will initiate compliance monitoring reviews. ADFA's staff will visit each development by the second year that the last building of the development is placed-in-service and once every three years throughout the compliance period. ADFA's staff will randomly select 20% of tax credit units and tenant files for review.

ADFA's staff will contact the owner or manager to schedule the on-site visits, which will include the following reviews:

Beginning with 2001 reservations, ADFA will assess and collect a compliance monitoring fee of 6 % of the total amount of annual credits. ADFA will submit an invoice for the fee upon issuance of IRS Form 8609. Owner's failure to pay the monitoring fee will result in the issuance of IRS Form 8823-Report of Non-Compliance or Building Disposition.

ADFA recommends that each development owner or manager maintain an "Administrative File for ADFA LIHTC Record Keeping Procedures." Since the information will be reviewed by ADFA during each visit, the Administrative File must include, but is not limited to the following items:

* Completed 8609 forms on each building (signed by ADFA and the development owner, with building identification numbers);

* Records that indicate the character and use of any nonresidential portion of the development included in eligible basis as defined under Section 42(d). For example,

tenant facilities that are available on a comparable basis to all tenants for which no separate fee is charged for the use of the facilities or facilities reasonably required by the development;

* Certificates of Occupancy or Approval;

* The eligible basis and qualified basis of the building at the end of the first year of the credit period;

* Copy of Land Use Restriction Agreement ("LURA");

* The vacancy history of the low income units and when and to whom the next available unit was rented;

* Total number of units in the property (this information must be retained on a building-by-building basis including the number of bedrooms and the square footage of each unit);

* HUD income tables for all years the development has been placed in service;

* Household size;

* Rents charged on each type of unit, including applicable utility allowances for all years the development has been placed in service;

* Non-residential use fee (i.e. additional fees charged for parking, etc.);

* 20/50 Test, Section 42 of the Code, OR 40/60 Test, Section 42 of the Code (also known as the minimum set-aside);

* Partnership Agreement;

* Evidence of Fair Housing Compliance;

* Copies of reports submitted to ADFA (if applicable, such as annual occupancy status reports); and

* Change in Ownership documentation, if applicable

First year records (including the tenant file for each tenant that initially occupied the LIHTC units, rent rolls, etc.) provide evidence that the property met its minimum set-aside, targeted applicable fraction, and other elected set-asides. Such first year records must be kept for twenty-one (21) years and subsequent records must be kept for a minimum of six (6) years, as mandated under the Code. ADFA requires the owner to certify on the Owner's Certificate of Continuing Program Compliance that he is complying with this section of the Code.

During the on-site visit, ADFA's staff, in addition to interviewing tenants, will check the following:

* Posting of Equal Housing Opportunity symbol on all advertising and exterior property sign;

* Display of the Equal Housing Opportunity sign in office where tenant applications are taken;

* Existence of acceptable number and location of accessible parking spaces and their proximity to units, ramps, etc.

* Maintenance of waiting lists and sign-in sheets;

* Diverse placement of accessible units for the disabled;

* Safe and sanitary condition of accessible units for the disabled (if units are chosen as part of random selection);

* Utilization of a current Affirmative Fair Housing Marketing Plan (ADFA can provide necessary forms if owner needs assistance in developing and implementing a Plan); and

* Documentation of affirmative fair housing marketing and outreach efforts.

Requirements for New Buildings: In buildings that were ready for first occupancy after March 13, 1991, and have an elevator and four (4) or more units:

* Public and common areas must be accessible to persons with disabilities;

* Doors and hallways must be wide enough for wheelchairs;

* The main entrance for the building must be at least 32 inches wide, measured between the face of the door and opposite doorjamb;

* All units must have (1) an accessible route into and through the unit; (2) accessible light switches, electrical outlets, thermostats and other environmental controls; (3) reinforced bathroom walls to allow later installation of grab bars; and (4) kitchens and bathrooms that can be used by people in wheelchairs.

