Arkansas Administrative Code
Agency 109 - Arkansas Development Finance Authority
Division 04 - Multi-Family Housing
Rule 109.04.11-001 - 2012 Low Income Housing Tax Credit Compliance Manual

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 generally follow the most restrictive regulations. Owners must be aware, however, that he may have to satisfy the requirements of all applicable 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

Congress created the LIHTC Program under the Tax Reform Act of 1986. The LIHTC Program, governed by Section 42 of the Internal Revenue Code, began in 1987. The tax credit is a dollar-for-dollar reduction in tax liability to investors in exchange for equity participation in the construction or acquisition and rehabilitation of rental housing that will remain income and rent restricted for an extended period of time. Tax credits are allocated by ADFA for properties located in Arkansas. After ADFA allocates the tax credits to developers, the developers typically sell the credits to private investors. The private investors use the tax credits to offset taxes otherwise owed on their tax returns. The money private investors pay for the credits is paid into the projects as equity financing. Equity financing is used to fill the gap between development costs for a project and the non-tax credit financing sources, such as mortgages, that could be expected to be repaid from rental income. In awarding the credits, ADFA attempts to provide sufficient credits to ensure the project's financial feasibility throughout the 15-year tax credit compliance period. ADFA must consider any proceeds or receipts expected to be generated through tax benefits, the percentage of housing credit dollar amounts used for project costs other than the cost of intermediaries, and the reasonableness of developmental and operational costs. Generally, ADFA will compare the proposed project's developmental costs with the nontax credit financing, both private and governmental. The difference between the development costs and the nontax credit financing is the financing gap. Tax credits are used to attract the equity investment needed to fill the gap, but are limited to a ceiling.

ADFA is also designated as Arkansas' LIHTC compliance monitoring agency. Crucial elements of compliance are ensuring that the appropriate number of tax credit units is occupied by eligible households, following income eligibility guidelines and restricting rents over a specified time period. ADFA also monitors to ensure LIHTC properties are decent, safe, sanitary, and in good repair. ADFA is available to provide guidance to owners in maintaining continuous compliance with federal and state LIHTC guidelines throughout the compliance period.

Generally, owners must place the projects in service within two (2) years of carryover allocation or return the credits to ADFA for reallocation to other projects. 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.

For buildings placed in service in 1987, the credit was taken at annual rates of 9 percent (for the 70 percent value credit) and 4 percent (for the 30 percent value credit). Three types of credit are available for low-income buildings placed in service after 1987. The first type of credit is a 9 percent annual credit for the cost of a new building or qualifying rehabilitation costs, without a federal subsidy. The second type of credit is a 4 percent annual credit for the cost of a new building or substantial rehabilitation built with a federal subsidy. The third type of credit is a 4 percent annual credit for the cost of buying an existing building for which substantial rehabilitation expenditures are also incurred. Although the 9 percent and 4 percent credits are called 9 percent and 4 percent, the figures are actually estimates. The IRS sets the figures each month based upon fluctuating interest rates. A project can qualify for one of the three credits or a combination of the credits.

Low income housing tax credit amounts are based on the cost of a building and the portion of the project that low-income households occupy. The cost of acquiring, rehabilitating, and constructing a building constitutes the building's eligible basis. The portion of the eligible basis attributable to low-income units is the building's qualified basis. Generally, the qualified basis excludes the cost of land. Developers are urged to consult legal counsel, as other costs may be excluded.

Low-income housing tax credit projects that use federal subsidies generally receive a smaller credit. If federally subsidized loans are used to finance substantial rehabilitation or new construction, either the eligible basis of the building must be reduced or the 30% credit must be used. Federally subsidized loans include below-market federal loans and tax-exempt financing.

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, 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,) must comply with the 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 modify 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.

September 9, 1992 IRS Revenue Ruling 92-61 deals with treatment of staff units as part of the eligible basis.

September 26, 1997 Section1.42-15 Available Unit Rule was adopted as an amendment to the regulations. This rule allows over-income persons in LIHTC units to relocate to another unit in the same building.

