Chapter 4: Lease-Up and Project Completion

This chapter reviews the HOME and LIHTC requirements that apply during the lease-up phase of the property, including the requirements for project completion. Specifically, this chapter addresses the following:

• Income targeting
• Income determinations
• Rents
• Leases
• Tenant selection
• Project completion.

As previously discussed, the requirements that apply to each unit depend on whether that unit is considered a HOME-assisted unit, an LIHTC-assisted unit, or both.

Income Targeting

Both the HOME and LIHTC programs have specific tenant income targeting requirements that affect initial and continued occupancy throughout the affordability period. Income targeting is the process of designating units by the income of their occupants. These requirements apply to the HOME-assisted and LIHTC-assisted units of a property.

This chapter uses the term “property manager” to refer to the person or entity that is carrying out property management tasks for the project. It applies equally to property management staff, contracted property management entities, and owners that carry out property management functions for the property.

Note that both programs also have rent restrictions to ensure that these income-eligible tenants can afford the rents of the assisted housing. Section 4.3 of this chapter discusses these rent restrictions.

Income targeting requirements may be determined up-front during the underwriting process, but the implementation of the income targeting requirements begins during the project’s lease-up phase. Property managers must be familiar with the income targeting requirements imposed by the underwriting process, as well as the specific income limits that are imposed by the regulations of the two funding sources. For a particular project, the income targeting will be specified in the HOME written agreement and the LIHTC Use Agreement.

Income targeting may vary from project to project. However, overall, the following minimum income targeting requirements apply to the HOME Program:

• Low-income occupancy. All HOME-assisted units must be occupied by low-income households, whose annual gross incomes do not exceed 80 percent of area median income (AMI).
• Program Rule. The program rule requires that, at initial occupancy, 90 percent of the households served across all of the PJ’s rental programs, must have annual gross incomes that are at or below 60 percent of AMI. For each project, the PJ needs to determine how this rule applies. Many PJs restrict initial occupancy of High HOME Rent units to tenants that have annual gross incomes that do not exceed 60 percenlit of AMI.
• Project Rule. The project rule requires that, at initial occupancy and throughout the period of affordability, in projects with five or more HOME-assisted units, 20 percent of the households that occupy HOME-assisted units must be very low-income (that is, have annual gross incomes that are at or below 50 percent of AMI). The units that the very low-income households occupy are called Low HOME Rent units.

LIHTC has a minimum set-aside requirement that one of the following must be met:

• 40 percent of units must be affordable to households whose annual gross incomes are at or below 60 percent of AMI.
• 20 percent of the units must be affordable to households whose annual gross incomes are at or below 50 percent of AMI.

These income targets are the LIHTC minimums for the program. The state allocating agency may impose additional income targeting in its Qualified Allocation Plan (QAP), and, developers can propose deeper targeting in the application process as well. The income targeting chosen must be met at initial occupancy and throughout the LIHTC compliance period.

On an annual basis, HUD updates and issues the HOME and LIHTC income limits. The HOME income limits are issued for both low-income and very low-income households.

Combining the Two Rules at Initial Occupancy

For any property that is funded by both HOME and LIHTC, there may be some combination of units in the property that carry a variety of designations (HOME-assisted, LIHTC-assisted, or both HOME- and LIHTC-assisted). For each unit type, the income targeting rule that applies to that unit type must be met. If a unit carries the designation of both programs, it must meet the more restrictive of the two income limit requirements. Exhibit 4-1 specifies the income limits that are imposed for each unit type.

Consider a unit that is designated as both an LIHTC unit and a Low HOME Rent unit:

• The tax credit income limit for the project requires that tax credit units be occupied by tenants with incomes at or below 60 percent of AMI.
• The HOME income limit for a Low HOME Rent unit restricts occupancy to tenants with incomes at or below 50 percent of AMI.

For this unit to meet the requirements of both programs, it must be occupied by a household that has an income at or below 50 percent of AMI because it is the lesser of the two income limits.

Exhibit 4-1: Applicable Income Limits, by Unit Type

The written agreement and deed restriction should clearly specify the tenant income requirements at initial occupancy and over the period of affordability.

