oversight

Rental Housing: Observations on the Low-Income Housing Tax Credit Program

Published by the Government Accountability Office on 1990-08-14.

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

                                                                                                  _.
____--..-..-..,. --. ._---__-_.-...-..
                                   - ..-_   l:rritwl
                                            ...---.---- States   (kr~t~wl   AwonrltitIg   Offiw

GAO                                         1Ct:port t,o tlw Chairman, Subcommittee --
                                            on III.2 >/Mod Rclral~ Investigation,
                                            Committoc on Banking, Housing and
                                            1~rlwr Af’i’airs, IJ.S. Swatc


                                            RENTAL HOUSING
                                            Observations on the
                                            Low-Income Housing
                                            Tax Credit Program
Uuited Statei.
General Accounting Office
Washington, D.C. 20548

Resources, Community, and
Economic Development Division

B-236206

August 14,lQQO

The Honorable Bob Graham
Chairman, Subcommittee on HUD/Mod
  Rehab Investigation
Committee on Banking, Housing and Urban
  Affairs
United States Senate

Dear Mr. Chairman:

Following our April 27, 1990, testimony on the Low-Income Housing
Tax Credit Program before your Subcommittee, you requested addi-
tional information on (1) the estimated cost to the Treasury of low-
income housing tax credits awarded during 1987-89, (2) whether the
awarded tax credits have resulted in reduced rents paid by tenants in
credit-assisted units, (3) whether such tenants have been selected from
waiting lists maintained by public housing authorities, (4) the adequacy
of existing compliance monitoring requirements, (5) the adequacy of
current statutory provisions designed to prevent noncompliance, and (6)
alternative tax credit allocation formulas. We briefed your office on
most of these matters in early November 1989 as part of the Subcom-
mittee’s interest in issues pertinent to national housing legislation being
considered in the Congress. This report, per your request, updates infor-
mation previously provided. Additionally, you requested our views on
programmatic or legislative changes that could improve the tax credit
program.

The Low-Income Housing Tax Credit Program was authorized in the Tax
Reform Act of 1986 as a 3-year program to provide an incentive for
investors to construct or rehabilitate low-income housing. The program,
administered by the U.S. Treasury Department and state housing agen-
cies, provides a lo-year tax credit to property owners for each unit set
aside for low-income use. The tax credits may be used, within specified
limits, on a dollar-for-dollar basis, to reduce income tax liability. They
are, therefore, financial assets sought by prospective investors. When
investors purchase interests in tax credit projects, they also are entitled
to use tax credits and other related project benefits, such as deprecia-
tion, as allowed by law. The capital raised is available to help finance
projects or to contribute to the developer’s profits. Since the credit was
established, it has emerged as the primary tax incentive for stimulating
low-income housing production and rehabilitation.



Page 1                            GAO/RCEIWO-203   Low-Income   Housing Tax Credits
\

                                                                                                                                                              XI




                             B236208




                          . For ta x credit a w a r d s m a d e d u r i n g 1 9 8 7 - 8 9 ,w e estimate th e to tal pro-
    R e sultsin B rie f     jected ta x e x p e n d i tu r e ’a t a b o u t $ 5 .7 billion, u n a d j u s te d for traditional
                            r e v e n u e estimating r e q u i r e m e n ts2 W e estimate th a t th e ta x e x p e n d i tu r e
                            will b e u s e d b e t w e e n 1 9 8 7 a n d 2 0 0 0 . T h e e x p e n d i tu r e extends to th e
                            year 2 0 0 0 b e c a u s eo f provisions o f th e p r o g r a m th a t allow th e start o f
                            th e lo-year credit p e r i o d to b e d e ferred.
                          . In th e tim e available, w e w e r e u n a b l e to d e te r m i n e th e extent to w h i c h
                            ta x credits a l o n e ,without a n y o th e r fo r m o f subsidy, h a v e b e e n u s e d to
                            r e d u c e to tal unit rents to n o m o r e th a n th e legally r e q u i r e d 3 0 p e r c e n t o f
                            th e te n a n ts’adjusted incomes.H o w e v e r , o n th e basis o f o u r lim ite d
                            information, it d o e s n o t a p p e a r th a t th e credits h a v e typically b e e n u s e d
                            to a c h i e v e this p u r p o s e . R a ther, it s e e m sth a t th e a m o u n t collected from
                            te n a n ts is frequently s u p p l e m e n te dwith either fe d e r a l or n o n fe d e r a l
                            subsidies a s a u th o r i z e d b y statute. Currently, th e r e is n o statutory or
                            regulatory r e q u i r e m e n t to u s e ta x credits solely to r e d u c e rents to a n
                            a m o u n t th a t eliminates th e n e e d for a d d i tio n a l subsidies.O u r work indi-
                            cates th a t if s u c h r e q u i r e m e n ts w e r e in place, th e y m ight adversely
                            a ffect th e financial viability o f p r o p o s e d projects, or substantially
                            r e d u c e project o w n e r s ’profits, a n d .c o u l d likely result in d i s c o u r a g i n g
                            th e d e v e l o p m e n to f l o w - i n c o m e h o u s i n g .
                          . Currently, th e r e is n o legal r e q u i r e m e n t to select te n a n ts for credit-
                            assisted h o u s i n g from waiting lists m a i n ta i n e d b y public h o u s i n g a g e n -
                            cies ( P H A S ) e x c e p t w h e n th e credit-assisted h o u s i n g also receives D e p a r t-
                            m e n t o f H o u s i n g a n d U r b a n D e v e l o p m e n t-sponsoredassistancein th e
                            fo r m o f project-basedsection 8 rental subsidies.W a iting lists m a i n ta i n e d
                            b y P H A S are, h o w e v e r , s o m e tim e su s e d to fill vacanciesin credit-assisted
                            h o u s i n g .A n d , a c c o r d i n g to N a tio n a l Council o f S ta te H o u s i n g A g e n c y
                            o fficials, state credit a w a r d i n g a g e n c i e sa r e r e q u i r e d to give evaluation
                            preferences to project p r o p o s a l s th a t p l a n to u s e waiting lists a s a s o u r c e
                            o f te n a n t referrals. W e w e r e u n a b l e to d e te r m i n e , h o w e v e r , to w h a t
                            extent credit-assisted projects w e r e actually rented to te n a n ts from
                            P H A swaiting lists.
                          . In o u r view, th e p r o g r a m ’s existing c o m p l i a n c em o n i toring r e q u i r e m e n ts
                            a r e n o t a d e q u a te b y th e m s e l v e s to e n s u r e c o m p l i a n c ewith p r o g r a m
                            r e q u i r e m e n ts. Currently, state credit a w a r d i n g a g e n c i e sa r e r e q u i r e d to
                            report to th e In ternal R e v e n u eService (IRS) a n y instance o f n o n c o m p l i -
                            a n c e o f w h i c h th e y b e c o m ea w a r e . H o w e v e r , a fter th e initial a w a r d , n o
                            specific federal, state, or local a g e n c y is r e q u i r e d to m o n i tor assisted

                             ‘Tax e x p e n d i t u r eis the term u s e d to d e s c r i b ethe r e v e n u ef o r e g o n et h r o u g h the various tax benefits
                             a u t h o r i z e din the Internal R e v e n u eC o d e .
                             “Traditional r e v e n u eestimatesw o u l d include adjustmentss u c h a s the interest costs the g o v e r n m e n t
                             w o u l d h a v e to p a y o n funds it b o r r o w e d to r e p l a c etax r e v e n u e sf o r e g o n e .



