A Detailed Look at an Acquisition/Rehab Rent-Up
By Elizabeth L. Moreland, NCP-E, SCS, HCCP, SHCM, FHC
In
the last issue, I wrote a detailed article explaining the rules
surrounding acquisition/rehab allocations. As I explained in that article,
these allocations can be confusing because of the special rules regarding
placed in service dates, the certification requirements of existing
households and the likely changes to unit status each month due to the
need to move the existing households around in order to perform the rehab
work.
This
month, I thought I’d walk you through a scenario that incorporates the
information I gave you in the last article to help you better apply it in
the real world. To help with the continuity between these two articles, I
will use the same example I used throughout the first article. To refresh
your memory, in the first article I described a property comprised of one
building that was acquired by a new owner who received acquisition/rehab
credits. The owner acquired the building on November 28, 2009, however,
was not able to meet the minimum rehab expenditure until March 1, 2010
causing the acquisition placed in service (PIS) date to shift to 2010,
specifically the earliest date in 2010 which of course is January 1. The
rehab PIS date is March 1, 2010. This year also becomes the first year of
the credit period which means the owner must meet the minimum set-aside by
the end of the year. If this occurs and the owner begins claiming credits
in 2010, January 1, 2010 becomes the first day of the credit period. Also,
if this occurs, you are not subject to the safe harbor test as all
certifications will be completed less than 120 days before the first day
of the credit period’s first year.
Building Facts
Now,
time to add some additional facts not provided in the last article but
that will help us work through some of the rules that were touched on.
First, the property’s minimum set-aside is 40/60 and the targeted fraction
is 100%. The building is comprised of 10 total units, all of which are the
same square footage. Of these 10 units, 6 of the units contain existing
households at the time the owner acquired the building. The remaining
units are vacant. This property was not previously a Tax Credit property
so there is no grandfathering of existing tenants; rather each tenant must
initially qualify under the Tax Credit Program and the elected set-asides
to become part of the building’s applicable fraction.
Okay, now that that is known, it should be understood that 4 units must be
rented to qualified households by December 31, 2010, but the overall goal
is to have all 10 units rented to qualified households by that date in
order to maximize the credit allocation. This is because 4 units is the
required number of units needed to meet the minimum set-aside but since
the targeted fraction is 100%, the owner actually wants all 10 units
filled with qualified households.
To
begin, since the building was acquired on November 28, 2009, we can
determine our window for completing the initial certifications on the
existing households. As stated in the previous article, the 8823 Guide
states we have 120 days following the acquisition date to complete these
certifications and such certifications will use the income limits in
effect on the acquisition date. We will assume you did not have access to
the tenants prior to the closing but remember that if you did have access,
you could start certifying the existing households immediately using the
current income limits. But since there is no early access, you will begin
processing the certifications immediately upon the November 28th
access point and have a 120 day window to complete them which results in a
deadline of March 27, 2010. All certifications performed in this window
will use the 2009 income limits as the 2009 income limits are the limits
in effect on the acquisition date. This will hold true, even if the 2010
income limits come out before the March 27th window is closed.
Also, the TIC effective dates for each of these certifications will be
November 28, 2009. Any new moves processed during this window will be
treated like any new move-in which means the current income limit will be
used and the TIC effective date will be the date the household is given
keys to a unit that is legally able to be occupied. And finally, if some
of the certifications are not completed by the March 27, 2010 deadline,
they too will be treated like new move-ins except because there is not
actual move-in date, the TIC effective date will be the date the last
adult household member signed the TIC.
Flash Forward
Now
let’s flash forward to December 31, 2010 and look back as to what
occurred. We will look at each unit and track exactly what occurred so we
can determine the unit’s status for each month.
Let’s start with Unit #1. When we originally obtained access to the
tenants and their records, we discovered Unit #1 was filled with a Section
8 tenant-based voucher holder. This household was quick to respond to your
invitation to have their income eligibility reviewed so you could
determine if their occupancy would be extended. However, as it turned out,
this household was over the current Tax Credit income limit applicable to
their household size so they did NOT qualify. Understanding the household
remained a qualified Section 8 household but an ineligible Tax Credit
household, you knew you could not just non-renew their lease. The
household indicated they did not want to move due to the tight housing
market and fears they would not be able to find another unit in the area.
