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.

Consulting Services We Provide

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