Chapter 5: Ensure Long-Term Compliance

This chapter discusses the long-term compliance requirements of the HOME and LIHTC programs during the property’s operation and management. Specifically, it explains:

  • HOME affordability period and LIHTC compliance and extended use periods
  • Requirements for ongoing property inspections and standards
  • Rent restrictions, income limits, and unit mix requirements that apply to assisted units during the affordability/compliance period
  • Consequences of noncompliance
  • Early intervention when a property is financially distressed.

Affordability/Compliance Period

Both the LIHTC and the HOME Programs have periods after project completion, during which their respective program requirements apply to the assisted units in the property. During this period, requirements related to rent limits, tenant income limits, tenant lease protections, affirmative marketing, and property standards apply. This period is generally referred to as the affordability period under the HOME Program, and the compliance and extended use periods for the LIHTC Program.

For more information on managing HOME rental properties during the affordability period, see HUD’s publication Compliance in HOME Rental Projects: A Guide for PJs (HUD-2009 HOME Rental PJ, issued January 2009). This publication is available from the HOME Program website at http://www.hud.gov/homeprogram/.

Duration of the Affordability/Compliance Period

The HOME and LIHTC Programs determine the duration of the affordability/compliance period differently. Therefore, the duration of these periods are not necessarily the same for any given project, although they may be.

LIHTC Compliance and Extended Use Periods

Generally, the LIHTC program imposes a 30-year period during which LIHTC requirements apply. These 30 years are comprised of a 15-year compliance period and a subsequent 15-year extended use period. This distinction is the result of a change in the tax code in 1990 that amended the compliance period from 15 to 30 years. Note that the state allocating agency may make this period longer.

In practical terms, the LIHTC investor must stay in the project for 15 years (the compliance period). For the extended use period, the Code permits investors to “opt out” under certain conditions. Although the state allocating agency continues to monitor compliance during the extended use period, there may be no tax implications in the event of noncompliance.

HOME Affordability Period

The minimum duration of the affordability period for the HOME Program is based on the per unit amount of the HOME investment in the project and the nature of the activity funded, as summarized in Exhibit 5-1.

Exhibit 5-1: HOME Period of Affordability for Rental Housing

Exhibit 5-1: HOME Period of Affordability for Rental Housing

Compliance Period When HOME and LIHTC Are Combined

When HOME and LIHTC are combined in a property, the property has to comply with the requirements for each program for the duration of that program’s affordability/compliance period. For the time during which these periods overlap, the property must satisfy both sets of requirements. It generally does this by adhering to the most restrictive requirement in any given circumstance.

PJs should be especially aware of the compliance periods for new construction projects. New construction triggers a minimum 20-year compliance period under HOME, while investors may be looking to “exit” the project after the 15-year compliance period of LIHTC. Under normal circumstances, a succeeding owner takes over the responsibilities and continues affordability compliance, but PJs may need to work to ensure that this happens when a buyout occurs. See Chapter 6 for additional discussion on this issue.

Ongoing Property Standards and Inspections

The property standards and inspection requirements for HOME and LIHTC differ, and a HOME-LIHTC property must meet the property inspection and property standards requirements of both programs. The PJ is responsible for conducting the property inspections of the HOME-assisted units, and the state allocating agency is responsible for conducting the inspections of the LIHTC-assisted units.

The two agencies should share inspection information. There may be some limited opportunities for the two agencies to coordinate inspection activities; this depends on the project, the number of units in the property, and the unit mix.

HOME Property Standards

For ongoing occupancy inspections by the PJ, HOME requires the property to meet state or local housing codes or standards applicable to the housing, or, in the absence of such local codes, Housing Choice Voucher Program Housing Quality Standards (formerly Section 8 HQS). The applicable HOME property standards are described in Chapter 3.

HOME-assisted units that were built to be accessible for persons with mobility or sensory impairments using the UFAS standard, in order to comply with Section 504, must be maintained to that standard during the affordability period.

Additionally, owners of properties that were constructed prior to 1978 are required to conduct ongoing lead-based paint maintenance. Ongoing maintenance standards are at 24 CFR 35.1355, and include (if the property has not been previously determined to have lead-based paint):

  • Visual assessment for deteriorating paint by trained personnel
  • Lead hazard reduction of identified surfaces by trained personnel
  • Clearance of any completed work by certified risk assessor
  • Notification of tenants
  • Recordkeeping.

Property standards apply to the HOME-assisted units. However, in a property with floating HOME-assisted units, it is prudent to maintain all units in accordance with the applicable property standards since a non-HOME-assisted unit might be designated as HOME-assisted at some later time.

HOME Property Inspections

Under the HOME Program, the frequency with which the PJ must conduct onsite inspections of HOME properties throughout the affordability period is based on the total number of units in a project (not just the HOME-assisted units), as identified in Exhibit 5-2.

Exhibit 5-2: Frequency of HOME Property Inspections

Exhibit 5-2: Frequency of HOME Property Inspections

The purpose of the property inspections is to ensure that HOME-assisted units, shared common areas, and the building’s exterior meet the applicable HOME property standards throughout the affordability period.

As part of the onsite monitoring, the PJ must do two things: (1) inspect units to verify compliance with HOME property standards, and (2) review records to verify the accuracy of the annual rent and occupancy reports submitted by owners. Note that the onsite records review is discussed in the following sections.

HOME requires the PJ to inspect the common areas, the building’s exterior, and a “sufficient sample” of HOME-assisted units (not all units in the project). HUD recommends that the PJ inspect 10 to 20 percent of the HOME-assisted units in a project, and a minimum of one unit in every building. If the PJ identifies any problems, it should inspect the remaining HOME-assisted units to ensure that these units comply with established property standards.

HOME also requires that the person or entity conducting the inspections be PJ staff or have a contractual relationship with the PJ to conduct such inspections.

PJs should consider inspecting a greater number than the minimum in the following circumstances:

  • The project is financially stressed.
  • The property manager has limited experience.
  • Development activities were completed more than ten years ago (since projects tend to have more maintenance problems in later years).

LIHTC Property Standards

At a minimum, the LIHTC property standards must meet local health, safety, and building codes; and the Uniform Physical Condition Standards for public housing established by HUD at 24 CFR 5.703. Note that the HUD Uniform Physical Condition Standards do not supersede or pre-empt local health, safety, and building codes. State allocating agencies may impose additional property standard requirements as well.

