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Steve Strain, Attorney
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When LIHTC properties stumble, it’s rarely one giant mistake—it’s a handful of small misses that snowball into Form 8823s, equity adjusters, or even credit recapture. Here are the most common risks unique to LIHTC compliance California projects and how experienced counsel helps you prevent and cure them. Top Compliance Risks Extended Use Agreements & Conflicting Covenants Risk: Misalignment between TCAC regulatory agreements, bond covenants, local soft-money restrictions, and recorded land-use controls creates contradictory rent/income requirements. Counsel’s fix: Harmonize regulatory language at closing, add conflict-resolution clauses, and maintain a matrix showing which covenant governs each requirement across the compliance period and extended use. Income Certifications & Recertification Timing Risk: Incomplete third-party verifications, misapplied income exclusions, missing student status checks, or late annual recerts lead to reportable noncompliance. Counsel’s fix: Adopt written verification standards, recert calendars, and QA checklists; train site staff; review borderline files; spot-check calculations; confirm student-rule exceptions are documented. Next Available Unit (NAU) & Over-Income Mismanagement Risk: Failure to promptly rent the next available unit of comparable or smaller size at the over-income tenant’s building/stack can destroy applicable fraction and trigger credit loss. Counsel’s fix: Create NAU tracking logs, define “comparable unit” in policy, and implement an alert workflow so leasing prioritizes NAU compliance. Rent Limits, Utility Allowances & Fee Policies Risk: Incorrect UA source or late UA updates push gross rent above limits; “mandatory” amenity or parking fees effectively increase rent. Counsel’s fix: Calendar UA updates (PHA, HUD, or engine-approved method), document the methodology, and vet all fees against gross rent rules before implementation. Unit Mix, Applicable Fraction & Eligible Basis Drift Risk: Conversions of common areas, amenity changes, or unit repurposing alter eligible basis or reduce the applicable fraction without anyone recalculating impacts. Counsel’s fix: Require legal review before space conversions; maintain a living as-built/unit-mix schedule; update applicable fraction models after any physical changes. Habitability, Accessibility & Fair Housing Risk: Unresolved habitability issues, uncorrected accessibility barriers (federal/California requirements), or marketing/tenant selection missteps lead to enforcement actions and 8823s. Counsel’s fix: Integrate fair housing and reasonable accommodation procedures, document UFAS/ADA/California accessibility compliance, and keep a repair SLA with escalation paths. Student Rule & Household Composition Changes Risk: All-student households without a valid exception remain in place or become one post-lease; undocumented household members cause income/rent errors. Counsel’s fix: Standardize student questionnaires, recheck status at recert, and require prompt household update forms with targeted re-verification. Casualty Loss, Displacement & Restoration Deadlines Risk: Fire/flood units are offline too long or restored without requalifying tenants; temporary relocation violates rent/income rules. Counsel’s fix: Pre-approved casualty protocols, timeline tracking to placed-back-in-service, and relocation agreements vetted for rent and recert implications. Transfers, Refinances & Ownership Changes Risk: Entity transfers or refinancing that trigger new covenants or break existing ones without re-underwriting compliance. Counsel’s fix: Make compliance review a condition precedent to any transfer/refi; update regulatory crosswalks; notify investors/issuers and obtain required consents. Recordkeeping, 8823 Responses & Cure Windows Risk: Incomplete files, missing third-party docs, and slow responses to agency findings escalate minor issues into credit recapture risks. Counsel’s fix: File taxonomy and retention policies; mock audits; designate a response lead; provide factual, time-stamped cure evidence within agency deadlines. Where Recapture Risk Hides Sustained rent or income noncompliance that isn’t cured within allowed periods. Failure to maintain applicable fraction/low-income set-asides. Inaccurate UA leading to months of over-rent. Student rule violations. Unremedied habitability/accessibility issues affecting eligible basis or qualified