The Internal Revenue Service is considering tightening the regulation that requires developers who use tax-exempt financing for a housing project to set aside units for low- and moderate-income families. The changes under consideration would make it more difficult for single people and families of fewer than four to qualify for the set-aside units.
Tax-exempt bonds can be issued by housing agencies for financing new construction or rehabilitation of older apartment buildings. Under the current IRS regulation, 20 percent of the units in such a project must be rented to families that make 80 percent or less of the median income for the area, at rental rates that are 30 percent of their income.
However, the regulation makes no provision for different family sizes. Therefore, a single person and a family of four both qualify as low-income at the same income level, even though the single person has more disposable income and can use a smaller apartment.
Under the current IRS regulation, developers can meet the test by providing smaller units with rents that are close to market rates.
In an area with a high median income, such as Washington, rents for set-aside units in projects financed with tax-exempt bonds can be surprisingly high and still meet the requirements of the IRS regulations.
Several months ago, tenants at the Abingdon Apartments, one of the remaining affordable apartment complexes in Alexandria, were shocked to find out that a proposal to rehabilitate their 40-year-old units with tax-exempt bonds would mean substantial rent increases, even for the units set aside for low- and moderate-income families.
Rents at the complex are now $375 for a one-bedroom unit and $400 for a two-bedroom. The proposed rents for the set-aside units were $536 for a one-bedroom and $635 for a two-bedroom. The other units, which can be rented at what the market will bear, were proposed to rent for $625 for a one-bedroom and $725 for a two-bedroom.
At the Summit Apartments in Rockville, a project renovated by the Artery Organization with tax-exempt bonds last year, 192 of the 235 families were forced to relocate after rents increased from between $315 and $400 before the renovation to between $525 and $695 after the renovation, including the set-aside units.
The problem, say tenants facing displacement, is that the current IRS rule allows a person earning $29,280 to qualify as low-income, and for rents set as high as $732 to qualify as "affordable" for a low- or moderate-income person.
"The problem with the rule is the definition of median income," said an IRS spokesman. "One of the considerations is redefining it for family size in such a way that would lower the median for families smaller than four people."
The IRS spokesman said that the Department of Housing and Urban Development, in its subsidized housing programs, defines median income in terms of a family of four when qualifying people as low- or moderate-income, and then prorates it to lower levels for families of fewer than four people. The IRS said it was considering changing the definition in its regulation so that it would be similar to that used by HUD.
Mark Looney, coordinator for the Alexandria Landlord Tenant Relations Board, said such a change would mean that proposed rents for set-aside units in projects with tax-exempt financing would be more affordable for the people the law is designed to serve.
He said the current regulation results in particularly high rents for efficiencies and one-bedrooms -- units that low-income people are more likely to be able to afford. Looney said that, as an example, Erkiletian Construction Corp. of Annandale has proposed building a new 324-unit apartment building next to its existing Park Center Apartment complex in Alexandria with $30 million in tax-exempt bond financing.
Although the new building will have a number of two-bedroom units, Erkiletian is proposing to meet the IRS regulation for the 20 percent set-aside units by offering efficiencies at $575 and one-bedroom units at $675 to $690. The market-rate efficiencies at the new Park Center building would be priced at $625 and the one-bedrooms at $795 to $850.
"The rents for the set-aside units are just too high for low- and moderate-income people in Alexandria," said Looney. "This is a lot of tax-exempt money Erkiletian is asking for, the biggest the Alexandria Redevelopment and Housing Authority will do so far, and I expect the landlord-tenant board will ask to have them lower the rents on the set-aside units before they approve it."
The IRS spokesman said that it would be several weeks before the IRS would have a concrete proposal prepared for public comment.