Firm Seeks Relief to Aid Assisted Living Project Developers

January 4, 2021

Internal Revenue Service
Attn: CC:PA LPD:PR
(IRS Review of Regulatory Relief)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Re: IRS Review of Regulatory and Other Relief to Support Economic Recovery 85 FR 73252

Dear Sir or Madam:

We are writing on behalf of our clients and other developers of projects that address a specific and significant need of an often overlooked but important segment of the country's population — affordable assisted living for low-income seniors (referred to herein as an “Affordable Assisted Living Project”). A number of these necessary facilities rely on the pairing of Medicaid reimbursement for assisted living services with allocations of federal low-income housing tax credits (“LIHTC”) under Section 42 to be economically feasible Unless otherwise indicated, all references to “Section” throughout this letter are to the Internal Revenue Code of 1986, as amended.

Given the unique and significant impact that the COVID-19 pandemic has had on senior housing and long-term care facilities across the country, the COVID-19 pandemic has made it virtually impossible for Affordable Assisted Living Projects to meet certain occupancy deadlines in order to receive their intended LIHTC benefits under Section 42, potentially resulting in economically devastating results to such projects. As a result, we are requesting, consistent with Section 7508A(a)(1) and Section 42(n), that the Internal Revenue Service (“IRS”) and the U.S. Department of Treasury (“Treasury”) provide a state governmental housing credit agency that has jurisdiction over an affected Affordable Assisted Living Project (the “Agency”) with the discretionary authority to toll the beginning of the Affordable Assisted Living Project's first year of the credit period under Section 42(f)(1) for a reasonable and appropriate additional period of time to permit the project to otherwise timely satisfy its occupancy requirements under Section 42.

Our clients appreciate and welcome the relief that the IRS and Treasury previously provided through Notice 2020-53 to address concerns regarding the impact of the COVID-19 pandemic on certain LIHTC program deadlines and requirements. However, such measures did not provide any relief for developers of LIHTC financed Affordable Assisted Living Project facing the substantial and unique limitations that the pandemic has placed on the operations of an assisted living facility, generally, while also coping with the drastic reduction in potential residents looking to relocate to such a facility during a continued national health crisis. The developers of these Affordable Assisted Living Projects completed all the necessary steps to timely construct and prepare their facilities for leasing. However, the developers could not have even remotely anticipated that a crisis like the current pandemic would occur in 2020 and that it would have such a specific and focused negative impact on both their industry and their potential residents, creating essentially insurmountable obstacles to timely complete their lease-up and qualified occupancy of the project. Given the above, developers of Affordable Assisted Living Projects need more time to meet their lease-up requirements under Section 42(f)(3)(A).

Although, as noted above, numerous Affordable Assisted Living Projects rely on the combination of health care subsidies and federal low-income housing tax credits to make these projects financially viable, it cannot be ignored that the government's “investment” in such projects provides significant benefits to state governments, the federal government, and their citizens. An Affordable Assisted Living Project permits an older individual with limited income to transition to a more financially accessible home and community based facility that is equipped to adjust its level of care and services to meet the individual resident's changing health needs and avoid premature relocation to more expensive institutional setting such as a skilled nursing care facility. Additionally, residents in such facilities have greater access to routine preventative care, nutrition, and medication assistance, in addition to more personal interaction with other residents and staff, which ultimately leads to greater overall healthcare cost savings to the states (and, as a result, the federal government). These projects combine health care and housing subsidies to alleviate growing healthcare costs for low-income seniors while also addressing significant lower-income housing needs for the same at-risk population.

The Problem

Under Section 42(f)(2), an Affordable Assisted Living Project's first-year tax credit is calculated by determining the average applicable fraction (i.e., the percentage of qualifying affordable housing units compared to total units in the project) using the applicable fractions at the close of each month of the first year of the credit period. Developers often make commitments to low-income housing tax credit investors as to an expected LIHTC for a specific Affordable Assisted Living Project based on a projected qualified occupancy rate for purposes of calculating the project's first-year credits. If an Affordable Assisted Living Project fails to achieve the projected qualified occupancy by the end of the first year of the credit period, the project's non-qualifying units do not count toward the calculation of the project's first-year credits.

