oversight

Low-Income Housing Tax Credits: Agencies Implemented Changes Enacted in 2008, but Project Data Collection Could Be Improved

Published by the Government Accountability Office on 2012-12-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                United States Government Accountability Office


GAO             Report to Congressional Committees




                LOW-INCOME
December 2012




                HOUSING TAX
                CREDITS

                Agencies Implemented
                Changes Enacted in
                2008, but Project Data
                Collection Could Be
                Improved




GAO-13-66
                                               December 2012

                                               LOW-INCOME HOUSING TAX CREDITS
                                               Agencies Implemented Changes Enacted in 2008, but Project Data
                                               Collection Could Be Improved

Highlights of GAO-13-66, a report to
congressional committees




Why GAO Did This Study                         What GAO Found
IRS and state HFAs administer the              Federal and state agencies implemented changes made in 2008 to the Low-
LIHTC program, the largest source of           Income Housing Tax Credit (LIHTC) program by revising program guidance and
federal assistance for developing              modifying plans for allocating tax credits. The Internal Revenue Service (IRS)
affordable rental housing. HFAs are            implemented the changes made by the Housing and Economic Recovery Act of
allocated tax credits on a per capita          2008 (HERA) by, among other things, issuing notices and revenue procedures.
basis and award them to developers.            Program stakeholders that GAO contacted said that IRS’s actions were generally
By acquiring project equity from               sufficient. But as of October 2012, IRS and the Department of the Treasury were
developers, investors may become               still working on implementation issues, such as developing guidance on the
eligible for the credits, which offset         provision designed to ease restrictions on using tax credits to acquire existing
federal tax liabilities. As part of HERA,      federally or state-assisted buildings. At the state level, housing finance agencies
Congress made changes to the                   (HFA) implemented the HERA changes by modifying their tax credit allocation
program that included increasing               plans, which provide criteria for awarding credits. For example, in their plans,
credits allocated to states, setting a         some HFAs cited financial need as the only criterion for awarding HERA-created
temporary floor on the most common
                                               enhanced credits. Others planned to target specific types of projects, such as
LIHTC rate (the portion of eligible
                                               those using “green building” practices.
project costs for which a developer can
receive credits), and giving HFAs more         The Department of Housing and Urban Development (HUD) voluntarily compiles
discretion in “enhancing” (i.e.,               the largest public database on LIHTC projects, but the data it collects from HFAs
increasing) awards. HERA also                  are incomplete. Despite HUD efforts to improve its data collection process, the
required GAO to study the changes,             database may undercount projects, in part because HUD did not follow up on
including the distribution of credit           potentially incomplete information. For example, HUD’s database showed that
allocations before and after HERA.             one state had between 23 and 49 completed projects each year from 2006
This report discusses (1) how IRS and          through 2009, but only 2 projects in 2010. However, officials from this state’s
selected HFAs implemented the HERA
                                               HFA provided GAO with documentation showing that they had reported 37
changes, (2) what HUD’s data show
                                               projects for 2010. Further, much of the project data that HUD has received does
about the number and characteristics
of projects completed from 2006                not include characteristics such as the type of location, construction, and tenants
through 2010 and any data limitations,         targeted. A HUD official noted that a HERA provision requiring states to collect
and (3) stakeholders’ views on the             tenant-level data (e.g., race and income) had made collecting project data more
effects of the HERA changes on LIHTC           challenging because HUD did not receive additional resources and available
projects. GAO reviewed IRS and state           resources had to be divided between tenant and project data collection. Without
guidelines, analyzed HUD data on               more complete data on the LIHTC program, the federal government’s ability to
LIHTC projects, and spoke with                 evaluate basic program outcomes—such as how much housing was produced—
federal, state, and industry officials.        and overall federal efforts to provide affordable housing may suffer. Data from 42
                                               HFAs that reported each year from 2006 through 2010 provide limited insight into
What GAO Recommends                            the actual number and characteristics of LIHTC projects. The number of reported
GAO recommends that HUD evaluate               projects completed exceeded 5,300, and most were in metropolitan areas and
and implement additional steps to              were new construction. However, missing data prevented analysis of trends over
improve its LIHTC Database. HUD                the 5-year period. For example, the proportion of missing information on the
agreed with the recommendation but             types of tenants targeted increased from 5 percent in 2006 to 28 percent in 2010.
said the report could better describe
                                               Program stakeholders told GAO that the broad effects of the HERA provisions on
the agency’s efforts to improve data
collection despite resource constraints.
                                               the LIHTC market were difficult to determine but noted that certain provisions
In response, GAO added further                 enhanced the financial feasibility of some individual projects. For example,
information on HUD’s changes to its            stakeholders said the temporary increase in per capita credit allocations,
collection process.                            temporary credit rate floor, and discretion to use enhanced credits improved the
                                               financial viability of some projects by allowing states to award more credits per
View GAO-13-66. For more information,          project. Some state officials also said that the larger awards especially benefited
contact Daniel Garcia-Diaz at (202) 512-8678
or garciadiazd@gao.gov or James R. White at
                                               projects in rural areas that can be difficult to finance because they tend to have
(202) 512-9110 or whitej@gao.gov.              lower rents and are less attractive to investors than projects in urban areas.
                                                                                       United States Government Accountability Office
Contents


Letter                                                                                  1
               Background                                                               4
               IRS Revised Guidance and States Modified Qualified Allocation
                 Plans to Implement the HERA Changes                                   12
               Available LIHTC Data Are Incomplete and Provide Limited Insight
                 into Program Trends                                                   17
               Stakeholders Said HERA Provisions Helped the Financial
                 Feasibility of Some LIHTC Projects                                    24
               Conclusions                                                             28
               Recommendation for Executive Action                                     29
               Agency Comments and Our Evaluation                                      29

Appendix I     Objectives, Scope, and Methodology                                      32



Appendix II    Specific 2008 Changes Related to the Low-Income Housing Tax Credit 35



Appendix III   Comments from the Department of Housing and Urban Development           37



Appendix IV    GAO Contacts and Staff Acknowledgments                                  40



Tables
               Table 1: Example of LIHTC Calculation                                    8
               Table 2: HERA Changes Discussed in This Report                           9
               Table 3: Percentage of Projects with Missing Information by
                        Project Characteristics, Calendar Years 2006-2010, as of
                        July 2012                                                      20
               Table 4: Reported Number of LIHTC Projects Placed in Service,
                        Calendar Years 2006-2010, as of July 2012                      22
               Table 5: Percentage of Reported LIHTC Projects Placed in Service
                        from Calendar Years 2006-2010 by Location Type, as of
                        July 2012                                                      23
               Table 6: Percentage of Reported LIHTC Projects by Construction
                        Type, Calendar Years 2006-2010, as of July 2012                23
               Table 7: Percentage of Reported LIHTC Projects by Type of Tenant
                        Targeted, 2006-2010, as of July 2012                           24



               Page i                                      GAO-13-66 LIHTC Program Changes
          Table 8: Per Capita LIHTC Allocations, Calendar Years 2006-2010,
                   Including HERA Increases in 2008 and 2009                                        25
          Table 9: Amount of Credits Developers Returned to HFAs,
                   Calendar Years 2006-2010                                                         26
          Table 10: Specific LIHTC Provisions Enacted in 2008, by Category                          35


Figures
          Figure 1: Key Steps and Entities in the LIHTC Process                                      5
          Figure 2: Timeline of Key Events Affecting LIHTC Market, 2007
                   through 2009                                                                     11




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          Page ii                                                GAO-13-66 LIHTC Program Changes
Abbreviations

DDA         difficult development area
HERA        Housing and Economic Recovery Act of 2008
HFA         housing finance agency
HUD         Department of Housing and Urban Development
IRS         Internal Revenue Service
LIHTC       Low-Income Housing Tax Credit
NCSHA       National Council of State Housing Agencies
QAP         qualified allocation plan
QCT         qualified census tract
TCAP        Tax Credit Assistance Program




Page iii                              GAO-13-66 LIHTC Program Changes
United States Government Accountability Office
Washington, DC 20548




                                   December 6, 2012

                                   The Honorable Max Baucus
                                   Chairman
                                   The Honorable Orrin G. Hatch
                                   Ranking Member
                                   Committee on Finance
                                   United States Senate

                                   The Honorable Dave Camp
                                   Chairman
                                   The Honorable Sander Levin
                                   Ranking Member
                                   Committee on Ways and Means
                                   House of Representatives

                                   The Low-Income Housing Tax Credit (LIHTC) program is the largest
                                   federal program for building and rehabilitating rental housing that is
                                   affordable to low-income households. It is estimated to cost $6.5 billion in
                                   fiscal year 2012 in forgone revenue. The program is jointly administered
                                   by the Internal Revenue Service (IRS) and state housing finance
                                   agencies (HFA). 1 Each state receives an annual allocation of LIHTCs by
                                   statutory formula according to population. 2 HFAs then competitively
                                   award the tax credits to owners of qualified rental housing projects that
                                   reserve all or a portion of their units for low-income tenants. Developers
                                   typically attempt to obtain funding for their projects by attracting third-
                                   party investors that are willing to contribute equity to the projects, and the
                                   project investors can then claim the LIHTCs. This process of providing
                                   LIHTCs in exchange for equity is generally referred to as “selling” the tax
                                   credits. 3 The developers or investors can claim their share of credit each
                                   year during the 10-year credit period, which can be used to reduce their



                                   1
                                    All 50 states, the District of Columbia, Puerto Rico, and four U.S. possessions (American
                                   Samoa, Guam, the Northern Mariana Islands, and the U.S. Virgin Islands) have HFAs that
                                   receive LIHTC allocations. HFAs are state-chartered authorities established to meet the
                                   affordable housing needs of the residents of their states.
                                   2
                                    26 U.S.C. § 42(h)(3).
                                   3
                                    The owners of the LIHTC project are permitted to claim the LIHTCs on their income tax
                                   return. Technically, what is sold to the investor is not the credit but an ownership interest
                                   in the project (through a partnership or other entity).




                                   Page 1                                                    GAO-13-66 LIHTC Program Changes
tax liability. Individual HFAs maintain data on the number of projects that
receive tax credit allocations each year, as well as the characteristics of
these projects. The Department of Housing and Urban Development
(HUD) has almost no direct administrative responsibility for the LITHC
program, but it voluntarily collects information from the HFAs on LIHTC
projects for its LIHTC Database, which is the most comprehensive public
source of information on LIHTC projects.