After many weeks of phone calls and explaining the Tax Credit Program to
the PHA, you found yourself unable to require the household to move. This
is where you started to get creative and began to reach out to your
network of property management companies to determine if they had any
vacant units. After several weeks, you found an owner in the area willing
to take voucher holders who also had a vacant unit. After helping the
household to complete the necessary paperwork to transfer their voucher to
the new unit and giving them 30 days free rent before vacating, you were
able to access Unit #1 and complete the necessary rehab work. Finally, on
March 3, 2010, you were able to move-in a qualified household using the
current income limits in effect. As this household was a new move in, the
TIC effective date was also March 3, 2010.
Moving on to Unit #2 which, at the time of acquisition you discover was
also a Section 8 tenant-based voucher holder, but unlike the previous
household living in Unit #1, this household qualified under the Tax Credit
Program. After explaining the Tax Credit Program to the household and
working with the PHA, you complete the household’s initial certification
under the Tax Credit Program. The TIC is dated November 28, 2009 and you
used the 2009 income limits to qualify the household.
Unit
#3 was also deemed eligible and had its initial certification completed
within the 120 day window so their TIC too was made effective November 28,
2009 after using the 2009 income limits to determine their income
eligibility.
Unit
#4, however, contained a very uncooperative household. They refused to
return your calls or show up for any meetings regarding their eligibility
status. The existing tenant records indicated the previous management
company also had issues with this household and it was suspected that an
unauthorized occupant lived in the unit. After numerous, yet unsuccessful
attempts, to communicate with the household, you were forced to begin the
eviction process. Finally, after more than a month you went to court.
During the proceeding, it was discovered the household members spoke
little to no English and did not understand all the notices they were sent
and were afraid to communicate with the new management company as they had
moved their elderly mother into the unit without permission. During the
proceeding, one of the household’s adult children appeared in an effort to
help communications. The judge ordered you to work with the household now
that communication was available. Knowing that time was of the essence as
you wanted to complete this certification within the 120 day window, you
immediately began communicating with the adult child. But this person was
not fast in responding and the certification was not completed until after
the March 27th deadline. The household was finally deemed
qualified on April 24, 2010 using the current income limits. The last
adult household member signed the TIC on May 2nd causing the
TIC effective date to be May 2, 2010.
Unit
# 5 and #6 where deemed qualified households immediately upon acquisition.
The households fully cooperated and had their initial certification
completed in early January of 2010. Both household’s TICs were dated
November 28, 2010 and both were qualified using the 2009 income limits.
Units #7, 8, 9 and 10 were vacant units. Immediately upon acquisition, the
rehab work on these units was started. On February 15, 2010, Unit #7 was
completed. Because work needed to be completed on Unit #2 that required
the existing household to vacate, you transferred the household to Unit
#7. The transfer occurred on March 1. This meant on March 1, Unit #2’s Tax
Credit status shut off as it swapped status with Unit #7 which had yet to
be filled with a qualified household and the Tax Credit status on Unit #7
was turned on because the household transferring from Unit #2 was a
qualified Tax Credit household. The work on Unit #2 was completed timely.
The household that originally occupied this unit wanted to return so they
transferred out of Unit #7 back to Unit #2. The transfer occurred on April
20, 2010 turning the Tax Credit status of Unit #2 back on for the month of
April. Unit #7 was again turned off for the month of April as it swapped
statuses with Unit #2, which at the time of the transfer, was a
non-qualified unit. Unit #7 was readied and filled with a new qualified
household on May 1, 2010, allowing its Tax Credit status to be turned on
again in May.
Unit
#8’s rehab did not go as well as planned and was delayed until March 19th.
You had already made arrangements with the household living in Unit #3 to
transfer to this unit as soon as it was available. This transfer occurred
on April 1st which meant the Tax Credit status on Unit #3 shut
off on April 1 and the Tax Credit status on Unit #8 turned on April 1. As
part of the agreement to get this household to transfer to Unit #8, the
household asked to remain in Unit #8 and not be returned to their original
unit. While the rehab work on Unit #3 was taking place, you began to
market the unit and processing submitted applications. The unit’s rehab
work was completed on June 2nd and a newly qualified household
was immediately moved in on June 6th. The TIC effective date
was June 6, 2010 and the household was qualified using the current income
limits.
