Top 5 LIHTC compliance stories of 2016

2016:
Top 5 Stories
From
1 vendomerealestatemedia.com
Presents...
Overview of State Agencies’ Compliance Monitoring Requirements........2
Include Key Elements to Ensure Effective
Nonpayment Settlements..........................................................7
Follow Four Tips to Prevent Owners from
Losing Credits Claimed Too Soon.................................................11
Q&A on Site Inspections...........................................................15
Avoid Insurance Coverage Disputes with
Incident Reporting Procedure.....................................................19

Overview of State Agencies’
Compliance Monitoring Requirements
The Low Income Housing Tax Credit (LIHTC) program is the country’s most
extensive affordable housing program. The program was added to Section
42 of the Internal Revenue Code (IRC) in 1986 to provide private owners
with an incentive to create and maintain affordable housing. The LIHTC
program works through a subsidy mechanism. The Internal Revenue Service
(IRS) allocates funds on a per-capita basis to each state. And each state has
a housing finance or other agency that assumes responsibility for allocating
tax credits to developers. The process by which the states allocate the
credits is competitive and uses criteria enumerated in the state’s Qualified
Allocation Plan (QAP).
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Under IRC Section 42(m)(1), the state agency must develop a QAP that’s
approved by the governmental unit having jurisdiction over the state
allocating agency. The QAP must:
• Identify the selection criteria to be used for determining
housing priorities that are appropriate to local conditions. The
selection criteria must include project location, housing needs
characteristics, project and sponsor characteristics, tenant
populations with special needs, public housing waiting lists, tenant
populations of individuals with children, projects intended for
eventual tenant ownership, the energy efficiency of the project,
and the historic nature of the project; and
• Give preference to projects serving the lowest income tenants, for
the longest periods, located in qualified census tracts, and which
will contribute to a concerted community revitalization plan.
In addition to assuming responsibility for allocating tax credits, state
agencies are also responsible for compliance monitoring. Compliance
monitoring regulations require state agencies to make site inspections
and require owners to certify to their state agencies that their sites were
in compliance with the requirements of IRC Section 42. We’ll provide an
overview of the state agencies’ responsibilities while monitoring LIHTC sites
throughout the compliance period.

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Under Treasury Regulation Section 1.42-5(c), owners are required to
annually certify that their sites were in compliance with IRC Section 42 for
the preceding 12-month period. They must report in the form and manner
the agency specifies and must certify, under the penalty of perjury, that
the information provided is true, accurate, and in compliance with the
requirements of IRC Section 42.
Treasury Regulation Section 1.42-5(c)(1) lists 12 specific requirements that
must be addressed in the certification. These requirements are identified in
“Meet Requirements of Annual Certifications to the State Housing Agency,”
in this issue.
The state agencies are required to review the certifications. And the owner
is considered to be in noncompliance if the certification is inaccurate,
incomplete, or the owner discloses noncompliance with any IRC Section 42
requirement.
Annual Reports
Treasury Regulation Section 1.42-5(c)(2)(ii) requires state agencies to
physically inspect a randomly selected sample of low-income rental units
by the end of the second calendar year following the year the last building
in the project is placed in service and then, on an ongoing basis, at least
once every three years. The purpose is to confirm that the rental units are
suitable for occupancy [IRC §42(i)(3)(B)(ii)].
If you manage a multi-building site and your state agency hasn’t adopted
HUD Real Estate Assessment Center (REAC) physical inspection protocols, all
LIHTC buildings must be inspected by the end of the second calendar year in
which the last building at your site was placed in service.
If your state agency, however, has adopted REAC protocols, it doesn’t have
to inspect all LIHTC buildings. In the eyes of the IRS, HUD’s oversight of the
REAC program substitutes for an all-buildings requirement for inspection.
The frequency of inspections under the REAC protocol is based on inspection
scores. But even with an outstanding score, inspections performed under
this protocol are required at least once every three years. REAC scores are
based on a scale of 0-100 that reflects the physical condition of a property,
Physical Inspections

