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Physical Inspections Pilot Program

A Physical Inspection Pilot Program which tests the feasibility of conducting one coordinated inspection on mixed-financed properties by which would satisfy LIHTC, HUD and/or RD requirements is currently underway in six states–Michigan, Minnesota, Ohio, Oregon, Washington, and Wisconsin. HFAs in these six states may satisfy their property-inspection responsibilities by using either their current property-inspection protocol or the inspection protocol of HUD’s Real Estate Assessment Center (REAC). A conflict between the IRS inspection requirements for LIHTC units and the REAC protocol has been discovered. Specifically, IRS rules require that at least 20 percent of the low-income units in a project be physically inspected and that the records for those same units be reviewed. However, in some cases, the number of low-income units physically inspected under the REAC inspection protocol may not satisfy the 20 percent requirement.




IRS Notice 2012-18 presents an alternative way for the six HFAs participating in the Physical Inspection pilot program to satisfy their inspection and review responsibilities under required by LIHTC regulations. It states that during the time period of the Pilot Program (scheduled for November 7, 2011, through December 31, 2012), if a project is physically inspected by REAC, then, for that project-


(1)  The HFA is deemed to satisfy the IRS’ minimum 20 percent low-income unit physical inspection requirements; and


(2) The HFA may satisfy the certification review rules by reviewing the annual low-income certifications, supporting documentation, and rent records for the tenants in at least 20 percent of the low-income units in the project, regardless of whether any of the units whose files are reviewed are among the units that are physically inspected by REAC.


The notice also invites public comments on:


(1) Whether the 20 percent rule for both physical inspections and certification review is appropriate, including whether-

·         this percentage appropriately balances the IRS’ compliance concerns against the desirability of reducing the inspection burden on HFAs, tenants, and building owners;

·         the percentage should vary depending on the type of inspection the HFA is performing (i.e., physical inspection or annual low-income certification review);

·         the percentage should vary with the number of low-income units in a project (that is, the size of the population from which the units that will be inspected are to be randomly drawn); and

·         the percentage should vary depending on whether the inspection is the initial inspection performed under § 1.42-5(c)(2)(ii)(A) or the on-going inspection performed under § 1.42-5(c)(2)(ii)(B).


(2) Whether permitting reviews of the annual low-income certifications for a sample of units different from the units physically inspected would simplify the inspection process under § 1.42-5(c)(2)(ii)(A) and (B), and whether the use of a

different sample would impair the value of the data obtained.


(3) Whether the Service should amend the current regulations to provide an exception from the inspection provisions of § 1.42-5(d) for inspections done under the REAC protocol, similar to the exception under § 1.42-5(d)(3) for inspections performed by the Rural Housing Service under the section 515 program.


Comments should be submitted to IRS by May 31, 2012. Therefore, NAHMA invites feedback on these three questions from members through May 15.  

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