The IRS subsequently issued other important rulings, especially notable are The Guide for Completing Form 8823, revised October 2009, and the Housing and Economic Recovery Act of 2008.

IMPLEMENTATION OF THE TAX CREDIT ASSISTANCE PROGRAM (TCAP) On February 17, 2009, the president of the United States signed the American Recovery and Reinvestment Act of 2009 (Public Law 111-5). The purpose of the Recovery Act was to jumpstart the nation's ailing economy, with a primary focus on creating and saving jobs in the near term and investing in infrastructure that will provide long-term economic benefits. Title XII of the Recovery Act appropriated funds for capital investments in Low-Income Housing Tax Credit (LIHTC) projects. All TCAP projects must have LIHTCs. The project must maintain eligible basis and comply with all other requirements of Section 42 throughout the compliance period. A violation under Section 42 also constitutes a violation under TCAP. ADFA staff will monitor TCAP projects in the same manner as LIHTC projects. Specific attention will be paid to the individual TCAP Agreements for compliance with all the terms thereof.

Owner's breach of any provision of the TCAP Agreement may constitute an event that ADFA may, in its discretion, deem a recapture event. If so, ADFA will give owner notice and an opportunity to return to compliance. ADFA shall have full recourse against applicable parties for the full amount of recapture.

IMPLEMENTATION OF SECTION 1602: Grants to states for Low-Income Housing Projects in Lieu of Low Income Housing Tax Credits:

The 1602 Program is sometimes called the Exchange Program; however, this does not mean that a building that has been allocated LIHTCs must exchange these LIHTCs in order to receive Section 1602 funds. The "Exchange program" refers to the exchange that takes place at the state level, where ADFA exchanges all or part of the State Housing Credit Ceiling (to the extent permitted under Section 1602) for Section 1602 funds. The purpose of the 1602 program is to provide funds to develop low-income housing where there is a funding gap. Just as with LIHTC projects, buildings receiving Section 1602 funds are subject to a 15-year compliance period. ADFA will monitor the projects for compliance with the terms and conditions set forth in the extended use agreement.

Section 1602 recapture event occurs any time within the 15-year compliance period (as defined in Section 42(i)(1) of the Internal Revenue Code when the applicable fraction of a building under Section 42(c)(1)(B) falls below the percentage of Section 1602 funds that comprise the eligible basis of the building (the Section 1602 percentage), or below the minimum set-aside elected for the building under Section 42(g)(1), whichever is greater. Individual extended use agreements will specify the 1602 percentage.

When a recapture event occurs, the full amount of the Section 1602 subaward is owed minus 6.67 percent (1/15th) for each full year of the building's 15-year compliance where a Section 1602 recapture event has not occurred.

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:

Fundamental requirements include the following:

After a qualified development has been placed in service, ADFA will initiate compliance monitoring reviews. ADFA's staff will audit each development within 180 days following the first taxable credit year and once every three years throughout the compliance period. ADFA's staff will conduct on-site inspections of all buildings in the project and will randomly select a minimum 20% of tax credit units and tenant files for review. During the initial review, staff will audit 40% or more of the tax credit units to confirm satisfaction of the minimum set-aside selection.

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

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

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

* 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") or other extended use agreement;

* 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;

* Rent Roll that must include, but is not limited to, name of tenant and unit number, total rents due per unit, tenant portion of rents, rents collected per unit, late fees collected, due date, any concessions, etc.

* 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;

* Management Agreement;

* Evidence of Fair Housing Compliance;

* Copies of reports submitted to ADFA (such as occupancy status reports); and

* Change in Ownership documentation, if applicable

* Bank statements to confirm amounts in operating reserve account and replacement reserve accounts.

NOTE: In order to monitor the balances in the operating reserve account and the replacement reserve account, ADFA requires owner to attach current year-end bank statements to the annual Owner's Certificate of Continuing Program Compliance throughout the compliance period.

