Make Your LIHTC Compliance System the Best: Experts Offer Advice, Cite Common Mistakes

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Tax Credit Advisor, September 2009: Having an effective compliance system for your properties is vital for success in the low-income housing tax credit (LIHTC) program. Mistakes, even if inadvertent, can risk the loss of housing credits for investors.

So what are the most common LIHTC compliance mistakes these days? And what are some elements and strategies for an effective compliance system?

Four LIHTC compliance experts shared their views in recent interviews with the Tax Credit Advisor: Andrew Bowden, Vice President and Part Owner, and Erik Whitton, Director of the Compliance Monitoring Division, Spectrum Enterprises, Cape Elizabeth, Me.; Ruth Theobald Probst, President, The TheoPRO Group, Pewaukee, Wisc.; and A. J. Johnson, President, A. J. Johnson Consulting Services, Inc., Williamsburg, Va.

Full compliance with LIHTC program requirements is arguably more important today than at any time in the past. With tax credit equity in short supply, developers and owners must run as error-free an operation as possible to be attractive to syndicators and investors.

Furthermore, the LIHTC program is more complex than ever. Just a few of the new program changes and guidance in the past year are:

  •  Amendments made by the Housing and Economic Recovery Act (HERA) and American Recovery and Reinvestment Act (ARRA).
  • Revised utility allowance rules published by the Internal Revenue Service.
  • Separate tenant income and rent limits for LIHTC projects, plus “special HERA” income limits for certain projects in certain areas.
  • Establishment of the new Tax Credit Assistance Program (TCAP) and credit exchange program.

In addition, the IRS is expected by year-end to issue a revised “8823” compliance guide and updated audit techniques guide for the LIHTC.

“Compliance requirements will not get easier,” says Johnson. “They will actually be more difficult now as we go forward.”

He noted, for instance, that the TCAP and credit exchange programs have requirements different in some respects than the standard LIHTC requirements, and that state housing credit agencies (HCAs) each have flexibility to impose their own special requirements. Johnson indicated this will make compliance particularly challenging for projects with both TCAP or credit exchange funds and housing credits.

Common Mistakes

The experts cited a range of common compliance mistakes that they detect in monitoring LIHTC properties for clients Ð developers, owners, management companies, and investors.

These include: incomplete paperwork, such as tenant files that are missing a form (e.g., rental application, income verification); forms not completely filled out (e.g., rental application); incorrect or deficient calculations of an applicant’s income, including income from assets; math mistakes; and conflicting information in documents. For instance, a person’s application may list two jobs but only one is listed and verified on the verification form.

“The rental application [often] is not adequate,” says Johnson. “They don’t ask the right information, or they’re not completely filled out, or there’s no follow-up.” In addition, he said many site employees don’t know how to properly interview an applicant to get the needed information.

The experts also noted there’s much confusion over the LIHTC student rules, which generally bar credits for units occupied entirely by full-time students. Johnson said many managers don’t understand the “five-month rule,” which defines a full-time student as a person enrolled full-time in a school for any part of five months during the calendar year. So, for instance, if an individual attends college full-time from January 2009 until graduating in May 2009, they would still be treated as a full-time student if they applied for a tax credit apartment in August 2009, and wouldn’t be treated otherwise until January 2010.

“Managers don’t look back on that five-month rule,” says Johnson. He also recommends that managers check on the past and future student status of applicants and of residents who are part-time students, to see if they were or switch to full-time student status.

Effective Strategies

The experts recommended multiple strategies and elements for an effective LIHTC compliance system.

Probst says a company’s first priority for a property should be to hire a management agent experienced in the LIHTC program, and establish a separate compliance department within the firm. The individual in this department should review the file of each applicant before they can move in to verify that they are an eligible LIHTC tenant. A firm without a dedicated compliance department can hire a third-party company to conduct these file reviews.

Probst also recommends an audit of all of a project’s tenant files before the end of the first year; this point sets the baseline credit amount for the project for the entire 10-year credit period. Related to this is having a duplicate set of first-year records, stored at a different location than the originals.

Probst also said that the management agent needs to identify all of the governmental housing and finance programs that are utilized for a project; identify which of these programs impose their own requirements (e.g., tenant income and rent limits); and, identify which specific units in the project are governed by which programs’ requirements. Where multiple programs with different requirements apply to a unit, the most restrictive should be met. For instance, the federal HOME program has different tenant income and unit rent limits than the LIHTC program, and HOME funds usually assist only some of the units in a project. Therefore, in a project with both HOME assistance and housing credits, the lower HOME limits should be applied to the HOME-assisted units.

Bowden and Whitton said compliance should be a high priority throughout each company, from corporate headquarters down to the site level. One sign of this is adequate budgeting for ongoing staff training, regular reviews of tenant files, and other compliance activities.

Whitton recommends regular compliance reviews by companies of all of the tenant files for their properties. He noted that mistakes discovered during this process, and corrected before the state HCA notifies that it will be inspecting the property, don’t constitute non-compliance that must be reported to the IRS.

The experts stress the importance of regular physical inspections of each project and all of the units in them – by in-house staff or an independent third party. Satisfaction of physical habitability standards is an area that the IRS is especially vigilant about.

Bowden said one effective technique he’s seen by firms is to inspect the unit of each new tenant three months after move-in. If they pass, they’re put on a regular annual inspection. If they fail, they’re put on monthly inspections. If they fail again, they’re put on weekly inspections with their days effectively numbered.

Whitton also advises managers to regularly check for compliance updates from the state HCA. He said many state agencies maintain an email distribution list that anyone can sign up for to receive alerts about changes.

Johnson recommends the following elements for an effective compliance system:

  • Regular, ongoing compliance training, at least once a year, for new and existing supervisory and site staff.
  • Corporate compliance oversight of site staff.
  • A company compliance manual or written procedures, plus standardized forms, that are used at all projects, to qualify applicants, recertify tenants, etc.
  • A system of internal checks and audits.
  • Regular independent reviews of each project, including the tenant files.
  • A pre-determined process for handling non-compliance issues. This includes identifying who will be the contact person with the state HCA, and who will oversee and coordinate corrections.
  • Physical inspections of each property and its apartments at least twice a year, and preferably quarterly. This provides an opportunity to check for lease violations as well as LIHTC compliance problems.
  • Consistent organization of tenant files across properties, so that each tenant file has all of all same forms, in the same order. “The reason for good file organization is to determine what’s not there,” says Johnson, since the absence of a form will stand out. “Good file organization will eliminate 70 to 80 percent of the noncompliance that we see,” he notes.