Revenue Procedure 2016-15, which was published by the IRS late last month, amends the long-standing compliance monitoring requirements for state housing agencies with respect to Low-Income Housing Tax Credit properties.

The stated purpose of the Revenue Procedure is to determine the minimum number of low-income units in a project on which a state agency must conduct physical inspections and certification reviews. It also expands the previous directive to now permit REAC protocol to satisfy LIHTC program requirements. This regulation was published as final but temporary since the Service has indicated that it is still open to additional input from interested parties.

According to Section 2 of the Procedure, agencies are now allowed to decouple units for on-site inspections and certification reviews (a.k.a. tenant file audits). If they choose to do this, it must be a separate random selection process and they may choose a different number of units for each as long as at least the minimum number is chosen for each. Previously, the two were coupled where the physical inspections were done for the same units as the file auditing. Section 3 of the Procedure states that the scope of the document should be used for determining whether the compliance monitoring procedures by the state agencies meet the regulatory requirements.

As far as the new minimum requirements for the number of units subject to review and inspection, the Rev. Proc. states that it is the lesser of 20% of the units in a project rounded up to the next whole unit or the minimum sample size from the Reference Chart included in the document, which ranges from 1 unit to 27 units based on the total number of LIHTC units at the property. (Readers may review this chart by accessing the document here: https://www.irs.gov/pub/irs-drop/rp-16-15.pdf.)

The provision allowing the use of HUD’s Real Estate Assessment Center (REAC) protocol based on its Uniform Physical Condition Standards (UPCS) only permits this if a number of requirements are met, which include:

  • inspection of both vacant and occupied units in the sample size
  • compliance with both procedural and substantive REAC requirements to include using the most current UPCS software
  • inspections only performed by REAC inspectors, and
  • submission of results to HUD ,which are then reviewed and scored by HUD’s secure system without involvement by the inspector. The inspection report must also be made available to the state agencies by HUD.

These changes are effective as of February 25, 2016 or if the state agency has already been using REAC as part of the Physical Inspections Pilot Program under the Federal Alignment Initiative, then they may be relied upon for inspections conducted between January 1, 2015 and February 25, 2016.

Overall, this new development should not have much effect on LIHTC property owners or managers as the state agencies are still required to give proper notice of generally no more than 30 days as to when the reviews and inspections will be conducted and the random sampling size itself may include less units than the previous minimum standard of a set 20% selection. Some state agencies had already begun to decouple their tenant files and unit inspections prior to the publication of this Rev. Proc. so that may be something that managers have already experienced as is the usage of the REAC protocol for those who have participated in the pilot program for having a shared physical inspection between programs when sites are blended.

Our best advice when it comes to compliance monitoring by your state agency for LIHTC is to be prepared. This means to be proactive when it comes to auditing your own tenant files on a regular basis and conducting at least bi-annual unit inspections using the same physical inspection standard that will be utilized by your state agency. When a date has been set for the monitoring review, make sure that you walk your property to see if there are any noticeable deficiencies that need repair and notify your tenants that their units may be chosen for inspection. If you establish and maintain the necessary internal controls for these two areas of review, then your due diligence should go a long way toward ensuring that your property stays in good compliance. The goal should always be to find any noncompliance on your own, make the corrections and learn from your mistakes in order to avoid repeating them.

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