Financial Statements-In order to monitor debt coverage ratio (DCR), ADFA requires owners to include current financial statements along with the Owner's Certificate of Continuing Program Compliance throughout the compliance period.

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 a minimum 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 units, parking spaces and their proximity to 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;

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

* Documentation of affirmative fair housing marketing and outreach efforts; and

* Records used to collect racial data on the head of household. This information is for statistical purposes only.

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 may request additional information for statistical purposes.

* In an effort to assist funded housing partners and entities comply with Federal Fair Housing laws and meet state Fair Housing objectives, ADFA will partner with Arkansas Fair Housing Commission (AFHC). The AFHC will provide training and certification for ADFA's housing program applicants.

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;

* Compare tenant files to WCMS data entries;

* 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. This list is not meant to be all-inclusive Section I - Eligibility

* Original Signed Tenant Application

* Credit Check

* Criminal Background Check

* Check of Landlord References

* Copy of birth certificate, if applicable

* Copy of drivers license or other photo ID, if applicable

* Copy of Social Security Card, if applicable, or SS #, or Alien Registration number Section II - Certification

* Move-in Tenant Income Certification (TIC)

* Affidavit of alimony or child support

* Authorization of release of information/disclosures

* Real estate verification

* Worksheet and calculator tape supporting determination of resident eligibility

* Statement of student status, if applicable

* Third-party verifications of income

* Tax returns or other self-employment verification, if applicable

* Social Security payment letters

* Zero income statement, if applicable

* Worksheet of Basic Needs Contribution, also known as Certification of Daily Needs

* Bank statements

* Asset statements and verifications

* Telephone conversation reports clarifying third party verifications or other similar circumstances ,if applicable

* Annual signed Recertifications

* Each year's recertification packet should be separated with a sheet of colored paper Section III - Occupancy

* Signed Leases

* Lease Addendums (e.g. LIHTC requirements, smoke detector rules, etc.)

* Site Rules and Regulations

* Security Deposit Rules

* Pet Information/ Signed Agreement

* Rent and income limits for each year of compliance

* Copy of annual utility allowances for each year of compliance

* Current amount of rental assistance payments

* Current amount of rent paid by tenant

* Copies of tenant's checks or receipts, if applicable

* Signed Tenant Agreements Section IV - Correspondence

* Correspondence between tenant and manager

* 120/90/60/30 day recertification notices

* 30-day notice of rent increase

* Copy of signed Warning Notices

* Inspection notifications

* Any brochures (e.g. guide to keeping unit clean)

* Permission to enter forms Section V - Maintenance

* Proof of move-in inspection signed by tenant and manager

* Proof of quarterly unit inspections and maintenance requests

* Form for Maintenance calls for repairs needed or requested (non-emergency repairs must be made within 30 days; life/health/safety repairs must be completed within twenty-four hours)

* Copies of work orders

* Copies of receipts or proof of completion

* Proof of move-out inspection signed by tenant and manager

The above-mentioned documents under Section V may also be maintained in a separate "Unit Maintenance" folder.

ADFA's staff will conduct inspections of the units that are randomly selected for file audit and will utilize Uniform Physical Conditions Standards and/ or ADFA-approved design standards. Owners may utilize standardized inspection forms for quarterly unit inspections. ADFA staff will inspect major areas of the property, identify the defect and the severity level of the defect. The levels are 1, 2, and 3 with 3 being the most severe. Any life threatening hazard must be addressed immediately. UPCS identifies the following inspectable areas:

ADFA has implemented a two-tiered plan for collecting monitoring fees. The first plan begins with the 2009 allocations. ADFA will assess a one-time monitoring fee of 8% of the annual credit allocation for the development. This assessment is due when credits are allocated and no other monitoring fee will be due. The second tier of the plan applies to existing properties that were assessed a monitoring fee of 6% at allocation. The initial 6% fee covers the first fifteen (15) years of monitoring. Properties that are now in extended years 16 through 30+ will be assessed a fee of $50.00 per tax credit unit. Rather than collect the fee annually, ADFA will collect this fee when ADFA conducts the audit, which is typically every three (3) years but is subject to ADFA's discretion.

