oversight

The Missouri Housing Development Commission Did Not Always Disburse Its Tax Credit Assistance Program Funds in Accordance With Recovery Act Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-01.

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

                                                                 Issue Date
                                                                        April 1, 2011
                                                                  
                                                                 Audit Report Number
                                                                         2011-KC-1003




TO:        Virginia Sardone, Acting Director, Office of Affordable Housing, DGH

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT: The Missouri Housing Development Commission Did Not Always Disburse Its
           Tax Credit Assistance Program Funds in Accordance With Recovery Act
           Requirements

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the Missouri Housing Development Commission (Commission)
            because it received and disbursed the largest amount of American Recovery and
            Reinvestment Act of 2009 (Recovery Act) funds in Region VII. The Commission
            received nearly $39 million in Tax Credit Assistance Program (TCAP) funds and
            had disbursed more than $23 million of these funds as of July 26, 2010. Our
            objective was to determine whether the Commission expended Recovery Act
            grant funds in accordance with Recovery Act requirements and applicable U.S.
            Department of Housing and Urban Development (HUD) rules.

 What We Found


            The Commission did not always disburse TCAP funds in accordance with
            Recovery Act requirements and applicable HUD rules. It disbursed more than
            $3.6 million in TCAP funds for ineligible and improperly documented
            expenditures. It spent over $137,000 of these funds on ineligible TCAP
            expenditures. In addition, it spent over $3.4 million of these funds on
            expenditures that lacked sufficient documentation of their eligible basis portion.
           HUD has no assurance that these funds were used for eligible TCAP purposes,
           and those that were not could have been made available for other eligible
           expenditures.

What We Recommend


           We recommend that the Director of HUD’s Office of Affordable Housing require
           the Commission to reimburse $137,062 to its U.S. Treasury line of credit from
           non-Federal funds for the ineligible expenditures. We also recommend that the
           Commission provide supporting documentation showing the amount includable in
           the eligible basis for the over $3.4 million of unsupported costs and reimburse its
           U.S. Treasury line of credit from non-Federal funds for the amount it determined
           was ineligible or it could not support. Further, we recommend that the Director
           require that HUD verify the implementation of the Commission’s new review
           process for the approval of draw requests to ensure that only eligible TCAP
           expenditures are paid.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We provided the discussion draft of the audit report to the Commission on March
           8, 2011. The Commission provided its written comments on March 25, 2011. It
           generally agreed with our recommendations.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                  4

Results of Audit
      Finding 1: The Commission Disbursed TCAP Funds for Ineligible and   6
      Improperly Documented Expenditures

Scope and Methodology                                                     12

Internal Controls                                                         13

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use      14
   B. Auditee Comments and OIG’s Evaluation                               15
   C. Criteria                                                            19




                                            3
                      BACKGROUND AND OBJECTIVE

The Missouri Housing Development Commission (Commission) was established by the 75th
Missouri General Assembly in 1969 and is the housing finance agency for the State of Missouri.
The Commission operates under a board of commissioners including the governor, lieutenant
governor, attorney general, state treasurer, and six persons appointed by the governor with the
advice and consent of the Senate. The Commission has invested almost $4 billion to construct,
renovate, and preserve affordable housing.

The Commission functions as a bank, providing financing directly to developers of affordable
rental properties and funding for home loans to qualified first-time buyers. It also administers
the Federal and Missouri low-income housing tax credit (LIHTC) programs and the Federal
HOME Investment Partnerships Program (HOME) funds as well as other programs related to its
housing finance activities.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act
of 2009 (Recovery Act) into law. The purpose of the Recovery Act was to jump-start the
Nation’s economy, with a primary focus on creating and saving jobs in the near term and
investing in infrastructure that will provide long-term economic benefits. The Recovery Act
appropriated $2.25 billion under the HOME program heading for a Tax Credit Assistance
Program (TCAP) grant to provide funds for capital investments in LIHTC projects. The U.S.
Department of Housing and Urban Development (HUD) awarded TCAP grants to the 52 State
housing credit agencies. On June 26, 2009, HUD awarded the Commission nearly $39 million in
TCAP funds.

Although these funds were appropriated under the HOME heading, TCAP funds are not subject
to HOME requirements other than the environmental review and can only be used in LIHTC
projects, which are administered through the U.S. Department of the Treasury. HUD awarded
TCAP grants to facilitate development of projects that received LIHTC awards between October
1, 2006, and September 30, 2009.

