Choose Among Four Unit Options for Site’s Model Unit

If you’re like many tax credit managers, you might want to set aside a model unit that you can show to prospects to help “sell” your site. But before you set aside any unit at your tax credit site for this purpose, you must consider what effect your action may have on your compliance efforts. Depending on the type of unit you choose to set aside, you could put the owner’s tax credits at risk.

You have four options when it comes to choosing the type of unit to set aside as a model unit. We’ll explain the pros and cons of each option, as well as some other factors you should consider.

Option #1: Market-Rate Unit

If you manage a mixed-income site and have any market-rate units available, you can set aside one of these units as a model unit.

Pros. The main advantage of setting aside a market-rate unit as a model unit is that it raises no compliance issues. Market-rate units aren’t included in your buildings’ applicable fractions, which means you can keep the unit unoccupied without it affecting the owner’s tax credits. And you don’t have to keep a market-rate model unit in compliance with the tax credit program’s requirements for the rest of your site’s 15-year compliance period. If you choose this option, you can convert a market-rate unit to a model unit whenever one becomes available.

Cons. Setting aside a market-rate unit as a model unit could lead to a large revenue loss and damage your cash flow. Also keep in mind that this option is limited to mixed-income sites.

Option #2: Empty Unit

If you’re in the first year or so of your site’s compliance period, you can set aside an empty unit (that is, a unit that hasn’t yet been occupied by a qualified, low-income household). This option is available to all tax credit managers at the beginning of their site’s compliance period.

Pros. At the beginning of your site’s compliance period (the time when you most need model units), all your low-income units are empty units. So if you want to use one or more of them as model units until you rent them to qualified low-income households, you’ll have many to choose from.

Cons. If you use an empty unit as a model unit, you must still work hard to find a low-income household to occupy that unit. If you don’t, the empty unit won’t become a low-income unit, which means the owner of your site won’t be able to count it toward the minimum set-aside and the site’s other first-year occupancy requirements. This could cost the owner all of its credits. Also, once you find a qualified low-income household for an empty unit, you can no longer use it as a model unit.

Option #3: Vacant Unit

Some managers use vacant (low-income) units as their model units. Because all tax credit sites have low-income units, this option is available to all tax credit managers any time a low-income unit becomes vacant.

Pros. If you use a low-income unit as a model unit, the owner can claim credits for the model unit (as long as you follow the vacant unit rule, as explained below).

Cons. You can use a low-income unit as a model unit only temporarily. When low-income households vacate their units, the vacant unit rule requires you to make reasonable efforts to re-rent that unit—or the next available unit of comparable or smaller size at your site—to a new qualified low-income household. If you take a low-income unit off the market to use as a model unit and ignore the vacant unit rule, you can’t continue counting the unit as low-income.

Other considerations. Because you can use a vacant unit as a model unit only temporarily, it’s not worth furnishing it as completely as you would a permanent model unit. Also, completely furnishing a vacant unit could give the wrong idea to your state housing agency. If a fully furnished unit remains vacant for many months, your state housing agency may question whether you’ve been making reasonable efforts to re-rent it and may think you’ve been trying to keep it available as a model unit for as long as possible. Also, don’t be tempted to try to convince prospects to rent only those vacant units that you’re not temporarily using as model units. To safeguard the owner’s tax credits, you must make reasonable attempts to rent every vacant unit at your site.

Option #4: Employee Unit

It’s possible that your site has already set aside one or more units for use by full-time employees as part of its common area. If that’s the case, you can use the employee unit as a model unit.

Pros. If you use an employee unit that’s part of your site’s common area as your model unit, it’s part of your site’s eligible basis and the owner can claim credits for it. And you needn’t worry about keeping such a unit in compliance with the tax credit program’s requirements, as you would have to with an empty or vacant unit.

Cons. You can use this option only if the owner of your site arranged with your state housing agency to set aside an employee unit as part of the common area when the owner got its tax credit allocation. You’ll also need to get the employee who occupies the unit to agree to let you use it as a model unit.

Other considerations. To avoid problems, it’s a good idea to have the employee sign an agreement with you stating that during business hours, the employee must make the unit available for your leasing staff to show to prospects as needed. Also, keep in mind that an employee unit can double as a model unit only as long as the unit stays occupied by an employee.