LIHTC Property Inspections

Under the LIHTC regulations, allocating agencies must inspect:

  • All buildings and at least 20 percent of the LIHTC-assisted units in the project by the end of the second calendar year following the year the last building in the project is placed in service. For instance, if the property is placed in service in June 2009, then the allocating agency must inspect it by December 2011.
  • After that, all buildings and at least 20 percent of the LIHTC project’s assisted units must be inspected at least once every three years during the compliance and extended use periods.

The LIHTC regulations specify that property owners are required to annually certify that, for the preceding 12-month period, each building in the project was suitable for occupancy, taking into account local health, safety, and building codes. Generally, this certification is based on a review of reports that the owner submits.

Property Inspection Requirements for HOME-LIHTC Properties and Units

Both LIHTC and HOME rules specify a sample of assisted units must be inspected. The LIHTC regulations require a larger sample of LIHTC units be inspected than the sample required by the HOME Program.

Although it may vary from project to project, and may depend on any state-imposed requirements, in most instances, HOME requires properties to be inspected more frequently than the LIHTC program.

Since both the PJ and the state allocating agency have inspection obligations, there may be opportunities for limited coordination that could benefit the PJ. However, at a minimum, the PJ should ask the state to forward copies of inspection reports for all HOME-funded properties to help the PJ identify any potential problem properties.

While the state allocating agency may be willing to use the PJ’s inspection as verification of the tax credit property standards, this would not generally work in reverse because the state LIHTC program’s property inspectors may not have the appropriate training to inspect for compliance with the HOME property standards (local codes or Housing Quality Standards) or the UFAS standard for accessible units, which does not generally apply to LIHTC projects that are not also HOME-funded. PJs also should remember that HOME inspections must be done by a person/entity with direct programmatic relationship to HOME, by employment or agreement. In addition, for most projects, the PJ is required to inspect the property more frequently than the state.

The state allocating agency and the PJ should also be aware that the different units may need a different type of inspection, depending on their designation as HOME-assisted only, LIHTC-assisted only, or both HOME- and LIHTC-assisted. HOME-assisted units must meet the HOME property standards; LIHTC-assisted units must meet the LIHTC property standards; and any units that carry both designations must meet the requirements of both programs. When the HOME requirements are more restrictive, this property standard should be used in these units.

Rents

Rent affordability for some period of time is required by both LIHTC and HOME Programs. Throughout the affordability period, both HOME and LIHTC require that assisted unit rents comply with the respective program rent limits. Chapter 2 provides a detailed discussion on program rent limits and how they apply to HOME-LIHTC projects, including how they are calculated for each program. The guidelines offered in Chapter 2 apply throughout the affordability period, as do the rent requirements of each program.

HOME Rent Limits

HOME rent limits are updated every year by HUD. HUD calculates and issues the HOME rent limits along with the HOME income limits early in the year (approximately March). The rent limits go into effect 30 days after they are posted on the HOME website at http://www.hud.gov/homeprogram/.

The calculations that are used to compute the High and Low HOME rent limits are explained in Chapter 2. PJs should be sure to notify all property managers of the new income and rent limits when they become effective.

LIHTC Rent Limits

HUD issues the income limits applicable to the LIHTC Program annually. State allocating agencies compute the rent limits from the HUD-issued income limits and notify the tax credit project owners.

Rent Limits in HOME and LIHTC Units

  • Establishing rents. Each time the rent limits are updated, the property manager must determine the maximum rents that can be charged for each program. This is done in the same way that the rents are initially determined (discussed in Chapter 2) and the new rent limits apply in the same way:
  • The High HOME rent limits (minus tenant-paid utilities) apply to High HOME Rent units; the Low HOME rent limits (minus tenant-paid utilities) apply to Low HOME Rent units.
  • The LIHTC rent limits (minus tenant-paid utilities) apply to the LIHTC-assisted only units.
  • The lesser of the two program rents (minus their respective utility allowances for tenant-paid utilities) applies to the HOME- and LIHTC-assisted units.

Keep in mind that tenant-based rental assistance is treated differently by the two programs. HOME is more restrictive, limiting the total rent – including tenant contribution and housing assistance payment – to the HOME rent limit. LIHTC limits tenant contributions, and does not restrict the housing assistance payment portion of total rent.

  • Rent increases. Under both programs, property owners can raise rents up to the new rent limits (minus any tenant-paid utilities) that apply to the unit. Rent adjustments for occupied units are subject to the terms of the tenant’s lease.
  • Under HOME, PJs must approve all rent increases in HOME-assisted units, in accordance with an approval process prescribed by the PJ and documented in the written agreement between the PJ and the owner.
    • PJs should note that the calculation of LIHTC rent limits, which is explained in Chapter 2, is slightly different than the HOME rent limits, and that they take effect at different times of year. PJs should remind owners and managers of this difference each year, so that adjustments permitted by new LIHTC rent limits do not violate the HOME requirements.
  • Rent decreases. The rent limits for either of these programs might decrease, depending on area market conditions or increasing utility costs. Both programs offer some financial protection to owners to ensure that rents do not drop below the rent limits established early in the project.
    • The HOME Program does not require the owner to decrease rents below the HOME rent limits that were in effect at the time of project commitment.
    • Similarly, LIHTC establishes a floor rent which keeps the applicable LIHTC rent limits from dropping below the rent limits that were in effect on the date the initial LIHTC allocation was made to the project.

Practically speaking, this is useful in the first few years of the project, although as the project ages and rent limits slowly increase, these floor rents are less likely to be a factor.

Tenant Income Eligibility

The HOME and LIHTC Programs restrict occupancy to income-eligible tenants throughout the affordability period. On an annual basis, HUD issues income limits for both programs, although these limits are calculated differently for the two programs, are issued separately, and take effect at different times.

The PJ must provide instruction to property owners on the owner’s responsibility to comply with the income requirements. Owners/Managers of rental housing must determine the occupant’s income-eligibility on an annual basis in accordance with these limits and verify that the tenant household has an annual gross income that is at or below the applicable and current income limit for the type of unit it occupies (High HOME Rent, Low HOME Rent, LIHTC, or both HOME and LIHTC). In the event that a tenant’s income has increased over the current income limit for the applicable program, depending on the type of unit the tenant occupies, the owner/manager must take certain steps to restore compliance in the building.

The steps to restore compliance are described throughout this chapter. The income limits are discussed in detail in Chapter 4 and apply throughout the affordability period.