occupancy. Missed NAU placement causing building-level disqualification. Post-closing covenant conflicts that force noncompliance with at least one program. Practical Mitigations—What Counsel Puts in Place Compliance Playbook: Property-specific manual covering certifications, NAU, UAs, fees, student rules, fair housing, relocation, and casualty . Calendar & Alerts: Automated reminders for UA updates, rent/income limits, recerts, marketing reports, and annual owner certifications. File QA & Mock Audits: Quarterly sampling with corrective action plans; pre-agency audit file scrubs. Covenant Crosswalk: One-page dashboard mapping TCAC, bond, and soft-fund requirements with the “most restrictive” flagged. Change-Control Policy: Legal review required before any fee, amenity, space use, transfer, or refinancing change. Training & Delegation: Annual training for site teams and regional managers; named compliance owner with authority to escalate. 8823 Response Kit: Templates, exhibits list, and timeline tracker to document cures quickly and thoroughly. How a Lawyer Adds Ongoing Value Interprets gray areas and negotiates pragmatic cures acceptable to investors, lenders, and agencies. Aligns regulatory agreements at closing so you don’t inherit conflicts you can’t meet. Builds systems that prevent errors—so compliance happens by default, not heroics. Coordinates with your investor to minimize adjusters and protect developer fee timing. If you want a property-specific plan to reduce findings and avoid recapture, contact us to discuss a pragmatic strategy for LIHTC compliance California—including extended use agreements, income certifications, NAU tracking, and audit readiness.
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If you’re building your first affordable housing project in California, LIHTC is likely the backbone of your capital stack. Below is a practical, end-to-end roadmap—eligibility, timelines, and closing checklists—so you know what happens when, who does what, and how a low income housing tax credit attorney keeps you on track. Confirm Project Fit & Eligibility Property type: New construction, acquisition/rehab, or adaptive reuse for multifamily rental. Income targeting: Units restricted to eligible AMI levels (e.g., 30%–60% of AMI), with rent caps and set-asides. Site readiness: Zoning that allows multifamily, feasible environmental conditions, utility capacity, and realistic construction logistics. Sponsor capacity: Development team with experience or documented partnerships (owner’s rep, GC, property manager, compliance lead). Program pathway: Choose between 9% (competitive) or 4% with tax-exempt bonds (as-of-right with volume cap). Feasibility test: Run a sources/uses model and 15-year operating pro forma (rent limits, vacancy, reserves, operating expenses, and debt coverage). Counsel: Engage a low income housing tax credit attorney early to flag structuring and compliance issues that can affect eligibility. Choose 9% vs 4% + Bonds (Key Tradeoffs) 9% credit: Highly competitive; larger equity per unit; limited annual allocation; strict scoring priorities (location, deeper affordability, readiness). 4% + bonds: Lower equity per unit but more available; requires tax-exempt bond allocation and often layered soft funds; timing driven by issuer, investor, and construction financing. Assemble the Team Developer/sponsor lead, architect, GC, owner’s rep. Lenders (construction/perm), bond issuer (if 4%), equity investor/syndicator. Property manager and compliance specialist. Environmental, title/survey, appraisal, market study. Low income housing tax credit attorney, municipal/land use counsel (if separate), and lender’s counsel. Secure Site Control (and Protect It) Use PSA, option, or long-term ground lease with clear timelines tied to funding and entitlements. Diligence rights: Access for environmental studies, survey, and inspections; cure periods for title issues. Contingencies: Funding awards, permit approvals, bond/credit allocations. Run Due Diligence in Parallel Title & survey: Resolve easements, access, encroachments; confirm legal descriptions. Environmental: Phase I/II, remediation plans, vapor mitigation if needed. Entitlements: Zoning verification, density bonus, parking reductions, CEQA strategy or exemptions. Physical scope: For rehab, assess relocation needs, lead/asbestos protocols, and scope pricing. Build the Capital Stack Equity: 9% or 4% LIHTC pricing, contribution schedule, adjusters, developer fee timing. Debt: Construction loan, perm