NCSHA’s has updated and expanded its Recommended Practices in Housing Credit Administration. Due to numerous changes & challenges facing our industry, it was time for a thorough update. The resulting report strengthens the existing practices and includes 13 new practices. These practices are important as they will inevitable be implemented at the state level which means it will be important to become familiar with them.
CLICK HERE for a complete copy of the new Recommended Practices
In 2016, NCSHA appointed a task force of State Allocation Agency executive directors to revise and expand NCSHA’s existing Recommended Practices in Housing Credit Administration. Originally published in 1993 and updated several time since, these recommendations addressed numerous areas of the program including allocation, underwriting & compliance monitoring. Due to numerous changes & challenges facing our industry, it was time for a thorough update. The resulting report strengthens the existing practices and includes 13 new practices. NCSHA published the final set of recommendations shortly after their approval at its December 2017 Board Meeting.
The task force worked on this for over 18 months with the collaboration of all state agency executive directors and their staff as well as with assistance from numerous industry representatives including national advocacy associations, developers, syndicators, equity investors and other stakeholder groups.
Below I summarize the biggest changes to the compliance recommended practices but understand updates occurred to other compliance recommendations and the allocation & development side of the program experienced updates and additions as well.
Understand these recommended practices are important to those of us in the trenches as the majority of our state agencies will be adopting some, if not all, of these practices or creating substantially equivalent ones so knowing what is coming down the pipeline will be important for our operations. Be sure to read through the summary of the biggest changes to the compliance practices contained here in this article but also ALL of the practices on both the allocation/underwriting/development side of the program as well as the compliance side. Have discussions with your state agency staff about their specific implementation plans and prepare for their inevitable implementation.
CLICK HERE for a complete copy of the new Recommended Practices
Foreclosure Prevention
As we all know, the program requires properties to remain affordable for a minimum 30 years but provides an exception to this rule if foreclosure occurs. Fortunately our industry has experienced a very low rate of foreclosures but, of course, some developments have experienced financial challenges. For the most part, state agencies have successfully worked with such owners keeping the properties in the program. In a few circumstance, however, state agencies have had to amend the extended use agreement provisions to improve the financial condition. An example of such an amendment is the removal of extremely low-income targeting requirements.
But some agencies have reported cases where they suspect an owner may have purposely allowed the foreclosure of a property in order to terminate the extended use agreement and its affordability restrictions. Hence the new recommended practice which states that if a development proceeds to foreclosure (or instrument in lieu), the state agencies should attempt to determine whether the foreclosure is part of an arrangement to terminate the extended use period on the original development. The specific recommendation states the following:
- If a property faces financial challenges, the state agency should examine and consider restructuring strategies to prevent foreclosure.
- Agencies should also adopt foreclosure policies that state termination of restrictive covenants and other long-term use restriction provisions are not automatic upon the execution of foreclosure or deed in lieu of foreclosure.
- Agencies should establish procedures requiring all entities initiating foreclosure to provide the agency with certain information at least 60 days prior to requesting their release from the extended use period. This information should include:
- The name of the lender on the note triggering the foreclosure activity;
- The original amount and date of the note, the existing balance, and the annual debt cost;
- The position of the note relative to other liabilities on the property;
- The names of all other holders of notes on the property;
- A detailed description of the circumstances that have prevented timely payment of interest on the note;
- A detailed description of efforts between the owner and the holder of the note to reach an agreement to modify the terms of the note to prevent foreclosure; and
- Any relationship between the holder of the note and the owner of the property by familial relationship, common principals, owners or employees (collectively, “affiliates” of the note holder).
- After thoroughly examining the provided information, state agencies should inform the entity initiating foreclosure that if it is determined the foreclosure activity is part of an arrangement to terminate the extended use agreement, they will notify the IRS and request they prevent the termination of agreement.
- And if the entity does not provide the information, the agency should review the situation further to determine if the owner was seeking foreclosure as a means for terminating the agreement and, if yes, assess sanctions.
Utility Allowances
In the past decade, periodic spikes in residential utility costs have resulted in operating cost increases. During this time, technology and federal policies relating to utility allowances have evolved rapidly and developers have responded by adopting alternative utility allowance methodologies that more accurately reflect utility costs and that acknowledge significant advances in energy efficiency. To provide flexibility to utilize the optimal utility allowance for each development and to encourage utility allowances that accurately reflect anticipated utility consumption, state agencies should:
- Permit developments to select from ALL utility allowance methodologies offered under the IRS regulations; and
- Specify requirements for application of alternative allowances in both new and existing properties that seek to change their utility allowance methodology.