As of July 26, 2010, the Commission had awarded all of its TCAP funds to 24 LIHTC projects
and disbursed more than $23 million of these funds. The 24 LIHTC projects consist of 12 family
and 12 elderly projects, which will create or rehabilitate 1,474 housing units.

Office of Community Planning and Development (CPD) Notice 09-03-REV, Implementation of
the Tax Credit Assistance Program, states that TCAP funds must be used for capital investment
in eligible LIHTC projects. Capital investment means costs that are included in the eligible basis
of a project under Section 42 of the Internal Revenue Code, costs of land acquisition, onsite
demolition costs, and hazardous material remediation costs. TCAP funds cannot be used for the
administrative costs of TCAP grantees, including the cost of operating the program or
monitoring compliance.

The eligible basis is the amount of all depreciable development costs that may be included in the
calculation of housing tax credits. Eligible depreciable costs include all “hard” costs, such as


                                                4
construction costs, and most depreciable “soft” costs, such as architectural and engineering costs,
soil tests, and utility connection fees.

This is our second audit report on the Commission’s TCAP program. Our first report disclosed
that the Commission did not obtain and review all Davis-Bacon Act reports and lobbying
certifications from contractors working on TCAP-funded projects and it did not accurately report
job creation data to Recovery.gov (report number 2010-KC-1007, dated September 10, 2010).

Our objective was to determine whether the Commission expended Recovery Act grant funds in
accordance with Recovery Act requirements and applicable HUD rules.




                                                5
                                 RESULTS OF AUDIT

Finding 1: The Commission Disbursed TCAP Funds for Ineligible and
Improperly Documented Expenditures
The Commission disbursed TCAP funds for ineligible and improperly documented expenditures.
This deficiency occurred because the Commission did not have a reliable process in place to
review the eligibility of TCAP expenditures. As a result, HUD has no assurance that more than
$3.6 million in TCAP funds were used for eligible purposes, and those that were not could have
otherwise been used for allowable TCAP purposes.


The Commission drew money from the Recovery Act grant funds for ineligible and improperly
documented expenditures. Specifically, it paid TCAP expenses that did not meet the eligibility
criteria outlined in the Internal Revenue Code, HUD’s TCAP guidance and the Commission’s own
TCAP guidance. In addition, it paid TCAP expenses that lacked supporting documentation
showing that the expenses met the criteria for inclusion in eligible basis under Section 42 of the
Internal Revenue Code. See appendix C for the criteria.

 Ineligible Expenditures


               Market Study Costs
               For 12 projects, the Commission paid market study costs, although such costs are
               ineligible under the Internal Revenue Code. Based on the Internal Revenue Code,
               Section 42(m)(1)(A)(iii), the comprehensive market study is conducted before the
               credit allocation is made and at the developer’s expense. In addition, the Internal
               Revenue Service maintains that market studies conducted and used to secure the
               credit allocation are associated with the credit allocation and are not included in
               eligible basis.

               Construction Inspection Fees
               For 10 projects, the Commission paid itself construction inspection fees, which were
               not allowed under HUD’s TCAP Guidance on Fees and Asset Management (HUD’s
               TCAP guidance). CPD Notice 09-03-REV (TCAP notice) requires that TCAP
               grantees perform asset management functions for TCAP projects. HUD’s TCAP
               guidance shows monitoring construction and conducting periodic construction
               inspections as an eligible asset management fee. However, 24 CFR (Code of
               Federal Regulations) 85.22(a)(2) prohibits project owners from paying these fees
               with TCAP funds.

               Construction Draw Fee
               The Commission used TCAP funds to pay construction draw fees for one project
               contrary to HUD’s TCAP guidance. The construction draw fee title companies



                                                 6
         charge to projects for paying their creditors is considered a TCAP grantee’s
         administrative cost. The Commission chose to contract with a third party (title
         companies) to perform this administrative function. Regardless of who performs
         this function, a grantee may not charge fees to the project owner so no pass-
         through fees are permitted. Therefore, these fees should not be charged to the
         TCAP project in an attempt to recoup all or a portion of the TCAP grantee’s
         administrative costs.

         Application Fee
         The Commission improperly paid itself an application fee for two projects. The
         Commission’s application fee would fall under an administrative task as shown in
         HUD’s TCAP guidance. TCAP Questions and Answers: Program Income, Fees,
         and Asset Management states that fees charged by the tax credit allocating agency
         to LIHTC projects, such as fees normally charged in conjunction with
         applications for LIHTC awards, cannot be paid for with TCAP funds. In addition,
         the Internal Revenue Service’s Revenue Ruling 2004-82 states that the application
         fee is not includable in the eligible basis of the applicant’s low-income housing
         building because the fees are not capitalizable into the adjusted basis of the
         building.