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inspectable area, or sub-area. A passing score is 60 or above, and your most
recent score will determine when your next inspection will occur. A score of
90 to 100 means your next inspections will occur in three years; 80 to 89 is
every two years; and 79 and below means your site will be inspected every
year under the REAC protocol.
According to IRS Revenue Procedure 2016-15, state housing agencies must
inspect the lesser of 20 percent of your site’s low-income units, rounded
up to the nearest whole number of units, or the number of low-income
units set forth in the Low Income Housing Credit Minimum Unit Sample
Size Reference Chart found in the Revenue Procedure. But your agency can
inspect more—or even all—of your units, if it chooses to.
Treasury Regulation Section 1.42-5(c)(2)(ii) also requires agencies to review
the tenant to confirm that the appropriate rental units are occupied by
income-qualified households.
This year, one important change with the issuance of Revenue Procedure
2016-15 is the decoupling of the requirement that your housing agency must
both inspect the units and review the low-income certifications in those
same units. Because the units no longer need to be the same, your state
agency may choose a different number of units for physical inspection and
for low-income certification review, provided that the agency chooses at
least the minimum number of low-income units in each case.
Tenant File Reviews
The agencies must also consider the taxpayer’s compliance with other
requirements under IRC Section 42 such as rent restrictions, the general
public use rule (units provided are consistent with federal housing
policy governing nondiscrimination as determined under HUD rules and
regulations), the next available unit rule, the unit vacancy rule, and
utility allowances.
Compliance Review with Other LIHTC Requirements

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Under IRC Section 42(l)(3), agencies submit an annual report to the IRS
specifying the amount of credit allocated during the year, information about
the building receiving the allocation and the owner of the building, and
information about the agency’s compliance with IRC
Section 42 requirements.
State agencies satisfy this reporting requirement by filing Form 8610, Annual
Low-Income Housing Credit Agencies Report. Section III of this form, Part III
has questions addressing the agency’s compliance monitoring activities for
that year and specific compliance monitoring requirement based on when
the low-income buildings were placed in service.
The report is due Feb. 28 of the following year and is signed by the state
agency’s official under penalties of perjury.
Annual IRC Section 42(l)(3) Report
Here’s a compliance monitoring timeline to which state agencies will
generally follow:
Compliance Monitoring Timeline
Notice of inspection. As a practical matter state agencies provide taxpayers
with advance notice of an upcoming inspection/review so that the taxpayer
can notify tenants and assemble tenant records. According to the IRS’ Guide
for Completing Form 8823, Low-Income Housing Credit Agencies Report of
Non-compliance, a state agency should accommodate an owner’s valid need
to reschedule a site visit or tenant file review, but should not allow owners
to delay or circumvent compliance monitoring reviews. The IRS recommends
that if the site visit/file review can be rescheduled within 45 days of the
initial date, the appointment should be rescheduled; longer postponements
should be discouraged except under unusual circumstances. However, the
IRS notes that there is no legal authority for allowing this time period; it’s
similar to IRS policy for rescheduling audit appointments during an audit.
Inspection/reviews. State agencies conduct inspections/reviews to confirm
continuous compliance with IRC Section 42 or to identify currently
existing noncompliance.

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Notifications of inspection/review results. Once the inspection/review is
completed, the agency must promptly provide the taxpayer with a written
notice if the IRC Section 42 project is not in compliance. Examples include:
the taxpayer didn’t submit its annual certification; the agency wasn’t
allowed to review the tenant files; or the agency discovers by inspection,
review, or in some other manner, that the project is not in compliance.
Many state agencies also provide notice to close the inspection/review when
no noncompliance issues are discovered.
Correction period. The date of the agency’s notice to the taxpayer starts the
correction period during which the taxpayer can resolve any noncompliance
issues identified by the agency. The correction period isn’t defined by
regulation, but is not to exceed 90 days. State agencies also have authority
under Treasury Regulation 1.425(e)(4) to extend the correction period to a
total of six months, but only if the agency determines there’s good cause for
doing so.
Reporting noncompliance to the IRS. Regardless of whether the
noncompliance is corrected within the designated correction period,
agencies must report any observed noncompliance to the IRS within 45 days
after the end of the correction period. Form 8823, Low-Income Housing
Agencies Report of Noncompliance or Building Disposition, is used to report
noncompliance to the IRS.
The state agency must explain on Form 8823 the nature of the
noncompliance or failure to certify and indicate whether the owner has
corrected the noncompliance or failure to certify. Any change in either the
applicable fraction or eligible basis that results in a decrease in the qualified
basis of the project under Section 42(c)(1)(A) is noncompliance that must
be reported to the IRS. If the agency reports on Form 8823 that a building
is entirely out of compliance and won’t be in compliance at any time in
the future, the state agency need not file Form 8823 in subsequent years
to report that building’s noncompliance. If the noncompliance or failure
to certify is corrected within three years after the end of the correction
period, the state agency is required to file Form 8823 with the IRS reporting
the correction of the noncompliance or failure to certify.
The state agency must retain records of noncompliance or failure to certify
for six years beyond the state agency’s filing of the respective Form 8823. In

