1. Jen Brewerton Vice President of Compliance, Dominium
Compliance in a Post Income-Averaging World
Jen Brewerton Vice President of Compliance, Dominium

2. Compliance with Income Averaging
Compliance Best Practices Income Averaging:
Know the rules
Establish project scope with the team who will implement it
Forecast potential issues over the long haul
Advocate

3. Compliance with Income Averaging
Best Practices Before Award: 1) Know the Rules!
Play to the ref!
Know the IRS/Federal Rules
Know the new law that impacts the Rules (Consolidated Appropriations Act of 2018)
Know the State Housing Finance Agency’s interpretation of the rules
Know the syndicator’s interpretations of the rules and expectations
Know how the rules play out with a potential property and market

4. Compliance with Income Averaging
IRS/Federal Rules
Section 42 of Internal Revenue Code
8823 Audit Guide (revised January 2011)
IRS Section 42 Audit Technique Guide (last updated Aug. 11, 2015)
Treasury Regulation 1.42
Revenue Rulings, Procedures and Notices
Treasury Decisions
Rules require states to come up with their policies

5. Compliance with Income Averaging
What does the new law say?

6. Compliance with Income Averaging
Minimum Set-Aside
20/50 = 20% of units in a project to be restricted to 50%
40/60 = 40% of units in a project to be restricted to 60%
Income Averaging = Set Aside at least 40% of units in a project to be rent restricted with income limits designated at 20% to 80% that on average are at or below 60%

8. Compliance with Income Averaging
Minimum Set-Aside Interpretation
Owner must designate at least 40% of units in a project to be rent restricted with income limits designated at 20% to 80% that on average are at or below 60%
Version 1: 10 units, owner must designate 4 units that average 60%
Version 2: 10 units, owner must designate 4 units, minimum, and the PROJECT must average 60% (so average of the 10 units, not 4)
Bottom line: State will tell you (suggest meet both

9. Compliance with Income Averaging
Minimum Set-Aside Multiple Years
Two buildings, 1 project (8609 8b election)
Building A is 10 units, all at 40% and Places In Service 2018 – qualifies all units
Building B is 10 units all at 80% and Places In Service 2019 – qualifies all units
Did we meet the Minimum Set-aside in 2018?
Yes, 50% of project qualified at average under 60%
Building B 2018 and Building A 2019? No, did not meet 40% average at 60% (we think)

10. Compliance with Income Averaging
Minimum Set-Aside Versus Applicable Fraction
2. Applicable Fraction
Has not changed
Is by Building, Minimum Set-Aside by Project
100% Applicable Fraction still means 100% of the building is LIHTC
90% Applicable Fraction includes market units
Minimum Set-Aside is exclusive of the Applicable Fraction

11. Compliance with Income Averaging
Next Available Unit Rule
Building-based rule
Explained in Treasury Regulation §
If a unit goes above 140% at 50%/60% depending on Minimum Set-Aside, must lease NAU to 50%/60% household
Example:
60% Income Limit is $10,000
$10,000 x 140% = $14,000
If a previously qualified household’s income increases to $15,000 at recert, the household becomes “OI” and the next unit must be leased to an eligible household

12. Compliance with Income Averaging
Next Available Unit Rule
Under the new rule, the 140% threshold at recertification is the greater of:
60% of AMI, or
the applicable designated income limit for the unit
Translated: Units at 20%, 30%, 40%, 50% and 60% all only go OI if recert shows household above 60% x 140% (otherwise can keep designation)
70% x 140% and 80% x 140% become OI

13. Compliance with Income Averaging
Income Averaging for Mixed Income
Next Available Unit Rule
If 70% goes above 140%, is 70% OI (biggest change) – next available unit leased to a 70%
10 units, 1 market, what if multiple units go OI? Don’t know for sure (assume lowest, and remember due diligence)

14. Compliance with Income Averaging
Does all this Next Available Rule conversation sound complicated? Then don’t have market units on an Income Averaged property!

15. Compliance with Income Averaging
Example: Next Available Unit Rule per page 166/167 of the IRS Section 42 Audit Technique Guide (last updated Aug. 11, 2015) is that the NAUR does not apply to 100% Properties

16. Compliance with Income Averaging
Implications for Income Averaging
Next Available Unit Rule for 100% Properties
Remain in compliance even if you accidentally move-in an ineligible household (as long as you can show due diligence)
Makes Income Averaging WAY less scary for 100% properties
Are not FEDERALLY required to recertify annually
State agencies trump, so advocate!

17. Compliance with Income Averaging
Best Practices Before Award:
Establish project scope with the team who will implement it
Meet with state
Bring your compliance team (3rd party hard)
Forecast potential issues over the long haul
Advocate for flexibility: Example: Bonds
Dominium Example

18. Compliance with Income Averaging
Dominium Example:
206 Units, Senior, 100% LIHTC with Tax Exempt Bonds in Colorado
Met with state multiple times
Confer with Bond Issuer
Carefully select syndicator
$10,000,000 award if spread units, $8,000,000 if tailor high set-asides to large 2 bedrooms, state wants spread
State wants 58% income average instead of 60% to be “safe”, at loss of $1,000,000 to project
Risk low, remember due diligence!

19. Compliance with Income Averaging
Advocate Flexibility with State Agencies!
No fixing units at State level (remember those LURA locked set-aside mixes from 15 years ago?)
Minimal restrictions of the rules (example, 58% averages)
Don’t require full recertifications (show the numbers for staffing)
Allow multiple funding (Bonds, HOME, PBS8)
Remember: We’ve been dealing with various set-asides at the state level for a very long time, we can do this!

20. Compliance with Income Averaging
Final Best Practices:
Get the right Software
Many major software companies are not ready
Get the right staffing
Consider the short and long haul
Develop compliance policies
Train, train, train!

21. Questions?
Jen Brewerton (763)