To be sure, it is entirely appropriate that taxpayers get their fair due and if revenues are leaking through this channel then it should be fixed. But the bottom line for developers and tax credit agencies—whether they are following IRS regulations to the letter or not —is that there could well be another layer of costs added to the process.

It will make what is already a difficult process even harder.

If the Land Is Donated, Then Can I Use Tax Credits?

And it is a difficult process, as the Urban Institute and National Housing Conference's new tool shows.

It allows the user to play with the various inputs an actual developer considers as he makes various decisions and trade offs in the planning process. Users can see what how the numbers pencil out when, say, the land is donated by a local government, how much developers' fees, design fees and project management fees eat away at the margins and how expensive the debt and equity could be. Tax credits, too, of course. But uncertainty exists at every step, as the tool's home page tells us.

One of the big benefits of developing a building with more apartments is that tax credits might be more cost effective. But just because your project is eligible for tax credits doesn't always mean you get them.

Okay. So you figure you'll just build a bigger apartment to get those credits. But ....

...adding more apartments is only useful if developers can fill them, which might be possible in larger cities but harder as you move farther away from dense urban areas. Additionally, creating large communities of affordable housing has its social and economic downsides, particularly if it unintentionally segregates low-income families from the rest of a community. It all depends on the scale and shape of the particular place.

The biggest challenge, though, is the discrepancy between what low-income residents can afford to pay and at what point the developer can break even and continue to operate the building.

To make a unit affordable to an extremely low-income family of three, you could charge no more than $540 a month. You could charge up to $1,081 for a family of three and still qualify for tax credits, but now you risk shutting out extremely low-income residents, like a parent of two children earning $21,125 as a retail cashier.

Subsidies are how developers bridge the gap, the tool's homepage concludes.

Subsidies come in different forms. Some, like vouchers or rental assistance, help pay the rent, leaving tenants enough income to pay for other needs and making the property operate sustainably. Others, like tax credits, HOME funds, Community Development Block Grants, and housing trust funds help pay the costs of construction, development, or major repairs. No one subsidy can solve the affordable housing problem. Rather, a combination of programs including federal tax credits, state housing trust funds, local zoning decisions, and public land contributions can help affordable housing get built. To close the gap for affordable housing, especially for the lowest-income households, there almost always has to be assistance for both development and rental income over time.

Where the IRS is Lax

Given that, one can easily foresee the angst by which LIHTC programs and their users would greet stepped up audits by the IRS for compliance. Compliance, no matter how scrupulously honest a developer is, always adds to the costs if only through increased paperwork and staff time.

In its report, GAO did find that allocating agencies generally have processes to meet requirements for reviewing costs and monitoring projects. The missing link, so to speak, was the IRS and its lack of monitoring of such factors as developers' fees, tenant incomes and physical inspection findings. HUD, however, as GAO repeatedly noted throughout the report, did have this capability in place.

HUD is building data on affordable housing that includes information about LlHTC projects. HUD's Real Estate Assessment Center (REAC) already maintains a series of databases with information about the condition of its affordable housing portfolio, including a database of physical inspection results and a system to verify tenant incomes to accurately calculate rents. REAC collects standardized sets of information from state and local housing agencies responsible for administering HUD programs and evaluates the data collected to develop objective performance scores.

It ends its report with the recommendation (again) that “Congress should consider designating HUD as a joint administrator of the program responsible for oversight due to its experience and expertise as an agency with a housing mission.”

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.

WASHINGTON, DC—If you ever wondered how low-income housing developers are able to make a proposed project pencil out, wonder no more. A new tool that gamifies the decision-making process that goes into the economics of an affordable development shows precisely how difficult the process can be.

Separately, a US Government Accountability Office report has found that the Internal Revenue Service's oversight of allocating tax credit agencies is minimal and recommended joint administration with the US Department of Housing and Urban Development to more efficiently address oversight challenges. Or rather, to be specific, GAO made this finding and recommendation last year.

This year, in an update [PDF] it noted that unlike the IRS, HUD collects and analyzes housing data, and through a Rental Policy Working Group initiative, now adds LIHTC inspection results to its database.