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 satisfy the requirements of all programs. Following the most restrictive requirement may or may not apply.

The Department of Housing and Urban Development (HUD) publishes the Multifamily Tax Subsidy Projects (MTSP) income limits annually. The IRS requires these income limits, adjusted for family size, to be used when determining eligibility of LIHTC tenants at move-in. The minimum set-aside election establishes whether the 50% or 60% AMGI limit applies to the development 's tax credit units.

HUD's L50 Very Low Income amounts equal the 50% AMGI limits for households of one to eight persons. The 60% AMGI limit must be calculated from the 50% limits. The 60% AMGI limit equals 120% of the HUD Very Low-Income amount for the corresponding family size. Owners must calculate the 60% limits by multiplying the 50% AMGI figures by 1.2.

When HUD publishes new MTSP income limits, owners are required to implement the new income limits no later than 45 days after the effective date. Any fluctuations in the income limits will have a corresponding impact on maximum gross rent amounts. When determining income levels for qualifying tenants, the correct family size must be determined. A family includes all occupants of the unit. Owners should closely monitor family size.

Note: Owners and managers must review development files to determine if HUD or Rural Development restrictions also apply or if owner agreed to other income restrictions.

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. See page 21 for a discussion of telephones.

Maximum Gross Rent = (Applicable Income Limit x 30%) divided by 12. Remember that the tenant's rent plus the utility allowance cannot exceed the maximum gross rent.

If the rent calculation ends with an amount beyond the decimal point, you must not round the amount up. Rounding up would charge more than the maximum allowable rent, thus resulting in non-compliance.

Example: If the applicable income limit is $21,750, multiply by .30 to get $$6,525.00, and then divide by 12 to get $543.75. You may round this amount down to $543.00 but you cannot round up to $544.00. The maximum gross rent including the utility allowance cannot exceed $543.75.

1987-1989 Developments

For developments with 1987, 1988, or 1989 tax credit allocations, the unit rent is calculated using the income limit for the actual number of people in the household. Thus, the maximum rent can increase or decrease based on respective changes in the household composition.

The resulting maximum allowable rents (including utility allowance) based on household size equals (limit x 30%) ÷ 12:

The rent decreases based on a reduction in household composition or a decrease in the income limits.

1990+ Developments

For developments with 1990 and subsequent allocations, the rent formula uses an imputed family size of 1.5 persons per bedroom to determine the applicable income limit to be used for rent calculations. For efficiency or studio units, the 1-person income limit is used.

To determine which income limit is used for the bedroom size rent formula, use the imputed household size of 1.5 persons times actual number of bedrooms.

Studio - 1 person

Any charges to low-income tenants for services that are not optional generally must be included in gross rent. A service is optional when the service is not a condition of occupancy and there is a reasonable alternative. No separate fees can be charged for tenant facilities (swimming pools, parking, recreational facilities) if the costs of the facilities are included in eligible basis. Fees cannot be charged for services considered as amenities or for which the owner received points.

Refundable fees associated with renting an LIHTC unit are not included in the rent computation. For example, security deposits and fees paid if a lease is prematurely terminated are one-time payments that are not considered in the rent computation. Required costs or fees, which are not refundable, are included in the rent computation. Examples include fees for month-to-month tenancy and renter's insurance.

The following fees may be charged if they are optional: pet fees, laundry room fees, garage, and storage fees.

Owners/managers must be careful that gross rents do not exceed tax credit limits. A common mistake is to charge additional fees that are prohibited under the program. Prohibited fees include, but are not limited, to the following:

. Unit preparation fees

. Re-decorating fees

. Re-keying fees

Application fees may be charged to cover the actual cost of checking a prospective tenant's income, credit history, and landlord references. The fee is limited to recovery of the actual out-of-pocket costs. Owners or managers must provide supporting documentation to justify the amount of application fees. It is also acceptable for the applicant to pay the application fee directly to the third-party actually providing the applicant's rental history.