ADFA requires files to be maintained in a consistent order. ADFA's staff will randomly select and review at least 20% of current tenant files, as required by IRS. First year tenant files must also be available on site for review. ADFA staff will conduct a thorough examination to:

* Ensure that all documents are completed, signed and dated by all appropriate parties;

* Review initial tenant income certifications;

* Review executed leases for the initial lease term of six (6) months or longer and for rents charged for each LIHTC unit;

* Review signed authorization for release of income, employment and asset information;

* Review and document annual income, subsidized rent, tenant contribution, utility allowance, and gross rent for compliance with LIHTC program limits;

* Ensure that third party income verifications are completed, signed and dated by all parties;

* Ensure that appropriate asset income verifications are used;

* Ensure that income recertifications are completed within the 12-month period;

* Review original tenant applications;

* Review student eligibility guidelines;

* Review unit inspection forms (unit inspections are recommended quarterly) and maintenance records; and

* Review tenant complaint forms, responses, and other correspondence

ADFA recommends the use of files divided into sections as follows with the latest information on top:

Section I

ADFA's staff will conduct inspections of the units that are randomly selected for file audit and will utilize Uniform Physical Conditions Standards or local codes. Owners may utilize standardized inspection forms for quarterly unit inspections.

During compliance monitoring visits, ADFA's staff will inspect the following:

In order for an owner to claim tax credits, a development must have a minimum number of qualified tax credit units. The owner must select one of two minimum set-asides, which establishes both the minimum percentage of tax credit units at the development and the maximum income limit used to determine tenant eligibility.

The choices are 20/50 and 40/60. Under the 20/50 selection, 20% or more of the aggregate residential rental units in the development must be occupied by persons with incomes of 50% or less of the area median gross income adjusted for family size. Under the 40/60 selection, 40% or more of the aggregate residential units in the development must be occupied by individuals with incomes of 60% or less of the area median gross income adjusted for family size.

The owner selects the minimum set-aside when applying for the tax credit allocation and makes the election on Form 8609. Once selected, the minimum set-aside is irrevocable. The year tax credits are "claimed" determines when the minimum set-aside test must be met. The minimum set-aside test must be maintained for the entire compliance period. If the property is identified as a multiple building project on Line 8b of Form 8609, the minimum set-aside may be met across the development. If the property is not identified as such, the minimum set-aside must be met building-by-building. For 1987-1990 developments, the minimum set-aside had to be met within twelve (12) months of the placed-in-service date. For 1991 and later years, the minimum set-aside must be met no later than December 31 of the second year of the initial credit period. The minimum set-aside must be met before any credits may be claimed.

The federal minimum set-aside election must not be confused with other set-aside elections that may have earned extra points in the allocation process and are recorded in the development's Regulatory Agreement. Additionally, the tax credit set-aside must not be confused with HOME fund requirements or subsidy programs such as Section 8 or Rural Development. Owners must always determine the tax credit minimum set-aside first and review allocation documents to identify any additional set-asides. If the development has layers of funding, the owner must follow the most restrictive set-aside requirements.

Units qualifying for tax credits are subject to a rent restriction formula that sets the maximum gross rent that may be charged. The maximum gross rent (including utilities) may not exceed 30% of the imputed income limitation. If low-income tenants are charged more than the allowable rent, the unit is in non-compliance and recapture of credits may result. Whenever utility costs are paid directly by the tenant, gross rent must include an allowance for utilities. Telephone and cable are not considered to be essential utilities and are not included in the allowance for utilities.

Gross rent does not include any housing assistance payments made to an owner to subsidize a tenant's rent (i.e. Section 8). Only the actual rent paid by the tenant, including tenant-paid utilities, is counted toward the maximum allowable rent. For example, if the LIHTC maximum gross rent is $350.00 and the total tenant payment is $250.00 with Rental Assistance paying an additional $150.00 subsidy to equal the Contract Rent of $400.00, there is no problem. The amount paid by the tenant, including utilities, does not exceed $350.00.

Under the HUD Section 8 Program, a tenant cannot pay more than 30% of his adjusted gross income for rent. For this reason, in 1989 the IRS ruled that if the tenant portion of rent increases above the LIHTC maximum allowable rent, thereby reducing the Section 8 subsidy, the higher rent may be charged. Owners must make sure the total tenant payment does not exceed the maximum LIHTC rent at time of move-in.

Utilities include the costs for heat, lights, air conditioning, water, sewer, and trash removal. Neither telephone nor cable television is included in utilities. Whenever a tenant directly pays utility costs, a utility allowance must be used to determine the maximum unit rent that may be charged. The utility allowance must be subtracted from the maximum gross rent to determine the maximum tenant portion of rent.

Owners must calculate utility allowances based on one of the following:

If a low-income unit becomes vacant during the year, the unit remains in compliance with LIHTC regulations and eligible for the tax credit. The unit may be counted in the set-aside requirement and in determining the qualified basis provided the owner has made

reasonable attempts to rent the unit or the next available comparable or smaller size unit to an eligible household and no other comparable or smaller size units in the building are rented to non-qualifying individuals.

