Novogradac LIHTC Working Group Comments on NCSHA Draft Recommended Practices

Published by Dirk Wallace, Mark Shelburne, Peter Lawrence on Monday, September 11, 2017 - 12:00am

An important function of the LIHTC Working Group is providing input on LIHTC policies, regulations and guidance to decision makers. Most recently, the working group submitted comments to the National Council of State Housing Agencies (NCSHA) regarding the proposed revisions to its Recommended Practices in Housing Credit Administration. NCSHA created the first version of the recommended practices in 1993 and revised it several times since. Before the current draft, the most recent revision was in 2011. Among other things, the current set of updates responds to a series of U.S. Government Accountability Office (GAO) reports.

Last month NCSHA circulated a draft of the proposed revisions to the recommended practices to selected industry stakeholders for feedback. The 43 proposed recommended practices cover allocation/development, underwriting, and compliance. The LIHTC Working Group’s letter, submitted Aug. 11, contains two dozen comments on 14 of the recommended practices. The letter also suggests adding another recommended practice on a topic not currently covered. The list below summarizes some of the input; the full letter is available here.

Per-Unit Cost Limits

The current set of recommended practices does not explicitly recognize the distinction between creating new housing and rehabilitating existing apartments. The LIHTC Working Group’s letter argues policies on costs should reflect the two activities being fundamentally different. For example, one development spending substantially more per unit to rehabilitate than another often is responsible, even necessary.

The LIHTC Working Group also calls for strengthening the statement on not awarding overly-expensive developments to read: “if an application’s total cost is higher than good public policy and prudent resource allocation should allow, it must not receive an allocation.” What may be valid explanations, or even compelling reasons, often do not matter when high costs are considered by those outside the LIHTC industry. No single LIHTC development, regardless of how worthy, is important enough to risk the program as a whole. This recommended practice is important to address potential criticism resulting from the next GAO report, which will focus on development costs.

Developer Fee and Builder Fee Limits

The LIHTC Working Group made three substantive suggestions about developer fee and builder fee limits; the first expresses a long-standing requirement for determining the amount of fee. Specifically, the LIHTC Working Group says the amount of a fee must relate to the extent of development work. Agencies should not base limits on other rationales. Unfortunately some practitioners have reasons that do not reflect the federal expectation, such as larger fees making developments more financially feasible.

The LIHTC Working Group’s letter also discusses the difference between the QAP maximum and how the fee is allocated on the cost certification between acquisition and rehabilitation. While the QAP should limit the overall fee, the LIHTC Working Group believes property owners and their CPAs should establish a basis for the allocation between acquisition and rehabilitation cost based on the services performed by the developer.

The letter also suggests deleting the last paragraph in the “Discussion” section regarding timing of developer fee payments, which is best determined in the partnership negotiation.

Verification of Expenditures and Issuance of IRS Form 8609

In what may be the most important topic, the LIHTC Working Group suggests the recommended practices should call for additional cost certification due diligence requirements on all developments (the draft proposed a random sample, except in the case of a related party contractor). Such a policy would directly respond to allegations against the program regarding accountability. Although these allegations are largely unfounded - stemming from a very small number of isolated cases - perception matters.

In support of this suggestion, the LIHTC Working Group letter lists five additional procedures CPAs could perform as part of their cost certification procedures:

a.   Select material subcontracts for thorough testing and a sampling of others based on risk assessment (e.g., highest likelihood of errors, irregularities, or fraud).

b.   Include every subcontract as part of the sample regardless of size, and qualitative factors are evaluated to select subcontracts for further testing.

c.   Use a risk-based approach to detect irregularities at general contractor and subcontract levels.

d.   Include examining source documents in the vouching of subcontractor costs.

e.   Explain any material differences and document results.

Calculating Anticipated Tenant Income

HUD’s 2013 update to its Handbook 4350.3 relaxed the stance on pay check stubs and other tenant provided documents. Under Section 5-13(B)(1)(b)(1) these documents are actually placed at a higher preference than “written documentation sent directly by the third-party source by mail or electronically by fax, email or internet.” Therefore the letter suggests adding a mention of allowing documents generated by a third party source.

Utility Allowances

In recent years technology and federal policies regarding utility allowances have evolved more rapidly than most other areas of compliance. Because of these changes the LIHTC Working Group suggested adding the following new recommended practice:

  • Agencies should permit developments to use all utility allowance methodologies available under Treasury Regulation §1.42-10.
  • Agencies should adopt a process under which an alternative utility allowance (e.g., utility company estimate or HUD utility schedule model) will be considered. Such processes should detail what owners need to do at the commencement of leasing activities, when they choose to change the method, or when undergoing the annual review of an already implemented alternative utility allowance.
  • The agency should provide guidance on the difference between actual-consumption submetering and utilities billed through an allocation method or Ratio Utility Billing System (RUBS).
  • The agency should be specific with the type(s) of HUD funding result in a building being considered HUD-regulated under Treasury Regulation §1.42-10(b)(3).

Next Steps

NCSHA is currently considering input from the LIHTC Working Group and other LIHTC industry stakeholders, with a goal of adopting a final revised set of recommended practices at its annual conference in Denver Oct. 14-17.

Joining the LIHTC Working Group

Providing input on important topics is just one of the LIHTC Working Group’s functions. Learn more about membership benefits and opportunities at www.lihtcworkinggroup.com