Elizabeth L. Moreland, NCP-E, SCS, HCCP, SHCM, FHC
Last month, the IRS published two publications – Revenue Ruling 2016-29 and IRS Notice 2016-77 – addressing compliance with local fair housing rules as it pertains to Housing Credit developments and, more specifically, provisions contained in Section 42(m)(1) of the Internal Revenue Code.
Revenue Ruling 2016-29
Revenue Ruling 2016-29 addresses local community approval requirements implemented by many state allocation agencies in their qualified allocation plans (QAPs) as part of their credit application requirements. This practice was criticized in the May 2016 GAO Report, Low-Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance reporting and Data Collection, specifically stating: “Allocating agencies notified local governments about proposed projects as required, but some also required letters of support from local governments. The Department of Housing and Urban Development (HUD) has raised fair housing concerns about this practice, saying that local support requirements (such as letters) could have a discriminatory influence on the location of affordable housing.” The report indicates that of the 58 QAPs reviewed, 12 agencies made credit application review or approval contingent on the receipt of a support letter from the local jurisdiction letter and an additional 10 agencies awarded points for such letters.
In the revenue ruling, an unnamed state allocation agency is used as an example indicating that it has a QAP that strongly favors credit applications that are able to demonstrate affirmative local support by granting points to projects that:
- Manifest quantifiable community participation with respect to the project, especially as evidenced by written statements from neighborhood organizations in the area of the proposed project.
- Receive a commitment of development funding by the local political subdivision.
- Receive community support for the application, as evidenced by a written statement from the state legislator elected from the district in which the project is proposed to be developed.
The ruling also indicates that this example agency believes Section 42(m)(1)(A)(ii) requires credit allocations be made only to applications where the proposed development receives approval from the local jurisdiction where it will be located giving local jurisdictions veto power over the development. Because of this, the ruling indicates this practice has created a credit allocation pattern of awarding credits to projects located in predominately lower-income or minority areas as these jurisdictions are more likely to give their support which ultimately results in the perpetuation of residential racial and economic segregation in that state.
Despite this unnamed agency’s belief and without addressing the May 2016 GAO Report, the ruling clarifies that the Code does not require nor encourage such a requirement and that it is a misinterpretation of what the actual provision indicates and is inconsistent with general Federal fair housing policy. The ruling clarifies that Section 42(m)(1)(A)(ii) prevents an allocation from being made unless the allocating agency notifies the local jurisdiction where the building will be located and provides the entity a reasonable opportunity to comment. The IRS states this requirement is not the same as requiring the jurisdiction’s approval rather ensures the jurisdiction is aware of the proposed development and allows them to weigh-in or object without providing veto power. In conclusion, the ruling holds:
“When state housing credit agencies allocate housing credit dollar amounts, § 42(m)(1)(A)(ii) does not require or encourage these agencies to reject all proposals that do not obtain the approval of the locality where the project developer proposes to place the project. That is, it neither requires nor encourages housing credit agencies to honor local vetoes.”
IRS Notice 2016-77
Notice 2016-77 focuses on preferences for Housing Credit properties built in a qualified census tract (QCT) and states such developments do not receive preference in a state’s QAP unless the project’s development contributes to a concerted community revitalization plan.
The notice reiterates that Section 42(m)(1)(B)(ii) requires every QAP to contain three preferences, one of which is this preference. In the notice, the IRS points out that in some cases, preference was given to projects located in a QCT without regard to whether they contributed to a concerted community revitalization plan. In fact, the notice indicates, preference was given to some projects simply because they were located in a QCT as that in itself was construed to be community revitalization.
In the discussion portion of this notice, the IRS indicates that:
“Placing LIHTC projects in qualified census tracts risks exacerbating concentrations of poverty. Therefore, § 42(m)(1)(B)(ii)(III) grants a preference to that placement only when there is an added benefit to the neighborhood in the form of the project’s contribution to a concerted community revitalization plan.”
The notice recognizes Treasury and the IRS have not issued guidance defining “concerted community revitalization plan” but clearly indicates the preference fails to apply unless a plan containing more than the project itself exists no later than the allocation award date. The IRS is considering providing guidance to clarify the preference and is requesting public comments regarding the contents of such guidance. Comments are due by February 10, 2017 and may be emailed to [email protected] with Notice 2016-77 indicated in the subject line. Comments may also be mailed or hand-delivered as per the instructions contained in the notice.