Since its inception in 1986, the program has helped to build or rehabilitate
more than 36,000 projects that help provide housing for low-income
households. 4 In 2008 and 2009—in the midst of the financial crisis—the
program was severely disrupted when investor demand for tax credits
collapsed and developers could not obtain funding for projects that would
have qualified for the credit. The onset of financial struggles for large
banks and the exit of two large LIHTC investors from the LIHTC market—
Fannie Mae and Freddie Mac—contributed greatly to decreased investor
demand. 5 During that period, Congress took a number of actions to
improve the operation of the LIHTC program, including changes enacted
as part of the Housing and Economic Recovery Act of 2008 (HERA). 6
These changes generally went into effect after July 30, 2008, including



4
 Although the LIHTC program is a major source of financing for affordable rental housing,
some researchers have argued that the program may displace other affordable housing
that would have been available through the private, unsubsidized housing market. A 2008
report by the Congressional Research Service reviewed the research literature on this and
other issues concerning the impact of the LIHTC program. Congressional Research
Service, The Low-Income Housing Tax Credit: A Framework for Evaluation, RL33904
(Washington, D.C.: Apr. 15, 2008).
5
 Fannie Mae and Freddie Mac are private, federally chartered companies created by
Congress to, among other things, provide liquidity to home mortgage markets by
purchasing mortgage loans, thus enabling lenders to make additional loans. In September
2008, Fannie Mae and Freddie Mac were placed into federal government conservatorship.
6
 Pub. L. No. 110-289, 122 Stat. 2654 (July 30, 2008). Under the American Recovery and
Reinvestment Act of 2009 (Pub. L. No. 111-5), Congress also created two new programs
that addressed the lack of private investment in projects that would otherwise have used
LIHTCs. The two programs are the Tax Credit Assistance Program and the Grants to
States for Low-Income Housing Projects in Lieu of Low-Income Housing Credits Program.
HFAs were to use the funding from these programs to provide gap financing for stalled
“shovel-ready” projects and to offset the drop in the demand for, and subsequently the
price of, LIHTCs. For information on the implementation of these programs, see GAO,
Recovery Act: Opportunities to Improve Management and Strengthen Accountability over
States’ and Localities’ Uses of Funds, GAO-10-999 (Washington, D.C.: Sept. 20, 2010)
and Recovery Act: Housing Programs Met Spending Milestones, but Asset Management
Information Needs Evaluation, GAO-12-634 (Washington, D.C.: June 18, 2012).




Page 2                                                GAO-13-66 LIHTC Program Changes
specific changes for projects placed in service—that is, suitable for
occupancy—after July 30, 2008. 7

HERA also required us to study and report on the implementation of the
changes, including analyzing the distribution of credit allocations before
and after the changes went into effect. 8 This report discusses (1) how IRS
and selected HFAs implemented the HERA changes to the LIHTC
program, (2) what HUD’s data on LIHTC projects show about the number
and characteristics of projects completed from 2006 through 2010 and
any data limitations, and (3) the views of program stakeholders about the
effects of the HERA changes on these projects.

To assess how IRS and HFAs implemented the HERA provisions, we
reviewed IRS guidance, memorandums, and planning documents, as well
as state qualified allocation plans (QAP), which contain detailed selection
criteria and application requirements for the LIHTC program. We also
interviewed officials from IRS, the Department of the Treasury (Treasury),
and nine HFAs about the implementation of these changes. 9 We selected
the 9 HFAs (out of the 56 that receive LIHTC allocations) to cover
different geographic regions and allocation amounts, but their
experiences are not representative of all states. To describe HUD’s
LIHTC data and what these data show about the number and
characteristics of LIHTC projects, we analyzed information contained in
HUD’s LIHTC Database, which was last updated in July 2012. 10 We
conducted reasonableness checks on the data to identify any missing,
erroneous, or outlying figures. We also interviewed HUD about how it and
its contractor compile the data. These steps revealed that the data were
not complete, which limited what we could conclude from our data
analysis. Using the HUD data that were available, we examined the types



7
 IRS Notice 88-116 defines the placed-in-service date as the date on which the first unit in
the building is certified as being suitable for occupancy under state or local law.
8
 HERA at § 3004. The program changes within the scope of our review are contained in
HERA, div. C, title I, subtitle A, 122 Stat. 2878-2888 (July 30, 2008).
9
We interviewed HFA officials from California, Florida, Massachusetts, Michigan,
Minnesota, North Carolina, Oregon, Texas, and Vermont.
10
  The LIHTC data that IRS maintains are oriented toward enforcing the tax code rather
than measuring program outcomes. Although not an administering agency, HUD has
historically collected information on projects produced under the program due to the
importance of LIHTCs as a source of funding for low-income housing. The most recent
data available from the database are for properties placed in service in 2010.




Page 3                                                  GAO-13-66 LIHTC Program Changes
                           and locations of projects that states supported with their tax credit
                           allocations, including the proportions of projects that were in rural versus
                           urban areas, that were newly constructed versus acquired, and that were
                           targeted to specific kinds of tenants. In addition, we used the National
                           Council of State Housing Agencies’ (NCSHA) annual HFA Factbooks
                           from 2006 through 2010 to analyze the extent to which developers
                           returned credits that had not been exchanged for equity to the states. We
                           assessed the reliability of the HUD and NCSHA data and concluded that
                           these data were sufficiently reliable for our reporting objective. To obtain
                           the views of selected HFAs and industry participants about the effect of
                           the HERA changes on LIHTC projects, we interviewed the same nine
                           HFAs, as well as industry associations, investors, syndicators, and
                           housing developers. We also reviewed supporting documentation from
                           these entities about their views. Appendix I contains additional details
                           about our scope and methodology.

                           We conducted this performance audit from February through December
                           2012 in accordance with generally accepted government auditing
                           standards. Those standards require that we plan and perform the audit to
                           obtain sufficient, appropriate evidence to provide a reasonable basis for
                           our findings and conclusions based on our audit objectives. We believe
                           that the evidence obtained provides a reasonable basis for our findings
                           and conclusions based on our audit objectives.



Background

Description of the LIHTC   LIHTCs follow a multistep process that begins with the allocation of tax
Program                    credits to HFAs. The process of allocating, awarding, and using LIHTCs is
                           depicted in figure 1.




                           Page 4                                        GAO-13-66 LIHTC Program Changes
Figure 1: Key Steps and Entities in the LIHTC Process




                                         Note: For a more complete description and an additional graphic on the LIHTC oversight and
                                         compliance system, see GAO, Opportunities to Improve Oversight of the Low-Income Housing
                                         Program, GAO/GGD/RCED-97-55 (Washington, D.C.: Mar. 27, 1997).
                                         As the figure shows, there are four primary steps in the LIHTC process.

                                         1. HFAs receive tax credit allocations. State ceilings for LIHTCs are
                                            allocated by statutory formula to states annually according to




                                         Page 5                                                     GAO-13-66 LIHTC Program Changes
     population, with a minimum amount awarded to states with small
     populations. 11 For 2012, the formula was $2.20 per capita or a
     minimum of $2,525,000. 12
2. Developers apply to the states for tax credits. To apply for tax credits,
   a developer must submit a detailed proposal to an HFA. To qualify for
   consideration, a project must meet certain requirements, such as
   reserving specified percentages of available units for lower income
   households and restricting rents for these households to 30 percent of
   a calculated income limit.
3. HFAs award tax credits to selected housing projects. The potential to
   earn tax credits is competitively awarded to housing projects in
   accordance with states’ QAPs. QAPs outline a state’s affordable
   housing priorities and set out its procedure for ranking the projects on
   the basis of how well they meet state priorities and selection criteria
   that are appropriate to local conditions. The QAP must give
   preference to projects that serve the tenants with the lowest incomes,
   serve qualifying tenants for the longest period of time, and are located
   in a qualified census tract (QCT) and contribute to a local community
   revitalization plan. 13 Developers receiving tax credit allocations have 2
   years to complete their projects and may not claim the credits until the
   projects are placed in service.
4. Investors receive tax benefits. Investment partnerships are a primary
   source of equity financing for LIHTC projects. Syndicators recruit
   investors willing to become partners in LIHTC partnerships. The
   money investors pay for the partnership interest is paid into the LIHTC
   project as equity financing. Although investors are buying an interest
   in a rental housing partnership, this process is commonly referred to
   as buying tax credits because they receive tax credits in return for
   their investment. Once the LIHTC project is placed in service, or ready



11
 26 U.S.C. § 42(h)(3).
12
  The state ceiling applies to (1) the 9 percent credit for nonfederally subsidized new
buildings and substantially rehabilitated buildings treated as new buildings, and (2) the 4
percent credit for acquired buildings. The state credit ceiling does not include the 4
percent credit available to housing projects financed with tax-exempt bonds, which are
associated with private activity bonds.
13
  Under 26 U.S.C. § 42(d)(5)(B)(ii)(l), QCTs are designated by the Secretary of Housing
and Urban Development and include census tracts where either 50 percent or more of
households have income below 60 percent of the area median gross income or the
poverty rate is at least 25 percent.




Page 6                                                   GAO-13-66 LIHTC Program Changes
     for occupancy, investors can receive their share of the credits each
     year of the 10-year credit period and can use the credit to offset
     federal income taxes otherwise owed on their tax returns, as long as
     the project meets the LIHTC requirements.

The amount of tax credits a project can receive depends on several
factors, including the applicable fraction and the applicable percentage
(see table 1). The applicable fraction, or the percentage of units in the
building considered to be qualified low-income units, is the lesser of (1)
the total square feet of the low-income units divided by the total square
feet of all the units, or (2) the number of the low-income units divided by
the total number of units. Regarding the applicable percentage, there are
two credit rates (referred to as the 9 percent and 4 percent rates) for the
LIHTC program that determine how much of a project’s costs the
allocated credits can cover. The credit rate takes into account whether the
project is newly constructed or acquired and rehabilitated and the extent
to which it uses other federal subsidies. 14 Most new construction and
substantial rehabilitation projects are eligible for the 9 percent rate, which
allows investors to claim credits for about 9 percent of the eligible basis
annually over a 10-year period. 15 Prior to HERA, the actual percentage for
the 9 percent credit floated based on a statutory formula and often fell
below 9 percent.




