The Impact of the Multiple Building Election on LIHTC Compliance
Part III: The Unit Vacancy Rule
Continuing our discussion of the impact of the multiple building election on LIHTC compliance, this month I’ll discuss its influence on the Unit Vacancy Rule.
The rule states that reasonable attempts must be made to re-rent vacant tax credit units before re-renting vacant market rate units in mixed-income projects. Reasonable attempts to re-rent vacant tax credit units is also required in order to continue claiming credits for it. As was the case with unit transfers (discussed in this forum last month), the IRS has been less stringent when it comes to this rule as well by accepting “reasonable attempts” instead of its previous mandate that required that vacant tax credit units be rented before vacant market rate units in mixed-income projects.
The distinction between empty and vacant
When dealing with the Unit Vacancy Rule, however, one needs to understand how the LIHTC program views unoccupied units. Units are considered empty until they have been occupied by a qualified household; when the qualified household moves out, the unoccupied unit is then considered vacant. This means that occupied units in acquisition/rehab projects that have not yet been qualified for LIHTC are regarded as empty units, though common sense would seem to suggest otherwise. The bottom line is that a vacant unit under the LIHTC program is one that has been previously qualified for tax credits and will continue to receive tax credits as long as it remains in compliance with the Unit Vacancy Rule and other compliance criteria.
So how does the multiple building election factor into this picture? Simply put, the Unit Vacancy Rule is a project-wide measurement which is applicable among all buildings (or BINs) in an LIHTC project. When the multiple building election has been taken, the rule has to be followed in one manner, and when it has not been taken, the rule is followed in a different manner. To explain this better, let me give you a couple of examples.
Let’s say the owner of Buildings A and B decided to take the multiple building election by selecting the “yes” box for item 8(b) under Part II of the IRS form 8609 at the end of the first year of the credit period. In terms of the Unit Vacancy Rule, and given that this is a mixed-income project, reasonable attempts must be made to rent a vacant tax credit unit in Building A before renting a vacant market rate unit in Building B. If, however, that same owner decided not to take the multiple building election and Buildings A and B were treated as separate projects, then the vacant market rate unit in Building B could be rented before the vacant tax credit unit in Building A without consequence. (Reasonable attempts would have to be made to rent the vacant tax credit unit before the vacant market rate unit if the vacant market rate unit was in the same building in either scenario.)
This is therefore one situation where it may be to the owner’s advantage not to take the multiple building election if it would mean keeping the market rate units full without regard to the vacant tax credit units at a mixed-income property. Next month, however, we’ll be examining how the multiple building election plays out with the State Housing Finance Agencies’ compliance monitoring requirements and how they generally feel about it.