                             Page 2                                                       G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
Ir      B23620S




       projects for c o n tin u i n g c o m p l i a n c ewith th e te n a n t eligibility a n d
       h o u s i n g quality r e q u i r e m e n ts o f th e p r o g r a m . A s a result, it is uncertain
       w h e th e r th e existing c o m p l i a n c eprovisions will e ffectively d e tect n o n -
       compliance.Accordingly, billions o f dollars in fe d e r a l subsidies a r e
       a p p a r e n tly b e i n g d i s p e n s e da l m o s t solely o n th e basis o f self-certifica-
       tio n b y th e recipient taxpayers. This condition c o u l d allow instances o f
       n o n c o m p l i a n c ewith p r o g r a m r e q u i r e m e n ts to g o u n d e tected for l o n g
       p e r i o d s o f tim e . E x p a n d i n g th e current role o f th e states in adminis-
       tering th e p r o g r a m to include c o m p l i a n c em o n i toring o f assisted projects
       c o u l d h e l p to e n s u r e c o m p l i a n c ewith p r o g r a m r e q u i r e m e n ts. Further,
       th e state role o f reporting n o n c o m p l i a n c eto th e IRS for e n fo r c e m e n t
       action, including civil a n d criminal p e n a l tie s w h e r e appropriate, w o u l d
       not change.
       O n th e basis o f o u r lim ite d work, it a p p e a r s th a t th e current statutory
       p r o g r a m provision related to n o n c o m p l i a n c e - r e c a p t u r e o f a portion o f
       th e a w a r d e d credit-may n o t e ffectively d i s c o u r a g en o n c o m p l i a n c e
       with p r o g r a m r e q u i r e m e n ts b y credit recipients. This is especially true
       in situations w h e r e it is economically b e n e ficial to convert l o w - i n c o m e
       h o u s i n g to o th e r uses. First, th e p o te n tial financial i m p a c t o f recapture
       is relatively small, a m o u n tin g a t m o s t to o n e - third o f th e a w a r d . S e c o n d ,
       recent a m e n d m e n tsto th e statute a d d e d a n extra 1 5 - y e a r low-income-
       u s e p e r i o d to th e original 1 5 y e a r c o m p l i a n c eperiod. H o w e v e r , th e r e is
       a p p a r e n tly n o recapture adjustment in th e p r o g r a m for a n o w n e r ’s
       failure to c o m p l y with p r o g r a m provisions d u r i n g th e s e c o n d 1 6 years.
     . B e c a u s eo f th e lim ite d tim e available to r e s p o n d to your r e q u e s t a n d th e
       resulting constraints o n o u r work, w e lack th e d a ta necessaryto e n d o r s e
       a n y alternatives to th e existing p e r capita allocation fo r m u l a u s e d to
       a u thorize ta x credit allocation a m o u n ts for e a c h state. H o w e v e r , th e r e
       a r e n u m e r o u s o p tio n s p o te n tially available for allocating states’respec-
       tive s h a r e s o f th e credits. For e x a m p l e , a fo r m u l a c o u l d b e established
       o n th e basis o f n e e d s o th a t th o s e states or a r e a s within states with th e
       g r e a test n e e d w o u l d receive a larger allocation. A n e x a m p l e o f n e e d
       could,b e th e lack o f v a c a n t, suitable rental h o u s i n g a l r e a d y in existence
       in th e state. D a ta r e q u i r e d to d e v e l o p a n e e d s - d r i v e nallocation fo r m u l a
       is n o t currently available o n a state-by-state basis. H o w e v e r , a c c o r d i n g
       to C e n s u s B u r e a u o fficials, it w o u l d b e possibleto m o d i fy th e A m e r i c a n
       H o u s i n g S u r v e y to p r o v i d e th e r e q u i r e d d a ta .

        W ith r e g a r d to o u r views o n possible p r o g r a m m a tic or legislative
        c h a n g e sto i m p r o v e th e ta x credit p r o g r a m , w e believe a clearer state-
        m e n t o f th e primary fo c u s o f th e p r o g r a m w o u l d b e u s e ful. O s tensibly,
        th e L o w - In c o m e Tax Credit P r o g r a m is d e s i g n e dto stim u l a te private
        investment a n d increaseth e supply o f l o w - i n c o m e h o u s i n g . H o w e v e r ,


        Page 3                                        G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
,
                                                                                               I

                                                                                                   .I


                  B-236205




                  decisions about how the credits are used can significantly affect the
                  results obtained. For example, credits can be used to provide the amount
                  of financing needed to fill the gap between the financing already secured
                  and the total amount required, and awarded as sparingly as possible in
                  combination with other kinds of financial assistance. Alternatively, they
                  can be viewed as deep subsidies to provide the greatest possible assis-
                  tance to the lowest income fam ilies. A clearer statement of the primary
                  focus of the program could enhance its effectiveness by allowing the
                  various mechanisms for financial and in-kind housing assistance,
                  including tax credits, to be structured to complement each other.

                  In addition, the 1989 amendments to the law directed states to award
                  the m inim u m amount of credit necessary to ensure the financial via-
                  bility of an assisted project. If states take this as an injunction to spread
                  credits among projects as sparingly as possible, it could impair project
                  owners’ ability to establish rents at the 30-percent level because the tax
                  credits are often used in amounts needed in combination with other sub-
                  sidies to achieve the mandated rent levels and ensure the financial via-
                  bility of the projects. The 1989 amendments also require that states plan
                  to award credits to projects serving the lowest income tenants over the
                  longest period of time. Again, it may be difficult to spread credits as
                  thinly as possible while concurrently assisting the lowest income
                  tenants. To achieve these objectives, the program allows state awarding
                  agencies to make determ inations about which projects receive credits
                  and in what amounts.

                  The foregoing demonstrates that stimulating private investment, pro-
                  ducing large numbers of assisted units, and reducing rents to reach the
                  lowest income tenants may be somewhat inconsistent objectives. It is
                  doubtful that tax credits alone can accomplish all of them . Accordingly,
                  we believe that in the reauthorization process it will be important to
                  decide what the primary focus of the tax credit program should be. An
                  advantage of stating a clear goal for the program is that it could then
                  better form part of a comprehensive, coordinated low-income housing
                  strategy.


                  Our work was performed between October 1989 and June 1990. To
    Scope and     develop our estimate of the cost to the Treasury of credits awarded to
    Methodology   projects by states from 1987 to 1989, we consulted with staff of the
             Y    Joint Committee on Taxation. To ascertain how some PHAS were using
                  waiting lists for credit-assisted projects and using tax credits to set rent
                  levels, we conducted a lim ited review of PHA practices and interviewed


                  Page 4                             GAO/RCED-90-203   Low-Income   Housing Tax Credits
,   B-226206




    PHA  officials in Prince Georges and Montgomery Counties, Maryland. To
    assessthe adequacy of compliance monitoring requirements and the
    adequacy of noncompliance sanctions, we interviewed officials of the
    Treasury, Internal Revenue Service, the National Council of State
    Housing Agencies, and the Executive Director of the Florida Housing
    Finance Agency. As requested, we did not obtain official comments on
    our draft report from the parties involved in these matters. However,
    we discussed our observations on these issues with them and incorpo-
    rated their comments where appropriate. The officials we contacted
    generally agreed with our assessments and observations.


    As agreed with your office, the observations in this report are condi-
    tional because of the limited scope of our work. Copies of this report will
    be sent to the Director of the PHAS in Prince Georges and Montgomery
    Counties, Maryland, and the Maryland and Florida tax credit allocation
    agencies. Should you require additional information on these issues,
    please contact me at (202) 275-5525. Major contributors to this report
    are listed in appendix IX.

    Sincerely yours,




    John M. Ols, Jr.
    Director, Housing and
      Community Development Issues




    Page 6                            GAO/RCED-30-203   Low-Income   Housing Tax Credits
                                                                             ,

                                                                                 3




Contents


Letter                                                                                1

Appendix I                                                                           8
The Low-Income
Housing Tax Credit
Program
Appendix II                                                                          10
Estimated Cost of Tax
Credits, 1987-89
Appendix III                                                                         15
Rent Reductions
Resulting From Tax
Credit Subsidies
Appendix IV                                                                          19
Use of Waiting Lists to
Select Tenants for
Credit-Assisted
Housing
Appendix V                                                                           21
Adequacy of
Compliance
Monitoring
Appendix VI                                                                          25
Adequacy of
Noncompliance
Sanctions


                          Page 6   GAO/RCED-30-203   Low-Income   Housing Tax Credits
‘,     .




