Compliance Concerns in Affordable Housing

IRVINE, CA—While it sounds simple, keeping affordable units habitable when occupied by rent-restricted and income-restricted individuals can be quite challenging, WNC's Kristin Han tells GlobeSt.com. As we recently reported, the firm, a national investor in real estate and community-development initiatives, has promoted Han to VP of compliance.

Han joined WNC in 1997 and brings more than 26 years of experience to her new role. During the past 18 years, she has maintained regulatory and statutory compliance on the company's affordable-housing portfolio, including 900 partnerships comprising multifamily, senior, special-needs, mixed-financing and mixed-use housing. We spoke with her exclusively about some of the challenges of regulatory and statutory compliance in affordable housing.

GlobeSt.com: What are some of the challenges of regulatory and statutory compliance in affordable housing?

Han: Since its creation in 1986, the Low-Income Housing Tax Credit program has been heralded as the most successful and efficient affordable-housing program to date. Not only does it provide a dollar-for-dollar reduction to the tax liability of investors, it also yields a predictable return for the investment of private equity through syndication, in exchange for providing safe and affordable housing to low-income families, seniors and under-served populations across the nation. But, as is the case with all investments, the LIHTC program carries risks, and the ultimate consequential risk is the risk of tax credit loss. In order for the benefits of the syndicated-tax-credit stream to flow through to the investors' tax return in the 10-year credit period, the properties must be in compliance with Section 42 of the Internal Revenue Code, 26 U.S.C. §42 and other regulations set forth by the IRS as well as the state housing agencies that are responsible for administering the program.

There are many different elements to compliance in relation to structuring the deal, from underwriting to construction of the properties to stabilized operations. From the operational perspective, the fundamental criteria for each LIHTC property can be boiled down to habitability, affordability and eligibility. While it sounds simple, keeping the units habitable while occupied by rent-restricted and income-restricted individuals can be quite challenging.

Economic conditions of the local area naturally affect the operations and pose greater challenges in meeting the compliance criteria. If the units are not made rent-ready and available for the general public due to the insufficient cash flow, the units will not meet the habitability requirement and would not generate any credits. Leasing to ineligible households as a result of inadequate resident screening policy or miscalculation of income in the processing of the rental application will also place the credits at risk. With the added regulation requiring LIHTC properties to be in compliance with Fair Housing and state-imposed regulations, multi-layered restrictions pose an even greater challenge in maintaining compliance.

GlobeSt.com: How are affordable developers meeting those challenges?

Han: In a typical LIHTC limited-partnership structure, the developer, acting as owner-operator of the property, assumes the responsibility of maintaining compliance. The developer can mitigate the risks of non-compliance by hiring competent and experienced management that are well versed in regulatory and statutory compliance. Often, the developers retain the services of third-party consultants to review all first-year tenant files to confirm eligibility of each household and provide LIHTC training as well as Fair Housing to all on-site management staff. The investors rely on syndicators for projected delivery of the benefit stream (credits and losses). Syndicators assume the unique role of protecting the interest of the partnership, monitoring the investment and administering the agreed-upon terms of the partnership agreement.

GlobeSt.com: Is the regulatory/compliance situation worsening for affordable housing?

Han: I would say that while the LIHTC program is extremely complex and that it comes with many challenges, especially with different-layered programs (i.e., HUD, USDA) and state agencies tightening their monitoring and enforcement, there are more support and resources available today than historically. Both the IRS and the state stage agencies are providing clarification on the regulations and provide additional guidance in meeting those imposed requirements. It should become less challenging as we continue to educate ourselves, use available guidance resources and keep current on any updates on the applicable compliance regulations changes. Also, over the life of this program, the industry as a whole has learned through practice and solving problems. We can certainly use the experience as precedence and know the what not-to-dos.

GlobeSt.com What else should our readers know about this topic?

Han: Syndicators, developers and state agencies work cohesively to promote the success of the LIHTC program. State agencies carry the responsibility of making decisions on the selection of the credit awards, and determining the amount of the allocation, and they enforce applicable regulations on behalf of the IRS. At the same time, they are strong advocates of the program and a tremendous resource for providing guidance on the interpretation of expectations and training for owners and managers. National Council of State Housing Agencies, a national advocacy group comprising the state agencies, offers annual housing conferences for the industry participants, and the National Association of Home Builders offers education opportunities to earn the industry-recognized designations.

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Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.