FAQs for HFAs: What goes on inside your state agency?

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State Housing Finance Agencies (HFAs) are required to perform regular monitoring reviews of Low Income Housing Tax Credit-funded projects. A Regulation states that without a monitoring procedure, States are not authorized to allocate credits. The HFA or a private contractor may carry out the monitoring.

HFAs are required to review each LIHTC project on a regular schedule (at least once every three years) and review and inspect a minimum percentage (20) of tenant files and units.

The Federal Requirements regarding what each HFA must examine during monitoring is also set by the Regulation. During the review, the Agencies must examine the property for compliance in many areas, including:
• The physical condition of the property;
• The eligibility of the households; and
• The rents and fees being charged to low-income residents.

During the reviews, the HFA is required to randomly select which low-income units and tenant records will be inspected and reviewed, without giving advance notice to the property owner regarding the specific units that will be reviewed.

Beyond the requirement, HFAs are free to establish whatever procedures and requirements they wish. While most HFAs are similar in their approach to the monitoring process, there are differences among the states, and owners should be well versed on the specific requirements of every jurisdiction in which they operate.

Inside Virginia’s Housing Authority

In order to assist owners and managers in their understanding of how these Agencies may approach the process, TCA decided to examine the procedures for one State Agency as a model, the Virginia Housing Development Authority (VHDA). I selected VHDA as an example Agency for two reasons – first, Virginia is my home state and I work very closely with the Agency and their staff; and second, VHDA is nationally recognized as a leader in the LIHTC program, both in their allocation and monitoring procedures.

While every Agency has its own way of doing things, VHDA’s procedures are fairly indicative of what owners and managers are likely to encounter, regardless of the Agency they are working with. (Special thanks go to Neal Rogers (Director of Compliance & Asset Management) and Cara Wallow (Compliance and Training Officer) at VHDA for making sure I’ve accurately reflected the Agency’s procedures.)

Owners generally have many questions about how a State will monitor for compliance with the LIHTC program. Following are 16 questions most often asked about HFA procedures, with answers based on how Virginia’s HDA operates:

1. How often will a project be reviewed by the State?
As noted above, states are required to monitor for compliance at least once every three years. For new projects, the first review must occur no later than the end of the second calendar year following the year the last building in the project is placed in service. Most states, including Virginia, follow this three-year schedule.

2. While a review once every three years is required, are there times when more frequent reviews are conducted?
VHDA reserves the right to inspect more frequently than once every three years if problems are encountered that warrant additional scrutiny. Also, states may conduct more frequent reviews due to the presence of other programs, including state programs. Many LIHTC projects have layered financing, and owners should be familiar with the requirements of all programs associated with the property.

3. How does the Agency make the determination to conduct reviews more frequently than required?
VHDA considers issues such as:
a. Serious physical deficiencies;
b. Constant and/or significant tenant complaints;
c. Problems with on-line entry of tenant data into the Agency’s web compliance system; and/or
d. If VHDA holds the loan, problems with property operations.

4. Are the reviews done on site or off site?
During the compliance period, VHDA conducts the reviews at the site. After year 15, and for the remainder of the Extended Use Period, the Agency still monitors every three years, but, depending on past performance, the owner may either have a “desk review” performed by running an income/occupancy test report from the web based compliance system or there may be a modified site visit during which five files will be reviewed, as well as rents and utility allowances (to ensure continued affordability). A physical inspection is performed on five units and common area.

5. If the Agency conducts a review off site, how are administrative issues other than files (e.g., use of common area, fees, etc.) reviewed?
Since physical inspections are still performed, common area will be inspected – even after the 15-year compliance period. VHDA also sends a questionnaire to the owner requesting information on certain issues (e.g., rents). However, during the extended use period after the end of year 15, the Agency may not review issues such as fees, which are tax issues – not state requirements. The State will also review for compliance with the terms of the Extended Use Agreement, also known in some states as the “LURA.”

6. Are there circumstances when the Agency will review more than 20% of files/units?
Possibly, depending on some of the issues noted above under #2 and 3. Decisions as to whether to increase the sample size are made on a case-by-case basis.

7. If the percentage is increased, is the review done by Agency staff or is the work contracted?
VHDA does all work in-house. However, a number of State Agencies contract the monitoring to independent contractors. Keep in mind however, that while a third party may conduct the monitoring reviews, only the HFA may actually issue an 8823 to the IRS.

