Spectrum is proud to announce it will be offering Online Training for the Tax Credit program!  We are currently in the production phases right now and will be sharing updates here and through email contact.  If you would like to be added to the email list please send request to jessica@spectrumseminars.com or comment below!

Written by Erik Whitton, Spectrum Enterprises

The Spectrum Companies has a long history of charitable donations to groups throughout the country.  My proudest moments working for this company have come at our annual compliance symposium when Steve Rosenblatt presents checks to groups such as as the NYC Firefighter Widow’s and Children’s Fund, NYC Fire Department Emerald Society Pipes and Drums, and high school marching band members in New Orleans, Boston & Baltimore.

Starting in 2012 the Spectrum Private Monitoring Division has built on this important quality to include separate donations reflecting the work we do with affordable properties across the country.  For every new property we begin working for we will donate $35 (the equivalent of one move in approval charge) to the following charitable organizations:

• The Fresh Air Fund:  Providing free summer vacations to New York City children from low income communities since 1877.
• Big Brothers Big Sisters of Southern Maine: focused on helping children discover their potential and find their places in society.
• Open Door Mission: Located in Omaha, NE helping to break the cycle of homelessness and poverty.
• Preble Street Resource Center: Located in Portland, ME providing solutions to homelessness, hunger, and poverty.

We encourage our clients to nominate exceptional organizations within their communities for consideration in our 2013 initiative.

Written by Wil Whalen, Spectrum Enterprises

DAY ONE

At some point in your Tax Credit career, you may take Steve Rosenblatt’s C3P Tax Credit Certification Seminar. Many people approach this class with a sense of fear because they’ve heard about the dreaded C3P Certification Exam. The C3P Certification Exam has become the stuff of Tax Credit Urban Legends. No one passes it on their first try and people get fired for not passing the exam. Just to put those urban legends to rest, know that many people pass this exam on their first try. Also, here at Spectrum we have never heard of someone being fired for failing this exam. Now that we’ve cleared that up, let’s talk about how to overcome basic exam anxiety.

First and foremost, put the exam out of your mind. If you spend the day and a half in class dreading the exam, you will most likely fail to absorb and retain the information being given to you. Exam anxiety can be distracting if nothing else.

Second: Listen. Steve will tell you everything you need to know to pass this exam. He will tell you what to highlight in your C3P Manual, what notes to take and he will answer your questions. The most knowledgeable person in the room is Steve. If you have a question, ask Steve. If you are confused, tell Steve. If you have a concern, address it with Steve. Chances are the person next to you is as confused as you, if not more. Also, side conversations during the class are distracting to others and any time you take your attention away from Steve, you may be missing vital information.

Third: Don’t leave the “class” in the room. Think about what you’ve learned on your breaks. Keep it in the back of your mind at lunch. Take 15 minutes or so before you go to sleep to think about and review what you’ve learned that day. Get a good night’s sleep between day one and two. Your chances of doing well on the exam will increase greatly if you are well rested.

The C3P Tax Credit Certification Seminar isn’t designed to just give you the information to pass the exam. The class is designed to teach you everything you will need to maneuver in the Tax Credit world, whether you are a housing officer, a property manager or even an investor in a Tax Credit property.

EXAM DAY

The first thing to know about this exam is that there is no reward for finishing first and no shame in finishing last. Your best bet is to block out the other people in the room. Don’t pay attention to how others are reacting to the exam and the questions. Don’t allow someone else’s stress level to affect yours.

Relax and go at your own pace. Read each question carefully. Read each answer option carefully. Do not try to “read into” anything. The questions and answers mean exactly what they say. There are no trick questions or hidden meanings.

Go with your gut. Chances are your first instinct is the correct one. The more you second guess yourself with any question, the more you will confuse yourself. The more you confuse yourself, the higher your anxiety level. If the anxiety still persists, know that it’s natural to have some anxiety. Just use it as a reminder to do your best and let it motivate you.

When you’re finished, do not go back and read each question and check your answers. This will only lead to a lot of second guessing and changed answers typically end up being the wrong answers. However, do scan through the exam to ensure that you’ve answered every question and the answer bubbles are completely filled in. Also, make sure your contact information is correct.