                               Content9




     Appendix VII                                                                                             28
     Alternatives to the Per
     Capita Allocation
     Formula
     Appendix VIII
     Other Programmatic
     or Legislative
     Improvements That
     Could Be Considered
     Appendix IX                                                                                              32
     Major Contributors to     Resources, Community, and Economic Development
                                    Division, Washington, D.C.
                                                                                                              32

     This Report               Office of the General Counsel                                                  32

     Tables                    Table 2.1: Estimated Costs of Tax Credits Awarded, 1987
                                   to 1989
                               Table 3.1: Estimated Rent Reductions for Tax Credit-                           18
                                   Assisted Housing




                               Abbreviations

                               GAO        General Accounting Office
                               HUD        Department of Housing and Urban Development
                               IRS        Internal Revenue Service
                               PHA        Public Housing Agency
                               SRO        Single Room Occupancy


                               Page 7                          GAO/RCED-W-203   Low-Income   Housing Tax Credits
‘)
                                                                                                 J
     Appendix I

     The Low-Income Housing Tax Credit Program


                   The Low-Income Housing Tax Credit Program was authorized in the Tax
                   Reform Act of 1986 as a 3-year program to provide an incentive for
                   investors to construct or rehabilitate low-income housing. In December
                   1989 the program was revised and extended through December 3 1,
                   1990. Before 1986 the Internal Revenue Code allowed other tax incen-
                   tives for low-income housing, such as accelerated cost recovery deduc-
                   tions and special treatment of construction-period interest and taxes,
                   among others. With passage of the 1986 act, those incentives were
                   replaced with low-income housing tax credits. Since the credit was
                   established, it has emerged as the primary tax incentive for stimulating
                   low-income housing production and rehabilitation.

                   The program is administered by the U.S. Treasury Department and state
                   housing agencies. Subject to eligibility criteria, it provides a lo-year tax
                   credit to property owners for each unit set aside for at least 15 years for
                   low-income use.

                   Three different categories and two different levels of low-income
                   housing tax credits are available. For new construction and rehabilita-
                   tion expenses, the credit is designed to return to the taxpayer over 10
                   years up to a maximum of the present value of 70 percent of the allow-
                   able cost or the qualified basis (i.e., the low-income units) in the project.
                   For acquisition costs (except land acquisition), the credit can return the
                   present value of 30 percent of qualified basis over 10 years. Federally
                   subsidized projects are eligible for credit only at the 30-percent level.
                   For the tax credit program, federal subsidies include any tax-exempt
                   financing or below-market federal financing. Rent supplements provided
                   through section 8 existing certificates or housing vouchers do not count
                   as federal subsidies and do not reduce the amount of credit a project
                   may receive.

                   The low-income housing tax credit program includes a state allocation
                   system. A project must qualify for the credit on the basis of require-
                   ments in the Internal Revenue Code, but in addition the owner must
                   apply to the state in which the project is located. The state tax credit
                   allocation agency has the authority to grant all or part of the allowable
                   tax credits requested, up to the limit of the state’s total tax credit
                   allocation.

                   The state allocation is made pursuant to a state limit, or cap, of 93.75
                   cents (formerly $1.25) per resident. For example, a state with about 4
                   million residents would have about $3.75 million ($0.9375 x 4 million)
                   worth of credit authority per year. Accordingly, that state could allocate


                   Page 8                             GAO/RCED-90-203   Low-Income   Housing Tax Credits
,       ,
    \

            Appendix 1
            The Low-Income   Housing Tax Credit Program




            credits for projects where all credits taken in a year by all owners who
            applied totaled $3.76 million. When multiplied by the lo-year credit
            period, the actual total of tax credits that could be used in that state
            originating from that year would be about $37.5 million.

            Individuals, corporations, partnerships, and nonprofit entities are eli-
            gible to be awarded low-income housing tax credits. However, passive
            activity rules limit the amount of taxes that can be offset by the credits
            for certain groups of taxpayers. The maximum low-income housing tax
            credit that an individual can use in any year is $8,250. On the other
            hand, most corporations can use the tax credit without being subject to
            the $8,260 limit. Corporations are also exempt from passive activity lim-
            itations on depreciation deductions that apply to individuals.

            Nonprofit entities that have no tax liability can also benefit from the
            credits by selling an interest in the project to investors who can use the
            credit. In fact, because of the limitations on using the credits directly,
            and because the credits provide dollar-for-dollar reductions in tax lia-
            bility, interests in tax credit projects are commonly sold by all types of
            owners to investors through syndicators, In this way, the developer con-
            verts future tax credits into cash, usually received within 3 to 4 years of
            project inception. When investors purchase interests in tax credit
            projects, the capital raised is available to help finance projects or may
            contribute indirectly to the developer’s profits.




            Page 9                                    GAO/RCED90-203   Low-Income   Housing Tax Credits
                                                                                                                                                      r-

                                                                                                                                           2

                                                                                                                                                I
t




    A p p e n d i x II

    E s tim a te dC o sto f T a x C r e d its,1 9 8 7 - 8 9


                         Q u e s tio n : W ith respect to th e ta x credits th a t h a v e b e e n allocated
                         d u r i n g th e years 1 9 8 7 8 9 , w h a t is th e estimated cost to th e Treasury o f
                         th e allocated credits over th e lo-year credit p e r i o d ? In a d d r e s s i n gthis
                         q u e s tio n , G A O m a y a s s u m eth a t th e r e will b e n o adjustment in th e
                         a m o u n t o f th e credits th a t h a v e b e e n allocated to projects, unless y o u
                         learn th a t credits h a v e n o t b e e n or will n o t b e u s e d . T h e S u b c o m m i tte eis
                         interested in a n absolute n u m b e r rather th a n a relative n u m b e r th a t
                         ta k e s into a c c o u n t alternative strategies available to ta x p a y e r s to a v o i d
                         or m inimize ta x a tio n . In providing this estimate, i d e n tify a n y m a terial
                         a s s u m p tio n s m a d e .

                         R e s p o n s e T: a b l e 2 .1 s h o w s th a t for ta x credit a w a r d s m a d e d u r i n g th e 3-
                         year period, th e to tal fe d e r a l projected ta x e x p e n d i tu r e is estimated a t
                         a b o u t $ 5 .7 billion to b e u s e d over th e p e r i o d from 1 9 8 7 th r o u g h 2 0 0 0 .

                         A s w e reported d u r i n g th e April 1 9 9 0 hearing, since th e L o w - In c o m e
                         H o u s i n g Tax Credit P r o g r a m b e g a n in 1 9 8 7 ,a w a r d a n d u s e o f th e credits
                         h a s steadily i n c r e a s e dfrom a b o u t 2 0 p e r c e n t o f th e allocation to states
                         in 1 9 8 7 to a b o u t 9 8 p e r c e n t o f th e allocation in 1 9 8 9 .B y th e e n d o f
                         1 9 8 9 , a b o u t $ 6 6 5 m illion worth o f initial-year credits h a d b e e n a w a r d e d
                         in c o n n e c tio n with th e d e v e l o p m e n to f a p p r o x i m a tely 2 3 6 ,0 0 0 low-
                         i n c o m e h o u s i n g units.

                         In consultation with th e Joint C o m m i tte e o n Taxation, w e d e v e l o p e do u r
                         estimated cost o f fo r e g o n e r e v e n u e s for ta x credit a w a r d s m a d e d u r i n g
                         1 9 8 7 - 8 9 .A s y o u r e q u e s te d ,this estimate d o e s n o t a s s u m eadjustments to
                         th e initial-year a w a r d s , s u c h a s recapture e v e n ts, a n d d o e s n o t reflect
                         o th e r considerations,s u c h a s interest costs th e g o v e r n m e n t w o u l d h a v e to
                         p a y o n fu n d s it b o r r o w e d to r e p l a c e th e ta x r e v e n u e s fo r e g o n e .This esti-
                         m a te is also b a s e d o n d a ta from th e N a tio n a l Council o f S ta te H o u s i n g
                         A g e n c i e s r e g a r d i n g th e respective portion o f credit a w a r d s th a t a r e n o t
                         u s e d in th e initial year. In a c c o r d a n c ewith th e m e th o d o l o g y u s e d b y th e
                         Joint C o m m i tte e o n Taxation, th e s e fig u r e s a r e p r e s e n te d in current dol-
                         lars, a n d n o a tte m p t h a s b e e n m a d e to discount th e a m o u n ts to a b a s e
                         period.