Income Determinations

The process of making income-eligibility determinations for applicants who will reside in a HOME and/or LIHTC unit is substantially the same for both programs. The property manager must determine the household’s annual gross income and compare it to the current income limits for the applicable program. The PJ must define income so that the property manager knows what income to “count.” If the applicant’s income is greater than the income limit that applies to that unit, the household cannot occupy the unit.

Definition of Income

The HOME Program permits the PJ to choose the definition of income from three options: the Part 5 definition (also known as the “Section 8” definition); the IRS 1040 Adjusted Long Form; or the U.S. Census. However, the LIHTC program requires the use of the Part 5 (Section 8) definition. Therefore, for HOME-LIHTC projects, the PJ should adopt the Part 5 definition so that it complies with both programs. The PJ must provide this definition to the owner (ideally in the written agreement between the PJ and the owner) and provide guidance on how to apply the definition to the income determination process.

Income Calculation

For both HOME and LIHTC, when determining the tenant household’s income, the following rules apply:

• The income of all adult household members must be included.
• The determination must be based on income that is expected in the next twelve months.
• For the initial income-eligibility determination, property managers must examine income source documents to verify the accuracy of the income information that the tenant reports on the application.

There is not an asset limit or “asset test” in the HOME Program; however, the LIHTC program requires tenants to certify asset amounts and asset income that are more than $5,000. The HOME Program requires all asset income to be verified with source documentation regardless of definition. Therefore, all asset income must be verified for the applicant of any unit that is counted as both an LIHTC and a HOME unit.

Comparing Household Income to Applicable Income Limits

Once the property manager determines the tenant household’s annual gross income, it must compare the household’s income amount to the current income limits for the property, based upon the unit type, whether the unit is HOME-assisted only, LIHTC-assisted only, or HOME-and LIHTC-assisted. When the unit carries both designations, the lesser of the income limits applies.

Note that income limits are published by HUD for both programs, but the income limits for each may be published and effective at different times. Managers must be sure to check the income limits posted for each of the programs, as applicable, and note the effective dates.

The following tools can help the property manager determine tenant income:

• Online Income Calculator. The Online Income Calculator calculates a household’s income and determines if it meets HOME income-eligibility requirements. It is available as a Tool on the HOME Program website at http://www.hud.gov/homeprogram/.
• HUD Publication. The HOME Program’s model program guide, Technical Guide for Determining Income and Allowances for the HOME Program, Third Edition (HUD 1780-CPD, issued January 2005) provides instructions and forms to determine tenant income for the HOME Program. This guide is available at no cost from the HOME Program website at http://www.hud.gov/homeprogram/.

Rents

Once the property manager has identified an income-eligible occupant for a unit, it must determine what rent it will charge for the unit.

Generally, the rent structure for the property is established during the financial feasibility and sustainability phase of the project (see Chapter 2). For sound financial operations, the property manager needs to strive to achieve the underwritten rents in order to keep the property’s revenue within the projections. However, in day-to-day management, there may need to be some flexibility with rents of specific units to enable the manager to keep units occupied.

In order to exercise sound judgment when establishing rents and ensuring compliance with the affordability restrictions of both the HOME Program and the LIHTC program, the property manager needs to understand how to use each program’s rent limits and related utility allowances and which rent limits apply to each unit type (HOME-assisted, LIHTC-assisted, and HOME- and LIHTC-assisted).

HOME and LIHTC Rent Limits

Within a given property, there are a number of rent limits that might apply to different units:

• HOME-assisted units must use either High HOME rent limits or the Low HOME rent limits (for at least 20 percent of the units in projects with five or more HOME-assisted units).
• LIHTC units must use rents based on 30 percent of either 50 percent or 60 percent of AMI, depending on the use restrictions imposed on the project.

Chapter 2 reviews the bases of these HOME and LIHTC rent limits and discusses how to use utility allowances.

Combining the Two Rules

The rent limit that applies to a specific unit is based on the unit type. If a unit carries the designation of both programs, it must meet the more restrictive of the two rent limit requirements. Exhibit 4-2 specifies the rent limits that are imposed for each unit type.