8. When a monitoring review is completed, does the Agency staff conduct an exit interview with the owner/manager?
In the case of VHDA, an exit interview is always conducted. This gives Agency staff the opportunity to go over what they found and provides site staff a chance to resolve the issue prior to the end of the visit. During this phase of the review, VHDA staff will discuss any findings, both those that may result in issuance of an 8823 to the IRS and those that are procedural issues (e.g., file weaknesses, paperwork problems, etc.). The Agency staff may also conduct one-on-one training relating to program requirements and make suggestions relative to general improvement. They will also use the time to compliment exceptional procedures or results. Keep in mind that while VHDA conducts this type of exit conference, it is not a requirement and not all agencies do it.

9. Once the review is completed, is site staff given an opportunity to correct issues prior to the departure of the Agency staff?
In Virginia, staff may correct any issues found, but if the issues rise to the level of noncompliance for IRS purposes, an 8823 will be sent to the IRS (although it will show as “corrected,” which is very important). Also, except for Level 3 physical violations, VHDA will not leave a written report at the site after the inspection. The official report from the review will be sent to the owner from VHDA following the review.

10. How does the Agency ensure consistency in its reviews and reporting?
In the case of VHDA, once the staff that performed the inspection prepares the report, a Regional Portfolio Manager reviews it and any potential 8823 issues are reviewed by the Agency’s Compliance and Training Officer. In some case, when dealing with complex compliance issues, the Director of Compliance and Asset Management undertakes a final review. This system is designed to ensure that only noncompliance with federal tax requirements are reported to the IRS and to maintain consistency from property to property.

11. How much time are owners given to correct noncompliance?
It depends on the issue, but VHDA generally allows 45 days for correction of noncompliance (the maximum a State may allow is 90), except for major physical violations, which may be given anywhere from 24 to 72 hours.

12. Under what circumstances will owners be given an extension of time to correct noncompliance? States may allow owners a total correction period not to exceed six months if there is a legitimate reason to do so. Owners must request this extension and provide a reason for the extension. VHDA will consider such requests if owners have difficulty (1) with the number of findings requiring correction; (2) when residents need to be contacted for corrective information; (3) when there is a delay – through no fault of the owner – in obtaining required documentation; and (4) if there are judicially imposed delays.

13. At the end of the correction period, the HFA has 45 days to submit the 8823 to the IRS. If the owner corrects the noncompliance after the correction deadline, but before the 8823 has been submitted to the IRS, will the HFA submit the 8823 as “corrected?”      VHDA does not want to send uncorrected 8823s to the IRS, so even if the correction for deadline is missed, VHDA will make every effort to reflect the issue as corrected in these circumstances. Owners should keep in mind that this may not be the case in all states, so it is important to correct all issues by the state imposed deadline.

14. Are copies of 8823s provided to the owner when they are submitted to the IRS?
In the case of VHDA, and most HFAs, the answer is yes – owners are given copies of 8823s.

15. Does the issuance of an 8823 to the IRS affect future credit allocations for the owner?
It depends. In Virginia, if all 8823s have been corrected, owners are generally not penalized when it comes to applying for credits on future deals. However, if there is a long-standing pattern of noncompliance on any property or with any owner or management company, additional training may be required. Also, management companies that have been certified by VHDA as a “Certified Management Agent” could have that certification revoked. If an 8823 has not been corrected, points may be deducted from future credit applications. In Virginia, if a life-threatening hazard remains uncorrected for three years 50 points are deducted after the hazard has been corrected. 15 points are deducted for three years after an uncorrected 8823 is filed or if a project is out of compliance with the requirements of the Extended Use Agreement after Year 15. This 15-point penalty may be avoided if appropriate representatives of the management company attend tax credit training (this will not eliminate the 50 point penalty). Also, if a management company is deemed “unsatisfactory” and an owner’s tax credit application shows intent to use that company in the management of the project, 25 points will be deducted from the application.

16. Other than the training requirement to eliminate the point deduction as noted above, does the state require any specific training in order to participate in the program?
In the case of VHDA, no specific training is required in order to participate in the LIHTC program (although the Agency does make regular training available throughout the year). There are a number of states that do require formal training in order to manage LIHTC properties, and owners should contact their state agencies for information in this area.

While this is an overview of the compliance procedures in Virginia, the questions posed are applicable to all HFAs. Owners and managers should use these questions as a guide in determining exactly how the Agency they are dealing with approaches these issues. Knowing the process upfront will help prevent problems in dealing with the Agency down the road.