14
  The 9 percent credit is also known as the 70 percent present value credit. 26 U.S.C. §
42(b). This latter terminology reflects the fact that the 9 percent credit is designed to yield
a total amount over the 10-year credit period that is worth 70 percent of the present value
of the stream of tax credits. The 9 percent rate refers to the approximate value that can be
claimed by investors each year.
15
  Investors use the 4 percent credit for acquisition of existing buildings and new
construction projects that are financed in conjunction with tax-exempt bonds and other
gap subsidies. The 4 percent credit floats based on a statutory formula.




Page 7                                                    GAO-13-66 LIHTC Program Changes
Table 1: Example of LIHTC Calculation

1. Total project development cost                                                                                             $11,500,000
2. Ineligible costs                                                                                                            (1,500,000)
(e.g., land acquisition, cash reserves, syndication costs, certain financing costs)
3. Eligible basis (row 1 - row 2)                                                                                             $10,000,000
(Construction costs, architects’ fees, environmental surveys, relocation expenses, title and recording fees,
appraisals)
4. Applicable fraction                                                                                                              100%
(In this example, all units in the project are low-income units)
5. Qualified basis (row 3 x row 4)                                                                                            $10,000,000
6. Applicable percentage                                                                                                                9%
7. Annual credit amount taken over 10 years (row 4 x row 5)                                                                      $900,000
8. Credits over 10 years                                                                                                       $9,000,000
                                               Source: GAO analysis.



                                               The amount of equity an investor is willing to contribute to the
                                               construction of the project in exchange for credits results in the effective
                                               price of an ownership interest in the project. In the above example, if the
                                               investor made $6,750,000 in total equity contributions, the implied price of
                                               the credits would be $0.75 for each dollar of credit
                                               ($6,750,000/$9,000,000). 16

HERA Changes to the                            HERA made more than 20 changes to the LIHTC program that generally
LIHTC Program                                  became effective after July 30, 2008. 17 Table 2 provides brief descriptions
                                               of the changes discussed in this report. Appendix II lists all of the
                                               changes to the LIHTC program made by the Multi-Family Housing subtitle
                                               of HERA.




                                               16
                                                For additional information on the calculation of the price of LIHTC credits, see GAO,
                                               Community Reinvestment Act: Challenges in Quantifying Its Effect on Low-Income
                                               Housing Tax Credit Investment, GAO-12-869R (Washington, D.C.: Aug. 28, 2012).
                                               17
                                                    HERA, div. C, title I, subtitle A, 122 Stat. 2878-2888 (July 30, 2008).




                                               Page 8                                                      GAO-13-66 LIHTC Program Changes
Table 2: HERA Changes Discussed in This Report

HERA change                                   Description
1.   Temporarily increased per capita         Before HERA, the amount of credits a state received was based on a formula that
     credit allocations to states             adjusted the 2003 per capita rate of $1.75 for inflation. In 2003, states with small
                                              populations received at least $2,030,000 in allocations, also adjusted for inflation each
                                              subsequent year. HERA increased the per capita allocation by 10 percent for 2008—from
                                              $2.00 to $2.20—which resulted in a per capita allocation of $2.30 in 2009 after adjusting
                                              for inflation. The allocation for states with small populations was increased to $2,555,000
                                              in 2008 ($2,665,000 in 2009, adjusted for inflation). After 2009, the per capita allocations
                                              reverted to the amounts that would have been specified by the inflation calculations
                                              ($2.10 and $2,430,000 in 2010).
2.   Established a 9 percent minimum          Before HERA, the actual percentages for the 9 percent credit floated based on a statutory
     credit rate                              formula and often fell below 9 percent. HERA set a floor of 9 percent for this credit,
                                              effective for buildings placed in service after July 30, 2008 and before December 31,
                                              2013. Without this provision, the rate would have been 7.94 percent for August 2008.
3.   Gave states flexibility to pick buildings HERA gave HFAs the ability to designate any building, regardless of location, as eligible
     eligible for a “basis boost”              for an enhanced credit of up to 130 percent of the building’s eligible basis (rather than the
                                               normal 100 percent), in effect treating these projects as if they were in a difficult
                                                                                              a
                                               development area or a qualified census tract. HERA required HFAs to find that the basis
                                               boost was necessary for a building to be financially feasible as part of a qualified project
                                               before granting it to a developer.
4.   Redefined when a building is             Before HERA, if any part of a building’s eligible basis was federally subsidized, the
     considered federally subsidized          building was ineligible for the 9 percent credit. HERA limited the definition of a federal
                                              subsidy for these purposes to tax-exempt bonds, thus possibly making more buildings
                                              eligible for the 9 percent credit.
5.   Eased restrictions on using LIHTCs to Before HERA, in general, the acquisition costs for an existing building would not be
     acquire an existing building          eligible for the credit unless there was a period of at least 10 years between the date it
                                           was acquired by the taxpayer and the date the building was last placed in service. HERA
                                           waived the 10-year rule for any federally or state-assisted building. A federally assisted
                                           building is a building “substantially” assisted, financed, or operated under specific
                                           sections of various housing acts or under any other housing program administered by
                                           HUD or by the Department of Agriculture’s Rural Housing Service. A state-assisted
                                           building is a building “substantially” assisted, financed, or operated under any state law
                                           with purposes similar to one of the acts just mentioned.
6.   Repealed the bond posting                Before HERA, a taxpayer could avoid credit recapture when disposing of a building by
     requirement                              posting a disposition bond with IRS. The purpose of the bond was to ensure the
                                              recapture amount could be assessed and collected if a recapture event occurred after the
                                              disposition. HERA replaced this option by extending a statute of limitations for assessing
                                              the recapture amount to 3 years from the date the taxpayer notifies Treasury (IRS) that
                                              noncompliance with federal LIHTC requirements has occurred, if it is reasonably
                                              expected that such building will continue to be a qualified low-income building for the
                                                                                    b
                                              remainder of the compliance period. Although generally applicable to dispositions of a
                                              building after HERA’s enactment date, at the election of the taxpayer, the provision also
                                              applies to dispositions on or before that date if the taxpayer had placed a disposition
                                              bond with IRS in a timely fashion.




                                              Page 9                                                    GAO-13-66 LIHTC Program Changes
HERA change                                 Description
7.   Changed median income rules in rural Before HERA, tenant income limits were based on the relevant area’s median gross
     areas                                income. HERA changed the measurement of area median gross income applied to
                                          certain properties in certain rural areas so that the income limits for these properties
                                          would be measured by the greater of the otherwise applicable area median gross income
                                          or the national nonmetropolitan median gross income.
8.   Changed the general public use         To be eligible for LIHTCs, residential units in qualified projects must be available for
     requirement                            general public use. HERA clarified that a project would not fail this requirement just
                                            because it favored tenants who had special needs, were members of specified groups, or
                                            were involved in artistic or literary activities.
9.   Instituted hold harmless provisions for Before HERA, HUD used a “hold harmless” policy to keep the area median gross income
     reductions in area median gross         it used to determine eligibility for HUD’s main rental assistance program from falling.
     income                                  HERA put the HUD practice into the Internal Revenue Code to bolster the financial
                                             viability of LIHTC projects by preventing rents from automatically falling when the area
                                             median gross income level on which rents are based declined. It did this by adding hold
                                             harmless provisions to address areas where the area median gross income had
                                             decreased. HERA prevented future decreases in tenant income limits and rents resulting
                                             from declines in area median gross income.
                                            Sources: GAO analysis of HERA changes; Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 110th
                                            Congress, JCS-1-09 (March 2009); Michael J. Novogradac and Glenn A. Graff, “Impact of the Housing and Economic Recovery Act of
                                            2008 on Current and Future Low-Income Housing Tax Credit Properties,” Journal of Affordable Housing & Community Development
                                            Law, vol.18, no.1 (fall 2008).

                                            Note: See appendix II for a list of all changes to the LIHTC program made by the Multi-Family
                                            Housing subtitle of HERA.
                                            a
                                            A difficult development area is defined as “any area designated by the Secretary of Housing and
                                            Urban Development as an area which has high construction, land, and utility costs relative to area
                                            median gross income.” HUD updates the list of such areas annually. 26 U.S.C § 42(d)(5)(B)(iii)(I).
                                            b
                                             A LIHTC project is subject to a 15-year compliance period during which a taxpayer is subject to IRS
                                            oversight and an extended use period of at least 30 years during which the project is subject to HFA
                                            oversight. The 15-year compliance period and the extended use period begin at the same time.
                                            Noncompliance with federal LIHTC requirements within the 15-year compliance period may result in
                                            IRS’s denying claims for the credit in the current year or recapturing credits claimed in prior years.


Other Economic and                          In addition to HERA, several other economic and program developments
Program Changes                             affected the LIHTC program in the 2008 to 2009 time frame (see fig. 2).
                                            For example, the general economic recession beginning at the end of
Affecting LIHTC                             2007 reduced the profitability of banks and other financial institutions that
                                            were large LIHTC investors. As a result, these investors had no need for
                                            tax credits because they experienced losses or lower profits and thus had
                                            lower tax liabilities to offset. With the drop in demand for the credits, the
                                            effective prices of LIHTCs fell, creating funding gaps for developers who
                                            had assumed they would be able to sell their tax credits for a higher price.




                                            Page 10                                                                       GAO-13-66 LIHTC Program Changes
                                        According to one report, thousands of projects and tens of thousands of
                                        units that would have otherwise been bought or rehabilitated stalled. 18

Figure 2: Timeline of Key Events Affecting LIHTC Market, 2007 through 2009




                                        To help fill the funding gaps, in February 2009 Congress enacted the
                                        American Recovery and Reinvestment Act of 2009 (Recovery Act), which
                                        created the Tax Credit Assistance Program (TCAP) and the Tax Credit
                                        Exchange Program (Exchange Program). TCAP provided supplemental
                                        grant and loan funds to projects that received LIHTCs. The Exchange
                                        Program allowed HFAs the option of exchanging eligible portions of the
                                        state’s housing credit ceiling for cash grants that could be used to finance
                                        low-income housing.




                                        18
                                          Joint Center for Housing Studies of Harvard University, The Disruption of the Low-
                                        Income Housing Tax Credit Program: Causes, Consequences, Responses, and Proposed
                                        Correctives (Cambridge, Mass.: December 2009).