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. A low-income resident may pay more that the restricted tax credit rent in one situation. If a federal rental subsidy, such as Section 8, is paid on behalf of a low income resident, Section 42(g)(2)(E) permits the resident to pay more than the maximum LIHTC rent if:

In RD 515 Projects, overage rents may result when 30% of the tenant income minus the utility allowance exceeds the RD Program's Basic Rent. If this overage rent exceeds the LIHTC rent, then the overage cannot always be charged. For 1991 and later year developments, the overage can be charged for amounts that are turned over to RD. In 1987-1990 developments, the overage cannot be charged to the tenant since the provision is not retroactive.

Utilities include the costs for heat, lights, air conditioning, water, sewer, and trash removal. Generally, telephone, cable television and Internet are not included in utilities; however, if a supportive service or any other charge is mandatory, such charge becomes part of the gross rent calculation. This may include parking fees, a telephone if it is required to open the door for visitors, meal service, or other required costs. 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. Utilities are part of rent. Overcharging rent can take the unit out of compliance even if the excessive amount is returned to the tenant.

The Internal Revenue Service (IRS) released final regulations regarding utility allowances for the LIHTC Program. ADFA is currently accepting 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 nonqualifying 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.

If the household income for residents in a qualified unit increases to more than 140% of the current applicable income limit, the unit is considered an "over-income-unit" but may continue to be counted as an LIHTC unit as long as two conditions are met. The unit must continue to be rent restricted and the next comparable size unit in the building must be rented to a qualified low-income tenant. The owner of an LIHTC building must rent to qualified residents all comparable units that are available or that subsequently become available in the same building until the applicable fraction (excluding the over-income units) is restored to the percentage on which the credit is based. Once the original applicable fraction of the building has been restored, the "over-income" unit may remain rent restricted or may become a market-rate unit if the building is a mixed income building.

If existing LIHTC tenants wish to transfer to a different LIHTC unit in the same building (as identified by the building identification number), they do not need to be recertified. A new lease must be executed to be effective on the move-in date to the new unit. When a household moves to a different unit within the building, the newly occupied unit adopts the status of the vacated unit. Thus, if a current household, whose income exceeds the applicable income limitation moves from an over-income unit to a vacant unit in the same building, the newly occupied unit is treated as an over-income unit. The vacated unit assumes the status the newly occupied unit had immediately before it was occupied by the current resident.

When a household moves to a unit in a different building, ADFA requires the owner or manager to treat that household as a new move-in and qualify accordingly.

During the initial credit period, existing tenants cannot be relocated for the purpose of qualifying more than one LIHTC unit to count toward the minimum set-aside or applicable fraction.

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:

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. Owners must report a casualty loss to ADFA within thirty (30) days following the loss. If the building or 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. If owner has obtained a recertification waiver, he, too, must continue to check student status annually. Student status must be verified through the registrar's office of the educational institution. Children in grades K-12 are considered full-time students.

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 the MTSP 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. Full-time students residing together in a unit must qualify under one of the exceptions previously listed herein.

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:

Total income is gross income with no adjustments or deductions. 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 current 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. Owners must review the current version of the HUD Handbook 4350.3 for a comprehensive discussion of income calculations.

Annual income includes:

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 K 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 C.

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 must 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 120 days before the effective date of the TIC. 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. The owner may obtain acceptable third party written verifications by facsimile, e-mail, or Internet. 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. The Tenant Income Certification must be completed in ink or by computer. ADFA will not accept strikethrough lines or the use of white out on the TIC. If errors are discovered before all parties sign, a new TIC must be prepared. If errors are discovered after all parties have signed, ADFA will accept a properly executed addendum with corrections or a new TIC. You may use the regular TIC form, identify it as the addendum, and complete only the areas that are being corrected. Attach the signed addendum to the TIC.