According to GAO:

The IRS division responsible for LIHTC was unaware of this effort and is not involved with the working group. By participating in the working group, the IRS could leverage HUD data to better understand the prevalence of noncompliance in LIHTC properties and determine whether to initiate audits.

My guess is, GAO's next update will be a bit different about IRS oversight of the process.

To be sure, it is entirely appropriate that taxpayers get their fair due and if revenues are leaking through this channel then it should be fixed. But the bottom line for developers and tax credit agencies—whether they are following IRS regulations to the letter or not —is that there could well be another layer of costs added to the process.

It will make what is already a difficult process even harder.

If the Land Is Donated, Then Can I Use Tax Credits?

And it is a difficult process, as the Urban Institute and National Housing Conference's new tool shows.

It allows the user to play with the various inputs an actual developer considers as he makes various decisions and trade offs in the planning process. Users can see what how the numbers pencil out when, say, the land is donated by a local government, how much developers' fees, design fees and project management fees eat away at the margins and how expensive the debt and equity could be. Tax credits, too, of course. But uncertainty exists at every step, as the tool's home page tells us.

One of the big benefits of developing a building with more apartments is that tax credits might be more cost effective. But just because your project is eligible for tax credits doesn't always mean you get them.

Okay. So you figure you'll just build a bigger apartment to get those credits. But ....

...adding more apartments is only useful if developers can fill them, which might be possible in larger cities but harder as you move farther away from dense urban areas. Additionally, creating large communities of affordable housing has its social and economic downsides, particularly if it unintentionally segregates low-income families from the rest of a community. It all depends on the scale and shape of the particular place.

The biggest challenge, though, is the discrepancy between what low-income residents can afford to pay and at what point the developer can break even and continue to operate the building.

To make a unit affordable to an extremely low-income family of three, you could charge no more than $540 a month. You could charge up to $1,081 for a family of three and still qualify for tax credits, but now you risk shutting out extremely low-income residents, like a parent of two children earning $21,125 as a retail cashier.

Subsidies are how developers bridge the gap, the tool's homepage concludes.

Subsidies come in different forms. Some, like vouchers or rental assistance, help pay the rent, leaving tenants enough income to pay for other needs and making the property operate sustainably. Others, like tax credits, HOME funds, Community Development Block Grants, and housing trust funds help pay the costs of construction, development, or major repairs. No one subsidy can solve the affordable housing problem. Rather, a combination of programs including federal tax credits, state housing trust funds, local zoning decisions, and public land contributions can help affordable housing get built. To close the gap for affordable housing, especially for the lowest-income households, there almost always has to be assistance for both development and rental income over time.

Where the IRS is Lax

Given that, one can easily foresee the angst by which LIHTC programs and their users would greet stepped up audits by the IRS for compliance. Compliance, no matter how scrupulously honest a developer is, always adds to the costs if only through increased paperwork and staff time.

In its report, GAO did find that allocating agencies generally have processes to meet requirements for reviewing costs and monitoring projects. The missing link, so to speak, was the IRS and its lack of monitoring of such factors as developers' fees, tenant incomes and physical inspection findings. HUD, however, as GAO repeatedly noted throughout the report, did have this capability in place.

HUD is building data on affordable housing that includes information about LlHTC projects. HUD's Real Estate Assessment Center (REAC) already maintains a series of databases with information about the condition of its affordable housing portfolio, including a database of physical inspection results and a system to verify tenant incomes to accurately calculate rents. REAC collects standardized sets of information from state and local housing agencies responsible for administering HUD programs and evaluates the data collected to develop objective performance scores.

It ends its report with the recommendation (again) that “Congress should consider designating HUD as a joint administrator of the program responsible for oversight due to its experience and expertise as an agency with a housing mission.”

Steady gains in the US economy have resulted in net positives for the multifamily sector—will this wave continue for the foreseeable future? What's driving development and capital flows? Join us at RealShare Apartments on October 19 & 20 for impactful information from the leaders in the National multifamily space. Learn more.