                                        Page 11                                            GAO-13-66 LIHTC Program Changes
                            Because the LIHTC program is jointly administered by federal and state
IRS Revised Guidance        governments, agencies at both levels played roles in implementing
and States Modified         HERA’s changes to the program. At the federal level, IRS and Treasury’s
                            Office of Tax Policy provided new guidance for program stakeholders. At
Qualified Allocation        the state level, HFAs modified their QAPs for allocating tax credits.
Plans to Implement
the HERA Changes


IRS and Treasury Have       HERA made changes to the LIHTC program that affected various parties,
Issued Guidance and Are     including taxpayers, HFAs, and project owners, and IRS and Treasury
                            provided guidance and took other actions into 2012 to implement these
Considering and Acting on   changes. To better ensure that information on the HERA changes was
Implementation Issues       widely accessible, IRS issued revenue procedures and notices, made
                            changes to forms and form instructions, and circulated newsletters to
                            program stakeholders. 19 More specifically, its actions included the
                            following:

                            •     Issuing (1) a revenue procedure for taxpayers to follow when
                                  choosing to no longer maintain a surety bond, as permitted by the
                                  HERA change described in table 2, item 6; 20 (2) a notice that the 9
                                  percent floor (table 2, item 2) would apply to eligible projects that had
                                  committed to a lower rate before HERA; and (3) a newsletter to
                                  program stakeholders describing new income limits related to the
                                  HERA “hold harmless” provisions described in table 2, item 9. The
                                  income limits are a percentage of the relevant area’s median gross




                            19
                              A revenue procedure is an official statement of a procedure published in the Internal
                            Revenue Bulletin that affects, for instance, the rights of a taxpayer under the Internal
                            Revenue Code and should be a matter of public knowledge. It provides return filing or
                            other instructions concerning an IRS position. A notice is a public pronouncement that
                            may contain guidance involving substantive interpretation of the Code or other provisions
                            of the law.
                            20
                                A surety bond is a bond guaranteeing the performance of a contract or an obligation.




                            Page 12                                                 GAO-13-66 LIHTC Program Changes
     income and are the basis for calculating the gross rent that a LIHTC
     project can charge. 21

•    Updating instructions for Form 8609, “Low-Income Housing Credit
     Allocation and Certification,” to reflect changes involving the 9 percent
     floor (table 2, item 2), federally subsidized buildings (table 2, item 4),
     and the HERA basis boost (table 2, item 3). HFAs use the form to
     report LIHTC allocations for buildings to IRS, and building owners use
     it to certify such things as a building’s eligible basis, qualified basis,
     and placed-in-service date.

•    Revising the Guide for Completing Form 8823, Low-Income Housing
     Credit Agencies Report of Noncompliance or Building Disposition, a
     guide intended to help housing agencies identify and consistently
     report noncompliance issues to IRS.

•    Discussing through internal memorandums whether regulations
     needed to be updated because of HERA and exploring
     implementation issues that surfaced. For instance, IRS internally
     considered questions from the division tracking its own
     implementation of HERA’s LIHTC provisions about whether the
     changes required updates to regulations governing general public use
     requirements mentioned in table 2, item 8. An official from IRS’s
     Office of Chief Counsel told us they determined that no updates were
     needed.

Program stakeholders we spoke with, including HFAs, industry
associations, syndicators, and developers, generally said that IRS’s
actions to implement the HERA changes were sufficient, and that they
were satisfied with the agency’s efforts. However, they raised two
concerns in our discussions that IRS and Treasury have continued to
consider and act on.

The first involved the HERA provision noted in table 2, item 5, that eased
restrictions on using LIHTCs to acquire an existing building. Before


21
  For any project, the area median gross income determined for a particular year after
2008 is held harmless—it cannot be lower than the amount determined the year before.
Also, for projects that had the area median gross income determined for 2007 or 2008, the
area median gross income for years after 2008 is at least the amount at which HUD had
held it harmless previously plus the amount by which the area median gross income
increased after 2008.




Page 13                                               GAO-13-66 LIHTC Program Changes
HERA, acquisition costs for an existing building generally would not be
eligible for LIHTCs unless the building had been placed in service 10
years or more before it was acquired. HERA waived this 10-year rule for
any federally or state-assisted building—that is, any building that was
“substantially” assisted, financed, or operated under certain federal or
state programs or laws.

In response to this HERA provision, the IRS Chief Counsel and Treasury
placed clarification of the meaning of “substantially” on priority lists of
guidance projects for July 2010 through June 2011 and July 2011 through
June 2012. With over 300 guidance projects on the priority list for 2011-
2012, IRS and Treasury had not issued any guidance defining
“substantially” as of October 2012. Agency officials cited the complexity of
the issue and other agency priorities as reasons for the delay. 22 A
Treasury official was not yet able to tell us when the agency would
complete the guidance, what it was likely to say, or whether it would
resolve the definition of “substantially” for both federal and state subsidies
at the same time.

The relative importance of future guidance is unclear as stakeholders
disagreed on the need to clarify the meaning of “substantially.” Some
stakeholders said there was little need for clarification. However, one
organization sought guidance from Treasury in 2009 and 2010 because, it
said, the lack of a definition was delaying some acquisition projects. 23 An
IRS official agreed, saying the lack of guidance had delayed acquisition
projects and resulted in the substitutions of other projects, such as
construction of new buildings, for acquisitions. In addition, a Treasury
official told us that the lack of guidance had likely made attorneys for
potential LIHTC projects conservative in interpreting “substantially.” For
example, some may have decided that all the units in a building must be
federally subsidized in order to meet the definition.

A second concern—related to HERA’s hold harmless provisions on
income and rent limits—did not rise to the level of necessarily requiring


22
  In previous reports, we have described delays in the priority guidance process. See
GAO, Tax Policy: The Research Tax Credit’s Design and Administration Can Be
Improved, GAO-10-136 (Washington, D.C.: Nov. 6, 2009), and Financial Derivatives:
Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse,
GAO-11-750 (Washington, D.C.: Sept. 20, 2011).
23
 The organization, the LIHTC Working Group, consists of LIHTC industry participants
who work together to try to resolve technical and administrative LIHTC program issues.




Page 14                                               GAO-13-66 LIHTC Program Changes
                            formal guidance, but has received continued federal attention because of
                            its complicated nature. The hold harmless provisions (table 2, item 9) are
                            aimed at bolstering the financial viability of LIHTC projects by preventing
                            rents from automatically falling when area income levels, on which the
                            rents are based, decline. In so doing, the provisions resulted in a system
                            in which, for instance, three projects on the same street could have three
                            different sets of income and rent limits if they were placed in service in
                            three different time periods. Accommodating all of the possibilities for
                            different placed-in-service dates required projects to use multiple tables to
                            find the applicable income and rent limits, and some program participants
                            have found this confusing. Furthermore, the income and rent limits
                            change annually when HUD publishes new area income levels. The
                            owner of a LIHTC project must use the correct table, based on the
                            building’s location and placed-in-service date, to determine the maximum
                            income that a household may have to be a qualified low-income
                            household, and the maximum gross rent that a household may be
                            charged, based on the number of bedrooms in the unit, for the unit to
                            qualify for the credit as a low-income unit.

                            IRS issued explanatory newsletters about the hold harmless provisions,
                            and IRS officials said they made public presentations to stakeholders
                            about them, but some LIHTC program participants reported that the
                            provisions were complicated, confusing, and hard to administer. For
                            example, Texas HFA officials told us that the increase in the number of
                            possible rent limits complicated communications with property owners
                            and increased property owners’ compliance risks. A Vermont HFA official
                            described how staff had to learn to calculate new limits, publish and
                            distribute new tables, and explain the changes in their QAP. However,
                            some HFAs told us that while the provisions were complex and
                            burdensome, they had worked hard to understand them and had learned
                            to work with them. IRS has continued to provide explanatory newsletters
                            and IRS officials told us they made public presentations into 2012. A
                            Treasury official acknowledged the complexity of the provisions and said
                            further clarifying guidance might be warranted. However, the official also
                            said that making a change to hold harmless guidance would require
                            determining that the change merited more consideration than the many
                            non-HERA topics that Treasury also needed to consider.


HFAs Generally              HFAs we spoke with also took steps to implement the changes, including
Implemented HERA            one of the changes HFAs generally thought was significant—the HERA
                            basis boost. Our review of QAPs for nine HFAs and research by an
Changes through Qualified   industry group found that HFAs often modified their QAPs to implement
Allocation Plans            the HERA basis boost but varied in how they used the new flexibility. Of


                            Page 15                                       GAO-13-66 LIHTC Program Changes
the nine states we examined, eight modified their QAPs by revising their
criteria for awarding the basis boost. According to a state official, the
remaining HFA also revised its criteria for the basis boost but conveyed
the changes to stakeholders through its website, public hearings, and
newspapers.

In general, states varied in the criteria they developed for awarding the
basis boost. We analyzed NCSHA summaries of the factors that HFAs
reported considering in awarding the HERA basis boost in 2009, the first
full year after HERA’s enactment. According to the summaries, 30 of the
54 HFAs reporting cited specific factors beyond the single criterion given
in HERA (financial feasibility). 24 The other 24 HFAs cited financial
feasibility or other general guidance (17), did not report any factors (1), or
chose not to implement the HERA basis boost (6). Research by NCSHA
in 2010 noted that some states applied the boost statewide and some
applied it to more specific geographical areas, project types, or projects
with certain characteristics. NCSHA cited examples of states targeting the
basis boost to developments that had tenants of different income levels,
involved expensive land, were in rural or tribal areas or areas affected by
natural disasters, featured “green building” practices or preservation
initiatives, or were transit oriented.

States’ use of the basis boost also varied over time. Our analysis of
NCSHA summaries for 2008 through 2010 showed that HFAs’ use of the
HERA basis boost became more widespread over that period. More
specifically, while 12 HFAs reported not having implemented the basis
boost in 2008, this number dropped to 3 in 2010. For example, the Florida
HFA did not begin to use the boost until the change appeared in its 2011
QAP because until then, the state was still benefitting from Gulf
Opportunity Zone disaster credits and did not need the HERA basis
boost. 25 California HFA officials said they did not use the boost as much
as some other states because California already had a large number of
counties that were designated as difficult development areas (DDA) and
had a state LIHTC program covering projects that might have benefitted




24
 Although 56 HFAs receive LIHTC allocations, not all of them report information to
NCSHA.
25
  Gulf Opportunity Zone disaster credits are LIHTCs, in addition to regular, annual
allocations available to states, given to states affected by Gulf Coast hurricanes.