Units that have never been occupied are termed "empty", rather than vacant, and cannot be counted as low-income units. Empty units must be included in the building's total unit count for purposes of counting the applicable fraction.

Throughout the compliance period, owners are required to keep records for each qualified low-income development showing the low-income unit vacancies and data for when, and to whom the next available units were rented. The vacant unit rule applies to both 100% LIHTC developments and mixed income developments.

Revenue Ruling 92-61 [Section A], effective 9/9/92, allows a unit for a full-time staff member to be considered part of a development's "common area". Such units are not classified as residential rental units and thus are not included in either the numerator or denominator of the applicable fraction under section 42(c)(1)(B) for purposes of determining the building's qualified basis.

Two options apply:

According to the Code, residential units must be for use by the general public and all of the units in a development must be used on a non-transient basis. For LIHTC units to be in compliance, a six-month minimum lease term is required at initial occupancy of such low-income units. A six-month lease addendum should be signed with in-place tenants who do not have six months left on an existing lease when the building is placed-in-service. The only exceptions to this requirement would be for Single Room Occupancy (SRO) housing rented on a month-by-month (30-day lease) basis or transitional housing for the homeless.

All residential rental units in the development must be available for use by the general public. LIHTC properties are subject to Title VIII of the Civil Rights Act of 1968, also known as the Fair Housing Act. This Act prohibits discrimination in the sale, rental, and financing of dwellings based on race or color, religion, sex, national origin, familial status (including children under the age of 18 living with parents or legal custodians, pregnant women and people securing custody of children under 18) and disability.

However, all households must be eligible in the areas of income, occupancy, selection criteria by management, and type of property.

Tax credit units may not be provided only for members of a social organization or provided by an employer for its employees. Also, a residential unit is not for use of the general public, and therefore, does not qualify under the Code as part of a hospital, nursing home, sanitarium, life care facility, dormitory, trailer park, retirement home that provides significant services other than housing, or intermediate care facility for the disabled.

The Fair Housing Act also mandates specific design and construction requirements for multi-family housing built after March 13, 1991, to provide accessible housing for individuals with disabilities. Owners are expected to be familiar with accessibility requirements for their developments in compliance with the Fair Housing Act, Section 504 of the Rehabilitation Act of 1973, as amended, and Americans with Disabilities Act ("ADA"). Some of those pertinent facts are:

* New Construction Requirements: Since March 13, 1991, Fair Housing has required that downstairs units in non-elevator buildings and all units in elevator buildings be accessible.

* Reasonable Accommodation: The law requires that reasonable accommodations in rules, regulations, policies and procedures may have to be made for disabled applicants or residents.

* Reasonable Modification: The law requires that reasonable physical alterations cannot be refused to an applicant or tenant.

* Section 504: Section 504 of the Rehabilitation Ace of 1973 covers all federal programs, including Community Development Block Grant ("CDBG"), HOME funds, RD, PHA and HUD properties. New construction and substantial rehabilitation require that a minimum of 5% of units or a minimum of one and additional 2% of units or a minimum of one be adapted for wheelchair and visual/hearing impaired respectively. All common areas must be accessible to and useable by the physically mobility impaired. While Fair Housing states that reasonable modification costs may be charged to tenants, Section 504 states it is a project expense unless it poses a financial or administrative burden. It is the owner's responsibility to provide documentation to prove financial or administrative burden.

* Fair Housing applies to all LIHTC developments. Section 504 does not apply to conventional 9% deals without other federal funds. This ruling may be subject to change. The ADA provision in regard to public accommodations would require offices and other common areas to be accessible.

The current Annual Owner's Certification being used by ADFA asks the owner to indicate if a finding of discrimination under the Fair Housing Act, 42 U.S.C. 3601-3619 has occurred for the development. A finding of discrimination includes an adverse final decision by the Secretary of Housing and Urban Development (HUD), 24 CFR 180.680, an adverse final finding by a substantially equivalent state or local fair housing agency, 42 U.S.C. 3616a(a)(1), or an adverse judgment by a federal court.

Owners may not refuse to rent to Section 8 housing choice voucher holders simply because they have Section 8. On the other hand, owners must not assume a Section 8 certificate or voucher holder automatically qualifies. Applicants eligible for Section 8 may have incomes exceeding LIHTC income limits, may have negative references, or otherwise may not qualify. Proof of income eligibility must be in the tenant file.