Annual Income Recertification

Each year, the property manager of a HOME-LIHTC property must be sure that the tenants of assisted units do not have incomes that exceed the current income limits. This process is called income recertification. The income recertification requirements for HOME and LIHTC are slightly different.

HOME Annual Income Recertification

The HOME Program requires the property manager to recertify each tenant household’s income on an annual basis throughout the affordability period. Initially, and every sixth year during the affordability period, the property manager must use source documentation to verify the household’s income. In alternate years, the PJ can choose one of the following three methods for the owner to use:

  • Source documentation
  • Self-certification
  • Written statement from the administrator of another government program under which the family receives benefits and that examines the annual gross income of the family each year.

LIHTC Annual Income Recertification

Generally, LIHTC requires owners/managers of LIHTC properties to reexamine the annual income of a household residing in a tax credit unit on an annual basis as well. However, these reexaminations of income must be performed with third-party source documentation each year.

Under Internal Revenue Code (IRC) §42(d)(3)(A) and IRC §42(g)(4), owners of 100 percent low-income projects are no longer required to complete annual income recertifications. State agencies, however, have authority to impose additional requirements upon LIHTC projects and may require income recertifications after completing the initial income certification at the time the household moves into the low-income unit.

Annual Income Recertification for Occupant of a HOME- and LIHTC-Assisted Unit

The property manager must ensure that the occupant of any unit that carries both the HOME- and LIHTC-assisted designation has an annual gross income that meets the income limits of both programs. This would be the lesser of the two income limits. See Chapter 4 for a discussion of the applicable income limits.

In addition, the property manager must use the most restrictive process of the two programs to determine the tenant household’s income eligibility. This means that:

  • For units that are designated as both HOME- and LIHTC-assisted, the manager must examine third-party source documentation of tenant incomes to verify tenant income-eligibility, unless one of the following is true:
  • There is an LIHTC waiver in a project with 100 percent tax credit units.
  • There are no new residents that exceed the LIHTC income limits.
  • For HOME- and LIHTC-assisted units where third-party source documentation is not required by LIHTC, the PJ can determine what type of documentation is required for income recertification. However, source documentation is required every sixth year during the HOME affordability period.

Over-Income Tenants

When conducting the annual income recertification, if the property manager determines that a tenant’s income has increased above the income limits for the applicable program, it must take certain steps to restore compliance in the property.

  • For a unit that is HOME-assisted only, the tenant is considered over-income when its income exceeds the HUD-published income limit for the unit. That is, a tenant that occupies a High HOME Rent unit becomes over-income when the household’s income exceeds 80 percent of AMI. A tenant that occupies a Low HOME Rent unit becomes over-income when the household’s income exceeds 50 percent of AMI. When a tenant is over-income, the owner/manager must adjust the rent. These adjustments are explained in more detail in Section 5.5, below.
  • For a unit that is LIHTC-assisted only, the tenant is considered over-income only when the household’s income increases to above 140 percent of the current qualifying income limit for the unit. LIHTC rules require the rent to remain restricted until that unit is replaced.
  • For a unit that is both HOME- and LIHTC-assisted, the HOME Program (at 24 CFR 92.252(i)(2)) states that the tenant pays the rent governed by the LIHTC program. This means that the tenant’s rent is not increased under the HOME over-income rules, but that the rent is restricted to the LIHTC rent until the LIHTC unit is replaced.

Maintaining Unit Mix

Maintaining unit mix to comply with HOME and LIHTC requirements is one of the more complex management functions during the affordability period. Owners/Managers must maintain the proper mix of HOME- and LIHTC-assisted units, as specified in their written agreements with the PJ and the state allocating agency. This requires making income-eligibility determinations annually and keeping track of unit occupancy and rents whenever there is turnover or changes in tenant income.

The steps the owner must take to maintain compliance with unit mix requirements will depend on:

  • The property’s written agreements. Owners of HOME-and LIHTC-assisted properties execute written agreements that state the terms and conditions of funding with the PJ and the state allocating agency, respectively. These written agreements specify the unit mix requirements for each program. The owner/manager must strive to maintain the property in compliance with these unit mix requirements throughout the affordability/compliance period.
  • Whether HOME-assisted units are fixed or floating. HOME units may be fixed or floating, as described in the following section. This gives the owner/manager more or less flexibility in changing unit designations to maintain the required unit mix.
  • The number and types of units in the property (such as HOME-assisted, LIHTC-assisted, HOME-LIHTC, and market rate). The greater the variety of unit types, the more options the owner/manager has to comply with unit mix requirements. For instance, in a property with a mix of HOME, LIHTC, and market rate units, the owner/manager has more choices to maintain or restore unit mix than in a property with only LIHTC units.

PJs must provide detailed instruction to owners/managers on how to ensure that HOME income-eligible tenants occupy HOME-assisted units and are charged the appropriate rents throughout the affordability period. State allocating agencies provide similar direction to LIHTC owners.

HOME Unit Mix Requirements

The HOME written agreement between the PJ and the owner specifies:

  • The number of HOME-assisted units that the owner/manager must maintain throughout the affordability period
  • Which units are initially designated as High HOME Rent units or Low HOME Rent units
  • Whether the HOME units are fixed or floating.

These decisions must be made at the time of project commitment.

Fixed vs. Floating HOME Units

Properties with fixed HOME units have specific units (e.g., Units 101, 102, and 103) that are designated as HOME-assisted. Owners/Managers must maintain these specific units as HOME-assisted throughout the affordability period, consistent with the written agreement.

  • The specific unit’s designation as a HOME-assisted unit does not change during the affordability period. However, the owner/manager may find it necessary to change the unit’s initial income targeting designation (High HOME Rent unit or Low HOME Rent unit) in order to maintain the required mix. If the property is out of compliance because of both a High HOME unit and Low HOME unit, the owner must always restore the number of Low HOME Rent units first.
    • For example, Unit 101 may initially be designated as a Low HOME Rent unit. If the tenant’s income increases and the tenant is no longer very low-income, the owner/manager must designate the next High HOME Rent unit that becomes available as a Low HOME Rent unit in order to restore the required number of Low HOME Rent units. (The following sections discuss over-income tenants, including applicable rents for over-income tenants.)

Properties with floating HOME units do not have specific units that are designated HOME-assisted for the duration of the affordability period. Initially, the PJ designates specific units as HOME-assisted, and as High HOME units and Low HOME units. During the affordability period the owner/manager is required to maintain the total number of HOME-assisted and non-assisted units, and High HOME units and Low HOME units that are originally designated, not the specific units.

