When considering an investment in low-income housing tax credits, don't overlook the need to evaluate the ability of the syndicator's asset management department to understand, oversee and protect your investment. The asset management department must serve much more than an accounting function and must have a keen understanding of how affordable housing is operated. This article will focus on the function of asset management beyond tax returns, Schedule K-1's and internal rate of return schedules.


A primary responsibility of the syndicator's asset management department is to supply the investor with meaningful reporting. Throughout the transitional and stabilized stages of the life of the property, comparisons of actual data to reasonable benchmarks provide the most apparent indicators of performance.

These standards may be monitored in a variety of ways. The simplest is to establish the minimum thresholds and measure whether the property is meeting them. Nevertheless, many investors prefer the use of a more flexible system that not only establishes minimum goals, but will also indicate the level of achievement and degree of impact on the property's overall function. Systems involving an aggregate alphanumeric scoring system are useful in providing this type of analysis.

Property operations are evaluated primarily on occupancy and financial data. Occupancy data should be collected, at minimum, on a quarterly basis. Physical occupancy is calculated as a percentage comparing the units actually occupied to the total number of units on the property. Financial occupancy is calculated as a percentage comparing the gross potential rent (the total rent available if 100% of the units were rented) to the actual rent billed, less rent amounts written off as uncollectible, for properties on an accrual accounting basis, and to the actual rent collected for properties on a cash accounting basis.

Typical underwriting of a new deal will use 7% for rental losses, allowing for 5% physical vacancy and an additional 2% for bad debt. A common industry comfort level for occupancy at a stabilized property is 90% or greater. In most cases, at that level of occupancy the property will have no difficulty covering expenses.

Financial data should also be collected, at minimum, on a quarterly basis. Reports sent to the syndicator for review should include a balance sheet and operating statement. An appropriate analysis of the statements by the syndicator should include adjusting accruals for one-time expenses, such as capital improvement items, property insurance and real estate taxes. The agreed-upon reserve for replacement payments should also be accrued as an expense before calculating net operating income. The debt-service coverage is then calculated by comparing the debt-service payments to the net operating income.

Typical underwriting of a new deal will use 1.15 as the target for debt-service coverage. However, a common industry comfort level for debt-service coverage at a stabilized property is 1.0, indicating that it is generating sufficient income to pay all of the expenses and fund the required reserve for replacement.

However, evaluation of property operations based purely on occupancy and financial benchmarks would be akin to using height and weight charts as the only to method to evaluate your physical health. Other factors contribute either positively or negatively to the overall stability of the property. For example, restrictions placed on the property because of sources of financing or rental assistance programs may limit the returns available to owners and therefore allow only for annual budgets at or very close to a 1.0 debt-service coverage.

Nonetheless, these programs enhance stability due to reduced debt-service expense and rental advantages. Therefore, the property's available operating cash, seasonal variances, proposed rent increases, the financial strength of the general partner, management history, the local market and the physical condition must be factored as part of the overall snapshot of property performance.

Physical inspections

Visits to the property must be performed regularly. Occupancy and financial reports alone may prove to be deceptive.

The following incident illustrates the point: A large owner in the Midwest contracted with a new management company largely because of its promise to increase the cash flow at the property. Occupancy was running approximately 96% when it took over. At the end of the first 12 months, true to its word, the company had increased the net operating income and things seemed to be going well. However, after about 20 months, occupancy at the property was falling rapidly and reached 85%, an all-time low.

The management company offered excuses based on problems in the local rental market and single-family home buying. Upon inspection of the property, the true problem became apparent. In order to bolster the bottom line, the management company had cut back on necessary services. Common areas, unit painting, work orders, hallway cleaning and maintenance were being neglected and tenant complaints were ignored. The result was that tenants were leaving as their leases expired at a much higher rate than normal.

Additionally, maintenance on vacant units was not being done well, and items such as carpeting and appliances were not being replaced where necessary. As a result, the property was offering a substandard product and the units couldn't be leased. Even after the situation was corrected, it took several months for the property to recover from the poor reputation that had developed. The money lost because of the occupancy problem and slow recovery by far outweighed the increased cash flow realized on that first-year operating statement. The lesson is that the problems would have been apparent through an inspection of the property many months before they affected the operating statement or occupancy.

Property inspections can help avoid and solve problems. Inspecting the buildings, walking common areas, observing that tenant rules are being enforced and noting how well the management appears to be overseeing the property should be done on every visit. If there appear to be problems, units should be inspected, tenants should be interviewed and on-site management should be queried as to how they plan to respond. In addition, the neighborhood and community should be studied.

Issues arising from the property inspection should be followed up directly with the general partner. Too often the general partner may not have been to the property in some time and has no sense of its present condition. There is a tendency to become complacent and assume the management company is doing their job. Broken smoke detectors, inoperable furnaces, tripping hazards or any other health and safety issues should require the general partner to take immediate corrective action and certify completion to the syndicator. A corrective action plan addressing all other issues should be requested from the general partner and subsequent visits should verify completion.

Tax credit compliance

Tax credit compliance is a good news and bad news situation. The good news is that issues of noncompliance after the initial lease-up that are addressed in a timely manner may not necessary adversely affect the overall delivery of credits. The bad news is that issues of noncompliance during the initial lease-up definitely have an effect on overall credit delivery and have a 15-year lookback by the IRS.

For that reason, as noted in the previous article in this series (or, see Journal of Tax Credit Investing, Winter 2003, page 22), an audit of all of the initial tenant files by the syndicator or a qualified third party should be completed to verify compliance.

A thorough file audit will include a review of the verifications for income, assets, student status, and lease terms and a review of copies of the original applications to check for inconsistencies.

Your syndicator should become involved in the audit process as early as possible after lease-up begins to uncover problem areas and initiate corrections. Some syndicators may require a pre-occurrence approval of the initial tenants before move-in, but this may slow down the leasing process and adversely affect marketing. The syndicator should archive the initial tenant files and audit information for the 15-year compliance period.

IRS Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition, is used by the issuing housing credit agency to report any out-of-compliance conditions and the subsequent date of correction. This form is used to report both tenant compliance issues as well as problems noted on the physical inspections that are performed by the housing agency or their third-party contractor. Your syndicator should obligate the general partner to report any IRS Form 8823 that is issued.

Additionally, forwarding of a regular certification of tax credit compliance, tenant summaries, all housing agency compliance reports and audits should be required of the general partner.

Dealing with problems

Even with the most thorough due diligence, there is a possibility that at some point in the 15-year compliance period any property may experience problems. Your syndicator should keep a watch list indicating which properties are currently under closer scrutiny. Please keep in mind that this in and of itself does not indicate that there is cause for concern. Rather, the fact that a property is on the watch list should be a sign that the asset management department is having a proactive involvement with the property operations. Remember that as in most business ventures, it is much easier to identify problems than to recognize solutions. Problem solving is where your syndicator's asset management department will prove its mettle.

Douglas Jenkins is portfolio asset manager for Raymond James Tax Credit Funds. He is responsible for building working relationships with affordable housing developers, monitoring property operations and facilitating effective solutions to issues that arise during the management of LIHTC properties. Joining Raymond James Tax Credit Funds in 2001, Jenkins has 14 years of affordable housing experience encompassing the HUD Sec. 8 and Sec. 236, FmHA and Sec. 42 LIHTC programs. Most recently he served as vice president of operations for a Chicago-based developer and management agent. In addition, he has held the positions of regional property manager and director of affordable housing programs. Jenkins holds certifications through a variety of recognized housing organizations, including certified credit compliance professional - Spectrum and Housing Credit Compliance Professional - National Association of Home Builders.