Page 16                                                GAO-13-66 LIHTC Program Changes
                       from the HERA basis boost. 26 The officials said they did not use the
                       HERA basis boost at all in 2012. The Massachusetts HFA began
                       implementing the HERA basis boost in 2009 and continued to use it into
                       2012. In its 2009 plan, the HFA identified 20 locations that were eligible
                       for the HERA basis boost, a number that rose to 35 in its 2012 plan.

                       HFAs also modified their QAPs and published technical information to
                       reflect other program changes in HERA. For instance, soon after HERA
                       was enacted, the Oregon HFA revised multiple sections of its QAP. In
                       accordance with HERA changes, it added the historic nature of buildings
                       and energy efficiency as criteria for awarding LIHTCs, updated policies on
                       the availability of LIHTC projects for general public use, and inserted new
                       policies on the use of the 9 percent floor. The Massachusetts HFA
                       incorporated the increase in per capita allocations as well as the 9
                       percent floor into its 2008 QAP. In addition, some of the states we
                       reviewed published technical information to help program stakeholders
                       comply with HERA program changes. For example, as they had done in
                       previous years, California HFA officials sent a memorandum to LIHTC
                       project owners and applicants in December 2011 on revised rent and
                       income limits the HFA had published, using information from HUD.


                       HUD maintains a database of LIHTC-funded projects, which was last
Available LIHTC Data   updated in July 2012, but the information it contains is incomplete.
Are Incomplete and     Although HUD has almost no direct administrative responsibility for the
                       LIHTC program, as the federal government’s lead housing agency, it has
Provide Limited        been voluntarily collecting information on the program since 1996
Insight into Program   because of the importance of these credits as a source of funding for low-
                       income housing. HUD’s LIHTC Database, the largest source of federal
Trends                 information on the LIHTC program, aggregates project-level data that are
                       voluntarily submitted by HFAs. HUD contracts with a consulting firm to
                       help compile the database, which is updated annually and is available to
                       the public on HUD’s website. 27 Additionally, HUD sponsors studies of the
                       LIHTC program that use these data. IRS, which jointly administers the
                       program with HFAs, collects limited data that it needs to carry out its




                       26
                         As previously noted, a DDA is any area designated by the Secretary of Housing and
                       Urban Development as an area which has high construction, land, and utility costs relative
                       to area median gross income.
                       27
                        http://www.huduser.org/portal/datasets/lihtc.html.




                       Page 17                                                GAO-13-66 LIHTC Program Changes
                             mission of administering and enforcing the internal revenue laws. 28 It
                             does not maintain the information needed to assess a housing production
                             program, such as the types of tenants targeted and whether projects are
                             in urban or rural areas. 29


HUD’s Database Is            HUD’s LIHTC Database does not capture all LIHTC projects placed in
Incomplete Despite Efforts   service, for three main reasons. First, although most HFAs voluntarily
                             report LIHTC project data to HUD each year, some do not report
to Improve Data Collection   consistently. Forty-two of 56 HFAs submitted project data to HUD for
                             each year from 2006 through 2010. In 2010, these 42 HFAs received
                             about 89 percent of all per capita LIHTC allocations. Of the remaining 14
                             HFAs, 2 did not report projects in any of the 5 years, while 12 did not
                             report each year, but did report for at least 2 of the years. For these 12,
                             all of the nonreporting was for 2008 through 2010 (the most recent
                             reporting year), a period in which some HFAs were struggling to comply
                             with a HERA requirement that they collect data on tenant characteristics
                             (e.g., race and income) for LIHTC projects, according to HUD and
                             NCSHA officials. 30

                             The HERA provision containing this requirement authorized $6.1 million
                             for fiscal years 2009 through 2013 for HUD to, among other things,
                             provide technical assistance to HFAs and compile the tenant data, but
                             HUD never received any appropriations for these tasks. HUD is working
                             to fulfill the requirement with existing resources. For example, HUD
                             streamlined the project and tenant data collections by merging the two


                             28
                               The lack of data is fairly typical with tax expenditures such as the LIHTC program. Tax
                             expenditures are reductions in a taxpayer’s tax liability that result from special credits,
                             deductions, exemptions and exclusions from taxation, deferral of tax liability, and
                             preferential tax rates. We previously reported that even basic information about who
                             claims tax benefits and which communities benefit from specific activities from tax
                             expenditures is often lacking. As a result, information often has not been available to help
                             Congress determine the effectiveness of some tax expenditures. For more information,
                             see GAO, Tax Policy: Factors for Evaluating Expiring Tax Provisions, GAO-12-760T
                             (Washington, D.C.: June 8, 2012) and Community Development: Limited Information on
                             the Use and Effectiveness of Tax Expenditures Could Be Mitigated through Congressional
                             Attention, GAO-12-262 (Washington, D.C.: Feb. 29, 2012).
                             29
                               A private accounting firm has also collected LIHTC project information, including
                             information on project characteristics, by surveying LIHTC investors and syndicators.
                             However, this database also does not capture all LIHTC projects, and is not publicly
                             available.
                             30
                              HERA at § 2835(d). Pub. L. No. 110-289 (codified at 42 U.S.C. § 1437z-8).




                             Page 18                                                 GAO-13-66 LIHTC Program Changes
efforts. It also required HFAs to submit data in a standardized electronic
format via a secure web portal. According to HUD, this change is
significant, as the prior data collection process involved a HUD contractor
that contacted each HFA and then standardized the collected data, which
HFAs often maintained in different formats. HUD said that although some
HFAs would need several years to make the transition, the new system
was the most cost-effective long-term solution. HUD also said it
recognized the problem of underreporting in recent years but that until the
transition to the new data collection method was completed, its options
were to either knowingly underreport properties placed in service or not
release any data for those years.

Second, in recent years, HUD has not identified or followed up on cases
in which HFAs reported a substantially lower number of projects than in
past years, although such information could potentially be incomplete. For
example, HUD’s database showed that one state had between 23 and 49
projects placed in service each year from 2006 through 2009, but only 2
projects in 2010. When we followed up with the HFA in this state, HFA
officials provided us with documentation showing that they had reported
37 projects for 2010. Similarly, HUD’s database showed that another
state had 2 projects placed in service in 2008, compared with 90 or more
in each of the 2 previous years. An official from this state’s HFA told us
that the actual number for 2008 was 96 properties. We provided HUD
with these and other examples for their review. According to a HUD
official, before 2008 its contractor followed up with HFAs on these types
of data anomalies but now places less emphasis on this function because
of resource limitations and the HERA requirement for tenant data.
Instead, the contractor now focuses on assisting HFAs with meeting the
tenant data requirement and follows up only with HFAs that do not report
any project data at all.

Third, at the time they reported to HUD, HFAs may not have had
information on all projects placed in service. Specifically, HFA officials
said that delays between the date when a project was placed in service,
the date a project owner reported it to the HFA, and the date the HFA
recorded it in its information system could result in underreporting of
projects. HUD instructs states to review the property information
previously submitted and include information for these omitted properties.
As a result, these omissions may be corrected in subsequent data
submissions.

Even when HUD did receive project data, much of it was incomplete,
omitting information on project characteristics such as the type of
location, construction, and tenants targeted. The proportion of missing


Page 19                                      GAO-13-66 LIHTC Program Changes
                                              information on project characteristics increased after 2007 (see table 3).
                                              For example, the proportion of missing information on the types of tenants
                                              targeted increased from 5 percent in 2006 to 28 percent in 2010. A HUD
                                              official noted that the HERA provision requiring HFAs to collect data on
                                              the characteristics of tenants in LIHTC projects had made it more
                                              challenging for HFAs to also report the project data with existing
                                              resources. In addition, a HUD official explained that across HFAs,
                                              different offices maintain tenant-level and project-level data. He said that
                                              HUD’s data request was often completed by the offices with the tenant
                                              data, which might not have detailed project information. The official added
                                              that he had emphasized the need for HFAs to direct HUD’s request for
                                              project data to the appropriate office in presentations to an HFA
                                              association and in communications with individual HFAs. However,
                                              according to HUD, resource limitations have prevented HUD and its
                                              contractor from performing thorough follow up with HFAs about missing
                                              information on project characteristics.

Table 3: Percentage of Projects with Missing Information by Project Characteristics, Calendar Years 2006-2010, as of July
2012

                                                                                              Percentage of projects with missing information by
                                                                                                            year placed in service
Project characteristic                                                                             2006      2007       2008      2009     2010
Location type (e.g., metropolitan, nonmetropolitan)                                                 10%        8%       11%       14%       17%
Construction type (e.g., new construction, acquisition and rehabilitation)                           5%        5%       10%       12%       17%
Types of tenants targeted (e.g., elderly, family, disabled)                                          5%        8%       17%       23%       28%
                                              Source: GAO analysis of HUD’s LIHTC Database.

                                              Note: Data are for the 42 HFAs that reported information on LIHTC projects each year from 2006
                                              through 2010.


                                              Having complete data on the LIHTC program is important because of the
                                              program’s significance to overall federal efforts to meet the nation’s
                                              affordable housing needs. As previously noted, the LIHTC program is the
                                              largest subsidy program for constructing and rehabilitating low-income
                                              rental housing. Additionally, the program is used in conjunction with other
                                              federal housing programs, including HUD’s programs. For example, some
                                              LIHTC projects receive grants through HUD’s HOME Investment
                                              Partnership program and have mortgages that are insured by HUD’s




                                              Page 20                                                           GAO-13-66 LIHTC Program Changes
Federal Housing Administration. 31 HUD’s LIHTC Database is the federal
government’s main source of information on LIHTC projects, and HUD
and others have used data from 2007 and earlier—prior to some of the
challenges discussed previously—to conduct research on the LIHTC
program. For example, one study HUD sponsored examined the
geographic distribution of LIHTC projects to assess whether program
rules contribute to clustering of subsidized housing in central city and
high-poverty areas. 32 Another HUD-sponsored study examined whether
LIHTC projects continue to provide affordable housing after the 15-year
period in which they are required to do so. 33 In addition, the Rental Policy
Working Group established by the White House’s Domestic Policy
Council has used the data to examine the potential for harmonizing and
streamlining property inspection requirements for rental properties with
multiple sources of federal funding, including LIHTCs. 34 However, as we
have seen, a number of challenges faced by HUD and HFAs have
adversely affected the completeness of HUD’s database. Without more
complete data on the number, location, and characteristics of LIHTC
projects, the federal government’s ability to continue evaluating program
outcomes and overall federal efforts to provide affordable housing is
limited.