  • The HOME-assisted unit designations can change, or “float,” among comparable assisted and non-assisted units in order to maintain the required unit mix, including the number of assisted and non-assisted units and the number of High and Low HOME units.
    • For example, at the time of annual income determination, if the owner/manager finds that the income of a tenant residing in a High HOME Rent unit has increased and the tenant is no longer low-income, then the owner must identify a comparable, non-assisted unit for a low-income tenant, and designate this unit as assisted. (The following sections discuss over-income tenants in more detail, including applicable rents for over-income tenants.)
    • The goal is to maintain the initial (required) number of HOME-assisted units, and the initial (required) mix of High and Low HOME Rent units. The owner can change designations as needed, in order to maintain the required unit mix.
    • For example, if a tenant residing in a Low HOME unit moves out, and there is a comparable non-assisted unit with an existing very low-income tenant, the owner can redesignate the occupied non-assisted unit as a Low HOME unit, and redesignate the vacated unit as non-assisted.
  • When redesignating a non-assisted unit as HOME-assisted, owners/managers must use a non-assisted unit that is comparable to the HOME unit. They may choose (but are not required) to substitute a “greater” non-assisted unit for a “lesser” HOME unit. A “greater” unit is one that might be considered preferable because of larger size, additional bedrooms, or amenities. Owners/Managers are not permitted to substitute a lesser non-assisted unit for a greater HOME unit, unless this restores the original unit mix specified in the written agreement.

Over-Income Tenants in HOME Units

When owners/managers recertify a tenant’s income, they may find that a tenant’s income has increased. A tenant is considered over-income in the HOME Program when one of the following occurs:

  • The tenant occupies a High or Low HOME unit and the household income increases over the current HOME low-income limit (80 percent of AMI) for its family size.
  • The tenant occupies a Low HOME unit and the household’s income increases above the current very low-income limit (50 percent of AMI), but is still below the low-income limit for its family size.

When a tenant is over-income, the property is considered temporarily out of compliance with HOME’s occupancy and unit mix requirements. Temporary noncompliance due to an increase in an existing tenant’s income is permissible as long as the owner takes specific steps to restore the correct occupancy and unit mix in the property as soon as possible. These steps are described throughout Section 5.4 of this chapter and vary depending on the type of unit and whether the units are fixed or floating.

After making applicable adjustments to ensure the property has the required HOME unit mix, the owner/manager may also need to adjust the rents of affected tenants:

  • A unit that is designated as a High HOME unit must be rented to low-income tenant at a rent that does not exceed the High HOME rent limit.
  • A unit that is designated as a Low HOME unit must be rented to very low-income tenant at a rent that does not exceed the Low HOME rent limit.
  • During a period of temporary noncompliance, if an over-income tenant (with income over 80 percent of AMI) is residing in a floating HOME-assisted unit, that tenant’s rent must be adjusted to be 30 percent of the household’s adjusted income, or the market rent, whichever is less. If an over-income tenant (with income over 80 percent of AMI) is residing in a fixed HOME-assisted unit, that tenant’s rent must be adjusted to be 30 percent of the household’s adjusted income. This rent adjustment must be made as soon as the tenant’s lease permits.

Owners/Managers may not evict or terminate the tenancy of a household because its income increased.

Making Income Determinations for Replacement Units

When renting any vacant unit— including units that are used for replacement purposes to comply with unit mix requirements--the owner/manager must verify that the tenant is income-eligible for the applicable program(s), prior to renting the unit. Income determination procedures are described in Section 5.4 of this chapter.

LIHTC Unit Mix Requirements

The LIHTC Program also requires that the owner/manager maintain the required LIHTC unit mix, as specified in its agreement with the state credit allocating agency. This agreement specifies how many units are reserved for households with incomes at or below 50 percent of AMI, 60 percent of AMI, or possibly a deeper income targeting mix if the developer has agreed to it. LIHTC unit mix requirements are in effect for the duration of the LIHTC compliance period.

Like HOME, LIHTC requires that as LIHTC units are vacated, the owner/manager must verify that the next tenant is income-eligible. The LIHTC income limit for the new tenant depends on the income targeting requirements in the property’s LIHTC agreement (50 percent of AMI, 60 percent of AMI, or deeper income targeting). Of course, the owner/manager must charge the new tenant the applicable LIHTC rent.

As households residing in LIHTC units become over income, the owner/manager must rent the next available non-LIHTC unit to an income-eligible tenant at the applicable LIHTC income limit in order to maintain the required number of LIHTC units.

  • The LIHTC Program defines "next available unit" as any unit in the same building, as long as the LIHTC-eligible basis square footage is maintained. (This differs from the HOME

Program, which uses the next available comparable unit, based on the number of bedrooms, unit size, and amenities.).7

  • The LIHTC definition of “over-income tenant” differs from the HOME Program, as well. Under LIHTC, an over-income tenant has an annual gross income that exceeds 140 percent of the current income limit for the unit (i.e., over 70 percent of area median income (AMI) for units designated at 50 percent of AMI (50 percent X 140 percent) or over 84 percent of AMI for units designated at 60 percent of AMI (60 percent X140 percent)).

7 Reminder: The applicable fraction is used to establish a building's qualified basis (for calculation of tax credits). The applicable fraction is the lesser of the percentage of units or the percentage of square footage occupied by eligible households. At no time can a building's applicable fraction drop below the first-year level.

  • Unlike HOME, under the LIHTC Program, once a tenant is determined to be over-income, the owner/manager cannot adjust its rent until after it designates a replacement unit and the unit is rented to an income-eligible tenant at the applicable LIHTC rent. Then, the over-income tenant’s unit is redesignated as a non-assisted unit. Once the unit is non-assisted, the owner/manager may charge any rent it chooses, likely to be the market rent.

Note, in properties that have 100 percent LIHTC units, there are no available “non-LIHTC units” that can be redesignated for replacement purposes when a tenant becomes over-income. Since the owner/manager cannot increase the rents above the LIHTC rent limits until a replacement unit is designated, this means that the owner/manager cannot adjust the rent of an over-income tenant in this situation. Compliance can only be restored when the tenant moves out and the unit is rented to an income-eligible tenant.

Timing of Rent Adjustments

Under both the HOME and LIHTC Programs, without exception, rent adjustments can only be made when the tenant’s lease permits. At the time of lease renewal, owners/managers should double-check the type of unit the tenant is in (High or Low HOME, LIHTC-HOME, etc.) and verify that the correct rent is being charged for that unit type.

