IRS Provides Guidance Relating to Low Income Occupancy Compliance for Multifamily Developments
On July 1, 2004, the Internal Revenue Service issued Revenue Procedure 2004-39 setting forth procedures for determining whether a bond financed residential rental project is in compliance with the set-aside requirements contained in Section 142(d) of the Internal Revenue Code in the context of an acquisition/rehabilitation transaction or a new construction project. In general, Section 142(d) requires that a bond financed residential rental project must have either (i) 20% of its units occupied by individuals whose income is 50% or less of area median income, or (ii) 40% of its units occupied by individuals whose income is 60% or less of area median income. The set-aside requirements often raise a compliance dilemma for developers, especially during rehabilitation of a project. For example, must a developer rent all available units in a project until the 20% or 40% set-asides, as applicable, are met in relation to the total units constructed? Or, alternatively, is it only necessary that 20% or 40% of the leased units, as applicable, at any given time actually be occupied by low income individuals? Among other guidance, Revenue Procedure 2004-39 generally provides that only a proportionate share of rental units available for occupancy (either actually occupied or unoccupied and previously leased at least once) need to be rented to eligible tenants to meet the low income occupancy requirements. However, when developers calculate the percentage of set-aside units in a project, rental units that are not occupied due to renovations are not included until such time as the unit is leased post-renovation. Similarly, for an existing project acquired by bond proceeds, units that are empty on the later of (i) the date of issuance of the bonds, or (ii) the date of acquisition of the project, are not considered in the compliance calculations until such units are leased.
The set-aside requirements generally apply on the later of the date when at least 10% of the total units in the project are occupied or tax exempt bonds are issued to finance the project. The Revenue Procedure, however, provides developers a special 12 month transition period to comply with the set-aside requirements when they purchase existing multifamily projects with the proceeds of tax-exempt bonds. Such transition period alleviates the pressure of obtaining immediate compliance on the date of acquisition. However, if the set-aside requirements are not satisfied on the last date of the
transition period, the bonds will becom taxable retroactive to the date of issue unless all the bonds are redeemed as soon as possible but in no event later than 18 months after the date of issue.
These rules promulgated by Revenue Procedure 2004-39 apply to multifamily housing bonds subject to Section 142(d) of the Code that are sold after July 19, 2004. Issuers of multifamily housing bonds that are sold prior to July 19, 2004 may elect to have these provisions apply to their bonds.
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