Once you’ve finished the exam, put it out of your mind. Don’t stress thinking about how you did. Once your exam results arrive, you’ll know exactly how you scored in the various areas. You can use this as a guide so you’ll know what to study should you choose to retake the exam online.

Last, remember once again that the C3P Tax Credit Certification Seminar isn’t there just to teach you how to pass the exam. It’s there to equip you with the knowledge you will need to be an effective member of your Tax Credit team.

One of the most common questions I’m asked as a Spectrum Compliance Monitor is, “What can I do to properly prepare for a Spectrum audit/inspection?” 

If you adhere to Internal Revenue Code § 42 (i) (3) (B) (ii), you would be ready for a Spectrum review 365 days a year.  Your files would be perfect, your property would be in tip top shape, every emergency light would work, every smoke detector would be attached and every unit would be free of UPCS violations.  If this were the case than you would not be nervous before one of our inspections.  However, we all know that maintaining a tax credit property, the files, the tenants and the units is a lot of work and the reality is preparation is often needed for any inspection or audit.

First and foremost, read the confirmation letter we send.  This has a list of the documents we will need to see, along with a few brief instructions as to what we will be looking for.  Please note that we are prohibited by IRS regulations from giving you prior knowledge of which units we will be examining.

Review of files:

If you practice your due diligence when completing an initial occupancy certification, as well as when recertifying your tenants, then your files will be ready for our audit.  A good practice is to make sure a few sets of eyes review every single file.  Spectrum will review 20% of your tax credit households.  Typically, we will ask for your most recent move-ins since our last inspection. 

It is recommended that a person familiar with the files be present to assist our monitor on issues that might be quickly rectified. This person may even want to sit with our monitor to facilitate the process.  They may also want to take notes so that they can get a jump-start on addressing any identified shortcomings in the files.  There are some types of non-compliance that may be correctable during our audit.  Should time allow, our will go over the results of our review. 

An Owner’s Report letter will be sent to the owner within 60 days identifying all outstanding potential issues of non-compliance.  It is imperative that any issues be addressed as soon as possible.  Please contact Spectrum should you have any questions regarding our findings or how you should address them. Failure to do so may result in the issuance of an 8823.

Physical inspection:

Inform your tenants we’re coming.  The lease typically stipulates a minimum amount of lead-time that is required (typically 24 hours).  In your letter you can tell them as much or as little about what we will be looking for when we inspect their units. 

It’s good to have more than one maintenance staff member available for the inspection.  Often, properties have one maintenance staff member follow behind the inspectors with extra batteries, smoke & CO detectors.  This way, certain findings can be fixed on the spot.  It’s also a good idea that someone on staff writes down each of the Spectrum findings.  As with the issues identified in the file review, this will give management a chance to address the issues as soon as possible.  Please note that the IRS Audit Guide requires that ALL identified violations of UPCS or local code be reported on an 8823, whether they are corrected or not.  This means that technically every missing sink stopper will require an 8823.

We will test every emergency light, exit sign, GFCI outlet, smoke detector and CO detector.  Many properties go through and test them the day before our arrival.  It can help to prevent unwanted surprises.  It’s a good idea that maintenance staff knows how to turn off the common area power so that the emergency systems can be tested, as this method may be required by Spectrum.

If there are any violations of Health and Safety we will issue a 24-hour notice.  It is critical that the identified infraction be repaired within the allotted time and a signed copy of the notice is faxed to our office.

We will check every common area including community rooms, offices, janitor closets, maintenance rooms, electrical rooms, trash rooms, boiler rooms, workshops, basements, storage areas.  Last month we conducted a series of inspections immediately following one of many treacherous snow storms in the Boston area. We found that many properties were storing flammable liquids improperly; to include gasoline being stored in a laundry bottle.   Regardless of what room or closet you keep them in; flammable liquids must be stored in a fire proof storage cabinet.  And please, do not store gasoline in anything but a gasoline container.  We will also check every hallway and stairwell.  We will check every entrance and exit to the building.

We will not enter any unit without a representative from management accompanying us.  It is generally our requirement that all closed doors be opened by a member of the management team.  Once inside the unit we practice the “one wall” method during an inspection.  The inspector will walk in and follow one wall throughout the unit to ensure everything is checked.  Among other things, we check to see if every gas burner lights and we check the GFCI outlets in the kitchen and the bathroom.