A unit must be suitable for occupancy in accordance with state or local codes in order for credits to be claimed. If the unit is not habitable, no credits can be claimed. The IRS has ruled that if a unit is destroyed due to a casualty loss (i.e. fire, flood, or other disaster), credits cannot be claimed while the unit is being replaced. If the unit is restored within a reasonable time, credits can again be claimed and no recapture would occur. What is a reasonable replacement time? The reasonableness of the time period to repair damaged property depends on the extent of the damage. ADFA will consider other factors such as the location of the property and the time of the year. Generally, however, two years should be sufficient for the replacement of property completely destroyed by a casualty loss. In the event the owner is not able to replace the property within two years, ADFA may extend the time period if the owner demonstrates that there is a reasonable cause for delay.

The Code specifies that LIHTC housing must be for the use of the general public on a non-transient basis. Further, the regulations state, "no dormitory...may be a qualified low income project". An LIHTC development cannot be entirely occupied by full time students. Student status becomes an issue when everyone in the household is a full-time student.

The tenant, in order to be considered a full-time student, must be (a) taking at least twelve (12) credit hours per semester; (b) taking the school's full-time requirement (as defined by the institution); or (c) enrolled five (5) months out of 12 months in an institution of higher learning. The 5 months need not be consecutive. Student status must be re-verified at annual recertifications to confirm continuing eligibility of the household. Student status must be verified through the registrar's office of the educational

institution. Generally, school refers to elementary through college. Recent graduates may apply to rent tax credit units.

Single full-time students who are not entitled to file a joint tax return are not eligible for the tax credit unit. There is no grandfathering of eligibility because the tenant was not a student when he/she moved in and later became one.

Exceptions: A unit would not be disqualified for tax credits if it is occupied as specified in Section 42(i)(3)(D)-

Section 42 of the Code mandates that HUD Section 8 income limits adjusted for household size be used in determining income eligibility for the LIHTC program. A household can consist of one or more persons. Members need not be related to be considered a household. Count all household members and compare to the per person 50% or 60% income limits currently in effect. Please do not confuse the 140% Rule which allows an existing tenant's income to exceed the allowable limit. Owners or managers must never allow over-income applicants to move into an LIHTC unit. Fulltime students residing together in a unit must qualify under one of the exceptions previously listed on page 22 hereof.

Certain individuals are not considered members of the household in determining the income limits. Do NOT count the income of the following when determining household income:

Temporarily absent members of the household should be counted when determining household size. Count the following:

Total income is gross income, not adjusted annual income. Tenant income is calculated in a manner consistent with the determination of annual income under Section 8 of the United States Housing Act of 1937 ("Section 8"), not in accordance with the determination of gross income for federal income tax liability. Annual income is the anticipated total income from all sources received by the family head and spouse (even if temporarily absent) and by each additional member of the family, including all net income derived from assets for the 12-month period following the effective date of certification of income. Certain types of income are excluded.

The LIHTC Program refers to the HUD Handbook 4350.3 in utilizing its definition of income only. Keep in mind that the LIHTC program is governed by Section 42 of the Internal Revenue Code. Owners or managers of mixed-use properties must comply with all applicable program regulations. Allowances used in some government programs, such as childcare, elderly status, medical expense, etc., are not deducted from the household's gross annual income to determine income eligibility for LIHTC units.

The net income from assets must be considered when determining the tax credit eligibility of a household. Asset information for all household members (including minors) should be obtained at the time of application. Please refer to the latest revision of HUD Handbook 4350.3 for a discussion of assets.

For LIHTC Program purposes, third party verification of assets is required only if assets exceed $5,000.00 per household. ADFA will accept the "Under $5,000 Asset Certification" included herein as Exhibit N for tax credit units only. Under the HOME or other federal programs, all assets, regardless of value, must be documented by third party verification. For example, if a tax credit unit is also HOME-assisted, the owner must comply with the stricter HOME verification requirement.

The "Under $5,000 Asset Certification" must be completed accurately. There should be no blank lines. Owners or managers should always question the reasonableness and compare the amounts on the form to the application.

If net family assets total $5,000 or less, owners must count the actual income derived from net family assets. If net family assets exceed $5,000, owners must impute the asset income by multiplying the net family assets amount by the passbook rate specified by HUD, which is currently 2 percent (.02). The income to be included in household

income will be the greater of (a) actual asset income, or (b) the imputed income from assets.