all other cases, the state agency must retain the certifications and records
described above for three years from the end of the calendar year the state
agency receives the certifications and records.
Include Key Elements to Ensure
Effective Nonpayment Settlements
An owner seeking to evict a resident can’t begin an eviction lawsuit without
first legally terminating the tenancy. This means giving the resident written
notice, as specified in the state’s termination statute. If the tenant doesn’t
move or fix the issue, for example, by paying the rent or finding a new home
for an unauthorized occupant, you can then file a lawsuit to evict. State
laws set out very detailed requirements to end a tenancy.
But before you get to court or before a judgment is issued, you may have
reached a settlement agreement (often called a “stipulation”) with the
resident. You may have agreed to allow the resident to stay in the unit in
exchange for some promise on the part of the resident. Saving of time and
money may have motivated you to settle out of court rather than to go
through a trial.
You may settle your case at any time during an eviction before a judge
makes a final decision after the hearing. When you settle an eviction case
involving nonpayment of rent, you and your resident must sign an agreement
that is reviewed and approved by the court. In a typical agreement, the
resident agrees to pay back rent and charges according to a set
payment schedule.
Problems may arise in the future because a settlement agreement may be
poorly written. It’s easy for owners, managers, and attorneys to overlook
key points that could prove useful later on. Here are five items you can use
to better protect your settlement. And, for each of them, we will give you
Model Language that you can adapt and use in your own agreements. Be
sure to show our Model Language to an attorney in your area before using it
in your agreements.

Have the resident admit the total amount owed, the months for which it is
owed, and the amount of rent owed for each month. If you settle before
your eviction case has gone very far, you don’t want to give the resident
leeway to later challenge whether he or she owed anything at all. And a
detailed description of the amount(s) the resident owes you helps to clarify
the total amount that he or she is agreeing to pay.
If, for example, a resident of ABC Apartments owes rent of $200 per month
and late fees for May, June, and July of 2016, the agreement should say:
Description of Amounts Owed
Model Language
Resident admits owing to ABC Apartments, Inc., the sum of $645,
including unpaid rent for May 2016, June 2016, and July 2016 at the
rate of $200 per month, plus late fees at the rate of $15 per month.
Depending on the law in your area, your claim in a nonpayment case may be
limited to rent only. However, despite this constraint, parties can agree that
charges due under a lease, such as late fees, are to be paid by the resident
in return for avoiding a trial. In addition, under rent restrictions outlined
in IRC §42(g)(2), fees for late payment of rent, if stated in the lease, is
a penalty for failure to perform according to the lease agreement and,
therefore, the fee is allowed because it is not included in the rent.
Repayment schedules usually list the amount of each payment the resident
must make and the date by which each payment must be made. But if the
resident has bounced any rent checks in the past, you should specify how
the resident must make the payments. Rather than worry about whether
checks will bounce in the future, have the resident pay in cash or by
certified check or money order.
Suppose the resident must repay $215 per month for the next three months.
Here is how you might word the repayment schedule.
Method of Payment

Model Language
Resident will make a payment of $215, by certified check, bank check,
or money order, on or before Sept. 1, 2016. Resident will make a
second payment of $215, by certified check or money order, on or
before Oct. 1, 2016. Resident will make a third payment of $215, by
certified check or money order, on or before Nov. 1, 2016.
Describe the way residents’ payments will be applied to current and
past-due rents. State that payments will first be applied to the current
month’s rent, then to the back rent still owed. This keeps you from ending
up back at square one. Applying payments in this way prevents the resident
from paying you only for past-due rent and then arguing that you are no
longer entitled to claim the full benefit of the settlement agreement,
because it concerns debts he or she no longer owes you.
Application of Payments
Example: A resident owes total back rent of $645 for the months of May,
June, and July 2016 ($200 rent, plus a $15 late fee per month). The resident
agrees to repay $215 per month for each of the next three months, but the
settlement agreement does not explain how the payments will be applied. In
September 2016, the resident should pay you $415—the combined amount of
the current rent payment and the scheduled payment of past-due rent and
late fee.
Instead, the resident pays $215. If the resident continues doing this for
three months and you then return to court, the resident may be able to
convince the court that you must file an entirely new eviction case. To avoid
this situation, your agreement should say:
Model Language
All payments received will be applied to current rent first and then to
past-due rent and charges.
Sometimes, as a defense, residents raise the argument that they didn’t pay
rent because you didn’t maintain the unit. This may result in a settlement
agreement in which the resident agrees to pay back rent, but you also agree
to perform the repairs that the resident claims are needed.
In these cases, it’s important to include in your agreement a detailed
Needed Repairs