                         Page 10                                        G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
Page 11   GAO/RCED-90-203   Low-Income   Housing Tax Credits
                                                  Appendix    II
                                                  Edmated      Cost of Tax Credits, 1987-99




Table 2.1: Ertlmated      Cost8 of Tax Credit8 Awarded,      1987 to 1989
                               Amount
                             of annual
Year of                             tax
tax credit                       credit             (1)                                     (3)                (4)                (5)              (6)
award
,._“..                        awarded            1987                193                 1989              1990               1991              1992
1987                      $ii,885,954-~~~- $62,885,954         $62,885,954         $62,885,954       $62,885,954        $62,885,954       $62,885,954
1986           _   . ~~    202,227,453
                         .~--.-.                        0      105,158,276         1631604,237        202,227,453       202,227,453       202,227,453
1989
_- .__._              .~   3070320,726                  0                    0     162,879,985        252,002,995       307,320,726       3078320,726
Annual Cost8                              $62,885,954        $168,044,230        $389,570,176       $517,116,402      $572,434,133      $572,434,133




                                                  Page 12                                         GAO/RCED-90-203    Low-Income   Housing Tax Credits
                                                              Appendix II
                                                              Estimated Cost of Tax Credits,    1987-89




Year8
                (7)                   (8)               (9)              (10)            (11)             (12)            (13)                                Total
              1993                  1994              1995              1998            1997              1998           1999             2E                 costs
             .._-"_- --._ ..--$62885,954
      $62,885,954                -.---.-        $62,805,954     $62,085,954                $0              $0               $0               $0       $620,859,540
.__   202,227,453
  ..__._.._.
         1"1                202,227,453         202,227,453     202,227,453      %,227,453         97,069,177       36,423,216                0      2,022,274,530
    ..__-__.__
             -_..- -._.. --.----         --
      307,320,726           307,320,726         307,320,726     307,320,726      307,320,726      307,320,726      144,440,741       55,317,731      3,073,207,260
 $572.434,133          $572,434,133           $572.434.133    $572,434,133      $509,548,179    $404,389,903     $182,883,957     $55,317,731      $5,724,341,330




                                                              Page 13                                       GAO/RCED-90-203      Low-Income    Housing Tax Credits
Appendix   II
Edmated     Cost of Tax Credit+   1987-39




According to officials of the National Council of State Housing Agencies,
only a portion of the cost of initial-year awards is incurred in the year
that the awards are made. After credit award, project owners have until
the end of the second calendar year after the year in which the award is
made to complete projects and place them in service, provided that at
least 10 percent of the total development cost is incurred in the year
that the credits are initially awarded. Additionally, a project owner may
elect to defer the start of the credit period for 1 year after the building
is placed in service. In those instances, the lo-year credit period begins
at a later time. Finally, the first year’s credit is reduced to reflect the
time during the year that any low-income units are unoccupied. The
reduced credit is claimed in the 1 lth year. As a result, when calculating
the cost of these awards, a portion of annual initial-year awards should
be carried through to subsequent years. Accordingly, in some instances,
the total project award amount (the initial-year award amount multi-
plied by 10) is actually used over a longer period. The maximum pos-
sible period from the credit award to final usage is 13 years and 11
months. For purposes of our calculations, however, we assumed 12
years as the longest credit use period.




Page 14                                     GAO/RCED-90-203   Low-Income   Housing Tax Credits
I          .


    Apphndix III

    Rent ReductionsResulting From Tax
    Credit Subsidies

                   Question: With respect to tax credit projects that have not received Sec-
                   tion 8 Moderate Rehabilitation rent subsidies, does available empirical
                   evidence indicate whether the tax credit subsidy has reduced the rents
                   paid by tenants in credit-assisted units below the rents that such tenants
                   would have paid for units not assisted by the credit?

                   Response: Rents for tax credit assisted units are statutorily set at 30
                   percent of the tenant’s adjusted family income as determined by Depart-
                   ment of Housing and Urban Development (HUD) standards.’ In some
                   instances, however, tenant rent is supplemented by federal or
                   nonfederal subsidies, However, we do not know the extent to which tax
                   credits have been used to maintain the statutory tenant rent without
                   using any additional subsidy. The time available to respond to your
                   request did not permit us to conduct an extensive review of this issue.
                   However, we believe additional subsidies will generally be needed in
                   combination with tax credits to adequately finance projects.

                   Currently, there is no statutory or regulatory requirement to use tax
                   credits to set or maintain tenant rents at the statutory level without
                   using any additional subsidy. An owner of a credit-assisted unit may not
                   require tenants to pay rents of more than 30 percent of the family’s
                   adjusted income. In that sense, tenants in credit-assisted units should
                   benefit from a reduced rent burden. The difference between the tenant’s
                   rent contribution and the actual rent, if any, would have to be subsi-
                   dized in order for the owner to receive the full market rent for the unit.

                   In addition, we believe that in higher cost or lower income areas, the
                   financial benefit derived from the capital generated solely through the
                   use of tax credit subsidies would be insufficient to offset development
                   and operating costs enough to permit substantial rent reductions below
                   the level mandated by law. This is because of the statutory limits on the
                   amount of project awards and the sizable portion of the credit award
                   amount used in raising capital through project syndication. Therefore, a
                   requirement to use credit proceeds solely for rent reductions without
                   allowing other subsidies could discourage low-income housing
                   development.

                   In order for the credits to enable a project owner to set the rents at a
                   level that qualified tenants could pay without any other subsidies,
                   credit awards would have to be large enough to absorb the effects of

                   ‘The tax credit program uses HUD’s income eligibility regulations to determine adjusted family
                   income. The regulations are at 24 CFR Part 813 (1989).



                   Page 16                                      GAO/RCED-90-203      Low-Income   Housing Tax Credits
                                                                                                                    c
,

                                                                                                                         L




    A p p e n d i x III
    Rent Reductions Resulting F r o m Tax
    Credit S u b s i d i e s




    lim ite d rents a n d still p r o v i d e for a financially viable project a n d a rea-
    s o n a b l eprofit to th e o w n e r . W e h a v e d o n e lim ite d prior work o n th e
    a m o u n t o f n e t e q u i ty capital d e r i v e d from l o w - i n c o m e h o u s i n g ta x
    credits a fter syndication costs a n d investor yields h a v e b e e n ta k e n into
    a c c o u n t. H o w e v e r , o u r work indicates th a t b e c a u s eo f th e cost associ-
    a te d with raising capital a n d th e discounted cost o f m o n e y , th e ta x
    credits usually p r o v i d e substantially less th a n o n e dollar o f e q u i ty cap-
    ital p o te n tially available for project d e v e l o p m e n tfor every dollar o f
    a w a r d e d ta x credits. Credit p r o c e e d sc o u l d also l e v e r a g e d e b t fin a n c i n g
    for th e projects.

    Accordingly, a d d i tio n a l subsidies(federal, n o n federal, or b o th) a r e
    likely to c o n tin u e to b e n e e d e din conjunction with ta x credits to e n a b l e
    project o w n e r s to receive th e full m a r k e t rent c h a r g e d for units a n d con-
    fo r m to th e statutory r e q u i r e m e n t to p r o v i d e units to te n a n ts a t rent
    levels n o g r e a ter th a n 3 0 p e r c e n t o f te n a n ts’adjusted family i n c o m e .
    R e q u i r e d a d d i tio n a l subsidiesconsist o f financial assistances u c h a s dis-
    c o u n t fin a n c i n g or in-kind c o n tributions s e c u r e d with th e h e l p o f state
    or local g o v e r n m e n ts, or fe d e r a l rent s u p p l e m e n tss u c h a s section 8
    existing certificates or h o u s i n g vouchers.

    W e discussedthis m a tter with o fficials o f two local public h o u s i n g
    a u thorities (pnAs)-Prince G e o r g e sC o u n ty, Maryland, a n d M o n tg o m e r y
    C o u n ty, Maryland. O n th e basis o f o u r discussions,w e fo u n d th a t e a c h
    u s e d ta x credits differently in assisting eligible te n a n ts.

    O fficials in P rince G e o r g e sC o u n ty to l d u s th a t th e u s e o f ta x credit sub-
    sidies in their jurisdiction w a s d e te r m i n e d solely b y th e state credit allo-
    cation a g e n c y in its decisionsr e g a r d i n g w h i c h projects w o u l d b e
    a w a r d e d credits. T h e o fficials n o te d th a t th e state credit allocation
    a g e n c y consulted with c o u n ty h o u s i n g o fficials a b o u t w h e th e r a project
    p r o p o s a l w a s consistent with c o u n ty h o u s i n g n e e d sprior to m a k i n g fin a l
    project a w a r d s , b u t th e P H A w a s n o t directly involved in w h i c h projects
    received credits or h o w th e credits w e r e u s e d .