Exhibit 4-2: Applicable Rent Limits, by Unit Type

HUD updates and issues the HOME income and rent limits on an annual basis. The HUD-issued rent limits are adjusted for different localities and for each bedroom-size unit from zero (efficiency) to six bedrooms. For LIHTC, state credit agencies compute the rent limits based on the HUD-issued income limits for the jurisdiction.

The property manager must deduct any tenant-paid utility allowance (using the applicable utility allowance) from the rent limits of each program in order to determine the maximum rent that can be charged for the unit.

Further, the rent structure must be approved by the PJ (and documented in the written agreement) and rents may not be increased without the PJ’s permission.

Project-Based and Tenant-Based Rental Assistance

Both the LIHTC and HOME Programs make certain exceptions to the rent limits for units with project-based rental assistance where tenants pay no more than 30 percent of their income for rent and tenant-paid utilities.

The following rent limit rules apply to units with a project-based rental subsidy:

For a unit that is HOME-assisted only:

• High HOME Rent unit with project-based assistance. The lesser of the project-based rent or the High HOME Rent may be charged when the tenant household is low-income, but not very low-income, or if the tenant pays more than 30 percent of its income towards rent.
• Low HOME Rent unit with project-based assistance. The project-based rent may be charged (even if it is higher than the Low HOME Rent) for any unit that meets three conditions:
• Receives state or Federal project-based rental assistance
• Is occupied by a very low-income tenant
• Tenant household pays no more than 30 percent of its adjusted monthly income toward rent.

For an LIHTC-assisted unit, the rent for each unit is established so that tenant monthly housing costs, including a utility allowance, do not exceed the applicable LIHTC rent limit. The LIHTC Program restricts only the portion of the rent paid by the tenant, not the total rent. As a result, rental assistance programs can be used to raise the total rent above the LIHTC rent limit. The maximum rent cannot exceed the greater of the LIHTC rent limit or the rent limit established by the rental assistance program. When there is rental assistance, the tenant portion cannot exceed the LIHTC rent limit, less the utility allowance.

For a unit that is both HOME-and LIHTC-assisted, the following rent limits apply:

• High HOME Rent Unit. The most restrictive rent of the three programs applies to the unit. That means the rent limit is established at the lesser of:
• The High HOME Rent
• The LIHTC rent
• The project-based rental assistance program rent.
• Low HOME Rent Unit. The rent cannot exceed the project-based rental assistance program rent limit.

Note that neither program makes an exception to its rent limits when a unit is occupied by a tenant that has a tenant-based rental subsidy, since this subsidy is portable with the tenant.

It is important to note that both HOME and LIHTC have floor rents that prevent rent limits over time from falling below initially approved rent limits, and these may need to be taken into account when determining applicable rent limits annually over the compliance period.

Recruiting and Selecting Tenants

Both the HOME and LIHTC programs impose certain requirements related to fair housing, marketing (the recruitment of tenants), and tenant selection policies and procedures. In addition, HOME requires PJs to approve marketing and tenant selection procedures. HOME also imposes affirmative marketing requirements to projects with five or more HOME-assisted units. When combining these sources of funds, the requirements of both programs must be met.

Fair Housing

Both HOME and tax credit projects are subject to the Federal Fair Housing Act. This means that property managers of HOME- and LIHTC-assisted housing are prohibited from discriminating on the basis of race, color, religion, sex, familial status, national origin, and disability, in all aspects of the rental housing program administration and management. Owners and managers cannot discriminate in the leasing of units, in establishing terms and conditions of property rentals, or in advertising the availability of rental housing units. Additional state and local fair housing laws may also apply.

Marketing

Owners of HOME- and LIHTC-assisted rental housing and their property managers must conduct marketing and advertising activities in accordance with applicable fair housing laws. HOME imposes additional requirements related to affirmative marketing of HOME-assisted units; and additional marketing restrictions on units that are accessible in accordance with the requirements of Section 504. These additional requirements apply to projects that are funded with both HOME and LIHTC.

