Effective Tenant Selection for LIHTC
This month I am looking forward to the National Council of State Housing Agency’s Housing Credit Connect conference, which will be held in one of my favorite cities, San Francisco. While I hope to have a little time to see the sights while there, my main purpose, of course, will be attending the conference to network with other industry peers and learn as much as I can about the current state of affairs for the Low-Income Housing Tax Credit Program. I will also serve as a panelist at a session entitled “Effective Tenant Selection.”
As I prepare for the session, my mind keeps returning to guidance from HUD Handbook 4350.3 Rev-1. Those of you versed in housing credit compliance know that there are portions of the 4350.3 handbook that we are required to follow when qualifying applicants for the LIHTC Program. But my thoughts have me reaching beyond the obvious mandates to apply HUD’s methodology for income and asset identification and calculations. I’m thinking more along the lines of HUD’s emphasis on the difference between program eligibility and project eligibility, and then even further into their guidance surrounding screening for suitability in addition to screening for eligibility. These concepts are not part of the Section 42 regulations for LIHTC, but I believe they are still worthy of understanding and consideration as they apply to tax credit properties.
Program eligibility simply means determining whether or not the applicant/tenant qualifies or continues to qualify for the program itself. In terms of LIHTC, the main two considerations are whether or not they are income eligible and eligible based on their household student status. That’s pretty straightforward, right?
Let’s now layer on the idea of project eligibility. We have an applicant household that qualifies based on its income and its student status, but how many household members are there who will be living in the unit? What if we only have two bedroom units and the family that is qualified for the program has six members? More than likely that many will not be in alignment with the occupancy standards in place at our property, where we’ve followed HUD’s guidance of two persons per bedroom as a reasonable standard.
Or what if another applicant household is program eligible, but we are managing a senior LIHTC property where the head, co-head or spouse must be 62 years of age or older and the household doesn’t qualify based on that criteria? Those are two examples of project eligibility that may disqualify a household from our LIHTC properties even if the applicant families qualify for the program. There is an entire chapter in the HUD Handbook devoted to these concepts of eligibility (chapter 3).
Finally, there’s the notion of suitability versus eligibility. Let’s say we have an applicant who qualifies for the program and the property but they have an extensive criminal background. They may meet our eligibility criteria, but are we going to consider them suitable to live at our property? In Chapter 4 of the HUD handbook, there are mandates for prohibition on admission based on drug abuse and other criminal activity that apply to HUD programs, but not LIHTC. Naturally, in a blended scenario where there is HUD subsidy in addition to the tax credit program, these would be applicable, but we don’t have any specific guidance from the IRS on issues of suitability, which of course means that it is always the owner’s or management’s decision how to screen for issues such as criminal background, credit history, and landlord references. Who do you consider to be suitable tenant households?
Effective tenant selection? I imagine some would argue that it’s an art, others that it’s a science. But we all know that it’s never 100% fool-proof in terms of qualifying the perfect tenant. Before I leave you, however, let me add one more basic caveat which I hope you already know by heart when it comes to tenant selection, whether it’s for HUD, LIHTC or otherwise: consistency is key. Next month I will try to add more to this discussion after gaining further insight in San Francisco …