What is Involved in Final Cost Certifications and Who Requires Them?
Question: What are final costs certifications and who requires them?
Answer: Final cost certifications (FCC) are a critical part of the process of obtaining investor equity and permanent financing. For this reason, developers should understand what FCCs are, why FCCs are required, and who requires them.
FCCs are attested reports that opine on and present the construction costs of historic rehabilitation tax credit (HTC) projects. The report also lists the qualified rehabilitation expenses (QRE) as they relate to the construction costs. The report generally will have one column for total construction cost and another for QREs. The level of attest services CPAs are typically asked to provide for HTC developers will be an audit, examination or an agreed-upon procedures (AUP).
An audit is the highest level of assurance that a CPA performs and is intended to provide a user comfort on the accuracy of the FCC. An examination is similar to audit and is attended to provide assurance on whether the subject matter meets the specified criteria or the responsible party’s assertion is fairly stated. An AUP report involves the CPA performing specific procedures and reporting findings based on procedures performed. The level of assurance is matter of preference dictated by the HTC investors or state agency. When an AUP is used for an FCC report, the procedures will need to be carefully crafted by the CPA and users of the FCCs in order for all parties to understand and accept the procedures that will be performed and reported.
Why and Who
HTC investors and some state agencies require an FCCs. The FCCs are intended to provide assurance to investor or state as to the validity of the total construction costs and QREs. The FCCs are generated at the end of the construction period, but HTC developers should plan and coordinate the completion of the FCC before the end of the construction period as the FCC is a critical benchmark for equity contribution. Upon admission to the partnership, the HTC investor will contribute a portion of its total anticipated equity. The remaining equity is contributed upon the developer reaching certain benchmarks. One of those benchmarks is the delivery of the FCC to the investor. Developers should be aware of the FCCs requirements as delays in FCC delivery postpone equity contributions which can hinder the funding of permanent financing.
Many states have a state HTC program that is typically coupled with the federal HTC incentive. Some states require an HTC FCC to be delivered in conjunction with the award of state HTC. Each state may have specific formats and forms related to the FCC and won’t accept reports unless they are in the specific format. Additionally, when HTC is twinned with low-income housing tax credits (LIHTC) additional reporting requirements are needed for the state housing allocating agency.
Phased HTC rehab projects and projects with placed-in-service dates that straddle more than one tax-filing period may be required by the investor to produce an FCC for each period in which HTC credits are claimed. In order to qualify for the HTC, the rehabilitation must be substantial. Phased projects have 60 months to meet the substantial rehabilitation test, while other projects have 24 months. Phased rehab projects are very likely to claim HTCs in multiple years. Investors may require reports to support the rehabilitation costs used to calculate credits in each tax year.
Developers should be aware of all the requirements and nuisances of the HTC FCC before construction starts and plan in order to provide the FCC on time to investors or the state. Doing so will assist in a successful permanent loan closing and payment of final equity contributions and hopefully a successful project.