In most situations where there is an over-income tenant, owners/managers cannot adjust rents until there is a replacement unit that restores the unit mix. The only exception to this is when an over-income tenant whose income is above 80 percent of AMI resides in a HOME-only unit, the rent must be adjusted as soon as the lease permits, regardless of the status of a replacement unit. As described below, if the unit is an LIHTC-HOME unit, the LIHTC rents apply.

If the income of a household in an LIHTC-only unit rises to more than 140 percent of the then-qualifying income for that unit, and there are non-LIHTC units at the property, the property manager must lease the next non-LIHTC unit to a household with qualifying income. Only after that next available unit has been rented to an LIHTC-qualified household, may the unit with the over-income household be converted to market rent, subject to the terms of the lease. Additionally, once the next available unit has been rented to an LIHTC-qualified household, the over-income household is no longer counted towards the property’s LIHTC set-aside, and is no longer considered an LIHTC household. Accordingly, the owner may choose not to renew the lease to the household which has been replaced by a qualifying LIHTC household, provided doing so is allowed by local and state laws.

Maintaining the Unit Mix in HOME-LIHTC Projects

Maintaining the unit mix in HOME-LIHTC projects can be challenging. To simplify the rules around unit mix in HOME-LIHTC properties, the HOME Program adopts some LIHTC rules in HOME-LIHTC units. These are reviewed in the sections below.

Maintaining the Unit Mix When a HOME-LIHTC Unit Is Vacated

Generally, when a tenant vacates a HOME-LIHTC unit and the property is in compliance with the unit mix requirements (that is, there are no over-income tenants in any of the assisted units), the owner/manager complies with the unit mix requirements by maintaining the unit’s HOME-LIHTC designation(s) and renting the unit to a tenant that meets the income and rent limits of both programs, as they apply to that specific unit (High or Low HOME unit; 50 percent or 60 percent of AMI, or other LIHTC applicable income limit).

Defining “Over-Income Tenant” and “Over-Income Unit”

An “over-income tenant” is defined differently for HOME and LIHTC.

For HOME, an “over-income tenant” is either one of the following:

  • A tenant whose annual gross household income exceeds the current HOME income limit (80 percent of AMI) for its family size
  • A tenant that occupies a Low HOME unit and whose annual gross household income exceeds the current very low-income limit (50 percent of AMI), but is still below the low-income limit, for its family size.

For LIHTC, an over-income tenant is a tenant whose annual gross household income exceeds 140 percent of the current income limit for the unit, for its family size. For units designated for households with incomes at 50 percent of AMI, the household becomes over-income if its income exceeds 70 percent of AMI (50 percent X 140 percent). For units designated for households with incomes at 60 percent of AMI, the household becomes over-income if its income exceeds 84 percent of AMI.

An “over-income unit,” for the purposes of this guidebook, is a unit that is occupied by an over-income tenant.

Maintaining the Mix when a Tenant Is Over-Income

When a tenant in a HOME-LIHTC unit becomes over-income, the owner/manager must take two steps to comply with the occupancy and unit mix requirements of both the HOME and LIHTC Programs:

  • Fix the Mix. The owner/manager must restore the unit mix specified in the property’s HOME and LIHTC agreements, as soon as possible. This is done using the same processes described for each program individually -- by renting vacant units and/or making unit redesignations -- but the owner/manager must be sure to comply with both programs. The specific actions vary, depending on the type of property (fixed or floating HOME units; and the number/percentage of LIHTC, HOME, and market rate units). These actions are described for different scenarios in detail below and illustrated in Exhibits 5-3, 5-4, and 5-5.
  • Fix the Rents. When a tenant becomes over-income, and/or when unit designations change (e.g., from High HOME to Low HOME units, or from HOME-assisted to non-assisted), the owner/manager must adjust the rents to remain in compliance with rent requirements for each type of unit. The requirements related to making rent adjustments to comply with both programs are described for different scenarios below and illustrated in Exhibits 5-3, 5-4, and 5-5.

Using three common scenarios, the flowcharts in Exhibits 5-3, 5-4, and 5-5 illustrate how to maintain the unit mix and occupancy requirements of both the HOME and LIHTC Programs when a tenant in an LIHTC-HOME unit goes over income, as follows:

  • Exhibit 5-3: The property has fixed HOME units and 100 percent LIHTC units.
  • Exhibit 5-4: The property has floating HOME units, and 100 percent LIHTC units.
  • Exhibit 5-5: The property has floating HOME units, and a mix of HOME, LIHTC, LIHTC-HOME, and market rate units.

In each scenario the decision process starts with two questions:

  • Does the over-income tenant reside in an LIHTC-High HOME unit or an LIHTC-Low HOME unit? This determines which type of unit (High or Low HOME) must be replaced to fix the mix.
  • If the over-income tenant is in an LIHTC-Low HOME rent unit, is the tenant’s income over 80 percent of AMI, or between 50 and 80 percent of AMI? This determines if the over-income unit can be redesignated as a High HOME unit, or if the tenant is no longer income-eligible for any HOME unit.

Depending on the answers to these questions, the owner/manager takes slightly different steps to (1) Fix the Mix and (2) Fix the Rents, to restore compliance.

Defining Comparable Units

“Replacement units” must meet certain criteria in each program:

HOME units may only be replaced by units that are comparable in terms of size (square footage), number of bedrooms, and amenities. A HOME unit can be replaced with a unit that is “greater” (typically more preferred in terms of size, number of bedrooms, and amenities), but it cannot be replaced with one that is lesser.

LIHTC units may only be replaced by units in the same building with equivalent LIHTC-eligible basis square footage.

Maintaining the Unit Mix in LIHTC-HOME Properties When HOME Units Are Fixed and the Property Is 100 Percent LIHTC

Exhibit 5-3 illustrates the course of action when a tenant’s income goes over income in a property where the HOME units are fixed and the property is 100 percent LIHTC. This is the most straightforward scenario because the owner/manager manages the unit mix with a relatively small inventory of units (only those that are HOME-assisted). Since all of the units are LIHTC, the owner/manager cannot take any action to restore LIHTC compliance until the over-income tenant moves out.