Accordingly, if an Affordable Assisted Living Project fails within the first year of the credit period to lease-up all of the affordable housing units required to meet the qualified occupancy rate necessary to generate the expected LIHTC for the project, then Section 42(f)(3)(A) imposes a “2/3rd haircut.” As a result, the amount of the LIHTC that an owner of an Affordable Assisted Living Project actually realizes (in contrast to the expected LIHTC that drove the calculation of the low-income housing investors' investment in the project) from each unleased affordable housing unit as of the end of the first year of the credit period is reduced by one-third (1/3) during the first 10 years of the project's 15-year credit period, with 80% of the 1/3 reduction claimed in years 11 through 14 of the project's 15-year credit period (rather than the full amount of the LIHTC being claimed during the first 10 years of the credit period). Given the reliance of the project's viability on the low-income housing tax credits and the tax credit investors expecting a certain LIHTC amount based on projected qualified occupancy rates, the impact of this “haircut” provision is economically devastating and will cost developers and their projects millions of dollars in indemnity adjusters that will become payable to low-income housing tax credit investors. The COVID-19 pandemic has created multiple compliance issues and concerns for LIHTC projects, some of which have been addressed by IRS and Treasury through prior relief. However, the impact of the pandemic on the ability of Affordable Assisted Living Projects to reach qualified occupancy by the end of their first credit year, is unique to both the nature of such projects, generally, and the characteristics of their defined pool of potential residents. This singular mix creates substantial compliance obstacles that are faced by Affordable Assisted Living Projects which, under current law, can only be overcome by the IRS and Treasury granting the requested relief.

According to recently released data from the Centers for Disease Control and Prevention (“CDC”), the COVID-19 pandemic has highlighted the vulnerability of residents and staff members in long-term care facilities such as assistive care facilities and those providing similar residential care.¹ Moreover, 22% of reporting assisted living facilities indicated that they have had at least one COVID-19 case among residents or staff members.² This relatively high incidence of positive cases is attributed to the potential transmission risk within assistive care facilities. Transmission can occur among and between residents and staff members due to the congregate nature of the setting and the need for close contact between staff members and residents as part of their assistive care.³ Of additional concern, is that residents are at increased risk for severe COVID-19–related outcomes because of their age and higher prevalence of chronic conditions.⁴ Among the states with available data, the proportion of COVID-19 cases that were fatal for residents of an assistive care facility were 21.2%, in comparison to 2.5% overall for the general population of these states.⁵ Additionally, in order to protect residents and staff during the COVID-19 pandemic, Affordable Assisted Living Projects must implement certain quarantine protocols and visitor restrictions that potential tenants most likely would not want to voluntarily subject themselves to by leasing an affordable unit. For example, such restrictions could prevent them from having in-person access to their family members for extended periods of time. Further, most of the communal gathering, social benefits, and other amenities of an assisted living facility are severely limited by the preventive measures that such facilities must generally impose as best practices to prevent the transmission and spread of COVID-19. Finally, the disproportionate share of deaths among residents of assisted living facilities in the reported data noted above is a major deterrent for potential tenants and an impediment to otherwise compliant Affordable Assisted Living Projects attempting to reach qualified occupancy by the end of their first credit year.

IRS AUTHORITY TO GRANT REQUESTED RELIEF

There are two statutory grants of authority under which the IRS and Treasury may act. First, Section 7508A provides that, “in the case of a taxpayer determined by the Secretary [of the Treasury] to be affected by a federally declared disaster (as defined by Section 165(i)(5)(A)), the Secretary may specify a period of up to 1 year that may be disregarded in determining . . . whether any of the acts described in paragraph (1) of Section 7508(a) were performed within the time prescribed therefor . . .” Section 165(i)(5)(A) provides “The term "Federally declared disaster" means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act [(“the “Stafford Act”)].”

Section 165 only requires a disaster where “in the determination of the President, Federal assistance is needed.” Clearly, the President's finding of a national emergency due to the COVID-19 pandemic and its impact is consistent with this conclusion. As a result, relief under Section 7508A (and, by reference, Section 7508) is authorized. It is important to note that Notice 2020-18 confirms that IRS and Treasury have reached a similar conclusion interpreting the requirements of Sections 7508A and 165:

On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic (Emergency Declaration). The Emergency Declaration instructed the Secretary of the Treasury 'to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).'

Once it is determined that Section 7508A authorizes IRS and Treasury to provide relief, Section 7508(a)(1) provides a lengthy list of actions that may be taken. Most have to do with filing returns and making claims for refunds, but Section 7508(a)(1)( K) provides a catch all for “(a)ny other act required or permitted under the internal revenue laws specified by the secretary.” In addition, Treas. Reg. Section 301.7508A-1(b)(5) underscores the broad nature of the IRS's relief authority under Section 7508A. (“The IRS may determine, however, that additional relief to taxpayers is appropriate and may provide additional relief to the extent allowed under section 7508A.”) Therefore, consistent with the major disaster declared in all 50 states, and the President's declaration of an “emergency” generally, we have a disaster that requires federal assistance, and the Secretary of the Treasury could grant one year extensions for any act required or permitted under the revenue laws.