The
rehab work required in Unit #5 was minor and was able to be completed
while the household occupied the unit. You gave this household a reduced
rent during the rehab period which lasted until February 15, 2010. As the
unit remained suitable for occupancy during the rehab period, the unit’s
Tax Credit status was not turned off.
The
rehab work in Unit #6, however, did require the household to move. The
household was given the choice between Unit #9 and Unit #10. The household
chose Unit #10 and transferred March 1, 2010 turning the Tax Credit status
in Unit #6 off and turning it on in Unit #10 on the same date. Shortly
after the household transferred, a leak was discovered which forced the
household to vacate the unit. This leak caused the unit to be unsuitable
for occupancy which turned the Tax Credit status of the unit off. As Unit
#9 had not yet been occupied, the transfer occurred immediately. The leak
was discovered on April 29, 2010 and the transfer to Unit #9 occurred on
May 1, 2010. The status of Unit #10 shut off in April as it was not
suitable for occupancy at the end of the month. The Tax Credit status in
Unit #9 was turned on May 1, 2010.
The
leak in Unit #10 was fixed by the end of May. Its previous occupants opted
not to transfer again and remained in Unit #9. A new qualified household
was moved in on June 21 and were qualified using the current income
limits.
And
finally, the rehab work in Unit #6 also proved problematic and was delayed
for several months. It was finally completed September 13, 2010 and a new
household moved in on October 1, 2010 after qualifying under the current
income limits.
Reviewing the Unit Tracking Chart
After your final analysis is completed and the activity on each unit
tracked monthly, you are able to create the following chart:
On
December 31, 2010, you have 10 qualified and occupied units which means
you successfully met both the minimum set-aside test and the targeted
applicable fraction. The owner of the building is now able to claim
credits and the prorated fraction on which this first-year credit claim is
made can be calculated. In this example, I stated all of the square
footages for each unit were the same, making it easy to determine your
month-end fractions. The chart above indicates each of these figures.
However, in the real world, you are likely to have different unit types
with different square footages. In this case, each month you will simply
perform both the Unit Fraction and the Floor Space Fraction with the
resulting month-end fraction being the lower of the two. When performing
these two calculations, you will be sure only to put in the units with
their Tax Credit status turned on in that month. So for example, in the
month of January, only Units #2, 3, 5 and 6 have their Tax Credit status
turned on so the Unit Fraction is 4 Tax Credit Units ÷10 Total Units in
the Building or 40%. If there were differing square footages, you would
add up the square footages of Units #2, 3, 5 and 6 and divide this figure
by the sum of the square footages of Units #1-10. And again, the lower of
the two fractions would become the resulting month-end fraction. And
finally, if the building did indeed have different square footages, I
would place the actual square footage figure in the column instead of
LIHC to indicate the unit’s Tax Credit status was turned on.
Calculating the Prorated Fraction
Now,
to finish out this example, you can see that the month end fractions are
as follows: Jan = 40%; Feb = 40%; Mar = 50%; Apr = 40%; May = 70%; Jun –
Sept = 90%; and Oct – Dec = 100%. After adding up each of these month end
fractions, I arrive at 900% which is then divided by the number 12
indicating the number of full months the building was placed in service in
2010. The prorated fraction in which the 2010 credit claim is based is
calculated to be 75%. The remaining credits from the 100% attained by
December 31, 2010 and the prorated fraction, or 25%, is claimable in Year
#11 assuming compliance is fully maintained.
I
hope this helps explained some of the nuances of acquisition/rehabs
including how the 120 day certification window works, what occurs when
some units are certified after the window is closed, and the affects
transfers and rehab work have on the applicable fraction. I realize I
simplified this example by making it a single building project and kept
all the square footages the same but this was done for ease of
illustration. Indeed, some acquisition/rehab rent ups can get very
complicated and there are endless scenarios that can occur, but I am
confident with the first article published in last month’s issue and this
article, you will be well on your way to understanding these unique
properties and will be able to tackle your real world scenarios.
And
again… don’t forget… I am still here if you need me!!
