The Ever-Changing Landscape of LIHTC & CRA: IRS Rule Changes for Compliance and Monitoring

David Risdon • 3/25/2020
This is part 2 in our series on Low-Income Housing Tax Credit Investments (LIHTC) and the Community Reinvestment Act (CRA).

Summary

  • The market for LIHTC investments by banks remains strong but could be stronger.
  • A corporate tax cut has LIHTC projects less attractive to banks, and an increase in tax credits is only a temporary fix.
  • Additional IRS regulations and lack of agreement among bank regulators on proposed CRA rule changes is impeding progress on the situation.
  • LIHTC projects critically contribute to US affordable housing, and the government should work with constituents to grow these kinds of projects.

In February of 2019, the IRS published final regulations pertaining to the state allocating agencies (each state awards federal tax credits to LIHTC projects within their borders) for LIHTC projects. Industry participants paid little attention as the IRS developed regulations, many expressing concern that the IRS did not fully satisfy the requirements of the Administrative Procedures Act to solicit comments from interested parties before the final regulations were issued. Indeed, the National Council of State Housing Agencies (NCSHA) and its members have petitioned the IRS to dial back the new regulations.

The reasons for concern are the substantially increased burden the regulations, effective as of January 1 of this year, place not just on the allocating agencies, but also property owners, managers and tenants. The new regulations:

  • substantially increase the number of units the agencies must monitor;
  • substantially reduce the number of days’ advance notice before a visit; and
  • prevent owners, managers and tenants from knowing the specific units to be inspected prior to the day of the inspection.

 

Allocating agencies are required to conduct physical inspections and file reviews of a minimum number of LIHTC units when a property is placed in service and not less than once every three years thereafter through the initial fifteen-year tax credit period. Prior to these changes, the minimum number of units to be inspected was the lesser of 20% of the number of project units or the number specified in the Reference Chart column:

Table (image)

 

With the new regulations, the new minimum is the number specified in the Reference Chart column above. For the average LIHTC property, which is 44 units, this results in a nearly 100% increase in the inspection and file review burden for an allocating agency property inspection. Agencies throughout the country are substantially increasing the up-front fees they charge owners/managers for their required compliance monitoring duties. For example, North Carolina will now charge an up-front monitoring fee of $52,800 for a 44-unit property, versus $39,600 pre-reg-change.   

 

In addition, the new regulations reduce the pre-inspection notice period from 30 to 15 days. This, on top of the fact that owners, managers and tenants will not know which units are to be inspected until the day of the inspection, places a potential unreasonable burden on said owners, managers and tenants. The IRS states that shorter pre-notice windows will ensure that the allocating agencies are getting a realistic view of the units and files inspected. The difficulties imposed may result in compliance shortfalls.

 

David Risdon is a Senior Managing Director within Cushman & Wakefield’s Special Opportunities Group, which specializes in assisting banks with regulatory compliance monitoring, data validation, data migration and loan portfolio due diligence.

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