description of the repairs you are responsible for. If the description is too
vague, you give the resident an excuse for not following the repayment
schedule—namely, that you never did the repairs.
If you are aware of all the needed repairs, be as specific as possible about
them in the settlement agreement. For example, suppose the resident
claims that the front-door lock is broken. Don’t state “Management will
correct problems with the front door to the unit.” Instead, your agreement
should say: “Management will replace the front-door lock.”
Spell out what will happen if the resident defaults or does not comply with
the repayment schedule. Get your attorney’s advice on your legal rights
if this occurs. Describing these rights in a default clause discourages the
resident from viewing the settlement agreement as an easy way to
avoid eviction.
What your default clause should say depends on whether your state’s
law allows for the award of money judgments and/or warrants based on
residents’ breach of eviction settlement agreements. If your state’s law
gives you these rights, you should add the following language
to the agreement:
Default Clause
Model Language
In the event of a default on any payment, the Manager shall have
the immediate right to a money judgment against Resident for the
remaining amount due under this agreement, and for a judgment of
possession and an eviction warrant, upon an affidavit of the Manager
setting forth the default.
If your state law does not permit you to obtain an immediate order or
judgment of any kind, you should still include a default clause that explains
your right to continue with the eviction case, such as the following:
Model Language
In the event of a default on any payment, the Manager shall have the
right to seek the entry of a final judgment of possession and a money
judgment for the remaining amount due under this agreement, and to
seek a warrant of eviction.

Make sure your settlement agreement does not establish a new tenancy. By
signing a nonpayment agreement, the resident should not only acknowledge
his obligations under the agreement but also agree to recognize all of his old
obligations under the lease. State in the nonpayment settlement that “prior
obligations under the lease are incorporated in the agreement and no new
tenancy is established voiding those obligations.”
Also make sure the settlement agreement stipulates its duration. After
the final payment under the settlement, a chronic late payer may pay late
again. To avoid going back to court, you might state that the nonpayment
agreement “shall remain in effect for one year from the date on which it is
signed, or whenever the outstanding arrearage is paid in full, whichever
is later.”
Other Points in Your Settlement Agreement
Follow Four Tips to Prevent Owners
from Losing Credits Claimed Too Soon
In the Fall 2016 Special Issue, we discussed how a site owner may comply
with first-year certification requirements under Internal Revenue Code (IRC)
Section 42(l)(1). Making the certification involves Form 8609, Low-Income
Housing Credit Allocation and Certification. The agency executes Part I
and then mails the Form 8609 to the owner. The owner then completes the
certification required under IRC Section 42(l)(1) for the first year of the
credit period by completing Part II of the Form 8609 and submitting it, one
time, to the IRS.
Part I of Form 8609, completed and signed by the state agency, documents
approval of the finished low-income housing building and identifies the
amount of the allowable annual low-income housing tax credit.
Naturally, tax credit owners want to start claiming the credits state housing
agencies have allocated to them as soon as possible. But in a rush to start
claiming credits, some owners may claim tax credits before their state
housing agency issues the IRS Form 8609. Owners may file tax returns with

