Outsourcing Tax Credit Compliance When Does It Make Sense?

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5 min read

By A. J. Johnson

An increasing number of investors, owners, management companies, syndicators, and developers have begun outsourcing their low-income housing tax credit (LIHTC) compliance functions to consultants specializing in this service, rather than doing the work in-house. Outsourcing can improve the quality of compliance Ð but may or may not be the best option for a particular organization. To make the best decision, you must weigh the pros and cons and the facts of your particular situation.

LIHTC compliance is the process of monitoring the development, lease-up, and operation of a housing credit property and taking actions to ensure that the federal housing credit program rules are met. This work involves many different functions, such as verifying that applicants and residents are qualified low-income households; that the units and the property are kept in good physical condition; and that required reports are filed on time.

Advantages of Outsourcing

Outsourcing means contracting all or some of the LIHTC compliance tasks to a third party, such as an LIHTC consultant.

The primary advantage of outsourcing compliance is cost savings, by not having to pay for salaries and benefits for in-house staff. LIHTC compliance is so technical, that many companies find it cost-effective to outsource rather than pay the high salaries required for the required expertise.

Additional advantages include:

  • On-Call Experts: Outside expertise can give companies the opportunity to pursue larger and more specialized types of work, especially if they can market a known industry expert as being a member of their team.
  • A Larger Workforce: Supplementing in-house staff with outside compliance personnel enables a company to expand its workforce and capacity without having to make new hires. This can permit smaller companies to compete for work with larger firms.
  • More Flexibility: When problems arise, outsourcing can provide solutions without alienating clients or performing poorly on a project.
  • The Only Solution: Outsourcing is the only logical approach if there is no in-house staff qualified in compliance.

Disadvantages of Outsourcing

Disadvantages of outsourcing compliance to third-party firms include:

  • Loss of Managerial Control: The consultant decideshow the job is done, not you. The consultant will be driven not by your company’s standards and mission, but rather by profit from the services provided to you. Never outsource to an individual or company that wants to deny you access to documents or work papers associated with your project.
  • Possible Hidden Costs: You will sign a contract with the consultant detailing the services to be provided. Anything not covered in the contract may trigger additional charges. You may be at a disadvantage when it comes to negotiating services.
  • Possible Threats to Security and Confidentiality: There is a risk that confidential information reviewed by the consultant will be compromised. To avoid this, the consultant should be able to tell you exactly what steps will be taken to protect this kind of information, and the consultant’s contract should have a non-disclosure clause.
  • Quality Problems: There is always the possibility that the quality of the consultant’s work may be less than what you could get from your own staff.
  • Dependence on the Strength of the Consultant: You are dependent on the consultant’s strength and integrity. Make sure that the consultant has a proven track record and is not likely to disappear in the middle of your project.
  • Possible Bad Publicity, Ill Will: Adverse actions by the consultant, including interactions with your employees and residents, can have a negative effect on your company, your staff’s morale, and the attitude of property residents.

Factors to Consider

Outsourcing of LIHTC compliance for one or more projects, on a short-term or long-term basis, makes sense in some cases and not in others. Factors to weigh in deciding if you should outsource include:    

  • Your budget, and whether there are funds to pay for an outside consultant;
  • Whether your syndicator or investor requires a third-party consultant;
  • Whether you will need the services of a consultant to meet a project deadline;
  • Whether you need a level of expertise not available in-house; and,
  • Whether a consultant will improve the quality of the compliance work, save you money, or both.

Outsourcing generally makes sense if this will save you money, help meet a deadline, or improve your company’s productivity.

When cost savings is the objective, make sure that the dollars saved won’t result in lower quality of compliance work. Outsourcing may carry a higher per-hour rate than in-house staff, but the company doesn’t pay benefits and an outside professional can often complete the job quicker with more accuracy. Efficient savings with high-quality work often occurs when specialized consultants are needed to deal with complex problems under aggressive deadlines. If the primary issue is to meet a deadline, make sure that the consultant’s current workload will not prevent meeting the deadline and that the work quality will not suffer.

There are times when companies face short periods of heavy workloads, such as meeting lease-up deadlines for a large property and ensuring that all new residents are properly qualified. Short-term outsourcing here can often provide the best option for meeting the deadline and maintaining high work quality. Having the third-party professional provide a second opinion regarding tenant eligibility is not only a sound business practice, but is now required by many investors.

The outsourcing of compliance and asset management activities is often a viable option for LIHTC developers, managers, and investors. However, those considering outsourcing should consider the specific need for which the third-party consultant would be used and determine if these tasks could best be performed in-house. Only when the cost of the consultant provides a tangible benefit should outsourcing be considered a viable option.

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].