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Income Certification Considerations for Existing Tenants in Acq/Rehab vs. LIHTC Resyndication

Published by Stephanie Naquin on Wednesday, June 5, 2024

Journal Cover June 2024   Download PDF

The low-income housing tax credit (LIHTC) incentive can be used for new construction, acquisition and rehabilitation of a building. Under the acquisition/rehabilitation (acq/rehab) activity, owners acquire existing buildings and rehabilitate them. 

When a building is acquired, there are often existing tenants. Navigating compliance requirements depends on whether the acquired building is already bound by a LIHTC extended-use agreement, which is commonly referred to as a resyndication. Resyndication is a subset of the acquisition/rehabilitation activity, but the practicality of how to approach the existing tenants at the time of acquisition differs. 

For a low-income apartment to be compliant for the purposes of LIHTC delivery, the apartment must be income- and rent-restricted, and suitable for occupancy. When there are existing households occupying an apartment at the time of acquisition, establishing income eligibility is the first challenge. With existing tenants, there is no physical move into the apartment, but there still needs to be a date as of when the apartment was determined to be income eligible. The process for verifying income eligibility depends on whether the project is a traditional acq/rehab or a resyndication. 

Traditional Acq-Rehab Approach

In a traditional acq/rehab, the owner acquires a building that is usually occupied where the gross income of the tenants in the apartments is either not known or has been determined for a program other than LIHTC. The new owner must document the existing tenants’ incomes and certify them for the LIHTC incentive (i.e., the tenant income certification). If a tenant income certification is executed within 120 days before or after the date of acquisition, the effective date of the tenant income certification is the date of acquisition; otherwise, the household is treated as a new move-in and the tenant income effective date is the date that the last adult household member signs the certification.

Example: A building is acquired March 1, 2024, with an allocation of LIHTCs in 2024. One hundred and twenty days from the date of acquisition is June 29, 2024 (March 1 + 120 days). 

  • Apartment 101: The existing household in Apartment 101 moved in July 1, 2015, and completed the tenant income certification May 30, 2024. Because the tenant income certification was executed within 120 days of date of acquisition, the LIHTC effective date for Apartment 101 is March 1, 2024. 

Resyndication Approach

For a resyndication, an allocation of LIHTCs was made in a prior year and, as a result, the building being acquired is already subject to a LIHTC extended-use agreement. This means that, unlike a traditional acq/rehab, when tenants move in, a tenant income certification was executed to support LIHTC income eligibility. Section IV of the Internal Revenue Service (IRS) Guide to Completing Form 8823, Part J.3 related to Previously Income-Qualified Household states (starting on page 73): 

Households determined to be income-qualified for purposes of the IRC §42 credit during the 15-year compliance period are concurrently income-qualified households for purposes of the +30-year extended use agreement. As a result, any household determined to be income qualified at the time of move-in for purpose of the extended use agreement is a qualified low-income household for any subsequent allocation of IRC §42 credit. 

The logic is that the extended-use agreement for the original LIHTC allocation requires that the owner make a long-term commitment to maintain the building as low-income. In doing so, the owner must maintain the building’s applicable fraction throughout the term of the agreement. When a new allocation of LIHTCs is then layered on, the existing tenant population is already LIHTC certified. The initial income certification was performed when the household moved in. 

To continue with the above example and use the same date of acquisition of March 1, 2024, but now viewed through the lenses of a resyndication: Apartment 101 was initially income certified July 1, 2015 (at move in). That means Apartment 101 was LIHTC certified when the building was acquired because of the extended-use agreement in effect for the prior LIHTC allocation. This course of action is referred to as “grandfathering” in a tenant’s income eligibility. No further action is needed at the time of acquisition to support that tenant in Apartment 101 is income-certified as LIHTC. 

While there is federal guidance to support the concept of grandfathering in households that exist at the time of the resyndication, relying on past work to support current eligibility can be intimidating. Further, because the state allocating agency is responsible for creating a procedure to monitor compliance specific to its LIHTC program, the state could levy additional requirements for determining when an existing tenant is to be considered income-eligible for the new allocation. As such, it is imperative that the building owner confer with the applicable state allocating agencies to ensure compliance, as failure to proceed in a manner compliant with state guidance could result in avoidable difficulties with the state. Owners should create a robust strategy for a detailed review of each income certification to support due diligence, and if a tenant income certification is not available or is insufficient to support income eligibility under the current extended use-agreement, then the owner must complete a current income certification to support income eligibility for the new LIHTC allocation.