only Part II of Form 8609 attached with an explanation that the owner has
provided the state agency with all the information necessary for the state
agency to make a final determination of the credit amount.
The IRS takes this seriously. To the IRS, there’s always the possibility that an owner
is fraudulently claiming the credit. Further, even if the taxpayer has entered into
a contract with the state agency, the IRS has no way of knowing that the state
agency has approved the completed project, the amount of credit the owner is
entitled to claim, or the terms of the allocation until the taxpayer completes the
IRC Section 42(l)(1) certification. Claiming credits too soon or failure to provide a
reasonable cause will result in the disallowance and/or recapture of tax credits.
As the manager of a tax credit site, you’re responsible for making sure the owner
can claim all the credits it’s entitled to. So when you begin to manage a site, you
should warn the owner to not claim credits too early. Heed the following four tips
to help make sure a site’s tax credits stay safe.
Tip #1: Wait Until State Issues Form 8609 Before Claiming Credits
Tell the owner that it can’t claim any credits until your state housing agency issues
the Form 8609 for the building or site. If the owner claims credits before the form
is issued, the IRS may disallow all the credits it claimed.
Under the tax credit law, after a building is placed in service, the state housing
agency must complete Part I of the Form 8609 and send the form to the IRS. The
IRS uses the form to keep track of the credits allocated to the building or site. The
agency must also send a copy of the form to the owner.
The owner must complete Part II of the form and attach it to its tax return when it
starts to claim credits. The owner must attach a completed Form 8609 when filing
the tax return on which it first claims credits for a building or site. Under the tax
credit rules, an owner can’t satisfy its first-year certification requirement unless
the Form 8609 is complete. The IRS says it won’t allow an owner to claim any
credits without submitting a completed Form 8609, unless the owner can prove it
had “reasonable cause” for doing so, and proving reasonable cause
can be difficult.
Reasonable cause means that the owner exercised ordinary business care and
prudence in determining its tax obligations but is unable to comply with those
obligations. To establish reasonable cause, the owner must explain why it claimed
the credit before completing the IRC 42(l)(1) certification. Owners may argue that
the circumstances were beyond their control: The Forms 8609 were requested
in a timely manner from the state agency after the end of the year in which the
property was placed in service, but were not received before filing its tax return.
During an audit, the IRS may consider the following factors:

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1. When was the request for the Forms 8609 made? What follow-up efforts
did the owner make to secure the Forms 8609?
2. Why did the state agency fail to provide the Forms 8609 (Part I
completed and signed)? State agencies generally attempt to provide
the completed forms quickly. Failure to do so could indicate a problem
such as the cost certifications may not be complete, the state may have
determined that the property was built using substandard materials, or
the property wasn’t built according to the contract.
According to the IRS, a determination of reasonable cause must be based on an
evaluation of all the facts and circumstances on a case-by-case basis. The IRS
considers the following factors:
1. How long after the end of the first year of the credit period did the
owner receive the Forms 8609? How many years has the owner claimed
the credit without having the Forms 8609? How did the owner answer
question C on Form 8609-A?
2. Did the owner encounter other difficulties while noncompliant with
the IRC Section 42(l)(1) certification requirement, and how were the
problems resolved?
3. What reason did the owner give for the delay? To show reasonable cause,
the dates and explanations should clearly reflect efforts to resolve
noncompliance with IRC Section 42 in a timely manner and expeditiously
obtain the Forms 8609 from the state agency.
4. Did the owner know, or make reasonable attempts, to determine the
IRC Section 42(l)(1) certification requirements? Is the general partner
a professional specializing in the development and management of IRC
Section 42 properties?
5. Did the owner make a mistake? How long was it before the owner
corrected the mistake? Generally, errors don’t provide a basis for
reasonable cause, but additional facts and circumstances may support
such a determination. Forgetfulness, oversight, or reliance upon another
person doesn’t support a determination of reasonable cause for failing to
make a timely required filing.
6. Death, serious illness, or unavoidable absence of the owner may
establish reasonable cause. The IRS will consider the relationship of the
responsible party to the owner; the dates and duration of the illness
or absence; how the event prevented compliance; whether other
business obligations were impaired; and whether the noncompliance was
remedied within a reasonable period after a death or absence.

