Can income-targeting set-asides be switched when a tenant’s income level changes?
Many tax credit properties have several different income-targeting set-asides, which lend themselves to several layers of rent schedules depending upon the level of income-targeting. For example, if Property A has units targeted at 60% of Area Median Income (AMI), 50% AMI, and 30% AMI, it would have three different rent limits for the same sized unit. So, for a two-bedroom unit at this property there could be a $500 rent at 60% AMI, a $400 rent at 50% AMI and a $200 rent at 30% AMI. Obviously it would follow that the families qualifying at the various levels of income-targeting would be paying the amount commensurate with their level of income qualification.
On this point, it has been brought to my attention recently that more and more LIHTC managers are coming face to face with the realities of our current economy when they have tenants with job losses or other decreases in income who are looking for rent relief. They may have initially qualified at the 60% AMI level and have been paying the $500 in rent as stated in our example. A subsequent job loss leads to a decrease in income, and they request that their rent be lowered to one of the lesser rent charges. The question then becomes, can you switch their unit status from one set-aside to another to provide them relief and still remain in compliance?
My first instinct when answering this question is one of caution. The IRS regulations do not stipulate that you cannot do this, but if you find yourself in this situation please be careful. For LIHTC purposes the main things that you must monitor are maintenance of your minimum set-aside and the first-year applicable fraction. Keeping this in mind, it is possible to switch unit status in this regard and stay in compliance, but there are several factors that need to be considered in addition to these two points.
First of all, you should know if your unit designations based on income targeting set-asides are fixed or floating. If they are fixed, then you would not be able to make a switch, as a 60% unit would need to remain a 60% unit at all times. If they float, then you have more flexibility, but you still need to be careful. There may be language in a regulatory agreement or other governing document for the property that would prohibit switching unit status. So I recommend doing some research before you proceed with the switch. You may find that your specific property obligations prohibit this practice.
A second step, which often becomes our fallback mantra for the tax credit program, is to check with your state agency to see how they view switching the income targeting set-asides. Some state agencies will allow it as long as you are properly managing your mix of units and others frown upon this practice and will not allow it. Make sure that you have their blessing before you continue or you could find yourself in a compliance pickle.
One other practical issue to consider is how this will affect your bottom line. If you lower the family’s rent to $200 and switch their unit status to the 30% AMI set-aside, do you have another unit available to move a family into qualifying at 60% AMI who will pay the $500 rent? If not, then there goes $300 per month in rent revenue. This, of course, plays into managing your unit mix as well.
As much as we would like to assist our tenant families when times are tough, the reality is that we have regulatory obligations that must be met in order to maintain compliance. I say that a good manager does what they can to have compassion for their tenants, but never forgets these obligations as their first priority.