Qualified allocation plans (QAPs) failed to consistently cite all required preferences and selection criteria required under the low-income housing tax credit (LIHTC) program, according to a new report.

The finding comes from the Government Accountability Office (GAO), which has been reviewing different aspects of the LIHTC program. The latest installment, which is the second of three expected reports, focuses on the state and local allocating agencies’ administration of the program.

More than half of the 58 QAPs reviewed did not explicitly mention all selection criteria and preferences required by the program. However, some of the LIHTC allocating agencies incorporated the information into other program documents, or implemented the requirements in practice, noted the GAO in its report, Low-Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS Could Improve Noncompliance Reporting and Data Collection.

“While the report’s title indicates that certain agency practices raise concerns, we are pleased that the body of the report suggest that, as we anticipated, states are administering the housing credit program in a manner largely consistent with federal laws and regulations and, in many cases, going above and beyond these requirements,” said Barbara Thompson, executive director of the National Council of State Housing Agencies (NCSHA), in a letter to the federal agency. “GAO points out that states fulfill program requirements in different ways. These variations in approach are in keeping with Congress’ intent upon establishing the program to devolve much program design and decision-making to the states instead of adopting a Washington-driven, one-size-fits-all approach to its administration.”

LIHTC awards and reasonableness of costs

Under the program rules, a LIHTC agency is to provide only the amount of credits that it deems necessary to ensure a project’s financial feasibility. The program also calls for allocating agencies to consider the reasonableness of development costs and their uses for projects. However, Sec. 42 of the Internal Revenue Code does not define or offer guidance on determining how to calculate these amounts.

Agencies have different methods for determining the amount of a LIHTC award. The GAO visited nine agencies and found:

· Six agencies (California, Illinois, Michigan, Nevada, Virginia, and Washington, D.C.) determined credit amounts explicitly in their application reviews by comparing the award amount calculated from the qualified basis with the amount calculated based on the project’s existing equity gap and awarding the lesser of the two. In other words, agencies reviewed cost information to determine the annual amount of tax credits needed to fill the gap in financing. These six agencies documented their calculations and award amounts in the project application and review files; and

· The other three agencies (Chicago, Massachusetts, and Rhode Island) determined credit amounts similarly by reviewing financial information from developers but did not explicitly compare the equity gap and qualified basis to determine award credit amounts. Instead, officials told us that underwriters reviewed this information and assessed if the amounts were reasonable based on their internal underwriting criteria to make award decisions.

Allocating agencies also have different ways to determine the reasonableness of project costs. “More specifically, based on our analysis of 58 QAPs and our site visits, agencies have established various limits against which to evaluate the reasonableness of submitted costs, such as applying limits on development costs, total credit awards, developer fees, and builder’s fees,” said the GAO, which received allocation plans from 2013.

The analysis also found that 40 of 58 agencies specified limits on the value and calculation of developer fees. Some allocating agencies cited limits as the lesser of a specific dollar value or a percentage based on the number of units in a development.

Letters of support

The program also calls for the head of a local jurisdiction to be notified when there is a LIHTC project proposed in his or her community and provide the official with a reasonable opportunity to comment on the project.

The GAO noted that some agencies have also required letters of support from local governments. This has been controversial because it can result in local authorities having veto power over a project. In addition, the Department of Housing and Urban Development (HUD) has raised fair housing concerns about this practice, saying that local support requirements (such as letters) could have a discriminatory influence on the location of affordable housing.

Key recommendations

In its first report, GAO officials found that Internal Revenue Service (IRS) oversight of the LIHTC program has been minimal. The new report echoes those concerns and makes three recommendations to improve IRS oversight:

· The IRS commissioner should collaborate with the allocating agencies to clarify when allocating agencies should report such information on the Form 8823 (report of noncompliance or building disposition). The IRS commissioner should collaborate with the Department of the Treasury in drafting such clarifications to help ensure that any new guidance is consistent with Treasury regulations;

· The IRS should ensure that staff from the Small Business/Self-Employed Division participate in the physical inspection alignment initiative of the Rental Policy Working Group; and

· The IRS should evaluate how it could use HUD’s Real Estate Assessment Center databases, including how the information might be used to reassess reporting categories on the Form 8823 and to reassess which categories of noncompliance information have to be reviewed for audit potential.

A third report that will focus on development costs and the role of syndicators is expected early next year, according to the NCSHA.