  • Fix the Mix. Because the HOME units are fixed, the owner/manager cannot replace the over-income unit with a non-assisted unit. One of three scenarios is possible:
    • The over-income tenant resides in an LIHTC-High HOME unit. Presuming that all the necessary Low HOME units in the property are compliant, the over-income unit remains designated as an LIHTC-High HOME unit. The owner/manager cannot restore the unit mix until the tenant moves out; the property is considered temporarily out of compliance until that time.
    • The over-income tenant resides in an LIHTC-Low HOME unit and its income goes above 80 percent of AMI. The owner/manager redesignates the next available LIHTC-High HOME unit as an LIHTC-Low HOME unit, and rents it to a very low-income household. This is because the owner must restore compliance to the Low HOME units before the High HOME units. Once an LIHTC-Low HOME unit has been designated, then, the owner/manager redesignates the over-income unit as an LIHTC-High HOME unit. Since the occupant has an income that exceeds the low-income limit, the property continues to be temporarily out of compliance until the over-income tenant moves out.
    • The over-income tenant resides in an LIHTC-Low HOME unit and its income goes above the HOME very low-income limit (50 percent of AMI), but does not exceed the HOME low-income limit (80 percent of AMI). The owner/manager redesignates the next available LIHTC-High HOME unit as an LIHTC-Low HOME unit, and rents it to a very low-income household. The tenant must be income-eligible under both HOME and LIHTC. Then, the owner/manager redesignates the over-income unit as an LIHTC-High HOME unit. If there are no other noncompliant units, this step restores the unit mix and the property is compliant.
  • Fix the Rents. When unit designations change as a result of steps taken to fix the mix (described above), the owner/manager may need to adjust the rents to ensure that each unit has a compliant rent. Rents can be adjusted only when the tenant’s lease permits.
    • In an LIHTC-Low HOME unit, the rent may not exceed the lesser of the Low HOME rent or the LIHTC rent. If a rent adjustment is needed, it can only be made after a replacement unit is designated. The HOME rule that requires raising the rent to 30 percent of the tenant’s adjusted monthly income does not apply.
    • In an LIHTC-High HOME unit, the rent may not exceed the lesser of the High HOME rent or the LIHTC rent. If a rent adjustment is needed, it can only be made after a replacement unit is designated. The HOME rule that requires raising the rent to 30 percent of the tenant’s adjusted monthly income does not apply.
    • While the property is temporarily out of compliance, when an over-income (above 80 percent of AMI) tenant occupies an LIHTC-HOME unit, the rent may not exceed the maximum LIHTC rent for the unit type. (The HOME Program adopts the LIHTC rents in this situation.) If a rent adjustment is needed, it must be made as soon as the tenant’s lease permits.

Exhibit 5-3: Addressing Over-Income Tenants in HOME-LIHTC Units When HOME Units Are Fixed

Exhibit 5-3: Addressing Over-Income Tenants in HOME-LIHTC Units When HOME Units Are Fixed

Maintaining the Unit Mix in LIHTC-HOME Properties when HOME Units Are Floating and the Property is 100 Percent LIHTC

Exhibit 5-4 illustrates the course of action when a tenant’s income goes over income in a property that has floating HOME units, and 100 percent of the units are LIHTC. This situation is a little more complicated than the one illustrated in Exhibit 5-3 because the owner/manager has all of the comparable units in the property at its disposal to manage the unit mix. These represent a mix of LIHTC-HOME units and LIHTC-only units (which are treated as non-assisted, for purposes of the HOME Program).

  • Fix the Mix. When HOME units float, and a tenant in a HOME unit becomes over-income, the owner/manager can draw from any comparable unit in the property (in this instance, all of which are LIHTC units) to replace the HOME unit and restore HOME compliance. Since all of the units are LIHTC, the owner/manager cannot take any actions to restore LIHTC compliance until the over-income tenant moves out. There are several possible scenarios:
    • The tenant of an LIHTC-High HOME unit becomes over-income. To restore the unit mix, the owner/manager can either:
      • Redesignate the next available comparable LIHTC-only (non-HOME-assisted) unit as an LIHTC-High HOME unit.
      • Identify a comparable LIHTC-only unit that is occupied by a low-income (HOME income-eligible) tenant and redesignate it as an LIHTC-High HOME unit.

      In both cases, once the replacement occurs, the owner/manager redesignates the over-income unit as an LIHTC-only unit.

    • The income of a tenant in an LIHTC-Low HOME unit exceeds the low-income limit. To restore the unit mix, the owner/manager can:
      • Use a comparable LIHTC-only unit for replacement—this can be either the next available LIHTC-only (non-HOME-assisted) unit, or an LIHTC-only unit that is occupied by a very low-income tenant. Redesignate the LIHTC-only replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as LIHTC-only.
    • The income of a tenant in an LIHTC-Low HOME unit increases above the HOME very income-limit (50 percent of AMI), but is still less than the HOME low-income limit (80 percent of AMI). The owner/manager can:
      • Use a comparable LIHTC-High HOME unit for replacement—this can be either the next available comparable LIHTC-High HOME or an LIHTC-High HOME unit that is occupied by a very low-income tenant. Redesignate the LIHTC-High HOME replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-High HOME unit.
      • Use a comparable LIHTC-only unit for replacement—this can be either the next available LIHTC-only unit or an LIHTC-only unit that is occupied by a very low-income tenant. Redesignate the LIHTC-only replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-only unit.
    • Fix the Rents. When unit designations change, as described above, the owner/manager adjusts the rents to ensure that each unit has a compliant rent. Rents can be adjusted only when the tenant’s lease permits.
      • In an LIHTC-Low HOME unit, the rent may not exceed the lesser of the Low HOME rent or the LIHTC rent. The rent is adjusted after the replacement unit is identified.
      • In an LIHTC-High HOME unit, the rent may not exceed the lesser of the High HOME rent or the LIHTC rent. The rent is adjusted after the replacement unit is identified.
      • In an LIHTC-only unit, the LIHTC rents apply.
      • While the property is temporarily out of compliance because an over-income tenant occupies an LIHTC-HOME unit, the rent may not exceed the maximum LIHTC rent for the unit type. (The HOME Program has adopted the LIHTC rents in this situation.) If a rent adjustment is needed, it must be done as soon as the tenant’s lease permits.

Exhibit 5-4: Addressing Over-Income Tenants in HOME-LIHTC Units When HOME Units are Floating and the Property is 100% LIHTC

Exhibit 5-4: Addressing Over-Income Tenants in HOME-LIHTC Units When HOME Units are Floating and the Property is 100% LIHTC

Maintaining the Unit Mix in LIHTC-HOME Properties when HOME Units Are Floating and the Property Has a Mix of LIHTC and Market Rate Units

Exhibit 5-5 illustrates the course of action when a tenant becomes over-income in a property that has a mix of HOME-only, LIHTC-only, LIHTC-HOME, and market rate units. This last scenario is one of the most complex property management situations because the owner/manager has the most options for maintaining and restoring HOME compliance with unit mix requirements.