The effective date of the LIHTC Tenant Income Certification (TIC): Section 42 of the Code specifies that the LIHTC TIC is effective on the date the unit is designated as a low-income unit, i.e., the date a qualified household occupies the unit. For example, John and Jane Doe completed a rental application on April 12, 2004. The property manager determined the household to be eligible on April 21, 2004. John and Jane Doe signed the rental lease on April 25th, and took possession of the unit on May 1, 2004. The effective date of the LIHTC certification is May 1, 2004. All subsequent recertifications must be performed within 120 days of May 1st of each subsequent year of the compliance period.

Managers must be aware of the tax credit effective date and be sure to re-certify within 120 days of the anniversary of the tax credit certification date. Do not move the effective date forward to accommodate other programs. If signatures are obtained in advance of the effective date, managers are responsible for determining that the information is true and correct. Please refer to Section IV.I on Recertifications for additional information.

The waiting list is required as part of the selection process. 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 must keep appropriate lists or columns by 30%, 50%, 60%, or other income limit.

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.J. The procedure for annual recertifications is virtually the same as determining initial income eligibility. Owners/mangers must contact the tenant and obtain an application with an accurate count of the current number of household members; information about student status of each member of the household; an accurate list of income sources, including assets, for the coming year ; and tenant's written authorization to verify household income, assets, etc. Owner/manager will compare income to 140% of the current income limit. Any changes in household size must be reflected. If the household's income at recertification exceeds 140% of the income limit, the available unit rule will apply. The preferred method for income verification is third-party written verification. If third-party verification is impossible (e.g. self-employed, extended delay, etc.) owners or managers must obtain and review appropriate alternative documentation.

Failure to recertify tenants on an annual basis is cause for ADFA to issue IRS Form 8823 Report of Non-Compliance. The timing of the recertification is critical to maintaining compliance with the tax credit program. Subsequent recertifications must be completed within 120 days of the anniversary of the move-in date. When additional adult individuals join the household, the effective date will remain the same until the unit is completely vacated.

In reference to the "recertification exception" for 100% LIHTC properties, ADFA reminds owners that the "waiver" refers to third-party verifications of income. ADFA requires the following:

For households occupying a unit at the time of acquisition by the owner, the initial tenant income certification is completed within 120 days after the date of acquisition using the income limits in effect on the day of acquisition. The effective date of the tenant income certification is the date of acquisition since there is no move-in date.

In the event that the household occupies a unit at the time of acquisition, but the tenant income certification is completed more than 120 days after the date of acquisition, the household is treated as a new move-in. Owners use the income limits in effect at the time of the tenant income certification and the effective date is the date the last adult member of the household signed the certification (this is an exception to the general rule for effective dates because there is no move-in date).

When the household moves into a unit after the building is acquired but before the beginning of the first year of the compliance period, the tenant income certification is completed using the income limits in effect at the time of the certification and the effective date is the date the household moves into the unit.

Under IRC 42(f)(2), the applicable fraction for the first year of the credit period is computed based on a month-by-month accounting of units or floor space occupied by income-qualified households. In the case of buildings that were acquired and then rehabilitated, there are two separate allocations of credit documented on two Forms 8609; one for the acquisition credit and a separate allocation for the rehabilitation credit. The owner is not required to determine tow applicable fractions. Under IRC 42(e)(4)(B), the applicable fraction for the substantial rehabilitation credit will be same as the applicable fraction for the acquisition credit. Therefore, for purposes of computing the applicable fraction under IRC 42(f)(2), the following units are considered low-income units:

For HUD Section 8 tenants only, Treasury Regulations permit the submission of a letter from the contract administrator (e.g., local PHA) as verification that the family's income does not exceed the applicable Section 42 income limitation. ADFA will accept the form

"Verification of Annual Income and Household Size", included herein as Exhibit Q. This form is a verification of income; it is NOT a substitute for the Tenant Income Certification (TIC), which must be executed for every LIHTC household. Upon receipt of the Exhibit Q, owner or manager must ensure the form is completed in its entirety and dated within the appropriate timeframe. The combined annual family income must be compared to the LIHTC income limit to ensure it falls at or below the limit. Any discrepancies between the application and income certified by the PHA will necessitate the use of third party verifications for all income. Owners or managers must remember that full-time student household eligibility must be verified.