    A c c o r d i n g to c o u n ty h o u s i n g o fficials, te n a n t n e e d s a n d h o u s i n g availa-
    bility largely d e te r m i n e d w h e th e r a n eligible, l o w - i n c o m e c o u n ty resi-
    d e n t r e s i d e d in credit-assisted h o u s i n g a s o p p o s e dto h o u s i n g th a t
    received a n o th e r fo r m o f subsidy, s u c h a s H U D section 8 subsidiesor
    public h o u s i n g . In a d d i tio n , th e o fficials said th a t th e y d i d n o t k n o w
    w h e th e r a n y rents h a d b e e n r e d u c e d b e l o w th e statutory m a x i m u m a s a
    result o f u s e o f ta x credits in credit-assisted projects in their
    jurisdiction.


    Page 16                                         G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
Appendix HI
Rent Reductions Resulting   From Tax
Credit Subsidies




Officials in Montgomery County, however, told us that the use of tax
credit subsidies was an integral part of their local low-income housing
strategy and that a primary objective of their use of-the credits and
other subsidies was to finance projects so that rents could be set at
much lower levels than would be possible using debt financing. Since
they started the program in 1987, they have developed about 126 units
of credit-assisted housing.

Generally, Montgomery County has used the funds raised from credits
to replace previous funding sources that are no longer available. The
PHA has accomplished this by receiving tax credit awards from the state
allocation agency and raising capital by forming limited partnerships
with local and other private corporate investors such as banks, public
utilities, and the Federal National Mortgage Corporation. The investors
contribute equity capital to the partnerships, which the PHA, in turn,
invests in low-income housing development that is owned by the part-
nership and operated by the PHA as the general partner. In exchange for
their equity contribution, the private investors receive tax credits and
related project tax benefits that are used to reduce their corporate tax
liability.

Montgomery County PHA officials told us that the allowable amount of
tax credits that can be awarded to a given project is usually not enough
to enable rents for units that meet housing quality standards to be
reduced to a level to serve the target population. Therefore, in addition
to the credits, other forms of project subsidies are required to reduce
rent levels sufficiently. Accordingly, the PHA has combined awarded tax
credits with other nonfederal subsidies, such as local real estate tax
abatement, donations of the land on which the housing has been devel-
oped, and state and local loans.

In addition to those measures, the PHA has acted as its own syndicator,
so that the transaction costs associated with raising investor capital
have been reduced greatly below the amounts usually incurred in these
kinds of arrangements. PHA officials said that they were able to accom-
plish most of the necessary syndication requirements “in-house”
because of their prior experience in underwriting real estate develop-
ment projects.

According to PHA officials, the equity raised from the three tax credit
partnerships in which they have participated has been targeted to
tenants in the county with average incomes of 55,35, and 40 percent of
the area median income levels. The credit-assisted units have been filled


Page 17                                GAO/RCED-90-203   Low-Income   Housing Tax Credits
                                                                                                                                                                             r
,
                                                                                                                                                                                    L




                                                      A p p e n d i x III
                                                      Rent Reductions lteaulting F r o m Tax
                                                      Credit S u b s i d i e s




                                                      with te n a n ts a t th e ta r g e t i n c o m e levels, without u s i n g o th e r fe d e r a l
                                                      subsidies,b e c a u s eo f th e w a y th e h o u s i n g w a s fin a n c e d . M o r e o v e r , P H A
                                                      o fficials to l d u s th a t th e P H A will retain c o n trol o f th e h o u s i n g in
                                                      p e r p e tuity b e c a u s eth e l a n d o n w h i c h th e h o u s i n g w a s d e v e l o p e dis
                                                      o w n e d b y th e P H A a n d m e r e l y l e a s e dto th e partnership.

                                                      According.to P H A o fficials, a s a result o f their u s e o f th e credits c o m -
                                                      b i n e d with n o n fe d e r a l subsidies,for th e h o u s i n g fin a n c e d with ta x
                                                      credit-related capital, rents for te n a n ts in th e h o u s i n g h a v e b e e n
                                                      r e d u c e d b e l o w w h a t th e y o th e r w i s e w o u l d h a v e b e e n ,a s s h o w n in th e
                                                      following ta b l e .

    T a b l e 3.1: Ertimated R e n t Reductions for
    Tax Credit-Asrlsted H o u s i n g                                                                                Actual rents
                                                                                                                         u s i n g tax
                                                                                                                      credits a n d           Estimated rents’ without
                                                                                                                      nonfederal            tax credits a n d n o n f e d e r a l
                                                                                                                        subsidies                               subsidies    -
                                                      1- b e d r o o m                                                           $321                                            $510
                                                      e-bedroom          -                                                         366                                            680
                                                      ___-___-
                                                      3-bedroom                                                                    433                                            860
                                                      4-bedroom                                                                    482                                           1,060

                                                      a A s s u m e s 1 0 0 percent debt financing at 9.5 percent interest rate.
                                                      Source: M o n t g o m e r y County H o u s i n g Opportunities Commission, M o n t g o m e r y County, Maryland.


                                                      M o n tg o m e r y C o u n ty P H A o fficials to l d u s th a t, a l t h o u g h th e y h a d b e e n
                                                      successful in u s i n g ta x credits a n d lim ite d partnerships in d e v e l o p i n g
                                                      a ffo r d a b l e l o w - i n c o m e h o u s i n g th a t d i d n o t require o th e r fe d e r a l subsi-
                                                      dies, th e y d i d n o t k n o w h o w widely their a p p r o a c h c o u l d b e u s e d in
                                                      o th e r h o u s i n g m a r k e ts. T h e y n o te d , for e x a m p l e , th a t th e state h a d
                                                      e n a c te d laws to a b a te real estate ta x e s th a t o th e r w i s e w o u l d h a v e to b e
                                                      p a i d a n d th a t local b a n k s h a d invested substantial fu n d s b e c a u s eth e y
                                                      h a d u s e d their l o w - i n c o m e h o u s i n g investments to satisfy C o m m u n i ty
                                                      Reinvestment A c t r e q u i r e m e n ts. In a d d i tio n , th e y said th a t th e r e w a s a
                                                      lot o f c o m m u n i ty s u p p o r t for th e kinds o f p r o g r a m s th a t th e y w e r e
                                                      sponsoring. It is n o t clear w h e ther, or to w h a t extent, th e s e conditions
                                                      m a y exist in o th e r areas.




                                                      Page 18                                              G A O / R C E D - 9 0 - 2 0 3L o w - I n c o m e H o u s i n g Tax Credits
Appendix
 \       IV

Use of Whiting Lists to SelectTenants for
Credit-AssistedHousing

                Question: To what extent have tenants of credit-assisted units in tax
                credit projects been selected from waiting lists maintained by local
                public housing authorities?

                Response: Waiting lists maintained by PHAS are sometimes used to ini-
                tially rent new units or fill vacancies in existing credit-assisted housing.
                In some states an owner’s willingness to use waiting lists is a factor in
                evaluating the application for a credit award. However, we do not know
                the extent to which this practice is used, nor how effective it is in
                securing tenants for the projects.

                The issue of using waiting lists to refer prospective tenants to credit-
                assisted housing was first raised at the Subcommittee’s September 29,
                1989, hearing. In our November 1989 briefing, we advised Committee
                staff that regulations for the HUD Moderate Rehabilitation Program
                required that for units that received project-based section 8 assistance
                along with the tax credits, vacancies be filled from the appropriate local
                waiting lists. Otherwise, we reported that the tax law contained no
                requirement to use waiting lists as a source of prospective tenants for
                tax credit units.

                A requirement to use the waiting lists for tenant selection would not
                necessarily ensure priority placement for those who have waited longest
                or have the greatest need unless prospective tenants on waiting lists are
                also provided with additional rental assistance subsidies that would
                enable project owners to obtain their minimum cash flow requirements.
                A project owner who used the PHA waiting list as a source of tenant
                referrals would not necessarily choose to accept tenants in the priority
                order dictated by the waiting list. An owner would likely seek tenants
                whose adjusted incomes were as high as possible in order to receive the
                most allowable rent. This consideration might well override the waiting-
                list priority that eligible families otherwise obtain because of length of
                time on the list, homelessness, extremely low income, or other priority
                preference factors.

