A Detailed Look at an Acquisition/Rehab Rent-Up

A Detailed Look at an Acquisition/Rehab Rent-Up

By Elizabeth L. Moreland, NCP-E, SCS, HCCP, SHCM, FHC

In the last issue, I wrote a detailed article explaining the rules surrounding acquisition/rehab allocations. As I explained in that article, these allocations can be confusing because of the  special rules regarding placed in service dates, the certification requirements of existing households and the likely changes to unit status each month due to the need to move the existing households around in order to perform the rehab work.

This month, I thought I’d walk you through a scenario that incorporates the information I gave you in the last article to help you better apply it in the real world. To help with the continuity between these two articles, I will use the same example I used throughout the first article. To refresh your memory, in the first article I described a property comprised of one building that was acquired by a new owner who received acquisition/rehab credits. The owner acquired the building on November 28, 2009, however, was not able to meet the minimum rehab expenditure until March 1, 2010 causing the acquisition placed in service (PIS) date to shift to 2010, specifically the earliest date in 2010 which of course is January 1. The rehab PIS date is March 1, 2010. This year also becomes the first year of the credit period which means the owner must meet the minimum set-aside by the end of the year. If this occurs and the owner begins claiming credits in 2010, January 1, 2010 becomes the first day of the credit period. Also, if this occurs, you are not subject to the safe harbor test as all certifications will be completed less than 120 days before the first day of the credit period’s first year.

Building Facts

Now, time to add some additional facts not provided in the last article but that will help us work through some of the rules that were touched on. First, the property’s minimum set-aside is 40/60 and the targeted fraction is 100%. The building is comprised of 10 total units, all of which are the same square footage. Of these 10 units, 6 of the units contain existing households at the time the owner acquired the building. The remaining units are vacant. This property was not previously a Tax Credit property so there is no grandfathering of existing tenants; rather each tenant must initially qualify under the Tax Credit Program and the elected set-asides to become part of the building’s applicable fraction.

Okay, now that that is known, it should be understood that 4 units must be rented to qualified households by December 31, 2010, but the overall goal is to have all 10 units rented to qualified households by that date in order to maximize the credit allocation. This is because 4 units is the required number of units needed to meet the minimum set-aside but since the targeted fraction is 100%, the owner actually wants all 10 units filled with qualified households.

To begin, since the building was acquired on November 28, 2009, we can determine our window for completing the initial certifications on the existing households. As stated in the previous article, the 8823 Guide states we have 120 days following the acquisition date to complete these certifications and such certifications will use the income limits in effect on the acquisition date. We will assume you did not have access to the tenants prior to the closing but remember that if you did have access, you could start certifying the existing households immediately using the current income limits. But since there is no early access, you will begin processing the certifications immediately upon the November 28^th access point and have a 120 day window to complete them which results in a deadline of March 27, 2010. All certifications performed in this window will use the 2009 income limits as the 2009 income limits are the limits in effect on the acquisition date. This will hold true, even if the 2010 income limits come out before the March 27^th window is closed. Also, the TIC effective dates for each of these certifications will be November 28, 2009. Any new moves processed during this window will be treated like any new move-in which means the current income limit will be used and the TIC effective date will be the date the household is given keys to a unit that is legally able to be occupied. And finally, if some of the certifications are not completed by the March 27, 2010 deadline, they too will be treated like new move-ins except because there is not actual move-in date, the TIC effective date will be the date the last adult household member signed the TIC.

Flash Forward

Now let’s flash forward to December 31, 2010 and look back as to what occurred. We will look at each unit and track exactly what occurred so we can determine the unit’s status for each month.

