On February 26, the IRS issued the final Compliance Monitoring regulations for the Housing Credit program. These replace the temporary compliance regulations that have been in place since 2016 and are immediately effective.
These final regulations revise and clarify the State Monitoring Agency requirement to conduct physical inspections and review reviews making significant changes including increasing the number of units State Monitoring Agencies need to monitor in some cases.
Historically, State Monitoring Agencies were not required to physically inspect every Housing Credit unit in a project rather the agency was allowed to infer that uninspected units were similar to the units inspected in the random sample if this sample yielded satisfactory results. Originally this sample size was 20% of a project’s Housing Credit units which is different than the sample size under the REAC protocol implemented by HUD.
In the 2016 temporary, yet final regulations a 2-step process was introduced and Revenue Procedure 2016-15 was concurrently published outlining the specific details how the amended rules should be implemented. At that time, the minimum number of Housing Credit units that had to be contained in a State Monitoring Agency’s monitoring sample was the lesser of:
- 20% of the Housing Credit units in the project, rounded up to the nearest whole number; OR
- the number of Housing Credit units set forth in the procedure’s Low Income Housing Credit Minimum Unit Sample Size Reference Chart.
At that time, the IRS also indicated their concern that the sample size may not be big enough for projects with a relatively small number of Housing Credit units indicating they would revisit this before the 2016 temporary regulations would be finalized.
In the 2019 final regulations, this 2-prong option was removed now requiring State Monitoring Agencies to inspect at least as many units as specified by project size in the Low Income Housing Credit Minimum Unit Sample Size Reference Chart with the option to increase this number at their discretion. Basically both the Treasury Department and the IRS determined the REAC numbers produce a statistically valid sampling of units and have further determined that the REAC numbers reasonably balance burden on the State Monitoring Agencies, tenants, and building owners with the need to adequately monitor habitability and compliance.
The 2016 temporary regulations required State Monitoring Agencies to physically inspect all buildings in a Housing Credit project by the end of the second calendar year following the year the last building was placed in service and at least once every 3 years thereafter. However, Revenue Procedure 2016–15 indicated that projects subject to the REAC protocol were exempt from this all-buildings requirement based on confidence in an inspection done under HUD oversight. At that time, many wanted the all-building requirement to also be applied to buildings not subject to the REAC protocol.
In the 2019 final regulations, the all-buildings rule was maintained. Under this rule, if the randomly selected minimum number of Housing Credit units fails to include units in every building, then the State Monitoring Agency may satisfy the all-buildings requirement by inspecting some aspect of each omitted building. These aspects might include the building exterior, common area, HVAC system, etc.
In the 2016 temporary regulations, State Monitoring Agencies were required to select units in their sample size in a manner that did NOT give advance notice of the selected units to the owner or its management agent and generally defined reasonable notice as no more than 30 days with limited extensions in certain situations. If an Agency chooses to select the same units for both monitoring components, it may perform them at the same time or separately but once the owner is informed which units are included, it must be performed within the reasonable timeframe. The IRS did request comments on this specifically requesting feedback on whether the same notice period is reasonable for both components or whether the physical inspection notice should be shortened indicating that under REAC protocol, an inspector provides a 15-day notice of an upcoming physical inspection but the selected units are not provided until the day of the inspection.
The 2019 final regulations shorten the reasonable notice requirement to a 15-day notice. Both Treasury and the IRS believe that the 15-day notice period gives building owners reasonable notice that a file review will occur and gives building owners and tenants reasonable notice that a project will be inspected and that low-income units will be inspected if they are in the random sample that will later be selected.
Scattered Site Projects
After the 2016 temporary regulations were published, commenters recommended special treatment for scattered site projects or multiple buildings with a common owner and plan of financing. It was recommended that the sample size on these types of projects be conducted as if the multiple buildings were part of a single project, even if the owner had not made a multiple-building election on Line 8b of the 8609.
In the 2019 final regulations, it was noted that the multiple-building election is a statutory requirement and since no suggestions were provided other than the one to treat these buildings as if such an election had been made, this suggestion was not adopted.
Effect on Other Documents
The 2019 final regulations contain the guidance that State Monitoring Agencies need and do not rely on the IRS to provide implementation guidance. Accordingly, Revenue Procedure 2016–15 is obsolete as of the date on which the state agency’s QAP is amended to reflect these final regulations, and, in all cases, is obsolete after December 31, 2020.