                For the above reasons, we believe that the projects’ debt service and
                owners’ cash flow requirements would be more likely to dictate rental
                decisions than would placement priorities of the waiting lists. Accord-
                ingly, the use of the PHA waiting list would be of limited utility in
                ensuring that families with the greatest need were served first.




                Page 19                            GAO/RCED-90-203 Low-Income Housing Tax Credits
\                                                                                           ,
                                                                                                *

    Appendix IV
    Use of Waiting Lists to Select Tenanta for
    Credi~AsSisted Housing




    Absent a statutory requirement to use waiting lists, we believe the
     ability to legally obtain a higher total rent would likely encourage pro-
    ject owners to first try to secure tenants with rent subsidies. These
    tenants would not be found on the PHA waiting list because, with rare
    exceptions, the waiting list consists of families who do not have current
    subsidies.

    We attempted to verify waiting list practices with officials in Prince
    Georges and Montgomery Counties. As was the case with using tax
    credits, each of the PHAS used its waiting list differently in assisting eli-
    gible tenants in its jurisdictions.

    Officials in Prince Georges County noted that there is no requirement to
    establish special procedures or a special waiting list to refer eligible pro-
    spective tenants to credit-assisted housing. Their standard waiting
    lists-both for public and assisted housing-are maintained to refer
    prospective tenants to available, suitable housing for which they are
    qualified as each listee moved up the list for referral. The standard lists
    are used for all assisted housing in their jurisdiction, irrespective of the
    housing assistance program involved. No specific waiting list is main-
    tained solely for the purpose of referring tenants to credit-assisted
    housing, nor are special procedures in place to use the standard assisted-
    housing waiting lists for that purpose. They said, therefore, that it
    would be coincidental if an eligible tenant from the waiting list was
    referred to a credit-assisted housing unit.

    Officials in Montgomery County told us that, in initially renting new
    units and filling vacancies in existing units in their credit-assisted
    housing, they exclusively use their standard assisted-housing waiting
    list of eligible prospective tenants. They noted, however, that because of
    the target group of tenants they wish to assist, they often have to go
    further down the waiting list to find tenants with qualifying incomes
    (i.e., 35,40, or 55 percent of area median income), but tenants are
    selected from the standard waiting list on the basis of listees’ eligibility
    within the target tenant group. The officials noted, however, that all
    such selected tenants are high-priority placement listees.

    The same waiting list is also used to refer prospective tenants to other
    types of assisted housing. However, because the prospective tenants for
    housing subsidized under other assistance programs often have lower
    qualifying incomes, the tenants usually require housing units that are
    subsidized with other federal assistance, such as section 8 rental
    subsidies.


    Page 20                                      GAO/RCED-90-203   Low-Income   Housing Tax Credits
I



    .
     ^

    Ppe

    ~~~&mcy of ComplianceMonitoring


                  Question: Are existing compliance monitoring requirements for the tax
                  credit program adequate?

                 Response: The tax credit program currently reflects nearly $6 billion in
                 present and future federal tax credit awards. If the program is author-
                 ized at the pre-1990 level of $1.25 in tax credits per capita, the total
                 program commitment could be as much as $3 billion annually. This
                 amount will increase for each year that the program is reauthorized.
                 Because the credits represent a unique financial commitment to low-
                 income housing, it is important that the program be monitored effec-
                 tively to discourage and detect possible fraud or waste. In our view, not-
                 withstanding the Internal Revenue Services’s (IRS) other available
                 criminal and civil noncompliance penalties, compliance monitoring
                 requirements of the program do not provide reasonable assurances that
                 the program will be used in accordance with requirements. That is
                 because after initial project evaluation, no specific state or federal
                 agency is required to monitor whether credit-assisted units are suitable
                 and actually being used to house low-income families. An option to
                 improve compliance monitoring could be to expand the states’ current
                 role in administering the program to include a requirement to have them
                 monitor assisted projects for continuing compliance with program
                 requirements. Through this expanded role, if states detected noncompli-
                 ance, they could continue to report it to the IRS for enforcement action as
                 is now required by the statute. In addition, effective compliance moni-
                 toring could be hampered because some occupancy requirement compli-
                 ance criteria are unclear.

                 Representatives of the IRStestified at the April 27, 1990, hearing that
                 current compliance monitoring for the Low-Income Housing Tax Credit
                 Program consists primarily of a review of taxpayer certifications of the
                 low-income use of the credit-assisted projects. Returns claiming the
                 credit are screened to ensure that proper documents are attached. They
                 also noted that a tracking system is being developed to match informa-
                 tion on a project owner’s tax return with information filed by the state
                 and local housing authorities. However effective existing tax return
                 reviews may be, we believe the review process would show only that
                 correct paperwork existed to document the claimed credit. A review
                 would not, for example, disclose whether the credit-assisted units meet
                 minimum housing quality standards or whether the units were actually
                 occupied by low-income tenants.

                 The December 1989 amendments require state housing credit awarding
                 agencies to report to IRS any instance of noncompliance of which they


                 Page 21                          GAO/RCED-90-203 Low-Income Housing Tax Credits
Appendix V
Adequacy of C!ompliance Monithng




become aware. However, there is no authority to require state agencies
to verify continuing compliance once they make their original certifica-
tion of a credit award. In fact, Treasury Regulation 1.42-1T (d)(8)(v),
adopted before the 1989 amendments, expressly states that state
housing credit agencies have no responsibility to monitor compliance.
Neither do public housing agencies.

In our view, if no specific state, federal, or local agency is required to
monitor on a continuing basis whether credit-assisted units are suitable
and actually being used to house low-income families, billions of dollars
in federal subsidies could be dispensed almost solely on the basis of self-
certification. We believe the importance of the program warrants addi-
tional program controls. A knowledgeable, independent party, such as
the state awarding agency, should be required annually to verify contin-
uing compliance with program requirements and entitlement to the
credit. The statute would have to be amended accordingly to require an
independent party to verify credit-assisted projects’ continuing low-
income use.

It appears that state housing finance agencies are in a good position to
monitor the program’s requirements because of their role in initially
awarding the credits and their expertise in housing matters. It would,
however, undoubtedly be a financial and administrative burden for
state agencies to verify annually that credit-assisted units are occupied
by qualified tenants at the statutorily permitted rents, but states could
rely, in part, on reports from local PHAS on occupancy by assisted
tenants and information about placements from the waiting lists.

If this compliance monitoring option is adopted, the importance of the
program and the amount of federal subsidy involved may warrant a
modest grant to the states to fund all or part of the additional cost of
compliance monitoring. If an additional inducement is necessary, states
could be permitted to reallocate the dollar value of all credits recaptured
as a result of detected noncompliance.

We discussed compliance monitoring provisions of the program with
officials of the National Council of State Housing Agencies and the Exec-
utive Director of the Florida Housing Finance Agency. They agreed with
our assessment of the existing compliance monitoring provisions. In
addition, council officials said that they had recently established a task
force to develop compliance monitoring procedures. They said the
planned procedures should provide better assurances that credit-



Page 22                            GAO/RCED-90-203   Low-Income   Housing Tax Credits
                            Appendix V
                            Adequacy of Compliance   Monitoring




                            assisted projects continue to meet minimum housing quality standards
                            and use requirements.

                            The Director of the Florida Housing Finance Agency also agreed with
                            our assessment of the existing provisions and said that compliance mon-
                            itoring grants to the states would be useful because otherwise the asso-
                            ciated costs would probably be charged to credit awardees who would
                            likely, in turn, include these charges in project development costs. He
                            said that would, in effect, reduce the amount of the credit award poten-
                            tially available for project development. He also said that he agreed that
                            states could use existing reports from local PHAS in monitoring project
                            compliance, and thought that reports from other entities, such as the
                            Farmers Home Administration, would also be useful.


Problems in Determi .ning   In addition to the issue of unspecified compliance monitoring responsi-
                            bility, a related problem exists in determining what constitutes noncom-
Noncompliance               pliance with the occupancy requirements of the program. The tax credit
                            provisions establish an occupancy requirement, but the requirement is
                            not clear. Section 42(i) requires that, to be counted as a part of the quali-
                            fied basis, low-income units must be both suitable for occupancy and
                            actually occupied on a nontransient basis.’