Let’s start with Unit #1. When we originally obtained access to the tenants and their records, we discovered Unit #1 was filled with a Section 8 tenant-based voucher holder. This household was quick to respond to your invitation to have their income eligibility reviewed so you could determine if their occupancy would be extended. However, as it turned out, this household was over the current Tax Credit income limit applicable to their household size so they did NOT qualify. Understanding the household remained a qualified Section 8 household but an ineligible Tax Credit household, you knew you could not just non-renew their lease. The household indicated they did not want to move due to the tight housing market and fears they would not be able to find another unit in the area. After many weeks of phone calls and explaining the Tax Credit Program to the PHA, you found yourself unable to require the household to move. This is where you started to get creative and began to reach out to your network of property management companies to determine if they had any vacant units. After several weeks, you found an owner in the area willing to take voucher holders who also had a vacant unit. After helping the household to complete the necessary paperwork to transfer their voucher to the new unit and giving them 30 days free rent before vacating, you were able to access Unit #1 and complete the necessary rehab work. Finally, on March 3, 2010, you were able to move-in a qualified household using the current income limits in effect. As this household was a new move in, the TIC effective date was also March 3, 2010.

Moving on to Unit #2 which, at the time of acquisition you discover was also a Section 8 tenant-based voucher holder, but unlike the previous household living in Unit #1, this household qualified under the Tax Credit Program. After explaining the Tax Credit Program to the household and working with the PHA, you complete the household’s initial certification under the Tax Credit Program. The TIC is dated November 28, 2009 and you used the 2009 income limits to qualify the household.

Unit #3 was also deemed eligible and had its initial certification completed within the 120 day window so their TIC too was made effective November 28, 2009 after using the 2009 income limits to determine their income eligibility.

Unit #4, however, contained a very uncooperative household. They refused to return your calls or show up for any meetings regarding their eligibility status. The existing tenant records indicated the previous management company also had issues with this household and it was suspected that an unauthorized occupant lived in the unit. After numerous, yet unsuccessful attempts, to communicate with the household, you were forced to begin the eviction process. Finally, after more than a month you went to court. During the proceeding, it was discovered the household members spoke little to no English and did not understand all the notices they were sent and were afraid to communicate with the new management company as they had moved their elderly mother into the unit without permission. During the proceeding, one of the household’s adult children appeared in an effort to help communications. The judge ordered you to work with the household now that communication was available. Knowing that time was of the essence as you wanted to complete this certification within the 120 day window, you immediately began communicating with the adult child. But this person was not fast in responding and the certification was not completed until after the March 27^th deadline. The household was finally deemed qualified on April 24, 2010 using the current income limits. The last adult household member signed the TIC on May 2^nd causing the TIC effective date to be May 2, 2010.

Unit # 5 and #6 where deemed qualified households immediately upon acquisition. The households fully cooperated and had their initial certification completed in early January of 2010. Both household’s TICs were dated November 28, 2010 and both were qualified using the 2009 income limits.

Units #7, 8, 9 and 10 were vacant units. Immediately upon acquisition, the rehab work on these units was started. On February 15, 2010, Unit #7 was completed. Because work needed to be completed on Unit #2 that required the existing household to vacate, you transferred the household to Unit #7. The transfer occurred on March 1. This meant on March 1, Unit #2’s Tax Credit status shut off as it swapped status with Unit #7 which had yet to be filled with a qualified household and the Tax Credit status on Unit #7 was turned on because the household transferring from Unit #2 was a qualified Tax Credit household. The work on Unit #2 was completed timely. The household that originally occupied this unit wanted to return so they transferred out of Unit #7 back to Unit #2. The transfer occurred on April 20, 2010 turning the Tax Credit status of Unit #2 back on for the month of April. Unit #7 was again turned off for the month of April as it swapped statuses with Unit #2, which at the time of the transfer, was a non-qualified unit. Unit #7 was readied and filled with a new qualified household on May 1, 2010, allowing its Tax Credit status to be turned on again in May.

Unit #8’s rehab did not go as well as planned and was delayed until March 19^th. You had already made arrangements with the household living in Unit #3 to transfer to this unit as soon as it was available. This transfer occurred on April 1^st which meant the Tax Credit status on Unit #3 shut off on April 1 and the Tax Credit status on Unit #8 turned on April 1. As part of the agreement to get this household to transfer to Unit #8, the household asked to remain in Unit #8 and not be returned to their original unit. While the rehab work on Unit #3 was taking place, you began to market the unit and processing submitted applications. The unit’s rehab work was completed on June 2^ndand a newly qualified household was immediately moved in on June 6^th. The TIC effective date was June 6, 2010 and the household was qualified using the current income limits.