Affirmative Marketing

PJs must develop affirmative marketing procedures for properties with five or more HOME-assisted units. Affirmative marketing procedures ensure that special outreach and advertising efforts are made to communicate the availability of HOME-assisted housing to those groups or individuals who might otherwise be unlikely to apply for it. Affirmative marketing should be made part of the property’s overall marketing activities. Generally, PJs require owners and managers to propose affirmative marketing procedures as part of written marketing and tenant selection procedures for the project.

Marketing Accessible Units

Property managers of properties with accessible units that are built in accordance with Section 504 requirements must develop procedures to ensure that information regarding the availability of accessible units reaches eligible individuals with disabilities. Reasonable, nondiscriminatory steps must be taken to make sure that available, accessible units are offered:

• First, to a current occupant of the property who might require or benefit from the accessibility feature(s) of the unit
• Second, to an eligible qualified applicant on the waiting list who requires the accessibility feature(s) of the unit
• Last, to a nondisabled person on the waiting list.

A nondisabled tenant may rent an accessible unit only when the property manager has made all reasonable efforts to attract a tenant with a disability, and has followed the above steps.

Tenant Selection

Although LIHTC does not have any specific requirements about tenant selection, under HOME, the owner must establish written tenant selection procedures (see 24 CFR 92.253(d)). These procedures describe the methods and procedures for taking applications and screening tenants for any HOME-assisted property, including HOME-LIHTC properties. The PJ should be sure that the procedures for a HOME-LIHTC project clearly describe the income restriction requirements that apply to the project.

Preferences for Tenants with Special Needs

The HOME and LIHTC programs have different approaches and requirements related to developing special needs housing. In some instances, in order to comply with the requirements of both programs, it may not be possible to designate a single unit as both HOME- and LIHTC-assisted.

Under the HOME Program, in certain circumstances, the PJ can authorize a property owner to give preference in the tenant selection process to persons with special needs, such as the elderly or persons with disabilities. The PJ must state this preference in its Consolidated Plan, document that the special needs group getting preference has an unmet housing need, and demonstrate that the preference is necessary to narrow the gaps in benefits and services to the special needs group.

However, PJs cannot permit owners and managers to limit the assisted housing to persons with a specific type of disability. Although HOME funds can be used to assist housing that gives a preference to persons with disabilities, civil rights laws (which confer certain protections on persons with disabilities) in most cases prohibit owners from discriminating based upon the nature of a disability. Consequently, HOME-assisted housing for persons with disabilities must be equally available to all persons with disabilities. Property managers may offer and advertise nonmandatory services that may be appropriate for persons with a particular special need or disability.₆

The LIHTC program rules do not impose these same restrictions on serving special needs groups. In fact, the state allocating agency may require that a certain number of units are “set aside” for a specific population. It is not uncommon for an owner to receive bonus points on its tax credit application for setting aside units for a specific population. The state identifies these types of preferences and requirements in its QAP.

For a tax credit project that has certain special needs set-asides, the tenant selection policies must clearly state these preferences, and these units must be marketed and occupied by persons who meet the state’s criteria. LIHTC rules require these set-aside units to remain vacant until an eligible tenant is found.

It is difficult in most situations to comply with the HOME and LIHTC rules in implementing any LIHTC-imposed special needs preference, particularly if the preference is for tenants with a specific type of disability. As a general rule, LIHTC set-aside units should not be combined as both HOME- and LIHTC-assisted units.

Leases

The HOME and LIHTC Programs impose certain lease requirements for the purpose of protecting tenants’ rights. Generally, the HOME Program imposes more restrictive requirements, and these must be followed for units that are both HOME- and LIHTC-assisted. As a general practice, these requirements would be followed across all units in the property operating under both programs.

Required Lease Provisions

The following HOME lease requirements, in accordance with 24 CFR 92.253, must be met for all HOME-LIHTC units:

6 Note, the only exception to this rule is for housing for persons with a specific type of disability who could not reside in housing that is available to the general public. In practice, this exception would apply to persons whose disabilities require them to have onsite supportive services (such as 24-hour supervision), because without the onsite services, these persons would be unable to maintain themselves in housing. See 24 CFR 8.4(b)(1)(iv).