                            Assuming a good faith intent to comply with the law’s occupancy
                            requirement, there is insufficient guidance as to how a vacant unit is to
                            be treated. An inference can be drawn from the fact that a de minimis
                            reduction in floor space reserved for low-income housing will not trigger
                            a recapture: A short-term vacancy (Le., a vacancy of less than the max-
                            imum 2 months allowed without loss of income in a typical Housing
                            Assistance Program contract) should probably not affect the qualified
                            basis at all. By the same token, a longer term vacancy should probably
                            be treated as a de facto reduction in basis.

                            As a practical matter, however, the project “head count” for deter-
                            mining qualified basis is only required to be conducted annually at the
                            end of the taxable year. Since the rules do not clearly require it, a pro-
                            ject owner would probably not have an economic incentive to reduce his
                            or her qualified basis by not counting a unit that had been vacant for
                            less than a year where the vacancy did not extend through the end of
                            the taxable year. Moreover, any vacancy of less than 3 months duration

                            ‘The December 1989 amendments authorized the award of tax credits on Single Room Occupancy
                            (SRO) units and allowed month-to-month rentals of SROs to count as nontransient usage.



                            Page 23                                   GAO/RCED-9&203     Low-Income   Housing Tax Credits
Appendix V
Adequacy of Compliance   Monitoring




in progress at year’s end would likely be considered de minimis by the
owner and would not be removed either. That vacancy could then con-
tinue through the next 11 months without posing a recapture threat.
Some adjustment seems to be needed here, and it could be handled effec-
tively through regulations without amending the statute.

One possible approach is to establish a maximum permissible vacancy
rate at the end of each taxable year. The vacancy rate could be the
vacancy rate in the market area. Another approach would be to limit the
number of months a unit can be held vacant without taking it out of
qualified basis for the year, irrespective of its status at year-end. A
third approach would be to use a monthly average vacancy rate.




Page 24                               GAO/RCED-90-203   Low-Income   Housing TM Credits
\        .
    PP

    iidGuacy of NoncomplianceSanctions


                  Question: Are existing sanctions for noncompliance with program
                  requirements adequate?

                  Response: The Internal Revenue Code authorizes the assessment of mon-
                  etary penalties and interest against taxpayers who fraudulently or neg-
                  ligently understate their tax liability. Tax fraud can result in criminal
                  prosecution as well. We do not question the efficacy of the Code’s civil
                  and criminal penalties, These sanctions would be as effective in
                  preventing underreporting and fraud in the low-income housing tax
                  credit area as they are in regard to other tax provisions. In addition to
                  the sanctions, however, the low-income housing tax credit program
                  includes a provision to adjust the tax credit in the event the low-income
                  status of the credit-assisted units is endangered or changed. That adjust-
                  ment is made by recapturing a portion of the awarded credit.

                  Either of two events may trigger recapture of the low-income housing
                  tax credit. The first and most visible event occurs when the taxpayer
                  disposes of the interest in the project without posting a bond to ensure
                  its future low-income use. The other recapture event occurs when the
                  qualified basis at year-end dips below the basis on which the credits
                  were originally calculated.

                  In recapture, the accelerated portion of the credit for all prior taxable
                  years on the noncomplying segment of the qualified basis is added to the
                  taxpayer’s tax liability for the current year along with nondeductible
                  annual interest at the overpayment rate.’ In the early years of the com-
                  pliance period, the recapture amount would be less, but because only the
                  accelerated portion of the credit is recaptured, recapture could never be
                  more than one-third of the total credit allowed on a unit. Thus, the
                  financial impact of recapture is relatively small.

                  Technically, recapture can occur at any time during the compliance
                  period, even in years 11-15 after the credits have been fully parcelled
                  out to the project owner. However, the December 1989 amendments to


                  ‘The amount of tax credit allocable to a building is computed and awarded on the building’s “quali-
                  fied basis,” The qualified basis for recapture purposes is computed at the time the credits are
                  awarded. “Qualified basis” is the lesser of two ratios-the number of low-income units compared to
                  the total number of units, or the amount of floor space for low-income units compared to the total
                  amount of floor space for all residential rental units in the building. (IRC Sec. 42(c).) The accelerated
                  portion of the credit is created by the fact that credit is awarded annually for a N-year compliance
                  period, but it is actually taken over a lo-year period. The difference between the amount of credit
                  that would have been allowed had the credit been used in 15 equal installments instead of 10 is the
                  “accelerated portion of the credit.” (IRC Sec. 42(j)(3).)



                  Page 25                                         GAO/RCED-90-203      Low-Income    Housing Tax Credits




                                                                     ’ /
                                                                                                                                              r

\                                                                                                                             r


                                                                                                                                   *




    Appendix V I
    A d e q u a c y of N o n c o m p l i a n c e Sanctions




    th e statute a d d e d a n extra 1 5 - y e a r “l o w - i n c o m e - u s ep e r i o d ” to th e orig-
    inal l& y e a r c o m p l i a n c eperiod. B e c a u s eth e r e w e r e n o c o r r e s p o n d i n g
    c h a n g e sin th e recapture provisions, th e r e is a p p a r e n tly n o p r o g r a m - s p e -
    cific financial sanction for failing to c o m p l y with th e a d d i tio n a l low-
    i n c o m e - u s eperiod.

    T h e o c c u r r e n c e o f a recapture a p p a r e n tly d o e s n o t te r m i n a te fu tu r e
    e n title m e n t to ta x credits if c o m p l i a n c eis r e s u m e d .A b s e n t a n y indica-
    tio n to th e c o n trary, it w o u l d also a p p e a r th a t th e acceleratedcredit
    u s a g e s c h e d u l ew o u l d also b e r e s u m e d in fu tu r e ta x a b l e years.z W e a g r e e
    th a t it w o u l d p r o b a b l y b e c o u n terproductive to te r m i n a te th e e n title-
    m e n t to fu tu r e credits b e c a u s eth a t c o u l d eliminate a n y incentive to
    r e s u m e compliance.

    If recapture is to b e a n e ffective to o l to e n s u r e m a i n te n a n c eo f credit-
    assisted units in a l o w - i n c o m e status, th e financial i m p a c t s h o u l d b e sub-
    stantial e n o u g h to p r o v i d e a credible d e terrent to m a k i n g o th e r u s e o f
    th e property. This m e a n s ,for e x a m p l e , th a t th e recapture liability
    s h o u l d b e h i g h e n o u g h th a t converting th e units to m a r k e t rent or selling
    th e property a n d p a y i n g th e recapture d u e w o u l d n o t b e financially b e n -
    e ficial to th e o w n e r .

    T h e r e a r e m a n y different w a y s in w h i c h th e recapture provision c o u l d
    b e revised. O n e possibility is th a t in a d d i tio n to recapturing th e acceler-
    a te d portion o f th e credit o n th e n o n c o m p l y i n g s e g m e n to f th e qualified
    basis, th e recapture provision c o u l d include provisions for (1) disallow-
    a n c e o f all o f th e current year’s credit a n d (2) if n o credits a r e b e i n g
    u s e d in th e current year, a p e n a l ty e x p r e s s e da s a p e r c e n ta g eo f accu-
    m u l a te d p a s t credits e q u a l to th e p e r c e n ta g eo f p r e s e n t n o n c o m p l i a n c e .
    S u c h a p e n a l ty c o u l d a p p l y d u r i n g years 1 1 - 1 5 o f th e c o m p l i a n c ep e r i o d
    or th e a d d i tio n a l l o w - i n c o m e - u s eperiod.

    W e discussedn o n c o m p l i a n c ea n d sanctions with o fficials o f th e N a tio n a l
    Council o f th e S ta te H o u s i n g A g e n c i e sa n d th e E x e c u tive Director o f th e
    Florida H o u s i n g F i n a n c e A g e n c y . T h e y a g r e e d with o u r a s s e s s m e n ot f
    th e a d e q u a c y o f th e current recapture adjustment. In a d d i tio n , th e y
    stressed th a t a n y c h a n g ein th e existing recapture provision s h o u l d pro-
    vide a d e q u a te tim e for d e tected n o n c o m p l i a n c eto b e corrected prior to
    th e imposition o f th e recapture. T h e y said a d e q u a tetim e w a s important
    s o th a t a p r o b a b l e loss o f credit to th e recapture provision w o u l d n o t

    “T h e effect of r e s u m i n gcredit u s a g eo n the 1 5 - y e a rs c h e d u l ew o u l d b e to allow the taxpayer to r e g a i n
    s o m eof the r e c a p t u r e dcredit.



