(1) Introduction. This rule explains the multifamily property tax exemption (MFTE) audit or review program authorized under RCW 84.14.100. The program requires the department of commerce (department) to conduct audits or reviews for certain properties issued certificates of tax exemption and determine whether the properties meet MFTE requirements.

(2) Definitions. For purposes of this rule, the following definitions apply:

(a) "Audit or review fee" means a monetary fee authorized under RCW 84.14.100 that the department may impose to fund the audit or review program described in subsection (3)(a) of this rule.

(b) "Authorizing jurisdiction" is the same as "governing authority" for purposes of this rule and means the local legislative authority of a city or county having jurisdiction over the property for which an exemption may be applied for under chapter 84.14 RCW.

(c) "Certificate of tax exemption" means a final document issued by an authorizing jurisdiction which is provided to the county auditor and confirms a property's eligibility for a property tax exemption in accordance with the conditions of chapter 84.14 RCW and local requirements.

(d) "Department" means the department of commerce.

(e) "Income-restricted unit" means a unit where the monthly housing cost, including utilities, other than telephone, is no more than 30 percent of the area median income (AMI) level established in the MFTE contract. Only tenants making no more than the AMI level established for the unit are eligible to rent an income-restricted unit.

(f) "Local audit or review program" means an audit or review program operated by an authorizing jurisdiction to ensure properties receiving a property tax exemption provide affordable housing as required by their MFTE contract consistent with the conditions of chapter 84.14 RCW and local requirements.

(g) "MFTE contract" means the agreement between the authorizing jurisdiction and the owner of the property receiving the exemption. The agreement must contain the number of units of affordable housing provided, the time period, and the AMI level. Authorizing jurisdictions may combine the certificate of tax exemption and MFTE contract into one document.

(h) "Nonprofit" means a group registered to operate in the state of Washington, under RCW 24.03A.010, for purposes other than generating profit, in which no part of the organization's income is distributed to its members, directors, or officers.

(i) "Plan of correction" means a document issued by the department following the completion of an audit or review under RCW 84.14.100 (3)(a), notifying the owner or operator of the property of:

(i) Substantial noncompliance with the MFTE program requirements; and

(ii) Corrective actions necessary to comply with the MFTE program requirements, which must be completed within six months of the document's issuance to avoid a recommendation of a sliding scale penalty or cancellation of the tax exemption by the authorizing jurisdiction.

(j) "Qualifying household" means a household that meets the income limits established in the MFTE program for an income-restricted unit.

(k) "Sliding scale penalty" means the monetary penalty imposed under RCW 84.14.100 (3)(b), which may not exceed an amount calculated by subtracting the amount of rental income the property owner or operator was authorized to collect under their MFTE program agreement with the city or county from the rental income the owner or operator collected.

(3) MFTE program eligibility - Department audits or reviews.

(a) Audit or review program. The department has established a program, as required by RCW 84.14.100, to determine the compliance of properties receiving the MFTE. The program includes requirements for the minimum number of units, rental rates, and tenant screening.

(i) Audits or reviews under this subsection (3) must occur at least once every five years, according to the following schedules:

(A) For properties receiving eight-year exemptions granted under RCW 84.14.020 (1)(a)(ii)(A), the audit or review will occur five years after the final certificate of exemption is issued, as reported to the department under RCW 84.14.100(2).

(B) For properties receiving 12-year exemptions granted under RCW 84.14.020 (1)(a)(ii)(B), including those with an extension granted under RCW 84.14.020 (1)(c), the audit or review will occur five years and 10 years after the final certificate of exemption is issued, as reported to the department under RCW 84.14.100(2).

(C) For properties receiving 20-year exemptions granted under RCW 84.14.020 (1)(a)(ii)(C), 84.14.020 (1)(a)(ii)(D), or 84.14.021 the audit or review will occur five years, 10 years, 15 years, and 20 years after the final certificate of exemption is issued, as reported to the department under RCW 84.14.100(2).

(ii) The department will issue a notice of audit or review to a property granted a property tax exemption under MFTE in January of the calendar year in which an audit under this subsection (3) will occur. The department will send this notice via certified mail through the United States postal service to the property owner of record.

(iii) At the discretion of the department, audits or reviews under this subsection (3) may be completed virtually, or in person and on-site.

(iv) The following properties are not subject to audits under this subsection (3):

(A) Properties owned or operated by a nonprofit;

(B) Properties subject to an independent audit or review program administered by a city or county; and

(C) Properties not required to offer income-restricted units by their MFTE contract.