  • Fix the Mix. As in the scenario above (Exhibit 5-4), when a tenant in an LIHTC-HOME unit becomes over-income, the owner/manager can draw from any other available and comparable units in the property to “replace” it. The following situations are possible:
    • The tenant of an LIHTC-High HOME unit becomes over income for both HOME and LIHTC (under both program definitions of over-income). The owner/manager can do one of the following:
      • Use a comparable market rate unit for replacement—this can be either the next available market rate unit or a market rate unit that is occupied by a low-income tenant. Redesignate the market rate replacement unit as an LIHTC-High HOME unit and rent it to a tenant that is income-eligible for both programs. Once the replacement occurs, redesignate the over-income unit as a market rate unit, with no HOME or LIHTC restrictions. This restores compliance with both programs.
      • Use a comparable LIHTC-only unit for replacement—this can be either the next available LIHTC-only unit or an LIHTC-only unit that is occupied by a low-income tenant. Redesignate the LIHTC-only replacement unit as an LIHTC-High HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-only unit. This restores compliance with HOME only; the unit continues to be out of compliance under LIHTC because the over-income tenant resides in an LIHTC unit.
    • The tenant of an LIHTC-Low HOME unit becomes over income for both HOME and LIHTC (under both program definitions of over-income), and the tenant’s income exceeds 80 percent of AMI. Assuming the tenant is over-income for both programs, the owner/manager can:
      • Use a comparable market rate unit for replacement—this can be either the next available market rate unit or a market rate unit that is occupied by a very low-income tenant (and meets the income requirements of both programs). Redesignate the market rate replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as a market rate unit.
      • Use a comparable LIHTC-only unit for replacement—this can either be the next available LIHTC-only unit, or an LIHTC-only unit that is occupied by a very low-income tenant. Redesignate the LIHTC-only replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-only unit. This restores compliance with HOME, but since the over-income tenant now resides in an LIHTC-only unit, it does not restore LIHTC compliance.

      When a Tenant is Over-Income for HOME, but not for LIHTC

      In some circumstances, a tenant in a HOME-LIHTC unit may go over income for the HOME Program, but not for LIHTC. This is because over-income is defined differently for each program. (For example, in an LIHTC unit reserved for a household with an income at or below 60 percent of AMI, the household becomes over-income when its income exceeds 84 percent of AMI (60 percent X 140 percent)). When this happens, the owner/manager may need to find a replacement unit for the HOME unit, but not the LIHTC unit. This may result in two assisted units. The owner/manager redesignates (1) the unit with the HOME-over-income tenant as an LIHTC-only unit, and (2) a non-assisted unit as a HOME-only unit.

    • The income of a tenant residing in an LIHTC-LowHOME unit exceeds 50 percent of AMI but is less than 80 percent of AMI. In this situation, it is likely that the tenant is over income for the HOME Program, but not necessarily for the LIHTC Program (due to the different income limits and definitions of over-income for each program). The owner/manager can:
      • Use a comparable LIHTC-High HOME unit for replacement—this can be either the next available LIHTC-High HOME unit or an LIHTC-High HOME unit that is occupied by a very low-income tenant. Redesignate the LIHTC-High HOME replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-High HOME unit.
      • Use a High HOME-only unit for replacement—this can be either the next available High HOME-only unit or a High HOME-only unit that is occupied by a very low-income tenant. Redesignate the High HOME-only replacement unit as a Low HOME-only unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-High HOME unit.(In other words, swap only the HOME designation, not the LIHTC designation.)
      • Use a comparable LIHTC-only unit for replacement—this can be either the next available LIHTC-only unit, or an LIHTC-only unit that is occupied by a very low-income tenant. Redesignate the LIHTC-only replacement unit as an LIHTC-Low HOME unit. Once the replacement occurs, redesignate the over-income unit as an LIHTC-only unit.

    Note, since the over-income tenant is low-income, and continues to be eligible for the HOME Program, the unit cannot be replaced by a market rate unit.

  • Fix the Rents. When unit designations change, as described above, adjust the rents to ensure that each unit has a compliant rent. Rents can only be adjusted when the tenant’s lease permits.

    • In an LIHTC-Low HOME unit, the rent may not exceed the lesser of the Low HOME rent or the LIHTC rent. If a rent adjustment is needed, it can only be done after a replacement unit is designated.
    • In an LIHTC-High HOME unit, the rent my not exceed the lesser of the High HOME rent or the LIHTC rent. If a rent adjustment is needed, it can only be done after a replacement unit is designated.
    • In an LIHTC-only unit, LIHTC rents apply. If a rent adjustment is needed, it can only be done after a replacement unit is designated. If the tenant is over-income (under LIHTC definition), the next available market rate unit must be rented to an income-eligible household at no more than the applicable LIHTC income limit. The rent for the unit with the over-income tenant may increase to market rate after the replacement unit is designated.
    • While the property is temporarily out of compliance (until the unit with the over-income tenant is replaced), because an over-income tenant (above the low-income limit) occupies an LIHTC-HOME unit, the rent cannot exceed the LIHTC rent. (The HOME Program adopts the LIHTC rents in this situation.) If a rent adjustment is needed, it must be done as soon as the tenant’s lease permits.
    • In a market rate unit, rents are no longer regulated and can be adjusted without restriction. Typically, these rents will be set at market rates.

Exhibit 5-5: Addressing Over-Income Tenants in HOME-LIHTC Units When HOME Units Are Floating and the Property is Mixed (Market and LIHTC)

Terminating Leases or Tenancy

The HOME and LIHTC requirements related to refusing to renew leases or terminating an occupant’s tenancy are substantially similar: both require that such actions require serious violations of the lease or applicable Federal, state, or local law. Tenant-landlord law and practices are heavily influenced by state and local law as well. Property managers should be sure that they understand when they can lawfully refuse to renew leases and terminate tenancy in their jurisdictions.

Using an Occupied Unit to Restore Unit Mix Compliance

The owner/manager can redesignate a unit with another that is occupied by an existing income-eligible tenant to restore unit mix compliance, for both the HOME and LIHTC Programs. However, both programs require that the terms and conditions of residing in an assisted unit be defined in the tenant’s lease. Therefore, when using this type of substitution, the owner/manager must amend the tenant’s lease to comply with the applicable program(s) requirements.

