Experts Offer Tips for Effective Compliance
By A. J. Johnson & Caitlin Jones
4 min read
Compliance is the heart and soul of the federal low-income housing tax credit (LIHTC) program.
If you build it, they – the residents – will come.
But then you must run the property in strict compliance with the program’s many rules. Otherwise, your investors risk the possible loss of tax credits.
So what are some of the most common compliance mistakes made? And what are the elements for an effective compliance system and strategy for a property?
In recent interviews with the Tax Credit Advisor, two leading LIHTC professionals – Andy Bowden and A. J. Johnson – shared their war stories and advice, to guide property owners and managers, developers, and others on how to “do the right thing.”
Bowden is an owner and vice president of Spectrum Enterprises, Inc., Cape Elizabeth, ME. Johnson is president of A. J. Johnson Consulting Services, Inc., Williamsburg, VA. Both firms perform compliance inspections of LIHTC properties and provide compliance training for clients that include owners, managers, investors, state agencies, and developers.
Common Mistakes
Johnson said common LIHTC compliance mistakes that he and his staff see include:
- Habitability issues – physical deficiencies in a building or its units that are health and safety violations. For example, this could be an exposed wire in an electrical outlet in a unit or common area.
- Lack of regular “pre-inspections” of the property by the owner.
- Charging improper fees. Johnson said tenant move-in fees aren’t permitted because LIHTC rules make the owner, not resident, responsible for preparation of a unit for occupancy. And community room rental or swimming pool guest fees, for example, create an issue of whether the particular space can be included in tax credit eligible basis.
- Utility allowances not being done correctly.
- Inappropriate transfers of residents within a project. Moving a tenant who is over-income to a different building can create the move-in of a non-qualified resident.
- Delaying income qualification of residents in acquisition/ rehabilitation projects. Johnson said owners often mistakenly think they can’t qualify residents until the rehab is completed, losing months of credits that otherwise could have been claimed.
Bowden said common compliance mistakes that he sees owners and managers make include:
- Failure to follow up on questions raised by information in supporting documents for tenant income certifications. One example, he noted, might be an individual who says they make $25,000 a year, but their pay stub shows they’ve already made $18,000 through June 30. “There might be an explanation,” says Bowden, “but maybe not.” He said “we run into a lot of fraud out there right now”¦That’s why we want to make sure when we seem information that seems to conflict, that there’s something in the [tenant] file that supports whatever stance the management takes.”
- Lack of signatures on documents.
- Clerical errors and mathematical mistakes, such as adding incomes incorrectly.
Effective Strategies, Systems
Bowden and Johnson offered recommendations to owners and managers for elements of effective LIHTC compliance systems and strategies to prevent costly compliance mistakes. These include to:
- Have at least two different individuals review each tenant file. “It’s hard to proof your own work sometimes,” says Bowden. “We find that the most successful management companies that we deal with have at least two layers of review before the tenant moves in.”
- Establish regular, ongoing in-house and/or external training for property management staff, in LIHTC program requirements, compliance, and any new changes.
- Use qualified outside experts. Johnson advises owners to line up qualified outside tax credit professionals – attorneys, accountants, or consultants – to whom they can turn for good advice and to help oversee what they’re doing. Johnson favors a third-party “procedural” review of each property at least once a year – to “go in and look at everything and see how you’re doing.” He indicated these reviews can identify compliance issues that can then be addressed, such that when the state agency review occurs there will likely be few if any findings.
- Monitor the physical condition of the property and units, and make necessary repairs, on a year-round basis, not just before an inspection visit by the state credit agency or a consultant representing the state agency or investor. “This program requires ongoing compliance,” says Bowden. “You can’t just, before we come out, have your maintenance people run around trying to fix up everything, and have a consultant come in and go through your files.”