• Every tenant must have a written lease.
• The lease for a HOME-assisted unit must explain the HOME rent requirements and clearly state the rent amount, applicable utility allowance (if any), whether or not there is project-based assistance, and under what circumstances rents may be adjusted. It should also clearly state the LIHTC requirements.
• The lease term must be for at least twelve (12) months, unless there is mutual agreement between the owner and the tenant. This is more restrictive than the LIHTC six-month requirement.
• Services or program participation requirements (such as “clean and sober” programs) cannot be mandated through the lease document.
• The PJ must approve the lease form.

Prohibited Lease Provisions

HOME also expressly prohibits the use of certain lease provisions (which may not be allowable under state or local tenant-landlord law as well). Therefore, leases for units that are assisted with both HOME and LIHTC may not include the following provisions:

• Agreement to be sued
• Agreement regarding seizure of property
• Agreement excusing the owner from responsibility
• Waiver of notice
• Waiver of legal proceedings
• Waiver of a jury trial
• Waiver of right to appeal a court decision
• Agreement to pay legal costs, regardless of outcome.

The LIHTC program permits the property manager to impose a requirement for tenants to participate in certain services or tenant programs. This is not permitted under the HOME Program. Therefore, no tenant of a unit funded with both HOME and LIHTC can be required to participate in any services or tenant programs.

Provisions for CHDO Projects

The HOME Program imposes additional requirements on projects that are owned, developed, or sponsored by CHDOs. These projects must adopt tenant participation plans and fair lease and grievance procedures to ensure ongoing involvement of low-income residents in decisions at the property.

Lead-Based Paint Disclosure

Federal law requires all owners of pre-1978 to disclose any knowledge of lead-based paint to tenants. Rules require a disclosure notice and provision of the Protect Your Family from Lead brochure.

In addition, property managers of HOME-assisted housing that is built prior to 1978 must comply with rules related to controlling or abating the hazards of lead-based paint in federally assisted housing. These rules require that the owner make additional disclosures regarding any evaluations or clearances of lead-based paint hazards.

The HOME requirements related to lead-based paint control are discussed in Chapter 3.

Project Completion and Close Out

HOME and LIHTC have slightly different project close-out requirements and procedures. These requirements do not generally conflict; therefore, for projects that have both HOME and LIHTC funding, the PJ and LIHTC project sponsor must comply with the requirements of both programs.

HOME Project Completion Requirements

When the project is fully leased, and presuming the construction close-out requirements (discussed in Chapter 3) have been satisfied, the PJ is required to ensure project completion steps are undertaken to start the affordability period.

Upon lease-up, PJs must require owners to report on rents and occupancy to enable the PJ to complete the Rental Set Up and Completion Form and enter information into IDIS.

Once the project completion data has been entered into IDIS and all the costs have been incurred, the PJ should mark the project as complete. The date associated with this project completion data is the date that the period of affordability begins for the HOME assistance. The PJ must contact the owner to notify it of the affordability period start and end dates. If possible, the PJ should also amend the HOME written agreement and deed restriction to include these dates. The date in IDIS may be altered to match the date on these legal documents.

PJs should note that not all units need to be occupied to enter completion data, and that completed units may be initially recorded in IDIS as vacant, but that the information regarding the first occupant must be entered into IDIS when available for the system to credit the unit as meeting HOME requirements. PJs should require their managers to report regularly until full occupancy of assisted units is achieved.

LIHTC Completion Requirements

Project completion under the LIHTC program is defined in terms of the placed in service date. The placed in service date is typically provided on a building by building basis when the first unit in an LIHTC building is certified as suitable for occupancy under state or local law.

Reconciling the Completion Dates under HOME and LIHTC

The completion date in IDIS and the placed in service date for the LIHTC program are different and the HOME period affordability could start either before or after the LIHTC-assisted buildings are considered placed in service.

From a practical standpoint this may have little operational impact on the project, as the requirements of the two programs run parallel during most of the affordability period. However, the property manager should be aware that the affordability/compliance periods may begin and terminate on different dates, even for projects where the period is the same for both programs (e.g., 15 years).