The Impact of the Multiple Building Election on LIHTC Compliance
For those of you who missed our recent Spotlight On webinar focusing on LIHTC Regulatory Rules Review with specific emphasis on the impact of the multiple building election on compliance, I have decided to break apart the components that were covered in that program for the next few tax credit related articles in our monthly HMU publication. I found that the deeper that I delved into this topic, the more I discovered in terms of the multi-faceted implications to LIHTC properties depending on whether or not the election was taken at the end of the first year of the credit period. But before I confuse anyone, let me back track a little and give you the basics.
Under Part II of the IRS Form 8609 which is completed by the owner with respect to the first year of the credit period, item 8(b) asks: “Are you treating this building as part of a multiple building project for purposes of section 42?” The two options are a straight-forward “yes” or “no” where the owner checks the appropriate box. So, on face value, this seems to be a fairly simple election and in many instances, it is probably made and then not given much thought. That is where the danger lies, especially from a management perspective. Now, I will attempt to explain why the answer to this question is so critical and why every LIHTC manager should know the answer provided for this question for their properties.
The first area of concern actually lies within the same IRS form, just a few items down from question 8(b). Question 10(c) is where the owner is given the opportunity, again, at the end of the first year of the credit period to elect the project’s minimum set-aside. This critical election determines whether the project is to have 20 percent of its units set-aside and qualified by households having at or below 50 percent of Area Median Income (AMI) or 40 percent of its units set-aside and qualified by households having at or below 60 percent AMI. (The third option is 25-60, but only applicable in New York City.) Notice that it references 20 or 40 percent of the project. That’s the kicker when it relates back to the election made in item 8(b).
If the multiple building election has been taken, meaning that the owner answered “yes” to the question, then the minimum set-aside must be met and maintained on the project level to include multiple buildings. If the multiple building election was not taken and the answer was “no”, then it must be met in every single building individually which represent individual projects. The purpose of the minimum set-aside is to act as firewall of sorts in terms of when the credits can be claimed – not before the minimum set-aside is met – and as threshold requirement in order to continue claiming any credits for the project after the first year of the credit period.
For this to play out in practical terms, let’s consider an example. If Property A has 420 units and the owner has taken the multiple-building election and chosen the 40/60 minimum set-aside then 168 units would have to be appropriately tax credit qualified in order to meet the minimum set-aside and begin claiming credits. (This is determined by multiplying 420 by 40 percent.) If Property B, however, has the same number of units represented by 10 buildings having 42 units apiece and the same minimum set-aside election, if the owner did not take the multiple-building election then 16.8 units per building would have to be qualified to meet the minimum set-aside. This, of course, would translate into a 17 unit per building minimum, which multiplied out by 10 buildings would equal 170 units overall that would need to be qualified for the entire property. Even though it is only a difference of two units, that can make a definite difference in the credit availability and the compliance status of the property.
Next month we will cover unit transfers as they relate to the multiple building election.