With the passage of H.R. 3221 and the issuance of Internal Revenue Service (IRS) Regulation 1.42-10, there is much to celebrate in affordable housing. The programs that many families rely on for affordable housing, however, can be improved. Affordable housing communities are now developed using several sources of funding, requiring owners and managers to be adept at managing multiple requirements and expectations. The programs and combination of programs are not without problems. The industry must develop a clear “compliance agenda.”
By delineating a clear agenda, we can more effectively address the issues that impact affordable housing. While not all of the issues are “compliance” issues, each affects the operation of affordable apartment communities. If one were creating such an agenda, what items should it include? The compliance agenda should first clearly acknowledge that all housing programs are not under the Department of Housing and Urban Development (HUD). This reality may propel affordable housing further than before when the industry acknowledges there is not currently one dominant housing player.
For example, HUD’s success may rest on accepting it no longer has the same role as from its inception through the 1980s as the only source of federal subsidy. The IRS, through the very able state housing agencies, administers an effective housing program—the low-income housing tax credit (LIHTC). HUD could, in partnership with state housing agencies, ensure that its programs, and those administered by state housing agencies, are meeting affordable housing needs effectively.
Some states and local communities have committees that work together on affordable housing, coordinating responses to issues and the integration of programs. There should be a council of federal agencies responsible for housing programs, in addition to a limited number of representatives from advocacy groups.
This “federal housing committee” could be responsible for identifying legislative and regulatory hurdles to effectively administer programs. The various interests would be represented in a venue that allows for collaboration and innovation.
The gross rent floor in the LIHTC program helps to protect against significant drops in rent. Unfortunately, the rent floor is not helpful when rents drop as a result of utility allowances. Using the new final utility allowance regulation, tax credit owners can expect to obtain more accurate utility allowances. This only partially addresses the problem, since utility costs in many areas continue to rise. With stagnant incomes and rising operating costs in many regions, the combination is financially lethal.
The downward pressure on net rents will continue to be a problem. One area in which some relief can be provided is with utility allowances. The IRS cannot make the fundamental changes necessary. Those changes can only occur through legislation. A number of innovative solutions have been proposed, including some that create a “net rent floor” similar to the rent floor.
The flexibility of the LIHTC program is considered one of its greatest assets. When allocating credits, flexibility is important, since it allows states to meet specific needs. Flexibility in compliance is not necessarily an asset. It raises costs for management companies that must navigate different requirements. Consistency in the application of tax credit rules and regulations both within and between states is critical. Each state has features of its market and affordable housing industry that drive the policies and procedures it enforces. Nonetheless, the agenda should include developing greater monitoring consistency across the states.
Few affordable housing communities are constructed and operated without multiple resources—both public and private. Given this fact, it makes sense to align the monitoring requirements. State agencies have professional staff who can competently review apartment communities. The role of the investor is often forgotten during discussion of tax credit monitoring. The investors are often represented by a syndicator or a compliance consultant, and these entities closely monitor the tax credit properties. Tax credit communities are the targets of extensive oversight. Therefore, it seems reasonable to use the LIHTC protocol when other funding, such as HOME funds, is invested in a property. There is no need to maintain a separate protocol.
If HUD is uncomfortable with the tax credit protocol, a risk-based model may be appropriate. Monitoring regulations that take into account the size and scope of a project, performance, location, and other factors would allow agencies to prioritize projects for monitoring. Monitoring based on the total number of units wastes resources and ignores the realities of managing apartment communities.
The Enterprise Income Verification System has reduced the recertification burden for Sec. 8 properties. The system is made possible by an agreement between HUD, the Department of Health and Human Services, and the Social Security Administration. Setting aside concerns of technology, tax credit properties should have access to the system, as should Rural Development properties.
Programs such as Sec. 8 are administered nationally. Consistent documents such as model leases or forms are helpful. Unfortunately, these types of documents can be barriers to properties remaining in compliance with all programs. By requiring a model lease and not allowing changes, HUD is imposing a significant burden on the communities that must comply with multiple programs. Greater flexibility in the use of the model lease would reduce the burden on communities.
Can the Sec. 8 program and the LIHTC student rule be aligned? A course of action may be to eliminate the tax credit student rule altogether. State housing agencies could be given discretion, through the qualified allocation plan, to set benchmarks for the number of traditional full-time student households.
Finally, affordable housing would be well-served by an IRS that speaks with one voice. Various opinions regarding the Code emanate from the chief counsel and the exam branch, which can cause some confusion.
As an industry, we need to recognize that it is not just the availability of programs and funding that matter, it is also how those programs operate once the housing is constructed. By taking action now, we can ensure the programs that so many count on will provide the housing they need.
Brian Carnahan is director of the Ohio Housing Finance Agency's Office of Program Compliance, where he manages the compliance monitoring of LIHTC, HOME, and Sec. 8 communities. Carnahan can be reached at [email protected].