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 E.

Any Owner who engages a management company without first obtaining ADFA approval will be considered no

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).

RULES FOR COMBINING HOME FUNDS AND LIHTC

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

Owners of qualified tax-exempt bond properties must comply with all regulatory agreements and program regulations. Owners' files must include 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

BUILDING IDENTIFICATION NUMBER: This is the nine-digit alpha numeric designation assigned by the state housing credit agency to a low-income building. Essential to the monitoring process for IRC section 42, IRS Notice 88-91 provides information regarding building identification number requirements.

COMPLIANCE PERIOD: This is the fifteen (15) year period over which a development must maintain compliance with IRC section 42. This period begins with the first taxable year of the credit period. The compliance period may be extended another 15 years by terms of extended use provisions.

CREDIT PERIOD: The 10-year period over which an owner may claim tax credits annually on a building-by-building basis. The tax credit period begins either with (a) the taxable year in which the building is placed in service or (b) the succeeding taxable year (if elected by the owner).

ELIGIBLE BASIS: That portion of the development allocated credits and for which credits are allowable. Eligible basis consists of (1) the cost of new construction, (2) the cost of rehabilitation, or (3) the cost of acquisition of existing buildings acquired by purchase (including the cost of rehabilitation, if any, to such buildings incurred before the close of the first taxable year of the credit period which do not exceed a prescribed minimum amount). Only the adjusted basis of the depreciable property may be included in eligible basis. The cost of land is not included in adjusted basis.

EMPTY UNIT: An LIHTC unit that has never been rented.

EQUITY: This term refers to the funds provided by investors in a project. The amount of this investment is contingent upon the value attributed to the tax benefits generated by ownership in the project. Equity represents one of the basic financing layers in a project.

EXTENDED LOW-INCOME HOUSING COMMITMENT: A binding agreement between the owner and the housing credit agency that obligates the owner and any successors to maintain specific occupancy and affordability requirements for the development.

GENERAL PUBLIC USE: The legislative history of IRC section 42 and Treas. Reg. Section 1.42-9 provides that the residential rental units upon which a low-income housing credit is taken must be available for use by the general public. A residential rental unit is for use by the general public if the unit is rented in a manner consistent with housing policy governing nondiscrimination. HUD Handbook 4350.3 is the appropriate reference source.

GROSS RENT FLOOR: This ruling allowed the owner to establish floor rent amounts that will not be affected by fluctuations in the income limits and maximum rent ceilings. For developments that received an allocation of credits or determination letter on or after October 6, 1994, the owner may elect to establish the gross rent floor as the maximum rent in effect either on the date the development was placed in service or on the date the development received an allocation. This irrevocable election must be made by the owner and submitted in writing to ADFA no later than the placed-in-service date of the development.

GROSS RENT LIMITATION: Gross rent may not exceed 30 percent of the applicable qualifying income as adjusted for household size. Gross rent includes the cost of utilities, except telephone and cable. If utilities are paid directly by the tenant, the maximum rent must be reduced by the amount of the utility allowance. The gross rent limitation applies only to payments made directly by the tenant. Any rental assistance payment (such as HUD Section 8) is not included in the gross rent limitation.

HOUSEHOLD INCOME LIMITATIONS: One of the requirements of the minimum set-aside test, household income limitation of a qualifying unit is a set percentage of the area median gross income figure. In accordance with the minimum set-aside elections, the income level may be no greater than 50 percent or 60 percent of the respective area median gross income. A household can consist of one or more persons. Count all household members and compare to the per person income limits. You may count unborn children or children in the process of being adopted as members of the household for income limit purposes.

INCOME CERTIFICATION: All qualifying units must have adequate documentation to support the household income limitation at initial lease-up as well as annually throughout the compliance period.