For instance, if a very low-income tenant resides in a market rate unit, and the income of a tenant in a Low HOME rent unit goes over income (income above 80 percent of AMI), the owner/manager can redesignate the market rate unit that is occupied by the income-eligible tenant as a Low HOME unit. The very low-income tenant’s lease must be amended to include the applicable Low HOME rent, an explanation of the HOME income-eligibility requirements, and the HOME rent rules. The lease cannot include any of the lease terms prohibited by the HOME Program.

The owner/manager redesignates the over-income unit as a market rate unit. Rent adjustments must be made as soon as the tenant’s lease permits, and the lease should be revised accordingly.

The HOME Program specifies that property owners or managers can only terminate the tenancy or refuse to renew the lease of a tenant of a HOME-assisted unit for good cause. Good cause includes any of the following:

  • Serious or repeated violation of the terms and conditions of the lease
  • Violation of applicable Federal, state, or local law(s)
  • Completion of the tenancy period for transitional housing.

The owner can state other circumstances that would be considered “good cause” and should include these in the lease. The HOME Program further imposes notification and documentation requirements that must be met. A 30-day termination notice is required by the HOME statute.

The LIHTC rules specify that property owners/managers can terminate or refuse to renew the lease of a tenant in an LIHTC unit only under specific conditions, including any of the following:

  • Material noncompliance with the lease
  • Failure to carry out obligations under any state or local landlord and tenant law
  • Other good cause. (Note, the conduct of a tenant cannot be categorized as “other good cause” unless the owner has given the tenant prior notice that the conduct shall, going forward, be a basis for terminating tenancy.)

    Consequences of Noncompliance

    The PJ is responsible for monitoring HOME-assisted properties for HOME compliance throughout the HOME affordability period, and the state allocating agency is responsible for monitoring tax credit properties for LIHTC compliance throughout the LIHTC compliance and extended use periods. Each agency monitors to ensure compliance with its respective program requirements. However, since these requirements are similar in many respects, and compliance problems under one program could indicate management or project problems that might affect compliance with the other program, it generally benefits both agencies to share monitoring information.

    During the compliance period, the state allocating agency must report instances of noncompliance to the IRS. Failure to meet IRS terms and conditions could result in a loss of the investors’ tax benefits. Investors are highly motivated to protect these benefits, and are therefore highly motivated to comply with LIHTC rules. Under the HOME Program, noncompliance with fundamental rules about affordability can result in the repayment of HOME funds by the PJ and/or owner. While PJs do not want this end result, it does not necessarily carry the same motivation to the owner/investor as personal financial losses.

    Noncompliance under LIHTC

    State allocating agencies are required to review compliance certifications submitted by property owners. The allocating agency must choose one of several monitoring options, each of which combines inspecting a certain percentage of records on site with reviewing a certain percentage of annual income certifications and documentation that are submitted by the owner. The state decides which tenant records must be submitted or reviewed on site. The state must conduct records reviews at least annually.

    If the allocating agency determines that a property is out of compliance with the LIHTC requirements, it must give notice to the owner of the project and an opportunity to correct the deficiency(ies). The correction period is no more than 90 days, unless otherwise extended by the allocating agency. During the compliance period, within 45 days of the correction period, the allocating agency must notify the IRS of the compliance issue and whether or not it has been corrected.

    Based on the state’s report, the IRS determines the consequences of noncompliance.

    • If there is noncompliance with initial households’ income-eligibility, it affects the applicable fraction on which the credits were awarded. This impacts the amount of credits the investor receives for the entire ten-year period. For instance, if the property gets credits based on a 60 percent applicable fraction, and it later turns out that one of the initial households was not income-eligible and the property should have had a 55 percent applicable fraction, then all the credit calculations are retroactively reduced and any prior claims of those credits that exceed a 55 percent applicable fraction are subject to repayment.
    • If a subsequent household is found to be ineligible, this would impact only those tax credit claims for the period during which they were out of compliance.
    • Persistent noncompliance can result in the recapture of all tax credit claims.

    During the extended use period, each state allocating agency continues to monitor compliance with the LIHTC occupancy and rent restrictions. Each state determines the appropriate level of intervention and enforcement. This information is generally found in the QAP.

    Noncompliance under the HOME Program

    Under the HOME Program, PJs monitor for compliance with HOME requirements. Owners are required to submit a Rent and Occupancy report for the PJ’s review on an annual basis. In addition, the PJ inspects the property and tenant records on a specified schedule (see Exhibit 5-2).

    PJs use their judgment to tailor consequences to the severity and extent of the noncompliance with HOME requirements. The HOME written agreement between the PJ and the owner specifies the steps a PJ can take to enforce the terms of the written agreement. For serious and repeated violations of HOME requirements that are not corrected, including failure to rent to income-eligible tenants or failure to charge affordable rents, the PJ may be required to repay HOME funds to HUD. The PJ should impose a repayment obligation on to owners in its written agreement and recorded documents, such as the default conditions in a recorded note and mortgage.

    Early Intervention to Address Property Distress

    In spite of best efforts to underwrite successful projects that remain financially viable over the long term, there are circumstances when properties fail. Typically, the earliest signs of problems are financial. Financial distress leads to physical distress because cash is insufficient to perform ongoing maintenance or address capital needs. Once a property fails to be maintained, it becomes harder for a property to retain and attract good tenants. This results in increasing tenant and possibly staff turnover. As the distress cycle progresses, it becomes more and more difficult and resource-intensive for the PJ to intervene and get the property back on track.

    The earlier these property issues are addressed, the more likely the property can recover and become financially successful again. While initial signs of property distress may be financial, if left unaddressed, it becomes increasingly difficult for the property manager to operate the property in compliance with the affordability requirements.

    If a HOME-LIHTC project shows signs of fiscal distress, it is important for the PJ to consult with the state allocating agency about appropriate interventions. In the first 15 years of the property’s operations, in particular, the LIHTC investor is highly motivated to ensure that the property remains financially viable and in compliance with the LIHTC rules. The PJ and state allocating agency should work together to address the specific needs of the project.

    For detailed information on what to do when a HOME-assisted property suffers financial distress, see the HUD publication Compliance in HOME Rental Projects: A Guide for PJs (HUD-2009 HOME Rental PJ, issued March 2009). This publication is available on the HOME Program website at http://www.hud.gov/homeprogram/.



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