Average Income Minimum Set-Aside - Latest Q&A
Now that the new income averaging minimum set-aside has been law for several months, the practical implementation questions are coming out. The National Council of State Housing Agencies (NCSHA) has asked the Department of the Treasury and the Internal Revenue Service (IRS) for guidance in numerous areas. The letter highlights some of the owners’ questions and what states must address during their required compliance monitoring. One thing that is becoming clear is that this new minimum set-aside will require the highest level of diligence by owners and property managers to avoid a failure to meet the elected minimum set-aside.
Meeting the average income set-aside may also be challenging in the first year of the credit period. The first thing to remember is that the minimum set-aside is met on a project basis. The basic rule is that each building is its own project unless a multiple building election is made (IRC 429g) (3)(D)). If a multiple building election is going to be made, the owner must be sure that the buildings to be grouped together meet the 60% average income. The groupings may also impact the buildings that would be grouped together in subsequent years. Desired average income targets may also impact the decision about deferring credits on buildings that may have not been fully rented to the targeted number of low-income units. Now more than ever the owner needs to coordinate with the property manager on the plan for renting up buildings and making multiple building elections. Be sure to discuss these issues with a trusted advisor before determining if a multiple building election makes sense for each individual project.
An extension of this first-year question relates to a single building failing to meet the minimum set-aside if the lower-income designated units are not rented by the end of the year. If the lower-income units are not rented and the 60% average not met in the year placed in service, the start of credits on the entire building would have to be deferred to the subsequent year. From a tax-credit-equity-timing-adjuster perspective, this is very different than starting the credits on the building in year one, if most of the units are rented by year end and claiming a two-thirds credit when the vacant units are subsequently rented.