At each certification and re-certification, applicants and tenants must declare whether or not an asset has been disposed of for less than fair market value during the two years preceding the date of application or the effective date of the re-certification. An asset is considered to be disposed of for less than fair market value if the cash value of the disposed asset exceeds the gross amount the family received by more than $1,000.00. If it does, for a period of two years owners must include in the total household assets the difference between the cash value of the asset and the amount received. For examples of assets disposed of for less than fair market value, you should refer to the latest revision of HUD Handbook 4350.3.

Because the LIHTC program uses special definitions for income, assets, and household composition, standard property management application forms may not collect sufficient information to determine tenant eligibility. A comprehensive housing application is critical to the accurate identification of full-time students, all assets, and anticipated income sources. An updated sample application form is included in this manual as Exhibit E.

Owners or managers must review all information furnished on the fully completed Application for Housing, including any supplementary historical documents (i.e. most recent 1040 tax form, divorce decree, etc.). The application procedure must include an interview with all adult household members to review the application and historical documents and clarify any discrepancies or missing information. For example, if the 1040 form and W-2 forms show two employers but the application only lists one, owners must ask about the second job and confirm its termination. One application signed by all co-applicants should be submitted per household. Non-related roommates should submit separate applications. If a delay of 90 days occurs between application and move-in, the owner or manager should take another application.

Owners/site managers must remember that the HUD Handbook 4350.3 is the reference guide to be used for identifying income to be included or excluded when determining household income. Determination of annual income of individuals and area median gross income must be made in a manner consistent with HUD Section 8 income definitions and guidelines.

The earned income of every prospective household member aged 18 or older must be verified. Unearned income, assets and asset income of all household members, including minors, must be verified. Verifications must be received by the owner or site manager prior to the execution of the certification of tenant eligibility and lease.

Third party verifications are valid for ninety (90) days from date completed by employer. If the information is orally updated from the source, owners may use these verifications for an additional thirty (30) days. Owners may not rely on verifications that are more than 120 days old. After this time, a new written verification must be obtained.

Written third party verifications are preferred. An authorization to release information must be signed by the applicant and must accompany verification requests. Owners must send verifications directly to the source and the source must return them directly to the owner. Verifications must not be hand-carried by the applicant to or from the source. If written verification is not possible, direct contact with the source, in person or by telephone, is acceptable. The owner must document this verbal verification in the tenant file and must obtain all information as requested on the written verification form.

When all the income and asset verifications have been received, the owner/manager must record and compute the 12-month anticipated income and income from assets of adult occupants and reconcile to amounts on the verifications. If the total 12-month projected income is less than or equal to the maximum allowable qualifying income in effect at the time of tenant certification, the household is income-eligible for a tax credit unit. If the household income exceeds the maximum allowable qualifying income, the household cannot be certified eligible for a tax credit unit. If it is determined that all requirements for eligibility are met, the Certification of Tenant Eligibility must be completed and executed along with the lease prior to move-in. All adults (age 18 or older at time of move-in) must sign the lease and TIC prior to move-in. ADFA prefers that the tenants and owner/manager execute the TIC and lease on the same date. The TIC should not be executed more than 15 days before the lease date. The Tenant Income Certification must be completed in ink. ADFA frowns on corrections or alterations to the TIC.

We have received many questions from site managers about the effective date of the LIHTC Tenant Income Certification (TIC) used in connection with both Rural Development ("RD") and tax credit properties. For example, if a tenant signs the TIC on the 15th day of January, the effective date may be the first day of February for billing purposes to RD or other entities. However, the tax credit regulations (Section 42 of the Code) specify that the LIHTC TIC is effective on the date the unit is designated as a low-income unit, i.e., the date a qualified tenant occupies the unit. The effective date of the initial certification is the move-in date. For annual recertifications, the effective date must be no later than twelve months from the effective (move-in) date of the previous (re) certification.

Example: Move-in date January 15, 2003

LIHTC Effective date: January 15, 2003

Recertification: Effective date may be January 1, 2004 but no later than January 15, 2004.

Managers must be aware of the tax credit effective date and be sure to re-certify within twelve months of the initial tax credit certification date or twelve months of the last tax credit recertification. Please refer to Section IV.I on Recertifications for additional information.

No one should be placed on the waiting list unless he has submitted a completed application. All applications should be logged by date and time received. The waiting list should have columns for bedroom size, need for subsidy (if available), any other program priorities, need for accommodations for disabled persons, gross income, etc. If the owner has more than one income level in the LIHTC property, the owner should keep lists or columns by 50%, 60%, HOME limit, etc.