The absolute best way to prepare for a Spectrum Audit/Inspection?  Practice your due diligence in both the maintaining of the files and the maintenance of the property year round.

Most of us at Spectrum have been shaking hands and taking notes for several years now.  It’s always a pleasure to meet new people.  It’s almost always a pleasure to see them again and again over the years. In fact, If you like to meet new people,  have strangers make your bed every day, eat out every night, talk a lot, walk a lot, write a lot, and drive a lot, then a job as a tax credit monitor could be just the thing for you.  This has nothing to do with my topic, I just think I have a really good job.  Even though eating out every night gets old really fast, and sleeping well in a hotel room is exceedingly rare.  Everything else is okay.

Not that any of that has anything to do with what I wanted to write about. I wanted to write about being a property manager, more specifically part of what it takes to be a good property manager. Property Management has a pretty high “churn” rate, particularly at the site level.  It’s a hard job.  Managers have to deal with the whole range of humankind and collect rent checks from all of them.  I do not envy the site manager.  Been there, done that, thank you.  To those of you who do your job really well, I congratulate you.  I also want to thank you.  You make my job sooo much easier. Let me offer some suggestions in the hope of making your job easier.

Actually read important documents.

Chapter 5 of the most recent version of the 4350. Download this and save it to your desktop.  Put it on every computer in the office.

Same with 8823s and you. These are searchable and fun to read.  Don’t know how to search a .pdf document?  It’s easy.  Look towards the very top of the page for a little white box with the word find.

 Just type in a key word like “student” or “annuity” or “self employment” and hit ENTER. Then just use the up and down arrows and the page will automatically go one by one to every instance of the word or phrase.  It SAVES A TON OF TIME and AVOIDS GUESSING.

The very best experts in this industry don’t know everything they need to know about tax credits, but they do know how to find it.  Check your reference materials.  If I had a nickel for every manager that said, “yeah, I have a copy of the (insert important lihtc document here) somewhere around here!”  I’d have a lot of nickels.  In fact, I don’t remember the last time someone could actually put their hands on their copy without having to scan dusty shelves.

Helpful Hint:

If you can quote the relevant portion of a regulation or law or guide when you respond to a potential finding, you are way more likely to see a favorable outcome.  Primarily because you are unlikely do something that goes counter to the regulation in the first place.

Want to move up the food chain as quick as possible in property management?  Get your tenant certifications done right the first time.  Supervisors/Regional Managers, etc. notice whose work needs to be checked and rechecked. More importantly for a good manager who wants to move up-They notice whose work doesn’t need to be re-checked again and again. Not every tenant leads an easily verified lifestyle unfortunately, so it’s unrealistic to expect the 8823 guide and the 4350 to address every nuance and particularity.  That’s when you’ll need to expand your resources.  We do it at Spectrum all the time.  On any given day, someone will walk into someone else’s office and start running scenarios past each other.  Why, just the other day at the office a few of us were on the veranda overlooking the ocean, we were sipping our lattes when someone came in and started a discussion about stipends. Our staff Barista freshened up everyone’s drink and we proceeded to play out various scenarios and look for consistency.  This was an interesting topic. Can it be a resident stipend if the resident is a paid employee?  My point is: Don’t be afraid to ask questions of anybody who is in a position to help you. 

Good Managers use all their resources and strive to do things right the first time, and then move on to the next issue at hand. Good Managers take advantage of opportunities to ask questions of people who should know. Regionals and district managers (and other higher ups) notice those who actively try to improve their value. Don’t shy away from getting noticed- especially when you’re trying do your job better.

Other thoughts:

It’s easy to forget something simple.  We’ve all had our “duh” moments.  No shame in it.  Funny when it happens to someone else, though.

 I had the honor of walking one tenant down the aisle at her wedding.  That was nice. I’ve also been told I ran a tight ship by some of my older tenants. That means a lot coming from the people you are there to help and it really made my day.  I’d be interested to know if anyone reading this would share a similar happy experience they’ve had.

It has been a dozen years since I ran a big apartment building.  I still see old tenants of mine.  Some of them still hate me. Oh well, just doing my job, Thanks for doing yours btw.