The rehab work required in Unit #5 was minor and was able to be completed while the household occupied the unit. You gave this household a reduced rent during the rehab period which lasted until February 15, 2010. As the unit remained suitable for occupancy during the rehab period, the unit’s Tax Credit status was not turned off.

The rehab work in Unit #6, however, did require the household to move. The household was given the choice between Unit #9 and Unit #10. The household chose Unit #10 and transferred March 1, 2010 turning the Tax Credit status in Unit #6 off and turning it on in Unit #10 on the same date. Shortly after the household transferred, a leak was discovered which forced the household to vacate the unit. This leak caused the unit to be unsuitable for occupancy which turned the Tax Credit status of the unit off. As Unit #9 had not yet been occupied, the transfer occurred immediately. The leak was discovered on April 29, 2010 and the transfer to Unit #9 occurred on May 1, 2010. The status of Unit #10 shut off in April as it was not suitable for occupancy at the end of the month. The Tax Credit status in Unit #9 was turned on May 1, 2010.

The leak in Unit #10 was fixed by the end of May. Its previous occupants opted not to transfer again and remained in Unit #9. A new qualified household was moved in on June 21 and were qualified using the current income limits.

And finally, the rehab work in Unit #6 also proved problematic and was delayed for several months. It was finally completed September 13, 2010 and a new household moved in on October 1, 2010 after qualifying under the current income limits.

Reviewing the Unit Tracking Chart

After your final analysis is completed and the activity on each unit tracked monthly, you are able to create the following chart:

On December 31, 2010, you have 10 qualified and occupied units which means you successfully met both the minimum set-aside test and the targeted applicable fraction. The owner of the building is now able to claim credits and the prorated fraction on which this first-year credit claim is made can be calculated. In this example, I stated all of the square footages for each unit were the same, making it easy to determine your month-end fractions. The chart above indicates each of these figures. However, in the real world, you are likely to have different unit types with different square footages. In this case, each month you will simply perform both the Unit Fraction and the Floor Space Fraction with the resulting month-end fraction being the lower of the two. When performing these two calculations, you will be sure only to put in the units with their Tax Credit status turned on in that month. So for example, in the month of January, only Units #2, 3, 5 and 6 have their Tax Credit status turned on so the Unit Fraction is 4 Tax Credit Units ÷10 Total Units in the Building or 40%. If there were differing square footages, you would add up the square footages of Units #2, 3, 5 and 6 and divide this figure by the sum of the square footages of Units #1-10. And again, the lower of the two fractions would become the resulting month-end fraction. And finally, if the building did indeed have different square footages, I would place the actual square footage figure in the column instead of LIHC to indicate the unit’s Tax Credit status was turned on.

Calculating the Prorated Fraction

Now, to finish out this example, you can see that the month end fractions are as follows: Jan = 40%; Feb = 40%; Mar = 50%; Apr = 40%; May = 70%; Jun – Sept = 90%; and Oct – Dec = 100%. After adding up each of these month end fractions, I arrive at 900% which is then divided by the number 12 indicating the number of full months the building was placed in service in 2010. The prorated fraction in which the 2010 credit claim is based is calculated to be 75%. The remaining credits from the 100% attained by December 31, 2010 and the prorated fraction, or 25%, is claimable in Year #11 assuming compliance is fully maintained.

I hope this helps explained some of the nuances of acquisition/rehabs including how the 120 day certification window works, what occurs when some units are certified after the window is closed, and the affects transfers and rehab work have on the applicable fraction. I realize I simplified this example by making it a single building project and kept all the square footages the same but this was done for ease of illustration. Indeed, some acquisition/rehab rent ups can get very complicated and there are endless scenarios that can occur, but I am confident with the first article published in last month’s issue and this article, you will be well on your way to understanding these unique properties and will be able to tackle your real world scenarios.

And again… don’t forget… I am still here if you need me!!