However, as noted above, this is not the only statute that authorizes the IRS and Treasury to act. Section 42(n) gives the Secretary of Treasury authority to issue “such regulations as may be necessary or appropriate to carry out the purposes of this section. . . .” Treas. Reg. 1.42-13(a) repeats that authority and adds that the Secretary can provide guidance in a variety of ways.

Consistent with that authority, the IRS has issued many administrative rulings authorizing various agencies to grant extensions of certain deadlines specifically related to LIHTC compliance. See Rev. Proc. 2014-49. In Rev. Proc. 2014-49, the IRS granted discretionary authority to a governmental housing credit agency that has jurisdiction over a Project where, during the first year of the credit period, buildings were “severely damaged or destroyed in a Major Disaster Area, or uninhabitable as a result of a Major Disaster,” to toll the beginning of the first year of the credit period under Section 42(f)(1). The agency was permitted to extend the tolling period an amount of time not to extend beyond the end of the 25th month following the close of the month of the “Major Disaster declaration.” Project owners were not permitted to claim any LIHTC during the restoration period of the buildings. Moreover, the agency would have to report projects on which it granted relief under Rev. Proc. 2014-49 to the IRS by attaching the required documentation as provided in the instructions to IRS Form 8610.

As indicated above, on March 13, 2020, President Trump declared a nationwide emergency pursuant to Sec. 501(b) of Stafford Act to avoid governors needing to request individual emergency declarations. At this time, all 50 states, the District of Columbia, and 5 territories have been approved for major disaster declarations to assist with additional needs identified under the nationwide emergency declaration for COVID-19. Although no Affordable Assisted Living Project has become severely damaged or destroyed, or physically “uninhabitable,” as a result of the COVID-19 pandemic, as discussed in detail above, the pandemic has effectively precluded the successful lease-up of the projects by creating temporary (we hope, with the ongoing rollout of the vaccine) impediments to potential tenants voluntarily agreeing to lease a qualifying affordable unit. The negative impact of the pandemic on the ability of a senior residential assisted living facility to lease its units is every bit as limiting and restrictive as a physically damaged unit.

Through no fault or lack of foresight on the part of developers, these projects are now unable to timely reach qualified occupancy that they would almost certainly have met but for the COVID-19 pandemic, a federal emergency and major disaster, which impacts senior care facilities and senior tenants in a substantially disproportionate way than other tax credit projects. As a result, these projects face severe financial penalties and risk economic viability. The IRS and Treasury recently provided the exact same relief requested herein to LIHTC projects with units damaged or destroyed by a major disaster. There is nothing within Section 42 or the underlying regulations that specifically limits such relief only to situations where there are physically damaged units. The relief granted in Section 10 of Rev. Proc. 2014-49 was simply a common-sense policy determination by the IRS to provide relief consistent with its authority under Section 42(n) in the context of a major disaster. Here, we have the same federally declared emergency and confirmed declarations of a major disaster. Additionally, the resulting impact from the COVID-19 emergency effectively limits the ability of an Affordable Assisted Living Project to lease its units in much the same way as if the units were damaged or destroyed.

Accordingly, based on either of these theories, we respectfully offer that the IRS is authorized to take suitable action to respond to the current crisis, including the actions proposed in this request.

REQUESTED RELIEF

We respectfully request that the IRS publish a notice granting relief to Affordable Assisted Living Projects with respect to the following items:

• For any Affordable Assisted Living Project during the first year of the credit period that is unable to timely achieve qualified occupancy of all LIHTC units as a result of the COVID-19 pandemic, the governmental housing credit agency that has jurisdiction over the project may toll the beginning of the first year of the credit period under Section 42(f)(1). The tolling period must not extend beyond the end of the December 31, 2021. If an agency provides the relief herein to any Affordable Assisted Living Projects, the agency must report such project(s) to the IRS by attaching the required documentation as provided in the instructions to Form 8610.

CONCLUSION

During this difficult time, urgent action is required to relieve uncertainty and allow Affordable Assisted Living Projects affected by the pandemic to continue their critical role in providing affordable housing and access to assisted living services to low-income seniors. As addressed above, we believe that the IRS has authority to extend deadlines and take similar actions that will alleviate the disruption caused by the pandemic. The requested relief is consistent with similar actions taken by the IRS in the past yet retooled to effectively to respond to the unprecedented, wide-ranging and disproportionate effect of the COVID-19 pandemic in the limited context of LIHTC senior residential assisted living projects. Additionally, the involvement of the appropriate state agency in approving a tolling period will ensure that such relief is not abused and provided only to those projects impacted by COVID-19.

Sincerely,

FROST BROWN TODD LLC
Indianapolis, IN

Matthew S. Carr

J. Christopher Coffman