31
  HOME is the largest federal program that awards block grants to state and local
governments exclusively to create affordable housing for low-income households.
32
  Casey J. Dawkins, Exploring the Spatial Distribution of Low-Income Housing Tax Credit
Properties, Assisted Housing Research Cadre Report, prepared for the Department of
Housing and Urban Development, Office of Policy and Development Research
(Washington, D.C.: February 2011).
33
  Jill Khadduri, Carissa Climaco, Kimberly Burnett, Laurie Gould, and Louise Elving, What
Happens to Low-Income Housing Tax Credit Properties at Year 15 and Beyond? Report
prepared for the Department of Housing and Urban Development by Abt Associates, in
partnership with VIVA Consulting (Washington, D.C.: August 2012).
34
  The working group consists of the White House Domestic Policy Council, National
Economic Council, Office of Management and Budget, HUD, U.S. Department of
Agriculture, and Treasury. The purpose of the working group is to better align rental
requirements across programs, and thereby increase the effectiveness of federal rental
policy and improve participant outcomes.




Page 21                                               GAO-13-66 LIHTC Program Changes
Available Data Provide                    According to HUD data as of July 2012, the 42 HFAs that submitted
Limited Insight into Trends               information for each year from 2006 through 2010 reported that more
                                          than 5,300 LIHTC projects were placed in service over the 5-year period
in the Number and                         (see table 4). 35 In total, these projects used more than $3 billion in
Characteristics of LIHTC                  LIHTCs and contained more than 421,000 living units. The reported
Projects                                  number of projects and units placed in service declined over the 5-year
                                          period, particularly after 2008; however, the lack of complete project data,
                                          as discussed previously, prevents a reliable analysis of actual program
                                          trends.

Table 4: Reported Number of LIHTC Projects Placed in Service, Calendar Years 2006-2010, as of July 2012

Number of projects placed in               2006               2007             2008             2009               2010                Total
service                                    1,387             1,286            1,225               886                594              5,378
Number of units placed in service       112,612           100,980            86,283           65,409             56,265             421,549
Amount of LIHTCs used for
projects placed in service          $664,950,647    $661,318,390 $686,848,400 $568,352,441                $454,559,496     $3,036,029,374

                                          Source: GAO analysis of HUD’s LIHTC Database.
                                          Note: Data are for the 42 HFAs that reported information on LIHTC projects each year from 2006
                                          through 2010. The lack of complete project data prevents a reliable analysis of program trends.


                                          Although data at the national level are limited, information from the nine
                                          HFAs we contacted provide some insight into changes in the number of
                                          projects placed in service after HERA was enacted in 2008. Six of the
                                          nine HFAs indicated that the number of projects declined substantially
                                          between 2008 and 2009, while the other three experienced either modest
                                          or no declines. For example, California HFA officials said they had 203
                                          projects placed in service in 2008, compared with 140 in 2009. In
                                          contrast, Massachusetts HFA officials said they had 21 projects placed in
                                          service in both years. Of the six HFAs that had substantial declines, three
                                          continued to see decreases in 2010, while the remainder experienced
                                          modest to large increases in 2010. 36

                                          While a portion of LIHTC projects in HUD’s database lack information on
                                          location type, the data do indicate that the majority of LIHTC projects


                                          35
                                            LIHTC projects are generally placed in service 1 to 2 years after receiving tax credit
                                          allocations. For example, projects placed in service in 2010 likely received allocations in
                                          2008 or 2009.
                                          36
                                            As discussed in the next section of this report, some of the unused credits were
                                          exchanged for cash grants or reallocated to future projects.




                                          Page 22                                                       GAO-13-66 LIHTC Program Changes
                                             placed in service from 2006 through 2010 were located in metropolitan
                                             central and noncentral cities (e.g., suburbs). For each of these years, at
                                             least 69 percent of reported projects were in metropolitan areas, but given
                                             the proportion of projects with missing information on location type, trends
                                             in this characteristic cannot be precisely determined (see table 5).

Table 5: Percentage of Reported LIHTC Projects Placed in Service from Calendar Years 2006-2010 by Location Type, as of
July 2012

                                                                                             Percentage of projects by year placed in service
Location type                                                                                   2006        2007          2008     2009   2010
Metropolitan/central city                                                                        42%        47%           40%      45%     43%
Metropolitan/noncentral city                                                                     27%        24%           30%      25%     27%
Nonmetropolitan                                                                                  21%        21%           19%      16%     13%
Location type not indicated                                                                      10%         8%           11%      14%     17%
                                             Source: GAO analysis of HUD’s LIHTC Database.

                                             Note: Data are for the 42 HFAs that reported information on LIHTC projects each year from 2006
                                             through 2010.


                                             According to HUD data, the majority of reported LIHTC projects placed in
                                             service from 2006 through 2010 were newly constructed (see table 6).
                                             However, the amount of missing data on construction type after 2007
                                             makes it impossible to draw accurate conclusions on potential changes in
                                             the proportion of projects that were newly constructed and those that
                                             were acquisition and rehabilitation projects.

Table 6: Percentage of Reported LIHTC Projects by Construction Type, Calendar Years 2006-2010, as of July 2012

                                                                                    Percentage of projects by year placed in service
Construction type                                                                    2006           2007           2008          2009     2010
New construction                                                                     58%            59%            55%           55%      54%
Acquisition and rehabilitation                                                       33%            33%            31%           31%      27%
Both new construction and acquisition/rehabilitation                                   2%              1%           2%            1%       1%
Missing construction type                                                              5%              5%          10%           12%      17%
                                             Source: GAO analysis of HUD’s LIHTC Database.

                                             Note: Data are for the 42 HFAs that reported information on LIHTC projects each year from 2006
                                             through 2010. Columns may not sum to 100 percent due to rounding.


                                             According to data reported to HUD, the most common types of tenants
                                             targeted by LIHTC projects in 2006 and 2007 were families and elderly
                                             tenants (see table 7). However, as previously noted, the proportion of
                                             projects in HUD’s database with missing information on tenant types


                                             Page 23                                                           GAO-13-66 LIHTC Program Changes
                                        increased substantially after 2007. As a result, any reported changes in
                                        types of tenants targeted are not definitive. In addition, HUD officials told
                                        us that HFAs may have used different criteria for determining whether a
                                        project was targeted to particular groups of tenants, potentially resulting in
                                        inconsistencies across HFAs.

Table 7: Percentage of Reported LIHTC Projects by Type of Tenant Targeted, 2006-2010, as of July 2012

                                                                          Percentage of projects by year placed in service
Tenants targeted                                                        2006                     2007    2008         2009          2010
Family                                                                   45%                     42%     44%          38%           30%
Elderly                                                                  24%                     25%     23%          20%           21%
Disabled                                                                  9%                     10%     15%          12%           15%
Homeless                                                                  3%                      4%      8%           7%             7%
Other                                                                     6%                     10%      7%          10%             7%
Did not target                                                           22%                     20%     14%          13%           14%
Not indicated                                                             5%                      8%     17%          23%           28%
                                        Source: GAO analysis of HUD’s National LIHTC Database.

                                        Notes: Percentages may sum to more than 100 percent because projects can target more than one
                                        type of tenant. Data are for 42 HFAs that reported LIHTC projects to HUD in each of these years.


                                        State and industry officials we spoke with said that isolating the effect of
Stakeholders Said                       the HERA changes on the overall LIHTC market was difficult because of
HERA Provisions                         other program changes (e.g., creation of the Exchange Program) and
                                        economic developments (e.g., the recession and financial crisis) that
Helped the Financial                    occurred around the same time. Nonetheless, state and industry officials
Feasibility of Some                     we spoke with identified specific LIHTC projects that they said would not
                                        have been completed without certain HERA provisions. In particular, they
LIHTC Projects                          cited the temporary increase in per capita credit allocations, the
                                        temporary 9 percent floor, and the HERA basis boost as three provisions
                                        that helped the financial feasibility of some projects and likely prevented
                                        even further decreases in LIHTC projects after 2008. In addition,
                                        stakeholders said HERA changes particularly helped the financial
                                        feasibility of rural projects.




                                        Page 24                                                         GAO-13-66 LIHTC Program Changes
Stakeholders Identified
HERA Changes That
Enhanced Project
Feasibility

Temporary Increase in Per               Because of HERA’s temporary increase in per capita credit allocations,
Capita Credits                          HFAs received tens of millions of dollars more in allocations in 2008 and
                                        2009 than they would have otherwise. By statute, LIHTC allocation
                                        amounts are adjusted for inflation each calendar year, but for calendar
                                        years 2008 and 2009 only, HERA further increased allocations to each
                                        HFA. Adjusted for inflation, the per capita allocation in 2008 would have
                                        been $2.00, but HERA increased the amount to $2.20 that year and to
                                        $2.30 in 2009. The minimum allocation for small HFAs was increased to
                                        $2,555,000 in 2008 and $2,665,000 in 2009. Without HERA, HFAs would
                                        have received $61,836,050 less in per capita credits than they did in 2008
                                        and $62,408,937 less in 2009. For 2010, LIHTC allocations returned to
                                        the path that would have been in place if HERA had not been enacted
                                        (see table 8).

Table 8: Per Capita LIHTC Allocations, Calendar Years 2006-2010, Including HERA Increases in 2008 and 2009

Calendar year       Credit per capita   Total per capita credits                   Percentage change in total credits from previous year
2006                           $1.90                  $575,565,080                                                                   ---
2007                           $1.95                  $598,946,906                                                                 4.06
2008                           $2.20                  $680,421,802                                                                13.60
2009                           $2.30                  $716,847,811                                                                 5.35
2010                           $2.10                  $662,928,791                                                                 -7.52
                                        Source: GAO analysis of data from NCSHA and IRS.