It is important to remember that no two households are the same; every application presents its own challenges.  However, all households are seeking quality affordable housing. The application is the foundation for the certification process; it contains all the information necessary to determine LIHTC eligibility and can serve as a back-up affidavit if necessary.

Remember:

1. Applications, verifications, and certifications must be no more than 120 days old as of the certification effective date.
2. Every question/field on the application must be answered; even if the answer is “no.” Nothing can be assumed in this business; a blank does not mean “no.” If a household does not have a certain type of income or asset, they must answer “none” or “no” or “n/a” on the application. An incomplete application could result in noncompliance.
3. Never modify a verification or application. Always use a separate sheet to document clarifications.  Never use white-out. If an applicant has used white-out, instruct them to initial the changes and document the reason on a separate page.
4. The LIHTC program income calculations include all anticipated income for the 12 months following move-in. Any possible changes in income and household composition must be reported during the application process.
5. If an applicant requires assistance completing the application, you must document this in writing. An affidavit stating why assistance was required (i.e. language barrier) and who provided the assistance must be included in the file and signed by the applicant(s).
6. Check for variations in ink and handwriting on the application.  Spectrum will question this, so ask the applicants(s) about variations and document the explanation(s) in writing.
7. Changes on the application should also be explained in writing.  Applications containing white-out should be re-done by the applicant with an attached explanation.
8. Relationships should be clearly defined (i.e. instruct applicants to use “son,” “niece,” “step-child,” etc. instead of “child”).
9. Unborn children are considered household members and should be included on the application.
10. Check for consistent answers. Any inconsistencies should be explained in writing.

Apply logic to each household’s situation.  If things on the application just don’t seem to add up, ask more questions and document the answers. Don’t rent to a household until you can get clear and complete answers to your questions!

Cathy Turner and I attended the HOME portion of the NCSHA HFA Institute in D.C. last week. Here are notes worth sharing:

• The biggest issue noted was in regards to housing for persons with disabilities. We were told time and time again that while housing may target or give preference to persons with a particular type of disability HUD is warning that there is a potential Fair Housing violation if you refuse to rent to a person with any type of disability that otherwise qualifies. For example, if you have a group home for the developmentally disabled and someone applies with a different disability, you cannot refuse to rent to them solely because they are not developmentally disabled. Another example is housing for the mentally disabled; you cannot refuse to rent to someone with a physical disability. Your marketing must be to all persons with disabilities, although it may state your preference for a specific disability. Wait lists are to be reviewed for reasons applicants are refused housing to ensure Fair Housing law is not violated.

However , The Fair Housing Act doesn’t state that you cannot have housing for specific types of disability. In fact, it states that one of the few instances when an owner may ask about a handicap is in “inquiry to determine whether an applicant is qualified for a dwelling available only to persons with handicaps or to persons with a particular type of handicap” (100.202(c)(2)).

USING LOW INCOME HOUSING TAX CREDITS WITH HOME

Nothing too earth shattering here. Here were a few points where I made notes:

• HOME rents & income limits may be more restrictive than LIHTC (FMR is HOME rent cap)
• If HOME funds are received through a grant, eligible basis is reduced
• Utility allowances may differ for HOME assisted units and LIHTC units
• Prohibited lease conditions – FYI, dry housing not allowed, mandatory counseling not allowed. Again here the issue about housing for specific types of disabilities was brought up.
• The one area where HOME rules defer to LIHTC rules is in regards to households going over income (140% rule)

We were also provided with a handy HOME & LIHTC COMPARISON CHART.

RENTAL HOUSING TRUST FUND

Still a proposed rule and fund is not yet funded, but the program was reviewed for when it does go active.