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Tip #2: Consider Claiming Credits Earlier If Site Is Financed with
Tax-Exempt Bonds
Ask the owner whether your site is financed with tax-exempt bonds. Owners of
sites financed with tax-exempt bonds may be able to claim credits earlier than if
the sites were financed with tax credits. That’s because the way states allocate
credits to sites financed with tax-exempt bonds is different from how they allocate
credits to tax credit sites without bonds. If you manage a site financed with tax-
exempt bonds, tell the owner it should ask its attorney or tax credit consultant
what to do.
Tip #3: File Amended Return If Form 8609 Issued After Filing Deadline
The owner of your site may not get the Form 8609 until after it files its tax return
for the first year of the credit period. In this case, tell the owner that after your
state housing agency issues the Form 8609, the owner should file an amended
return to claim any credits missed because it didn’t have the form in time to claim
them. This way, the owner doesn’t have to forfeit the credits it couldn’t claim.
For example, say the credit period for XYZ Apartments began in 2015. Suppose
the site owner files its 2015 federal tax return by the April 15, 2016, deadline, but
the state housing agency doesn’t issue the Form 8609 until May 15, 2016. Because
the Form 8609 was issued after the filing deadline, the owner can’t claim any tax
credits on its 2015 return. But the owner can file an amended return after it gets
the Form 8609 and claim the credits.
In this situation, it may sometimes make more sense for an owner to request
an extension to file its tax return instead of amending the return later to claim
credits. Tell the owner to talk to its accountant or attorney about this option.
Tip #4: Treat Date First Unit Is ‘Suitable for Occupancy’ as New Building’s
PIS Date
Make sure the owner of your site knows how to determine the placed-in-
service (PIS) date for a new building or for an existing building that’s now used
as residential rental property. The PIS date for these buildings is the date on
which the first unit in the building is deemed “suitable for occupancy,” taking
into account local health, building, and safety codes. This is typically the date
the building’s certificate of occupancy is issued. But the determination is “fact-
specific.”
Once a building is placed in service, you must keep it in compliance with the tax
credit law. The PIS date also starts the clock for record-keeping purposes. And the
date determines the deadline for meeting the minimum set-aside. Owners have
until the end of the taxable year following the PIS year to meet the set-aside.

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Q&A on Site Inspections
Once the owner meets the set-aside, the site becomes eligible for credits. Each
building has its own PIS date. So if you have several buildings at your site, each
one may have a different PIS date.
The owner doesn’t have to wait until its low-income units are occupied before
placing the building in service. All that matters is that the units are suitable for
occupancy—they need not actually be occupied.
Postponing Inspections
Most tax credit managers know that state housing agencies must regularly
inspect sites for compliance with the tax credit program. The agencies
inspect units to make sure they’re suitable for occupancy and look at
household files to make sure they’re accurate and complete. But many
managers are confused about what these inspections involve.
We’ll tell you the answers to the most commonly asked questions about
state housing agency inspections. This way, you can help these inspections
go smoothly during your site’s 15-year compliance period.
Are we allowed to request a postponement after receiving notice of
inspections? For example, if the owner requested that the inspection be
postponed for two weeks because the permanent on-site manager had
scheduled training during that time period, would this request
be granted?
An owner is out of compliance when requests for a site inspection and
tenant file reviews are denied or unreasonably postponed. The IRS, in
the Guide for Completing Form 8823, has advised the state agencies that
valid reasons for postponing an inspection or tenant file review should be
accommodated. However, the IRS says site visits and files reviews should
not be delayed more than 45 days, except under unusual circumstances.
In your example above, the request would be considered a reasonable
request because the permanent manager rather than the temporary
manager would be more knowledgeable regarding the day-to-day
Q
A

operations, procedures, and tenant files.
Without inspections, the state agency cannot determine whether the
property is physically suitable for occupancy, whether any of the households
occupying the units are income-qualified, or whether the rents are correctly
restricted. And, since the noncompliance is global in nature, the site would
be considered entirely out of compliance.
Under IRC §42(c)(1)(A)(i), the applicable fraction is determined as of the
close of the taxable year. If the noncompliance persists and is not corrected
by the end of the taxpayer’s taxable year, the applicable fraction is zero.
If the applicable fraction is zero, then the qualified basis is zero and no
credit is allowable for that year, or for any year until the physical inspection
and tenant file review is completed. The taxpayer is also subject to the
recapture provisions under IRC §42(j).
Number of Units Inspected
Is there a limit to the number of units our state housing agency may
inspect?
No. According to IRS Revenue Procedure 2016-15, state housing agencies
must inspect the lesser of 20 percent of your site’s low-income units,
rounded up to the nearest whole number of units, or the number of
low-income units set forth in the Low Income Housing Credit Minimum
Unit Sample Size Reference Chart found in the Revenue Procedure. But
your agency can inspect more—or even all—of your units, if it chooses
to. In other words, your state housing agency is free to conduct physical
inspections or low-income certification reviews on a larger number of
low-income units if it believes that to be appropriate.
One important change to note with the issuance of Revenue Procedure
2016-15 is the decoupling of the requirement that your housing agency
must both inspect the units and review the low-income certifications
in those same units. Because the units no longer need to be the same,
a your agency may choose a different number of units for physical
inspection and for low-income certification review, provided that the
agency chooses at least the minimum number of low-income units
in each case.
Q
A