                                        Some state officials we spoke with said that they allocated the additional
                                        credits to projects already under development and to new projects. For
                                        example, HFA officials in Michigan and Oregon told us that they used the
                                        additional credits to both fill funding gaps for projects that had previously
                                        received LIHTC allocations and to fund one or two additional projects in
                                        their states. Massachusetts HFA officials told us that they used the
                                        additional credits to finish projects that were in danger of not being
                                        completed because of drops in prices that investors were willing to pay for
                                        LIHTCs.

                                        Although HFAs received additional credits in 2008 and 2009, developers
                                        also returned more unused credits to HFAs in these years. According to



                                        Page 25                                                         GAO-13-66 LIHTC Program Changes
                                data from NCSHA, the total amount of credits developers returned to
                                HFAs increased substantially in 2008 and 2009. The amount of returned
                                credits in 2009 was more than 6 times the amount in 2006 (see table 9).

                                Table 9: Amount of Credits Developers Returned to HFAs, Calendar Years 2006-
                                2010

                                 Calendar year                              Credits developers returned to HFAs
                                 2006                                                               $66,809,433
                                 2007                                                               $68,641,795
                                 2008                                                              $108,431,328
                                 2009                                                              $426,862,481
                                 2010                                                               $72,322,543
                                Source: GAO analysis of data from NCSHA.



                                An NCSHA official explained that developers returned credits for several
                                reasons. For example, the NCSHA official noted that in 2008, developers
                                had trouble finding LIHTC investors, resulting in a higher-than-normal
                                amount returned to the HFAs. Also, in 2009, the Recovery Act’s
                                Exchange Program allowed HFAs to exchange returned credits for cash
                                grants, resulting in a very high amount of returns that year. For 2009, the
                                amount of returned credits included those that were returned and
                                exchanged, as well as those returned and possibly reallocated to other
                                developers. According to the NCSHA official, virtually all of the returned
                                credits that were not exchanged were reallocated either the same year or
                                the following year.

Temporary 9 Percent Floor and   Some state housing officials and industry stakeholders said that HERA’s
Basis Boost                     temporary floor for the 9 percent credit helped the financial feasibility of
                                individual projects. Owing to the floating credit rate prior to HERA,
                                developers that received the 9 percent credit actually received a credit
                                approximating 8 percent. By setting a floor of 9 percent for projects
                                placed in service by the end of 2013, HERA increased the amount of
                                credits these projects could receive. For example, if a pre-HERA project
                                had an eligible basis of $1,000,000 and the floating rate for the 9 percent
                                credit was 8 percent, that project would be eligible to receive $800,000 in
                                credits ($80,000 per year for 10 years). In contrast, by setting a floor of 9
                                percent for the 9 percent credit, that same project would be eligible for
                                $900,000 in credits ($90,000 per year for 10 years).

                                Also, as previously noted, the HERA basis boost provision gave HFAs the
                                ability to designate any building, regardless of location, as eligible for an
                                enhanced credit of up to 130 percent of the building’s eligible basis rather


                                Page 26                                         GAO-13-66 LIHTC Program Changes
                         than just those in a DDA or a QCT. One developer told us that every
                         LIHTC project he had completed since the passage of HERA used the
                         HERA basis boost, and that it and the 9 percent floor together had made
                         a significant difference in his ability to complete projects. This developer
                         cited a project in which these two provisions reduced a funding gap of
                         $1,680,000 to $450,000, which the developer was able to close by other
                         means. Another LIHTC developer noted that the 9 percent floor allowed
                         LIHTC deals to be engineered with fewer funding sources and that in
                         many cases such deals would not have been completed without this
                         provision. In addition, North Carolina HFA officials told us that some
                         projects had received tax credit awards in 2007 and 2008, but had
                         funding gaps when the tax credit market collapsed and prices for tax
                         credits fell before developers could secure equity from investors. For
                         these projects, the HFA allowed developers to return their allocated
                         credits and receive new credits with the 9 percent rate and the HERA
                         basis boost, thus filling the funding gaps. According to the North Carolina
                         officials, these HERA provisions helped in completing a total of 46
                         projects that likely would not otherwise have been completed.

                         In addition, HFA officials in Oregon and Michigan noted that they used the
                         HERA basis boost for permanent supportive housing—long-term housing
                         projects with supportive services for homeless persons with disabilities or
                         other barriers—which have lower income tenants. Similarly, HFA officials
                         in Florida said that the HERA basis boost helped fund three projects that
                         will be placed in service in either 2012 or 2013 for tenants that were
                         homeless and had lower incomes. According to the officials, such projects
                         are typically difficult to develop because project cash flows are limited
                         because tenants may not have any income when they move in. HFA
                         officials in Minnesota said that without the 9 percent floor, it would have
                         been difficult to fund projects serving the long-term homeless, those with
                         special needs, and those with lower incomes.


Stakeholders Said HERA   According to state housing officials and industry participants, certain
Changes Helped Rural     HERA provisions helped mitigate some of the challenges associated with
                         developing projects in rural areas. For example, the maximum amount of
Projects                 rent a project owner can charge is based on the area’s income limits.
                         According to officials from the Council for Affordable and Rural Housing,
                         because rural areas often have lower income limits compared with urban
                         areas, rural projects also often have lower cash flows from rents. They
                         noted that the HERA provision that allowed projects in rural areas to base
                         tenant income limits on the greater of the area median gross income or
                         the national nonmetropolitan median gross income was one of the most
                         significant HERA provisions for rural housing. In cases where the national


                         Page 27                                        GAO-13-66 LIHTC Program Changes
              nonmetropolitan measure is greater than the local area measure, project
              owners can set higher rent levels than they would have prior to HERA.
              This flexibility, in turn, can give project owners access to a broader pool of
              qualified tenants and increase cash flows from rent, potentially making
              the projects more attractive to investors. Additionally, according to some
              industry stakeholders, investor demand for LIHTCs is often weaker in
              rural areas than in urban areas in part because rural LIHTC projects tend
              to be smaller in scale. As a result, fixed transaction costs are spread over
              fewer units, and a few vacancies can have a relatively greater impact on
              the viability of a small project. Some state officials told us they applied the
              HERA basis boost to rural areas to help strengthen the financial viability
              of projects in these locations. For example, Michigan HFA officials said
              they applied the HERA basis boost to rural areas because rural projects
              would not have been desirable to investors without it.


              The LIHTC program is the largest federal program for building and
Conclusions   rehabilitating affordable rental housing and provides billions of dollars in
              tax credits each year. Through HERA, Congress made a number of
              changes to the program and sought analysis of credit allocations made
              before and after the act’s implementation. However, limitations in
              available program data hamper this type of analysis and potentially other
              research that could be useful to policymakers. HUD is not required to
              collect data on LIHTC projects and has very limited administrative
              responsibility for the program, but it has collected some information from
              HFAs for many years. We commend HUD for taking steps as the lead
              federal housing agency to collect and disseminate project information.
              This information has been used to examine important issues, such as the
              extent to which subsidized housing remains affordable over the long term
              and the potential for harmonizing requirements across federal housing
              programs. But, in recent years, the completeness of HUD’s LIHTC
              Database has worsened, due partly to resource constraints and
              challenges HUD and HFAs face in meeting new requirements for
              compiling information on tenants in LIHTC projects. In addition, HUD and
              its contractor have not followed up on data anomalies that could indicate
              incomplete reporting. Our work suggests that HUD’s database may be
              missing many projects that could be captured through additional follow-up
              efforts. Without improvements in the database, the federal government’s
              ability to evaluate basic program outcomes—such as how much housing
              was produced—and other aspects of federal housing policy may suffer.




              Page 28                                         GAO-13-66 LIHTC Program Changes
                     HUD has taken steps to improve its data collection process and faces
Recommendation for   resource constraints. However, the importance of the LIHTC program to
Executive Action     federal housing policy underscores the need for continued attention to
                     data quality and completeness. Therefore, we recommend that the
                     Secretary of Housing and Urban Development (1) evaluate options for
                     improving the completeness of HUD’s LIHTC Database, including
                     following up on data anomalies and enhancing the role of HUD’s
                     contractor in data collection and quality control; and (2) based on this
                     evaluation, take additional steps to improve the data.


                     We provided a draft of this report to HUD, IRS, and Treasury for their
Agency Comments      review and comment. We received written comments from HUD’s Acting
and Our Evaluation   Assistant Secretary for Policy Development and Research that are
                     reprinted in appendix III. We also received technical comments from IRS
                     and Treasury, which we incorporated into the final report where
                     appropriate.

                     In its written comments, HUD agreed with our conclusions and
                     recommendations but expressed concerns about the draft report’s
                     characterization of HUD’s LIHTC Database and data collection efforts.
                     HUD said that our draft report did not adequately explain either the
                     transition HUD was experiencing in its data collection or changes it had
                     made to the collection process. HUD noted, as did our draft report, that
                     while HERA required the agency to compile data on tenants in LIHTC
                     units and authorized $6.1 million for this purpose, Congress did not
                     appropriate these funds. HUD stated that to more cost-effectively collect
                     both the tenant and property data, it merged the two efforts and required
                     HFAs to submit all of the data through a secure web portal in a
                     standardized electronic format. HUD said that it understood that this
                     requirement would entail a multiyear transition for some HFAs, but also
                     noted that in the long run this solution was the most cost-effective way to
                     collect the information. Additionally, HUD said it recognized that its
                     database had suffered from underreporting in recent years but said that
                     until the transition to the new data collection method was completed, its
                     options were either to knowingly underreport properties placed in service
                     or to not release any data for those years. In response to HUD’s
                     comments, we added language to the final report clarifying the connection
                     between resource constraints for the implementation of the tenant data
                     requirement and the completeness of the project data. We also added
                     language describing how HUD had modified its data collection process
                     and its rationale for reporting incomplete data rather than no data.




                     Page 29                                      GAO-13-66 LIHTC Program Changes
HUD also expressed concern about our use of the word “inaccurate” to
describe potential shortcomings in some of the information in the LIHTC
Database. HUD said that it would never publicly release information that it
thought might be inaccurate and suggested that we substitute
“incomplete” for “inaccurate.” Our draft report generally used the word
“incomplete” to characterize the information in the LIHTC Database but in
three places used the phrase “potentially inaccurate information” to
describe cases in which the LIHTC Database showed substantially fewer
projects for an HFA than the number we obtained from the HFA directly.
We agree that “incomplete” is a more appropriate term and revised the
final report to use that word throughout.