Different States, Different Requirements

As an example of how each state may view this differently, see the following policies from Ohio and California: 

Ohio Housing Finance Agency (OHFA) Resyndication Frequently Asked Questions #8: 

What documentation is used to verify the household is qualified under the old allocation of credits? 

The IRS is silent on this matter. OHFA’s policy is the owner should use the original file showing the household qualified for the first set of credits (IRS Audit Technique Guide for competing Form 8823 pgs. 4-35 and 4-36). OHFA recommends the original file is color coded to readily identify it during a compliance audit. If the original file is not available or sufficient to prove eligibility at move-in, a recertification must be completed using limits in effect at the time of the recertification. This establishes a point in which the household qualified even if after move-in.

OHFA’s policy allows the building owner to use the tenant income certification executed under the existing extended-use agreement to concurrently support income eligibility with the new allocation without having to perform a new tenant income certification after the date of acquisition. However, if an owner chooses to perform a new tenant income certification after the date of acquisition, then the tenant income certification must be treated as current certification with all supporting documentation dated within 120-days of the tenant income certification effective date. 

California Tax Credit Allocating Committee (CTCAC) Compliance Online Reference Manual, Part 4.12:

CTCAC will require the owner to perform a full income and asset certification of all existing households when property is resyndicated. This certification may be completed either at the tenant’s next normal recertification date OR the owner may elect to select a date after the award of the new allocation (usually coinciding with the start of the new credit period) to certify all households*. The date the certification is completed becomes the new “move-in/effective” date for the household and starts the recertification cycle over under the new allocation. Starting in 2017, CTCAC will require the owner to create a new file for each newly resyndicated household. 

*Please note - The “120 day before/after Acquisition date” guidance that applies for certifying households in Acq/Rehab projects that have never had tax credits does not apply to resyndication properties. 

(A)(3) For households where the certification determines the household is over the current income limits for the new allocation, CTCAC will require a copy of the Re-syndication Clarification Form and a copy of a previous certification showing the household was eligible under the prior allocation, be in the file to prove eligibility to be grandfathered.

CTCAC requires that a new tenant income certification be executed. It also requires that tenant income certification be treated as current certification with all supporting documentation dated within 120 days of the tenant income certification effective date; and, if that certification indicates the tenant’s income exceeds the applicable income limit associated with the new allocation, then the owner can use a tenant income certification executed under the current extended-use agreement. 

Under both states’ policies, the 120 days before/after the date of acquisition afforded to a traditional acq/rehab is not applicable. Rather, a new tenant income certification must be executed as appropriate. So, to approach a resyndication as a traditional acq/rehab does not comply with either state’s policy, resulting in unnecessary strife in such event that the new building owner treats the existing tenants at the time of acquisition as a traditional acq/rehab.

First-Year Low-Income Occupancy Percentage

It is important to understand that considering an existing tenant concurrently income eligible for a resyndication does not change how the first-year low-income occupancy percentage is calculated. For the above example that received a 2024 allocation of credits where the acquisition was placed in service March 1, 2024, assume that the rehabilitation was completed in July 2025 and 2025 is the first year of the credit period. To maximize the first-year LIHTC delivery, the goal would be to tack back to Jan. 1, 2025. With the traditional acq/rehab, taking action to complete the tenant income certification by June 29, 2024, for Apartment 101 means that the effective date of the certification is March 1, 2024. Likewise, with the resyndication, when the building was acquired, Apartment 101 was already income eligible under the existing extended-use agreement without having to again assess tenant income at the time of acquisition. Under both scenarios, for January 2025, the first month in the first year of the credit period, Apartment 101 is occupied with an income-eligible tenant. So long as the other provisions of compliance are met (i.e., rent restricted, student status and suitable for occupancy), Apartment 101 can be included in the month-end low-income occupancy percentage, resulting in a fraction for the first-year low-income occupancy percentage weighted as earliest as possible. 

Conclusion: Be Familiar with Expectations

In a resyndication, some new owners may fear the process of grandfathering in existing tenants and using the existing tenant income certifications. Instead of approaching the tenant income eligibility for a resyndication with the assumption that the existing tenant income certifications are incorrect or insufficient, owners should work with their consultants to understand their state agency’s expectations and to create an informed income certification strategy.

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