IRS Final Regulations Effective Feb. 6, 2019

1. IRS Final Regulations Effective Feb. 6, 2019

2. WE WILL DISCUSS • The reduced audit notification timeframe and unit selection process • Random unit sample selection and changes to the amount of units to be inspected • All building inspection requirement • Physical inspection and file review uncoupled • REAC inspection in lieu of the physical inspection

3. REDUCED AUDIT NOTIFICATION TIMEFRAME and UNIT SELECTION

4. PAST AUDIT NOTICE REGULATIONS/ PRACTICE Regulations allowed… • The agency to give an owner reasonable notice that a review/ audit would be conducted • It was provided that reasonable notice was generally NO MORE than 30 days • The agency may also provide a very limited extension for certain extraordinary circumstances beyond an agency control

5. NEW REGULATIONS The Treasury Department and IRS… • Shortened the notification period to a NO MORE than 15 day notice • Believes this period gives building owners and tenants reasonable notification that a review will occur

6. UNIT SELECTION • An Agency must select low income units to inspect in a manner that will not give advanced notice that a particular unit is either selected or not selected • The regulations also clarified that an Agency may only notify the owner that a particular unit is being inspected ON THE DAY that unit is to be inspected • Units inspected day one • Units inspected day two….

7. REASONING • The Treasury Department stated, “The statistical validity of inspecting only a sample of the low income units in a project depends on the sample being random and representative. Thus, the validity would be destroyed if a project owner has an opportunity to selectively prepare the units…” • The reduced notice and unit selection provisions are intended to prevent owners from preparing units for inspections

8. NEVADA’S PROPERTIES ARE ALWAYS INSPECTION READY Any Questions, Concerns, Comments, or Grievances?

9. RANDOM UNIT SAMPLE SELECTION

10. PAST REGULATION/ PRACTICE • Previously the Treasury Department and the IRS determined that a 20% sample size of a property’s low income units was adequate to determine the entirety of the property’s physical condition • At the time it was thought that this sample size was adequate regardless of the total number of low income units in aproject

11. WHY CHANGE IT?? • It was determined that the “20% Rule” may have been unnecessarily burdensome for large projects • It was also determined the “20% Rule” may have failed to adequately assess the habitability of smaller projects, and may NOT have accurately estimated the overall compliance of the uninspected units

12. FINAL REGULATIONS • “20% Rule” abolished • Agencies must now inspect no fewer units than the number specified for projects of their size as stated in the Low Income Housing Credit Minimum Unit Sample Size Reference Chart

13. Easy Enough

14. BUT WAIT, THERE’S MORE…. Each building’s 8609 selection for checkbox 8b, “Are you treating this building as part of a multiple building project for purposes of Section 42?” also comes into play

15. Affects the Random Sample Count

16. SCENARIO 1

17. B 1 B 2 B 3 B 4 B 5 B 6 B 7 B 8 B 9 B 10 100% LIHTC Each Building Has 10 Units Total Units = 100 20% Rule = 20 Inspected Units NEW REGULATIONS Step 1- Check the 8609 question 8b; for EACH building All 8609s are checked “Yes” Because all 10 buildings are being treated as part of a multiple building project their units are totaled at 100 (10 Buildings x 10 Units) and referenced with the sample size chart 21 Inspected Units selected randomly throughout the property

18. SCENARIO 2

19. 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units B 1 B 6 B 7 B 2 B 4 B 5 B 8 B 9 B 10 B 3 100% LIHTC Total Units = 100 20% Rule = Still 20 Inspected Units NEW REGULATIONS Step 1- Check the 8609 question 8b; for EACH building All 8609s are now checked “No” Because all 10 buildings are NOT treated as part of a multiple building project each building is viewed as it’s own project We now reference the sample size chart for EACH building Each building has 10 units 8 inspected units selected randomly in each building totaling in 80 units throughout the property

20. SCENARIO 3

21. 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units 10 Units B 1 B 6 B 7 B 2 B 4 B 5 B 8 B 9 B 10 B 3 100% LIHTC Total Units = 100 NEW REGULATIONS Step 1- Check the 8609 question 8b Building 1-5 are checked “Yes” Building 6-10 are checked “No” Buildings 1-5 are being treated as part of a multiple building project so their units are totaled at 50 Buildings 6-10 are NOT being treated as part of a multiple building project. Each building will be referenced individually 8 units are selected randomly and inspected in each Building 6-10 18 units are selected randomly and inspected throughout Buildings 1-5 58 total units will be inspected throughout the property

22. PLEASE NOTE: • This new regulation does not apply to projects in the Extended Use Period (POST 15). These projects will continue to have ten percent physical inspection and file reviews

23. Any Questions, Comments, Concerns, or Grievances?

24. ADDITIONAL REGULATION TOPICS

25. SITE VISIT MINIMUMS • Final regulations retained the rule that a project must be inspected, at a minimum, of once every three years • - State of Nevada will continue to inspect yearly

26. ALL BUILDING REQUIREMENT • Regulations requires that an Agency physically inspect all buildings in a project • When units are selected to be inspected and the selection fails to include at least one unit in a building, the Agency may satisfy the All Building Rule requirement by inspecting an area of the building (the exterior, common areas, HVAC system, etc.)

27. PHYSICAL INSPECTION AND FILE REVIEW, UNIT SELECTIONS UNCOUPLED • Agencies may select a different set of unit files for review than was selected for the physical inspection • The file review and physical inspection do not have to be done on the same day • Agencies may not select the same units for physical inspections and file review, unless they are done on the same day • Agencies may also choose a different number of units for physical inspection and file reviews provided that the Agency chooses at least the minimum number of units in each case

28. REAC IN LIEU OF PHYSICAL INSPECTION • An Agency may use the REAC protocol to meet its physical inspection obligation if the inspection is conducted by HUD or a HUD certified REAC inspector • The Agency will still review tenant files for compliance

29. PLEASE NOTE: • Properties should notify the Agency when a REAC inspection is scheduled and after it is completed • The Agency will need a copy of the REAC inspection within 90 days of its completion. If not received the REAC inspection cannot be used and a physical inspection conducted by the Agency must be completed • 8823s will be filed based on that REAC inspection • A file review will still be scheduled. There is not a timeframe requirement, in relation to the REAC inspection, from which this must be done

30. THANK YOU Questions, Concerns, Comments, or Grievances?