Notice of Inspection
Are we entitled to get a notice of an inspection?
Yes. Your state housing agency must give you “reasonable notice” of a
site inspection, according to the regulations. This way, you can let your
residents know about inspections to get their cooperation, and you can
make sure all your files are in order.
Your agency mustn’t tell you which units it will inspect. So you should
keep all your files in order and all your units in good condition to prepare
for upcoming inspections.
Q
A
Frequency of Inspections
How often is our state housing agency required to inspect our site?
At least once every three years. If you’re just starting to manage a new
site, your state housing agency must conduct its first inspection by the
end of the second calendar year after the site’s placed-in-service year.
If you manage a multi-building site and your state agency has not
adopted HUD Real Estate Assessment Center (REAC) physical inspection
protocols, all LIHTC buildings must be inspected by the end of the
second calendar year in which the last building at your site was placed in
service.
If your state agency, however, has adopted REAC protocols, it does
not have to inspect all LIHTC buildings. In the eyes of the IRS,
HUD’s oversight of the REAC program substitutes for an all-buildings
requirement for inspection.
The frequency of inspections under the REAC protocol is based on
inspection scores. But even with an outstanding score, inspections
performed under this protocol are required at least once every three
years. REAC scores are based on a scale of 0-100 that reflects the
physical condition of a property, inspectable area, or sub-area. A passing
score is 60 or above, and your most recent score will determine when
your next inspection will occur. A score of 90 to 100 means your next
inspections will occur in three years; 80 to 89 is every two years; and 79
and below means your site will be inspected every year under
the REAC protocol.
Q
A

Who Performs Inspections
Must our state housing agency perform its own inspections?
No. State housing agencies may either perform inspections themselves or
delegate this responsibility to another state or local government agency,
to HUD, or even to a private, HUD-approved inspector.
Q
A
Inspection Standards
Minor Violations
Must our state housing agency use local building, safety, and health
codes as its standard when performing physical inspections?
No. Your state housing agency has a choice of which standards it may
use when inspecting your tax credit site. Your agency may use local
building, safety, and health codes. Or it may use HUD’s Uniform Physical
Condition Standards (commonly known as “UPCS”). The UPCS inspection
protocol was developed by REAC to ensure that housing is “decent, safe,
sanitary and in good repair.” REAC conducts approximately 20,000 annual
inspections of rental housing that is owned, insured, or subsidized by
HUD using the UPCS inspection protocol.
State housing agencies usually prefer to use HUD’s UPCS standards
because they’re the same for tax credit sites throughout the state, which
isn’t the case with local codes.
Even if your state housing agency uses the UPCS standards, don’t ignore
any local building, safety, and health code violations your site gets. You
still must correct all local code violations, and failure to do so could lead
to tax credit noncompliance.
Is our state housing agency interested in both major and minor local
code violations?
Yes. Tax credit site owners must list all violations of local building,
health, and safety codes when filing their annual certification.
Q
Q
A
A

Information in Owner Certification
Does the owner of our site need to tell our state housing agency about
every health, safety, and building code violation we get?
Yes. Each year, the owner of your site must complete an annual owner’s
certification and submit this form to your state housing agency. One item
your owner must certify is that each building at your site is “suitable for
occupancy, taking into account local health, safety, and building codes,”
and that it didn’t get any violations in the past year. If the owner did
get violations, the owner must identify them and attach documentation
about each one to its certification. This includes state or local
inspectors’ violation reports or a statement summarizing the violation.
Q
A
Exemption for Rural Housing
The tax credit site we’re about to manage also participates in the RD 515
program, and the Rural Housing Service (RHS) will be inspecting our site.
Does this mean that we could be exempt from state housing
agency inspections?
Yes, you could be. If a tax credit site participates in the RD 515 program
and RHS performs site inspections, your state housing agency might not
need to inspect your site. This is the case if RHS and your state housing
agency signed a memorandum of understanding in which the RHS agrees
to report the results of its inspections to your agency. Check with your
agency if you’re not sure whether it signed such a memorandum
with RHS.
Q
A
Avoid Insurance Coverage Disputes
with Incident Reporting Procedure
Suppose a resident’s unit is burglarized or a site visitor falls when a stairway
handrail becomes loose or something happens at your site which causes
property loss or bodily injury. Are you certain your employees let you know
about certain incidents like these as soon as they happen? If they don’t, you
risk insurance coverage problems.