We are sending copies of this report to interested congressional
committees, the Secretary of the Treasury, the Commissioner of Internal
Revenue, and the Secretary of Housing and Urban Development. This
report is also available at no charge on the GAO website at
http://www.gao.gov.




Page 30                                      GAO-13-66 LIHTC Program Changes
If you or your staffs have any questions about this report, please contact
us at (202) 512-8678 or garciadiazd@gao.gov, or (202) 512-9110 or
whitej@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this report.
GAO staff who made major contributions to this report are listed in
appendix IV.




Daniel Garcia-Diaz
Acting Director
Financial Markets and Community Investment




James R. White
Director
Strategic Issues




Page 31                                       GAO-13-66 LIHTC Program Changes
Appendix I: Objectives, Scope, and
              Appendix I: Objectives, Scope, and
              Methodology



Methodology

              This report discusses (1) how the Internal Revenue Service (IRS) and
              selected housing finance agencies (HFA) implemented the Housing and
              Economic Recovery Act of 2008 (HERA) changes to the Low-Income
              Housing Tax Credit (LIHTC) program, (2) what the Department of
              Housing and Urban Development’s (HUD) data on LIHTC projects show
              about the number and characteristics of projects completed from 2006
              through 2010 and any data limitations, and (3) the views of program
              stakeholders about the effects of the HERA changes on these projects.

              To assess how IRS and selected HFAs implemented HERA changes to
              the LIHTC program, we reviewed IRS guidance, memorandums, and
              planning documents. We also interviewed IRS and Department of the
              Treasury officials. In addition, we interviewed officials from nine HFAs:
              California, Florida, Massachusetts, Michigan, Minnesota, North Carolina,
              Oregon, Texas, and Vermont. We selected these HFAs to cover different
              regions of the country and amounts of tax credit allocations. The selected
              states are not representative of the entire LIHTC market. For the selected
              HFAs, we reviewed qualified allocation plans (QAP) that contained
              detailed selection criteria and application requirements for LIHTCs. To
              further learn how HERA changes were implemented, we interviewed
              other industry stakeholders, such as industry associations, investors,
              syndicators, and housing developers.

              To examine HUD’s data on LIHTC projects and what these data show
              about the number and characteristics of LIHTC projects completed from
              2006 through 2010, we analyzed information from HUD’s LIHTC
              Database. 1 HUD collects these data from HFAs and maintains
              information on LIHTC-financed projects once they are placed in service.
              We conducted reasonableness checks on the data to identify any
              missing, erroneous, or outlying figures. We also asked the nine HFAs
              previously mentioned to check HUD’s numbers of projects placed in
              service from 2006 through 2010 against their own records, and
              interviewed HUD about how it and its contractor compiled the data. As
              discussed in the body of this report, we found that HUD’s data may not
              contain all LIHTC projects placed in service as of 2010 for several
              reasons, including (1) challenges states face in implementing new
              requirements for reporting tenant data and (2) delays between when a
              project is placed in service and when that information is entered into the



              1
               The most recent data available from the database are for properties placed in service in
              2010.




              Page 32                                                GAO-13-66 LIHTC Program Changes
Appendix I: Objectives, Scope, and
Methodology




state’s data system and reported to HUD. As a result, the number of
reported projects placed in service as of 2010 may be understated. We
also found that a substantial proportion of projects in the database had
missing values for key project characteristics. For this reason, changes in
the reported number and characteristics of projects over time should be
interpreted with caution. While we acknowledge these limitations, we
chose to present the LIHTC data as reported by HUD because they
provided the broadest coverage of LIHTC projects placed in service
through 2010. We concluded that the data elements we used were
sufficiently reliable for describing limitations of the data and presenting
the project information HUD had compiled as of July 2012. For each year,
we totaled the number of projects placed in service. Due to the limitations
of HUD’s data, we supplemented this analysis by examining information
from the nine HFAs we contacted to identify any state-level trends. Using
the HUD data, we calculated the proportion of projects with certain
characteristics, including location type (metropolitan/central city,
metropolitan noncentral city, nonmetropolitan), construction type (new
construction, acquisition/rehabilitation, both new construction and
acquisition/rehabilitation), and the type of tenants targeted (elderly, family,
disabled, homeless, other). In addition, because HERA increased the
amount of credits allocated to states in 2008 and 2009, we analyzed
trends in annual LIHTC allocations from 2006 through 2010 using data
collected by the National Council of State Housing Agencies (NCSHA). In
order to assess the reliability of the NCSHA data we analyzed, we
reviewed documentation and interviewed NCHSA officials about their
methods for collecting and reporting the data. We concluded that the
NCHSA data were sufficiently reliable for our purposes.

To obtain the views of selected HFAs and industry participants about the
effects of the HERA changes on LIHTC projects, we interviewed officials
from the HFAs and industry stakeholders noted previously. We obtained
their views on which HERA changes were most significant, the extent to
which the HERA changes helped complete projects that otherwise would
not have been feasible, and the extent to which the HERA changes
affected the characteristics of projects that received LIHTC allocations. In
addition, we reviewed documentation on projects that industry
stakeholders said had been affected by the changes.

We conducted this performance audit from February through December
2012 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe




Page 33                                         GAO-13-66 LIHTC Program Changes
Appendix I: Objectives, Scope, and
Methodology




that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




Page 34                                      GAO-13-66 LIHTC Program Changes
Appendix II: Specific 2008 Changes Related
                                            Appendix II: Specific 2008 Changes Related to
                                            the Low-Income Housing Tax Credit



to the Low-Income Housing Tax Credit

                                            Table 10 summarizes the changes related to the LIHTC program made in
                                            the Multi-Family Housing subtitle of HERA. 1

Table 10: Specific LIHTC Provisions Enacted in 2008, by Category

Temporary increase in per capita credit allocations to states
•   For 2008 and 2009 only, increased the per-resident credit amount a state may allocate and the small-state minimum annual cap
Determination of credit rate
•   For buildings placed in service after July 30, 2008, and before December 31, 2013, established a 9 percent minimum credit rate
    for newly constructed and substantially rehabilitated nonfederally subsidized buildings
•   Redefined the criteria for considering whether a building is federally subsidized by not counting certain federal loans and
    assistance
Changes to definition of eligible basis
•   Gave states the flexibility to designate buildings as eligible for an enhanced credit of 130 percent of the normal amount when the
    buildings needed the enhanced credit in order to be financially feasible
•   Increased the minimum rehabilitation expenses needed for existing buildings to be eligible for the credit
•   Expanded the size of the community service facility that is counted as part of the eligible basis of a low-income building
•   Clarified how federal grants are treated in reducing a building’s eligible basis
•   Redefined related persons to include only those with a 50 percent ownership commonality (raised from 10 percent)
•   Expanded the definition of a federally assisted building and included state-assisted buildings in the waiver of the 10-year rule on
    change of ownership
Other simplification and reform of low-income housing tax incentives
•   Repealed prohibition on the credit for buildings receiving HUD moderate rehabilitation help
•   Gave projects 1 year, not 6 months, after credit allocation to incur 10 percent of reasonably expected costs
•   For buildings disposed of, released the disposition bond requirement to avoid recapture
•   Added energy-efficiency and ”historic nature” criteria to criteria that states must set forth in qualified allocation plans
•   Added an exception to a general rule prohibiting 100 percent full-time student households from occupying low-income units to
    allow a unit occupied by a student who had previously received foster care to be eligible for the credit
•   Changed median income rules in rural areas
•   Clarified a provision so that a project would not fail the general public use requirement just because it favored tenants who had
    special needs, were members of specified groups, or were involved in artistic or literary activities
Treatment of basic housing allowances
•   Excluded military basic housing allowances from income for purposes of income eligibility rules in certain locations
Refunding treatment for certain multifamily housing bonds
•   Treated a bond issued to refinance a first issue of bonds as a refunding issue




                                            1
                                             Pub. L. No. 110-289, div. C, title I, subtitle A, 122 Stat. 2878-2888 (July 30, 2008).




                                            Page 35                                                  GAO-13-66 LIHTC Program Changes
                                              Appendix II: Specific 2008 Changes Related to
                                              the Low-Income Housing Tax Credit




Coordination of certain tax-exempt bond rules and credit rules
•   Conformed rules so that in both cases certain restrictions will be satisfied if the next available unit in a building is rented to a new
    tenant who satisfies income and rent-restriction requirements
•   Conformed rules related to residential units occupied by 100 percent low-income student households
•   Conformed rules related to single-room occupancy housing
Hold harmless for reductions in area median gross income
•   Changed how area median gross income is determined
Exception from annual recertification requirement
•   For projects that are 100 percent low income, waived the requirement for annual tenant income recertifications
                                              Source: GAO analysis of Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 110th Congress, JCS-1-
                                              09 (March 2009).




                                              Page 36                                                                        GAO-13-66 LIHTC Program Changes
Appendix III: Comments from the
             Appendix III: Comments from the Department
             of Housing and Urban Development



Department of Housing and Urban
Development




             Page 37                                      GAO-13-66 LIHTC Program Changes
Appendix III: Comments from the Department
of Housing and Urban Development




Page 38                                      GAO-13-66 LIHTC Program Changes
Appendix III: Comments from the Department
of Housing and Urban Development




Page 39                                      GAO-13-66 LIHTC Program Changes
Appendix IV: GAO Contacts and Staff
                  Appendix IV: GAO Contacts and Staff
                  Acknowledgments



Acknowledgments

                  Daniel Garcia-Diaz, (202) 512-8678 or garciadiazd@gao.gov
GAO Contacts
                  James R. White, (202) 512-9110 or whitej@gao.gov


                  In addition to the contacts named above, Steve Westley and Joanna
Staff             Stamatiades (Assistant Directors), Emily Chalmers, William Chatlos, Lois
Acknowledgments   Hanshaw, Lawrence Korb, May Lee, John McGrail, Marc Molino, Edward
                  Nannenhorn, Winnie Tsen, and Jason Wildhagen made important
                  contributions to this report.




(250655)
                  Page 40                                     GAO-13-66 LIHTC Program Changes
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