• HTF will be a new Subpart N of HOME program (24 CFR Part 92). It is not a program itself, but a source of funds.
• Income targeting will be to ELI and VLI households at a 75/25 ratio. In the first year of funding, 100% of HTF funds must be used to produce units that benefit ELI families or families with incomes below the poverty line, whichever is greater.
• One item noted as being unique to HTF is that operating costs of HTF-assisted rental housing are an eligible activity (not more than 20% of each annual grant). It was noted that the suggestion is that this be used as an additional reserve account to pay gap of Section 8 lost.
• HTF will use HUD published rents. While the slide appeared to show that rents are set by household size we were told that this is not true.
• Minimum affordability period of 30 years was determined based on the assumption that HTF will be used with LIHTC which has a 15 & 15 affordability period.
• Funds may not be used for public housing, including HOPE VI housing operated as public housing.
• Funds are not to go to already affordable housing projects, meant to increase the number of affordable units.
• HTF will use UPCS inspection standards at a minimum, not HOME’s HQS. Must meet applicable property standards at time of acquisition or be rehabbed to meet them
• On site inspections must occur 12 months after project completion and at least once every 3 years.
• Calls for follow-up inspections within 12 months or within a reasonable time frame established by grantee for projects with observed deficiencies. I asked if there was a particular level of observed deficiency that would trigger a re-inspection. I reminded them that a missing sink stopper (level 1) is an observed deficiency but would something as minor as that require a follow-up visit. They actually made note of my comment for follow-up discussion. More to come!

RENTAL HOUSING COMPLIANCE

I had really looked forward to this session as Spectrum Enterprises has not been allowed to attend any of the HUD sponsored HOME trainings in compliance.

• Affirmative marketing procedures of a PJ is monitored by HUD. Affirmative marketing is required for projects with 5 or more HOME-assisted units. Presentation reminded all that the plan must include special outreach to those least likely to apply. HUD looks to see that PJ has an affirmative marketing procedure that they relay and require of owners.
• A written Tenant Selection Criteria is required.
• A written waiting list must be maintained by owners.
• There is no one specific HOME rule on maximum number of people per unit. PJ should establish standards based on local code if any.
• Not a HOME violation if unit is under-utilized or overcrowded. Overcrowding may be a lease violation if there is an occupancy standard in place however.
• Leases in use at HOME properties must be approved by the PJ, are required, must include rent and procedures for changes in rents, and must not contain any HOME prohibited clauses.
• Timing of rent changes when households go over income – cannot change rent from Low to High HOME until the Low HOME unit is substituted. Can change rent for over income HH (over 80% AMI) as permitted by lease, do not need to wait for substitute unit.
• Property standards also include UFAS standards for handicapped access. PJs may adopt more stringent standards than HQS.
• PJs must verify compliance with HOME requirements each year. The desk review for property condition includes pictures of the property, maintenance records, sub work orders, and tenant complaints. A drive-by is also recommended.
• The Occupancy portion of the annual reporting should include whether or not the property complies with property standards.
• There should also be a Property Management portion of the annual report (recommended) that notes pending capital improvements, status/turnover in property management staff, as well as significant issues that the property is facing such as crime, high unit turnover, and high vacancy.

The session then went on to talk about signs of distressed properties.

NEIGHBORHOOD STABILIZATION PROGRAM

I got absolutely nothing out of this session. It was merely the presenter asking if people had any problems with NSP, nothing about the program itself.

Written by Erik Whitton, Originally published in Tax Credit Advisor Magazine

The Low Income Housing Tax Credit program provides the necessary capital for many affordable housing properties be be developed.  As Steve Rosenblatt (owner & president of Spectrum Seminars, Inc.) teaches throughout the nation in his c3p courses, “the price of credits is compliance.”  In other words, tax credits may be claimed as long as the property meets compliance requirements.  

Where an owner fails to maintain compliance, the state allocating agency may file an IRS Form 8823 (Report of Noncompliance) and the IRS may, in turn, disallow or recapture credits.  Even if the state agency and/or IRS does not discover noncompliance via the 8823 form, many partnership agreements stipulate that the investor will audit tenant files for compliance and require an adjuster penalty paid by the owner for units that are deemed at risk for credit loss.  

Many owners, developers, and even managers may not be aware of the actual cost associated with losing tax credits due to non-compliance.  In my experience, the dollar amount attached to noncompliance is not really known by a party until they have suffered a credit loss; in other words, too late!  To underscore the importance of partnering with qualified & experienced individuals this article will present hypothetical scenarios involving noncompliance events and the potential cost to the property owner.

Credit Value per Unit

To begin understanding the impact of credit loss due to noncompliance, you need arrive at the credit value per unit.  Simply divide the total amount of annual tax credits by the number of affordable units.