Fair Housing
Given the importance of fair housing and the recent focus because of the SCOTUS disparate impact decision and HUD’s push on Affirmatively Furthering Fair Housing, this updated recommendation encourages more fair housing compliance by stating:
- Agencies should implement monitoring procedures to ensure properties comply with federal nondiscrimination.
- Agencies should require owners and their management staff to attend fair housing training before beginning rent-up and on a regular basis throughout the extended use period.
- Agencies should encourage the use of affirmative fair housing marketing plans.
VAWA
To date, the IRS has not issued VAWA guidance that applies to the Housing Credit program. As implementation is required, with or without the IRS’s guidance, this new recommendation states agencies should adopt policies and procedures that support VAWA compliance including:
- Referencing victims under the QAP selection criterion for tenant populations with special housing needs;
- Clarifying that a domestic violence incident does not constitute good cause for eviction of the victim if the victim otherwise meets tenant occupancy rules;
- Notifying owners and property managers about victims’ rights under VAWA, including providing tenant notice, establishing an emergency transfer plan, and formalizing transfer request requirements;
- Amending extended use agreements to explicitly reference VAWA requirements; and
- Modifying compliance monitoring procedures to identify VAWA noncompliance.
- Requiring owners to implement the following practices to ensure compliance:
- Prohibit denial of assistance and/or eviction from housing (consistent with state eviction laws) on the basis that an applicant or resident is such a victim;
- Provide notices similar to HUD-5380 (Notice of Occupancy Rights Under VAWA) and HUD-5382 (Certification of Domestic Violence) to all households;
- Utilize a lease addendum to inform tenants they are protected by VAWA;
- Allow bifurcation of tenant leases in order to evict or terminate assistance of the perpetrator and continue housing for the victim;
- Develop policies on acceptable unit transfers, referencing guidance from HUD-5381 (Model Emergency Transfer Plan) and HUD-5383 (Emergency Transfer Request); and
- Train management staff on VAWA requirements.
Extended Use Period Compliance
Since noncompliance in the extended use period does not result in recapture, this new recommendation provides guidance to state agencies on enforcement of the affordability restrictions and compliance requirements of the EUA and states agencies should:
- Develop policies to regulate and facilitate Post Year 15 continued compliance addressing continued enforcement of the statutory compliance requirements including income and rent restrictions, minimum set-aside election, applicable fraction, general public use requirements, Fair Housing Act compliance, habitability standards, utility allowance updates, Section 8 voucher holder acceptance, annual tenant income recertification requirements, and the annual owner certification of compliance.
- Establish different criteria for other compliance rules including policies on student households, the next available unit rule, unit transfers, frequency of property inspections, documentation required for tenant income recertification, and monitoring fees.
- Develop procedures for handling noncompliance in the extended use period.
- Require notification from owners in the event of ownership transfers.
Resyndication Compliance
As the IRS considers existing households income-qualified during the extended use period as long as it was initially income-qualified during the original 15-year compliance period, this new recommendation addresses resyndication income qualifications by stating agencies should develop policies on compliance issues encountered in resyndication including:
- Considering an existing household income-qualified, as long as the household was initially income-qualified during the original 15-year compliance period;
- Specifying any policies on amendment of the original extended use agreement; and
- Providing guidance on applying the correct income limits.
Ultimately the goal of these recommendations is to encourage prudent real estate judgments in every property rather than intrude on the discrete housing policy objectives Congress left to each state to determine. Therefore, it is important to understand, implementation is voluntary but strongly encouraged. The preface indicates state agencies can adopt substantially equivalent standards to achieve specific state policy objectives and further states to be substantially equivalent, the… “alternative standard needs to be based on sound underlying economics adequate to provide, under the particular circumstances of the state or development, the same long-term viability the standards recommended in this report are intended to help assure.”
NCSHA feels the adoption of these practices or a substantial equivalent allows states to achieve program excellence while maintaining flexibility to meet their specific affordable housing needs, which, in turn, is the cornerstone for overall program success.
CLICK HERE for a complete copy of the new Recommended Practices