    Page 26                                                     G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
.
        Appendix V I
        A d e q u a c y of N o n c o m p l i a n c e Sanctions




        d i s c o u r a g eo w n e r s ’g o o d faith e fforts to correct p r o b l e m s a n d bring
        units b a c k into compliance.




    Y




        Page 27                                                  G A O / R C E D - 9 0 - 2 0 3 L o w - I n c o m e H o u s i n g Tax Credits
I
                                                                                                 ,

    Appendix VII                                                                                     1

    Alternatives to the Per Capita
    Allocation Formula

                    Question: What alternative, preferable allocation formulas could be used
                    to allocate tax credits to states?

                    Response: The Congress made two changes in the allocation formula in
                    the 1989 amendments to section 42. First, it reduced the allocation from
                    $1.26 to $.9375 per capita for calendar year 1990 only. Second, it
                    allowed the redistribution of expiring prior year tax credits from states
                    that had not fully used their credits to states that had previously used
                    all their available credits. Building on the latter change, a further refine-
                    ment in targeting these redistributed credits could be to direct them to
                    projects in high-cost, extreme poverty areas which, under the 1989
                    amendments, became eligible for bonus credits obtained on an enhanced
                    (130 percent) basis. This would allow additional credits to be used for
                    projects that cost more or would be located in very poor areas.

                    We are not in a position to endorse any alternatives to the flat allocation
                    of tax credits on a state population basis because of the limited data we
                    gathered in the time available. However, there are numerous options
                    potentially available for allocating states’ respective shares of the tax
                    credit authorization. Under the current allocation method, states with
                    equal populations receive equal tax credit allocations without regard to
                    possible need-determined factors such as poverty levels, unemployment
                    rates, or the availability of existing, affordable housing.

                    In our view, the program could be more effective if credit allocations to
                    the states were based on relative need. In prior testimony and briefings
                    for the Subcommittee, we have noted that tax credits have been used
                    inefficiently to produce additional housing units in markets where sig-
                    nificant numbers of suitable available rental housing units already exist.
                    We also pointed out that in housing markets with an adequate supply of
                    rental units, where the problem is one of affordability, the use of the
                    existing housing supply with tenant-based section 8 existing housing
                    certificates or vouchers becomes the less costly form of assistance.
                    Accordingly, we believe an option would be to restrict the use of tax
                    credits generally to areas where vacancy rates are low for suitable units
                    renting at or below the area’s fair market rents. It might also be feasible
                    to require that any deviation from this policy by a state credit allocation
                    agency be documented, justified, and subject to review by an authorized
                    representative of the federal or state government.

                    Much of the data required to determine state-by-state low-income
                    housing needs, however, is not currently available. We discussed this
                    matter with officials in the Bureau of the Census. They said that the bi-


                    Page 28                            GAO/RCED-M-203   Low-Income   Housing Tax Credits
Appendix VU
Alternatives to the Per Capita
Allocation Formula




annual American Housing Survey collects much of the data required to
assess the quality and amount of housing in existence in selected areas
of the country. In their opinion, the current survey could be expanded
and conducted annually (as it was between 1973 and 1981) so that it
could be used to assess low-income housing needs on a state-by-state
basis, Required changes in the way that the survey is conducted would
necessitate additional funding for the survey. Census officials said the
additional cost would probably be relatively small in comparison to the
amount of credits awarded annually, but time did not permit us to
develop an estimate of the added cost.




Page 29                          GAO/RCED-90-203   Low-Income   Housing Tax Credits
I                                                                                               I
    Appendix VIII                                                                                   c
                                                                                                        I(
                                                                                                             t-




    Other Programmatic or Legislative
    Improvements That Could Be Considered

                    Question: What programmatic or legislative considerations should be
                    considered to improve the program?

                    Response: We believe that it is important to clearly define the primary
                    focus of the tax credit program as part of any reauthorization, The
                    ostensible purpose of the program is to stimulate private investment and
                    increase the supply of low-income housing. The program also compen-
                    sated for the elimination of some tax benefits that had previously been
                    available to investors in low-income housing.

                    Some program proponents may have expected that reduced debt service
                    associated with generating capital through the use of tax credits would
                    have enabled project owners to reduce rents to no more than 30 percent
                    of adjusted income for tenants with incomes of less than 50 or 60 per-
                    cent of the area median, without any additional federal subsidy being
                    provided. However, current law does not require that any specific por-
                    tion of the financial benefit derived from the tax credit be used for that
                    purpose as long as certain minimum statutory requirements are met. In
                    fact, if such a requirement were to adversely affect projects’ financial
                    viability or substantially reduce owners’ profits, it could conceivably
                    work against the goal of stimulating investment in low-income housing
                    to produce more units.

                    What is needed is to carefully balance two potentially conflicting objec-
                    tives: putting as much of the credit award as possible into the project to
                    allow lower tenant rents, thereby assisting the lowest income tenants,
                    versus providing project owners and investors with sufficient returns on
                    their investment so that units continue to be produced, As previously
                    noted, state awarding agencies are beginning to evaluate project pro-
                    posals on the basis of how much credit subsidy is actually needed for
                    the project. These evaluations are aimed at minimizing credit awards in
                    view of other project funding sources.

                    That approach is consistent with our prior analyses of situations where
                    tax credits and other rent subsidies, notably project-based section 8
                    assistance, have been combined. Our prior analyses showed that the tax
                    credits are probably not needed at current allowable levels to ensure
                    project financial viability where rental subsidies are available for all or
                    most of the units in an assisted project.




                    Page 30                           GAO/RCED-BO-203   Low-Income   Housing Tax Credits
Appendix VIII
Other Programmatic or Legblative
Improvements  That Could Be Considered




The 1989 amendments directed states to allocate the minimum amount
of credit necessary to ensure the financial viability of a project, How-
ever, if states take this as an injunction to spread the tax credits as spar-
ingly as possible, it will likely, in many housing markets, impair project
owners’ ability to establish rents at the 30-percent level because the tax
credits are often used in amounts needed in combination with other sub-
sidies to achieve the mandated rent levels and ensure the financial via-
bility of the projects. Moreover, the 1989 amendments contained
another requirement that states should plan to allocate the credits to
projects serving the lowest income tenants over the longest period of
time. State awarding agencies would likely have to make the largest
allowable project awards to achieve this objective. It may be difficult to
achieve both goals at the same time.

These issues demonstrate that stimulating private investment, pro-
ducing large numbers of low-income units, and reducing rents to reach
the lowest income tenants may be somewhat inconsistent objectives. It is
doubtful that tax credits can accomplish all of them. Accordingly, we
believe that in the reauthorization process it will be important to decide
what the primary focus of the tax credit program should be. An advan-
tage of stating a clear goal for the program is that the various mecha-
nisms for financial and in-kind housing assistance, including tax credits,
can be structured to complement each other and provide a comprehen-
sive, coordinated low-income housing strategy.




Puge 31                                  GAO/RCEDBO-203   Low-Income   Housing Tax Credits
I
                                                                                                         I


    Appendix IX                                                                                              %

    Major Contributors to This Report


    Resources,                  Richard M . Greene, Evaluator-in-Charge
    Com m unity, and            Patrick Doerning, Operations Research Analyst
    Econom ic
    Development Division,
    Washington, D.C.
                            1
                                Margie Armen, Senior Attorney
    Office of the General
    Counsel




                                                                                     4   .




    (385224)                    Page 32                         GAO/RCED-N-203   Low-Income   Housing Tax Credits
                                                                   ...I”.x..   .   .   ._^.   ._   -.   .._._   -   .-...--._.-...--         ---.~--             _“------
    __-lll-l-l-   Il-~~l~*,ll”.l.X-                    II




    _.~___(-             -...         I.   __-_----._l-_--__-.--




                                                                                                                                       1’3. (h*nt~ral Atw)utlf.ing          O fl’iw
/
                                                                                                                                       Post. O f’l’iw 130x 60 15
                                                                                                                                       (;;~it.lwrsburg,  MaryI;rrlcl        20877
.l,l_“ll
  .,.,
   I.,I
    I_,,l
     .,,I
      .,_.,.
        ..---...---....-