(b) Records. Records requested in advance by the department must be made available to the auditor by the time requested. Failure to be ready for the scheduled audit may result in a fee to recover the costs for audit staff travel and time. Records will be reviewed for all years starting at the beginning of the exemption period or starting after the last audit or review, whichever is later. Records will include, at a minimum:

(i) The MFTE contract with the authorizing jurisdiction;

(ii) All lease agreements for designated affordable units on the property;

(iii) Copy of lease payments for designated affordable units;

(iv) Copy of payment of households' monthly housing costs, including utilities other than telephone, for residents of designated affordable units;

(v) The documents verifying income of tenants for each income-restricted unit;

(vi) Any other documents necessary for supporting any additional local requirements under subsection (3)(c) of this rule;

(vii) Vacancy status for both income-restricted and market-rate units over the five-year audit or review period; and

(viii) Records from all previously completed audits or reviews.

(c) Additional local requirements. A city or county may impose additional requirements for MFTE eligibility within its jurisdiction. Audits or reviews conducted under subsection (3) of this rule may evaluate whether any additional local requirements are satisfied for purposes of MFTE eligibility.

(d) Owner-occupied housing. In cases where an owner-occupied income-restricted housing unit is due for an audit or review, the audit or review will include reviewing resale conditions, and if a sale has occurred, reviewing whether the resale conditions prevented the property from being resold at market rates.

(4) Audit or review fees and penalties for noncompliance.

(a) Audit or review fees. The owner or operator of any property subject to an audit or review under subsection (3) of this rule may be subject to an audit or review fee.

(i) The department may publish a fee schedule detailing potential audit or review costs by unit count and location prior to engaging in any audits for which a fee is charged. The department may elect not to charge fees for an audit.

(ii) Audit or review fees may not exceed the expected costs of the audit or review.

(iii) The property owner bears the costs of any additional audits or reviews necessary to confirm that a plan for correction has been carried out. Property owners may be responsible for added costs of evaluating compliance with additional local requirements under subsection (3)(c) of this rule.

(b) Noncompliance types. Different occurrences of noncompliance have different impacts on the balance between public and private benefits. Noncompliance types include:

(i) Minor errors with nominal impacts on program requirements. Errors by property owners that result in minor impacts, not material to the amount of rent charged to tenants or the provision of income-restricted units, may result in the department requiring a property owner to follow a plan of correction and participate in a follow-up audit or review within six months of the prior audit or review to determine compliance. In these cases, the department recommends waiving any penalties unless these errors persist.

(ii) Major errors with significant impacts on program requirements. Errors by property owners that have a substantial effect on the provision of income-restricted units constitute substantial noncompliance and will result in a recommendation for penalties. In these cases, the department recommends:

(A) Imposing the sliding scale penalty under subsection (4)(d)(i) of this rule;

(B) Requiring the property owner or operator to follow a plan of correction under subsection (4)(d)(ii) of this rule; and

(C) Conducting a follow-up audit or review within six months of the prior audit or review to demonstrate compliance.

(iii) Bad faith noncompliance. In cases of willful noncompliance or fraud, such as the property owner intentionally failing to fulfill requirements under an MFTE program, the department recommends immediate cancellation of the exemption, with collection of penalties as per RCW 84.14.110 (1)(a).

(c) Noncompliant projects. Upon receiving the results of the audit or review, the department will review any noncompliance issues and provide plans of correction for addressing properties that do not meet the affordability requirements of the program. These penalties may range from outreach and education to cancellation of the exemption for the property. However, while the department can require a follow-up audit or review to confirm that corrective action has been taken, imposing penalties is the responsibility of the authorizing jurisdiction.

(d) Audit or review penalties. If the required audit or review for a given property finds that the owner or operator has made major errors with significant impacts on program requirements that constitute substantial noncompliance under subsection (4)(b) of this rule, the department must notify the authorizing jurisdiction, and that jurisdiction must impose and collect a sliding scale penalty. If a follow-up audit or review finds continued substantial noncompliance with the program requirements, the exemption certificate must be canceled pursuant to RCW 84.14.110.

(i) The penalty may not exceed an amount calculated by subtracting the amount of rents that would have been collected had the owner or operator complied with their income-restricted unit commitment from the amount of rents collected by the owner or operator for the income-restricted units, with consideration of the severity of the noncompliance.

(Noncompliant monthly rent amount - Compliant monthly rent amount) * Months out of compliance = Maximum penalty amount

(ii) Corrective actions to ensure compliance may be assigned through a plan of correction. These actions may include staff training, creation of forms and policies for tenant screening, affirmative marketing requirements, etc. Compliance with corrective actions will be evaluated through a follow-up audit or review under subsection (4)(b)(ii)(C) of this rule.

(5) Audit or review programs managed by cities and counties.

(a) Standards for local audit or review programs. An authorizing jurisdiction may choose to conduct its own program to provide oversight of program compliance.

(b) Information provided. The department encourages authorizing jurisdictions to follow the department's audit or review standards and to provide the results of the audit or review to the department when noncompliance is identified.