_. ____--..-..-..,. --. ._---__-_.-...-.. - ..-_ 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 .,_.,. ..---...---....-
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)