All tenants occupying tax credit units must be certified and under lease no later than the date the tenant takes possession of the unit. All parties must sign the lease by the beginning of the lease term date to be properly in effect and the unit in compliance.

Some leasing guidelines are as follows:

Section 42 of the Code requires that recertification of residents be completed on at least an annual basis. Annual recertification is crucial in identifying the 140% rule situation, student status, and household composition changes. The 140% Rule is discussed in Section III.I. Failure to recertify tenants on an annual basis is cause for ADFA to issue IRS Form 8823 Report of Non-Compliance or Building Disposition. The timing of the recertification is critical to maintain compliance with the tax credit program. Recertifications must be completed

Additional forms of income verifications may be used for tenants who receive housing assistance through HUD Section 8 program. For these tenants only, acceptable

forms of income verification include a signed copy of the appropriate HUD Form 50058 or 50059 or a letter from the HUD Contract Administrator (e.g., local PHA) stating that the tenant's annual gross income is less than the applicable LIHTC income limit. These forms may be used as income verification documentation to support the Certification of Tenant Eligibility, which must be executed for every LIHTC household.

The Fair Housing Law states that there are three types of Elderly housing:

The most serious action the IRS can take against an ownership is the recapture of credits previously claimed. Only the IRS determines this course of action. ADFA does not determine the consequences of reported non-compliance. If the owner discovers at any time that credits have been claimed in error, miscalculated, or the basis was incorrectly listed, owner must complete IRS Form 8611 included herein as Exhibit G.

Rental projects that combine HOME funds with Low Income Housing Tax Credits (LIHTC) must be structured to ensure compliance with the requirements of both programs.

Tax credit projects must meet one of two minimum set-asides: 20/50 or 40/60. 20/50 means that at least 20 percent of the units must be rented to tenants with incomes at or below 50 percent of the area median income. The 40/60 set-aside means that at least 40 percent of the units must be rented to tenants earning at or below 60 percent of area median income. When combining HOME and tax credits, occupancy requirements depend on the type of credit taken and the type of HOME funding provided:

In order to take the 9 percent credit in conjunction with below-market HOME loans, joint HOME/tax credit projects must meet a higher occupancy standard than either the tax credit program or the HOME program. Together, they require 40 percent of the units to be occupied by tenants with incomes at or below 50 percent of area median income. Such projects are not eligible for the 130 percent increase in basis for projects in "qualified census tracts" or "difficult development areas". To receive the 130 percent increase, the project must either take the 4 percent credit of use the HOME funds at or above the applicable Federal rate.

In all other cases (when HOME funds are provided in some for other than a below-market interest rate loan) projects must ensure that they meet both sets of program rules. For example, a project receiving a market-rate loan can comply with both sets of rules by establishing a 20 percent set-aside for households with incomes at or below 50 percent of the area median income (as long as all remaining HOME-assisted units are leased to tenants with incomes at or below 80 percent of the area median income).

ADFA, as issuer of certain tax-exempt bonds, will monitor those projects that combined tax credits and tax-exempt bonds. ADFA will monitor those projects in accordance with the terms and conditions of specific Regulatory Agreements and applicable LIHTC program requirements.

The bond issuer, rather than the project owner, may make the election to satisfy the 20-50 test or the 40-60 test at the time the bonds are issued. This election may be entirely separate from the choice of minimum set aside for LIHTC purposes. Thus, it is not impossible that an issuer will elect the 20-50 test for a bond issue, while the project owner elects the 40-60 test for the LIHTC project financed by those bonds. Of course, the project would have to satisfy both the 20-50 test for bond purposes and the 40-60 test for LIHTC purposes. The rent restriction must comply with the terms of the Regulatory Agreement but must not exceed the LIHTC limit.

The property that is financed with both tax-exempt bonds and low income housing tax credits must comply with both programs. While some rules overlap, such as the 20/50 or 40/60 minimum set aside, the programs do not exactly match. The owner is responsible for knowing and complying with both sets of requirements.

RULES FOR COMBINING LIHTC AND TAX EXEMPT BONDS

Owner's file must include, but is not limited to, the following:

* Initial and annual income certifications, income verifications/documents, etc.

* Complete records of unit history/occupancy reports

* Leases (6-month minimum term, as property cannot be used on a transient basis)

* Interim recertifications are required if number of occupants in the unit changes for any reason other than the birth of a baby to an occupant of the unit

* Copy of Certificate of Continuing Program Compliance

* Copy of IRS form 8703