Most insurance policies require owners to notify their insurance companies
as soon as possible after there’s any incident that could lead to a claim. If
your notice comes too late, the insurance company can refuse to cover you.
Since your site employees are your eyes and ears, it’s important to establish
a procedure for employees to immediately report to you any incidents
they’ve seen or heard about. That way, you can promptly alert your
insurance company about the incident.
When You’re ‘On Notice’
Your time to notify the insurance company begins to run as soon as you’re
“on notice” about a potential claim. Obviously, you’re on notice when you
see a resident trip and get hurt in the hallway. You’re also on notice when
your leasing agent tells you about water damage to a vacant unit. But
you may even be on notice for an incident that you neither saw nor heard
about. That’s because the law presumes that you’re aware of incidents
your employees and leasing agents see and hear. Your employee’s or agent’s
knowledge of an incident can be considered yours, even though you never
found out about it.
Much litigation involving property liability insurance involves when notice
was given or if notice should have been given in the first place. In one
case, an owner notified his insurance company more than two years after
he learned a construction job had damaged his site. In December 2006,
residents began to complain about noise and vibrations caused by a nearby
construction project. Later that month, the construction on the neighboring
property stopped, but it began again in late 2007. In January 2008, the walls

had shifted in the site’s building and he filed a notice of loss with his broker,
who forwarded it to the insurance company around Jan. 17. The insurance
company denied coverage for any losses that occurred before Dec. 19,
2007, citing late notice. The insurance policy required the owner to provide
“prompt” notice of any losses. The court sided with the insurance company,
stating that the owner failed to give his insurer timely notice of his claim
[Pfeffer v. Harleysville Group Inc., November 2012].
In another case, an owner sued an insurer after the insurer refused to cover
a claim. The insurer asked the court to dismiss the case without a trial,
claiming that it clearly didn’t have to defend the owner because the owner
didn’t file a timely claim. A resident had sued the owner after she fell
down a staircase within her unit in 2002. The owner didn’t notify its insurer
about the accident until 10 months later. The building superintendent had
discovered the resident lying on the floor inside her unit. In this case there
was some issue as to whether the owner had some justification for assuming
that the resident’s hospitalization after her fall was attributable to a prior
medical condition. Nonetheless, the staff member hadn’t reported to the
owner that he had seen an injured tenant [426-428 West 46th St. Owners,
Inc. v. Greater New York Mutual Insurance Company, November 2008].
Diligently reporting incidents that may trigger liability as soon as possible
after they occur may save you paperwork and stress from litigation months
or even years down the line. In one case, an owner was sued for negligence
after a murder occurred in its building. The owner sued its insurance
company for denying coverage. The insurer claimed that the owner didn’t
give notice of its claim on time. Fortunately, the court was persuaded
when the owner testified that it didn’t know at first that an intruder
had committed the resident’s murder. And the owner wasn’t sued by the
resident’s family until some time after the incident. The appeals court
eventually ruled against the insurance company [Agoado Realty Corp. v.
United Intl. Ins. Co., November 2001].

Set Reporting Procedure
To protect themselves, owners and managers should establish a procedure
for site employees to report mishaps.
Educate your staff about site incidents. Meet with your site employees and
instruct them to be on the lookout for mishaps that could lead to insurance
claims or lawsuits. Give your employees plenty of examples of site incidents
that they should report to you, such as slips, falls, trips, stolen property,
water damage, smoke damage, etc. Reinforce your meeting with a memo
that tells how to identify and report site incidents. See Model Memo: Inform
Employees of Incident Reporting Procedure.
Give employees forms to record incidents. Use forms for employees to
record information about potential injuries, property damage, or other
incidents they’ve seen or heard about on the property. We’ve prepared a
Model Form: Use Site Incident Report to Protect Yourself from Liability. Keep
a supply of these forms at the site, and show your employees how to fill
them out.
Use forms to notify insurer about possible claim. Once you receive an
incident report from a staff member, send the handwritten report to the
insurer’s agent with a cover letter identifying the owner, the property, and
any other relevant facts that could assist the insurer in processing the claim.
Some agents may prefer telephone notification instead.
To avoid confusion, you should ask your insurance agent to put its incident
reporting procedure in writing, and keep the written procedure with your
other insurance documents. That way, your broker can’t claim that you
didn’t follow proper procedure.
Get written acknowledgment of your report. A good insurance agent will
give you a written acknowledgment of any incident that’s reported. Once
you receive acknowledgment, usually within 48 to 72 hours of the owner’s
first report, file it away for safekeeping.

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