Work continues on solving one of the big issues facing the low-income housing tax credit (LIHTC) market this year: the possibility of more expensive accounting requirements.
The issue stems from the Sarbanes-Oxley Act of 2002 and the tougher accounting standards that resulted from the legislation. Recent positions taken by the Public Company Accounting Oversight Board (PCAOB) and the Securities and Exchange Commission (SEC) could mean that there would be redundant requirements and an undue burden on the lower-tier partnerships.
The pending issue hasn’t seemed to affect investments in the market, but concern is growing.
Members of the Housing Advisory Group and the Affordable Housing Tax Credit Coalition have been meeting with officials on Capitol Hill. “We had an initial meeting with staff counsel from the Housing Finance Services Committee,” said David Gasson, executive director of the Housing Advisory Group. “It was very positive. They understand our concerns.”
The group also plans to meet with officials in the Senate.
It appears that there are two ways that the LIHTC industry may be affected. Many of the early LIHTC funds were large public partnerships, principally marketed to individual investors, that were required to register with the SEC. With the recent PCAOB position, a concern is that the lower-tier general partners and property managers involved in these funds would have to meet PCAOB standards because of their “public” status.
More recent funds may also be affected. Since the mid-1990s, the LIHTC industry has become more of a corporate market, and the latest funds offered by syndicators do not have to register with the SEC. The recent PCAOB issue, however, could still come into play. If an auditor for a corporate investor feels that the housing tax credit investments are material to the firm’s financial statements, the auditor may demand that the financial statements of the operating partnerships meet PCAOB standards.
“The idea that a partnership with 45 rental units can afford to do an audit that meets PCAOB standards is frankly unrealistic because the local general partners and management companies don’t have the staff to do this,” said Fred Copeman, national director of Tax Credit Investment Advisory Services at Ernst & Young.
Meeting such standards would require accountants for partnerships to do significantly more work, causing a consequent increase in accounting fees.
A recent Ernst & Young study of housing tax credit performance found that a typical tax credit project generates only about $200 per apartment in cash flow each year. As a result, a 50-unit apartment might generate $10,000 in cash flow, a very narrow cushion in the best of circumstances. The notion that such a partnership can come up with an additional $10,000 to $15,000 for accounting fees is not realistic, Copeman said.
“My concern relates to the fact that this industry is basically engineered to develop and operate assets that break even in order to stretch the housing credit volume cap as far as possible,” he said. “To the extent that we may be adding costs, we are going to hurt affordable housing.”
According to Gasson, there is an effort to get an interpretation that will allow auditors for lower-tier partnerships to continue to use their current accounting standards. In addition, upper-tier partnerships would be able to use the lower-tier opinions in their accounting.