Example: A property with $600,000 in annual credits and 40 affordable units =  $15,000 per unit per year (or $1,250 per month).  

Compliance Period, Credit Period, & Accelerated Credits

The IRS defines the credit period for a building as “the period of 10 taxable years beginning with” either the year the building is placed in service or the succeeding taxable year (owners make this election on the IRS 8609 form).  

The IRS defines the compliance period  as “the period of 15 taxable years beginning with the 1st taxable year of the credit period.”

A property must maintain compliance requirements during years 11-15 even though no credits are being claimed.  One-third of the credits that were claimed in years 1-10 are referred to as the accelerated portion inasmuch as they are generally claimed prior to the compliance requirement ending.  Therefore, it is important to think of credits in terms of thirds.

Non Compliance in Year 1

ABC Apartments (40 units; $600k annual credit) is constructed during 2007; the owner chooses 2008 as the first credit year. Due to an error in processing the move in file, this household is over the income limit.  They occupy the unit from February 1, 2008 until February 1, 2009.  The unit is re-rented to an eligible household on April 1, 2009.  The potential credit loss is calculated as follows:

a) All of year 1 ($15,000), and

b) January – March in year 2 ($1250 x 3 = $3,750), and

c) The owner loses the accelerated portion of the credit attached to that unit.

The owner may claim $0 in year 1; $7,500 in year 2; and $10,000 (2/3 full credit value) in years 3-15 for a total of $137,500 over 15 years.  If the unit had been in compliance from the beginning the owner could have claimed $15,000 per year for 10 years equaling $150,000 over 10 years.  In addition to the $12,500 in lost credit the owner must also consider the time value of money that has been lost (i.e. credits must be claimed in years 1-15 instead of 1-10).

Non Compliance in Year 5
If a non-eligible household moves into the property during year 5 the owner loses credits starting the month of move in until the unit becomes occupied by a qualified household.  In addition, the owner could lose the accelerated portion of the credit claimed in years 1-4 (the IRS may not recapture credits if the owner corrects a noncompliance event within a reasonable period after it is discovered or should have been discovered).

Example 2: Unit 201 becomes occupied by an ineligible household on May 1, 2012.  The owner offers and the family accepts an incentive to vacate the unit.  On February 1, 2013 the units is re-rented to an eligible household.  

The owner loses credit for 8 months in 2012 and 1 month in 2013 ($11,250).  In addition to this, the owner could face recapture on the accelerated portion of credits claimed in years 1-4  (the maximum recapture exposure is $30,000 plus interest and possible penalties).  

Finally, the owner may lose the ability to claim the accelerated portion of the credit from 2012 – forward.

Non Compliance in Year 12

Normally, all credits are claimed in years 1-10.  However, the owner must maintain compliance for 15 years.  What happens if an error is made after all credits have been claimed?  

Example 3.  Unit 301 becomes occupied by an over income household from February 1, 2019 until February 1, 2020.    

In a scenario such as this the owner faces possible recapture of credits already claimed.  After year 10 the maximum recapture exposure amount begins to decrease.  In this example the recapture exposure is $30,000 plus interest and possible penalties.  

Lessons Learned

The scenarios used in this article are very simple in order to illustrate how to calculate the potential loss of credit due to noncompliance.  Where we discuss a single ineligible household we must stress how rare it is to witness isolated incidents of noncompliance.  These problems are often compounded by others.          

Take a moment to consider all of the parties involved in a typical tax credit property; the developer, engineer, architect, accountant, attorney, etc.  There is no job with more credits at stake than with the on-site leasing staff – yet these are the positions most often filled with inexperienced, untrained, or unsupervised individuals.  

Now that we have illustrated the potential cost of credit loss due to noncompliance an owner should weigh the benefits of hiring a management company well versed in tax credit compliance against a company that is cheaper but offers less experience & oversight.  And, despite a large company’s lengthy tax credit pedigree, it is crucial to know that the on-site employee(s) assigned to your site are sufficiently trained, experienced, and supervised.  

Knowing how to factor the potential cost of noncompliance should assist an owner is weighing the cost benefit analysis of sending managers to routine training (in light of recent legislative changes impacting compliance regulations we suggest annual training).  Owners should also consider the benefits of tax credit compliance software and using outside compliance consultants.