LOW INCOME UNIT: A low-income unit includes any unit in a qualified low-income building if the individuals occupying such unit meet the income limitations and if the unit meets the gross rent restrictions.

MARKET UNIT: Any non-LIHTC unit whether occupied or not.

MINIMUM SET-ASIDE TEST: This is a requirement that must be met at all times during the development's compliance period. This test restricts rent and dictates which households qualify as low income and how many units must be occupied by the qualifying households. The two general minimum set aside tests are the 20/50 and the 40/60 tests, which are defined in the glossary.

MOV E-IN CERTIFICATION: The form, signed by both the resident and owner's representative, summarizes household composition, projected household income and assets.

NEXT AVAILABLE UNIT RULE: The rule states that if an existing tenant's income in a LIHTC unit increases above 140 percent of the applicable income limitations (over- income unit), the next available unit of comparable or smaller size must be rented to a low income tenant to continue treating the over- income unit as a low income unit within that building. In fact, all comparable units that subsequently become available in the same building must be rented to qualified residents until the applicable fraction is restored to the percentage on which the credit is based.

OCCUPIED UNIT: An LIHTC unit that has been rented.

OWNER'S CERTIFICATION: A building owner must provide certification to ADFA every year that the low-income units in a development are occupied by qualifying households. Failure to provide such certification in a timely manner will result in the filing of IRS Form 8823 (Report of Non-Compliance or Building Disposition (Non-compliance Report) by ADFA.

PLACED IN SERVICE: "Placed in service" is defined in IRS Notice 88-116, 1988-2 C.B. 449, as being the date on which the first unit in the building is first certified as being suitable for occupancy under state or local law. For rehabilitations which qualify for treatment as a separate new building, the placed in service date would occur at the end of the 24-month period over which such expenditures are aggregated.

QUALIFIED BASIS: The "Qualified Basis" is the formula used to calculate how much tax credit will be provided. Qualified Basis amounts are determined as the proportion of eligible basis in a qualified LIHTC building attributable to the LIHTC rental units. This proportion is the lesser of (1) the proportion of low-income units to all residential rental units, or (2) the proportion of floor space of the low-income units to the floor space of all residential rental units.

RECERTIFICATION: The annual re-determination of household income and composition for continuing eligibility.

RECAPTURE: Recapture refers to an adjustment in which the accelerated portion of the credit, plus interest, is recovered as a result of reductions in qualified basis (including but not limited to the partial or full disposition of the building or interest therein). If the qualified basis on which credit is taken decreases, recapture applies to that portion of the qualified basis that is no longer eligible for the credit. If a project ceases to meet the minimum set-aside requirement, the project no longer qualifies as a low-income housing project until the minimum ser-aside is again met, and recapture is applied to all credits previously taken on the entire project.

SINGLE ROOM OCCUPANCY (SRO) UNITS: Residential rental units must generally contain complete living, sleeping, eating, cooking, and sanitation facilities. IRS section 42 provides an exception to this definition which allows SRO units to qualify as residential rental units even if eating, cooking, and sanitation facilities are on a shared basis.

STUDENT TENANTS: Units occupied entirely by full time students will not be eligible. Exceptions apply for students who are single parents of children who are also full-time students, provided no one is claimed as a dependent of a third party other than a parent of the dependent children. Another exception is a student who was previously under the care and placement of the state agency responsible for administering foster care. Married students who are entitled to file a joint tax return are also exceptions, as are students enrolled in certain job training programs or those receiving welfare assistance under Title IV of the Social Security Act.

UNIT FRACTION: The percentage of low-income units in a building expressed as a fraction-the numerator of which is the number of low-income units in the building and the denominator of which is the number of residential units (whether occupied or not) in such building.

UTILITY ALLOWANCE: A calculated average of expenses for utilities (other than telephone and cable) for units comparable in size or the utility allowances used by the local Public Housing Authority or Section 8 office. Utility allowances are calculated annually.

VACANT UNIT: An LIHTC unit from which someone has moved.