loan, potential credit enhancement. Soft funds: Local/HCD programs, HOME, CDBG, IIG/AHSC/TOD, trust funds—mind each program’s covenants and timelines. Reserves: Operating, replacement, lease-up, casualty, and required guarantees. Pre-Application & Application Milesto nes Investor indications: Term sheet with projected pricing, adjusters, and reserve requirements. Lender terms: Indicative letters detailing proceeds, interest, recourse/guaranties. Bond path (4%): Inducement resolution, TEFRA hearing/approval, volume cap application, credit enhancement/trustee onboarding. TCAC filing (for credits): Scoring strategy, threshold requirements, and documentation. Local approvals: Inclusionary/affordability agreements, fee deferrals, and any discretionary approvals. Typical First-Time Timeline (Indicative) Months 0–3: Site control; initial diligence; engage team; early investor/lender outreach. Months 2–6: Entitlements/CEQA; full due diligence; refine design & cost; secure soft funds. Months 5–9: Submit bond allocation (if 4%) and/or 9% credit application; negotiate investor and lender terms. Months 8–12: Receive allocations/awards; finalize construction budget; execute GMP or similar. Months 10–14: Close on land/lease, loans, partnership/operating agreements; start construction. Add 2–4 months buffer for environmental remediation, right-of-way, or complex title cures. Entity & Deal Structure Ownership tiers: Investor limited partner/upper-tier entity; project-level partnership or LLC; sponsor/managing member. Agreements: Partnership/operating agreements, guaranties (completion, carve-outs, tax credit delivery), management and compliance agreements. Regulatory docs: LURAs, regulatory agreements, and all recorded restrictions aligned across TCAC, bonds, and soft sources. Pre-Closing Readiness Checks Budget & gap: Lock GMP, contingencies, and value engineering; confirm sources/uses balance. Conditions precedent: Allocation letters, credit underwriting approvals, insurance, legal opinions. Third-party reports: Appraisal, market study, PNA/PCNA, environmental, plans/specs. Compliance setup: Tenant selection plan, fair housing marketing plan, income certification systems, reporting calendars. Closing Checklist (What You’ll Sign & Deliver) Title & escrow: Updated pro forma, endorsements, REMs, ALTA survey; subordination and SNDA as needed. Credit/bond documents: Indenture, loan agreements, tax certificates, issuer/underwriter documents (if applicable), TEFRA/volume cap confirmations. Loan documents: Construction loan, perm take-out commitments, intercreditor agreements, collateral assignments. Equity documents: Partnership/operating agreement, subscription, contribution schedule, capital account provisions, adjusters, ROFR/Year-15 mechanics. Regulatory agreements: TCAC regulatory agreement, land use/restrictions, soft-fund covenants recorded against the property. Insurance & risk: Builder’s risk, GL, professional liability, workers comp, OCIP/CCIP if applicable. Closing deliverables: Opinions (borrower, tax, enforceability, bond), certificates, resolutions, authority documents, updated draw schedules, and escrow instructions. Construction & Lease-Up Compliance (Don’t Wait) Labor requirements: Prevailing wage, skilled & trained workforce, Section 3 (where applicable). Change orders: Keep investor/lender informed; maintain coverage ratios and contingency levels. Lease-up: Income qualification protocols, rent/rider accuracy, AFHMP/fair housing records. Cost certification & placed-in-service: Track eligible basis; prep final cost cert and 8609 package. Year-15 & Long-Term Obligations (Plan Early) Options & exits: Plan for ROFR or buyout provisions in line with mission and investor economics. Asset management: Ongoing reporting, reserve funding, and physical needs planning. Extended use: Comply with post-Year-15 restrictions where applicable. How a Low Income Housing Tax Credit Attorney Helps Structuring: Aligns tax, financing, and regulatory requirements so documents don’t conflict. Risk management: Spots title, environmental, and covenant conflicts early—before they become closing blockers. Negotiation: Balances investor/lender protections with sponsor economics and long-term control. Compliance: Builds a workable plan for certifications, reporting, and fair housing from day one. Have a site or concept you want to move forward? Contact us to speak with a low income housing tax credit attorney about eligibility, timelines, and a closing checklist tailored to your project.
