Planning for Success: Selecting the Right Management Company for a Tax Credit Property

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The successful operation and performance of a low-income housing tax credit (LIHTC) project requires choosing the right property management company.

Skilled and vigilant management should keep a property at a healthy occupancy level, assure that it performs well physically and financially, and put investors in a good position to receive the full amount of projected tax benefits. Substandard management, on the other hand, can lead to unfilled units, tenant issues, physical and economic woes, and unhappy tax credit investors.

Management errors occurring during a LIHTC property’s 15-year compliance period cause a large share of the events that can lead to the loss or recapture of housing credits. Accordingly, careful screening of prospective management companies – setting up the selection of the best firm – can go a long way toward reducing this risk.

In general, there are two types of property management companies that operate LIHTC properties:

  • Identity-of-interest companies, which are owned by the owner of the property; and,
  • Fee management companies (fee managers), which are third-party firms that manage the property on behalf of the owner for a fee.

The characteristics of a good tax credit property management company are the same regardless of the type of company. This article will focus on the selection of a fee manager, although owners might wish to use the guidance to evaluate their identity-of-interest management company if they have one.

Guidance for Due Diligence

When selecting a fee management firm to operate a LIHTC property, the property’s general partner (GP) and investor (i.e. syndicator or direct investor) must exercise significant due diligence. This process should be organized, systematic, and geared toward ensuring that the selected company is competent to manage a LIHTC property.

Following is some guidance for screening prospective management companies and some questions to ask:

  • Check the company’s experience. A company should have at least five years’ experience in managing LIHTC properties. However, a very good property management company lacking extensive management experience with LIHTC properties shouldn’t automatically be ruled out. The owner might select such a company and bring in a third-party LIHTC compliance firm to provide additional oversight for certain tax credit compliance functions (e.g., reviewing files of applicants initially approved as eligible LIHTC tenants).
  • Review the firm’s portfolio. Find out the number and type of properties that the company manages. For each property, get details on the subsidy programs utilized (LIHTC, Section 8, HOME, etc.), the current occupancy level, and the length of time managed by the company. If the owner is developing a LIHTC property that, for example, will serve seniors or a special needs population, make sure that the company has experience in managing these kinds of projects.
  • Vet the company’s staff and their qualifications. As many of the company’s management staff people as possible should have professional licenses or designations. Examples of such designations include CPM, RAM, HCCP, SCHM, and Real Estate and Broker licenses.
  • Check out the people who would be assigned to your property. The company should be able to provide you a list of the management staff that would be assigned to your property, including the management agent. Ask for and review the resumes of key personnel. The prospective management agent should have experience in the subsidy programs used at your development (LIHTC, Section 8, HOME, HOPE VI, etc.).
  • Learn about how the company operates. Centralized bookkeeping, leasing oversight, maintenance, and compliance supervision should be present. Does corporate staff perform regular inspections of property operations? Are there regular staff reviews? There should be a strong internal review process for compliance procedures, including for the review and approval of tenant files. Will there be a separation of duties between leasing and compliance? The strongest operations have different people responsible for leasing and tenant eligibility approval. Does the company use qualified third-party professionals for regular reviews of each LIHTC property and the tenant files? The strongest management companies recognize that such redundancy is strong evidence of fiduciary responsibility to investors.
  • Probe into resources and procedures. Does the company use computer software designed for LIHTC program compliance? Does the firm have written procedures (operations manuals, compliance manuals, etc.)? Is there a corporate training program? Is there ongoing professional training? If there is ongoing professional training, who conducts it? (It should be a recognized, reputable organization.) Do staff persons attend training on a regular basis? What are the training procedures for the agent that would be assigned to your property.
  • Ferret out possible red flags. Have any other owners canceled or decided not to renew their management contract with the company? If yes, get an explanation of the circumstances. Have any management staff had their professional credentials or licenses revoked or suspended? If yes, find out the details. Have any of the company’s managed properties gone into default or foreclosure? Again, get the particulars if the answer is affirmative. The company should also furnish at least three references attesting to the firm’s LIHTC management capabilities.

Compliance Monitoring Results

It’s also important for the general partner or investor to review the results of past compliance monitoring visits made by state tax credit allocating agencies to some of the company’s LIHTC properties. The owner or their qualified representative should review at least five tax credit tenant files from at least two tax credit properties that were prepared by the prospective management company. This can reveal whether the company clearly understands the LIHTC program’s requirements for tenant eligibility and file documentation.

Finally, ask about the company’s LIHTC tenant file retention policies, including for the storage of original resident files and overall file organization.

The administrative requirements of tax credit property management are complex and burdensome. Only professional management companies should be considered. And even highly skilled companies may require additional oversight unless they are very experienced with the management of LIHTC properties.
A. J. Johnson is president of A. J. Johnson Consulting Services, Inc., a Williamsburg, Va.-based full service real estate consulting firm specializing in due diligence and asset management issues, with an emphasis on low-income housing tax credit properties. He may be reached at 757-259-9920, [email protected].