The Impact of the Multiple Building Election on LIHTC Compliance
Part IV
Most LIHTC practitioners know that compliance monitoring, from a regulatory perspective, is the responsibility of the state housing finance agencies who also allocate the credits. For this installment of our series on the multiple building election for purposes of LIHTC compliance, readers will be asked to tap into their imagination in order to envision various scenarios that illustrate our topic, which is compliance monitoring. Many managers may not have considered that the way in which their owners answer the multiple building election question on IRS Form 8609 could affect the number of units that the state agency is required to review, so the point here will be to show its significance in this regard – keeping in mind the old adage that the more files and units the state must review, the greater the likelihood that they will find something amiss.
Before moving forward, however, let’s examine the basics of the state agencies’ compliance monitoring duties. These were standardized by regulatory changes that became effective in 2001 and include the requirement that all LIHTC properties have their first state agency audit within two years of when the last building on site is placed in service and then at least every three years from that point through the end of the compliance period. A minimum of twenty percent of the tenant files must be reviewed and at least twenty percent of the units must pass physical inspections based on either local health, safety and building codes or HUD’s Uniform Physical Condition Standards (UPCS). Each state is then given discretion as to whether they will maintain staff to conduct these audits or contract out with consultants to do the work with their oversight. If noncompliance is found during the audit, whether a tenant file error or a physical deficiency, they are required to report it to the IRS using Form 8823.
So a very basic example of a state agency’s minimum audit requirement would be to imagine a 100 unit LIHTC property consisting of 10 buildings with 10 units apiece. With the multiple building election, twenty percent of the units, which in this case would be twenty units, would have to be audited to meet the minimum and technically any twenty units would suffice. If the election was not taken, then the breakdown would require the same twenty percent be audited from each building, which would be the same count of twenty units overall but would specifically require that two units per building be reviewed.
Now let’s say those 100 units are configured in fifty duplexes. Using the same minimum requirement and assuming the multiple building election taken, then again, any twenty units could be audited to meet the regulation. If, however, the election is not taken, then at least one unit per building would have to be audited which would equate to fifty units rather than twenty. Obviously this is because units must be audited as a whole, not a percentage of a unit. Without the multiple building election, this would equate to fifty percent of each building rather than twenty percent, by default, and would result in a significant increase in the number of units subject to audit.
One more scenario will drive this point home even more strongly. Imagine the 100 units as all single-family homes. (This situation is relatively uncommon, but the tax credit program does allow for it.) Again, with the multiple-building election taken, then any twenty of these houses, representing single units, can be audited to meet the requirement. What if the election was not taken? Based on the same line of reasoning as with the last example, the conclusion would be that all 100 units would have to be audited. For this reason, it is easy to understand why most state agencies prefer owners to make the multiple building election, especially under these types of circumstances.
Next month we will look at our final two areas of impact with the multiple building election – income limits and annual recertification.