Insufficient Documentation of
the Eligibility

         Legal Fees
         The Commission paid legal expenses for 15 projects without determining which
         portion of the expenses was included in the eligible basis. Under Section 42 of
         the Internal Revenue Code, there is no general treatment for legal fees; rather, the
         purpose of the fee has to be determined. The Internal Revenue Service provided
         several examples of fees that are excluded from the eligible basis, including
         forming the partnership and preparing a prospectus to syndicate or sell partnership
         interests.

         Many of the legal invoices were extremely detailed, but the Commission made no
         determination of whether the line items on the invoices should be included in the
         eligible basis. Other legal invoices did not provide any detail other than including
         a generic statement such as payment for legal services. In the latter examples,
         there was no way to determine whether the legal services provided related to
         eligible basis items. The Commission did not properly review these legal
         invoices to determine which portions could be included in eligible basis under
         Section 42 of the Internal Revenue Code.

         Furniture, Fixtures, and Equipment
         The Commission paid furniture, fixture, and equipment expenses for two projects
         without determining which expenses would be maintained for 15 years.
         According to the Internal Revenue Service, furniture, fixtures, and equipment can



                                          7
be included in the eligible basis, but usually only rugs, curtains, and appliances
are included. The Internal Revenue Service noted that usually only those items
are included because the project owner is obligated to maintain the items for the
entire 15-year period and most of these items have a much shorter life. Those
items also must be depreciated.

The Commission paid TCAP funds for many items that would not be included in
the Internal Revenue Service definition of eligible basis including pencils, pens,
binders, legal pads, and bathroom and facial tissue. The Commission also made
no determination in the file as to whether any of the furniture, fixture, and
equipment items were being depreciated, which would trigger inclusion in the
eligible basis and qualify for TCAP reimbursement.

Accounting and Auditing Fees
The Commission paid accounting and auditing expenses for seven projects
without evaluating the purpose of the expenses and calculating the eligible basis
portion. According to the Internal Revenue Service, the services provided for
accounting and auditing need to be evaluated to determine whether the fees meet
the criteria for inclusion in eligible basis under Section 42 of the Internal Revenue
Code. If the accounting was for the purpose of a loan, the cost should be included
in the cost of financing and amortized over the life of the loan, and if the loan
period overlaps the construction period, a portion would be includable in the
eligible basis. In general, amortized costs are not includable in eligible basis.

The Internal Revenue Service noted that accounting fees incurred to prepare the
cost certification required to get the LIHTC allocation are not includable in the
eligible basis. The invoices in the Commission’s draw files did not always
indicate the purpose of the accounting and auditing fees and did not show whether
any of the fees were amortized over the life of the loan. Several of the accounting
and auditing invoices reimbursed with TCAP funds showed a fee for cost
certifications relating to the LIHTC, which is not includable in the eligible basis.

Closing Costs and Financing Fees
The Commission paid closing and/or financing costs for 12 projects without
evaluating the purpose of the costs and calculating the eligible basis portion.
According to the Internal Revenue Service, all costs, including the closing costs
and financing costs incurred to secure a permanent loan, are capitalized and
amortized over the life of the loan. Amortized costs are not includable in eligible
basis. Costs associated with permanent financing are generally not includable in
eligible basis.

On the other hand, construction period costs may indirectly qualify for inclusion
in eligible basis, as calculated based on the construction period and the life of the
loan. Many of the closing and financing invoices failed to document whether the
costs related to construction or permanent financing. In addition, the Commission
made no determination in the file of whether the line items on the invoices should



                                  8
            be included in the eligible basis, nor did it calculate what portion of the line item
            warranted inclusion.

            Developer Fee
            The Commission paid developer fees with TCAP funds for four projects without
            determining the eligible basis portion. The Internal Revenue Service states that
            the developer fee should be allocated based on associating the services provided
            with an asset includable in eligible basis. Not all developer costs are included in
            the eligible basis of a project.

            Construction Interest
            The Commission paid construction interest for one project with TCAP funds. The
            Novogradac Handbook, which provides guidance in applying eligible basis costs
            for LIHTC under Section 42 of the Internal Revenue Code, states that interest
            expense must be capitalized to the extent that it is incurred during the production
            period. Interest expense must be capitalized if it is traceable directly or indirectly
            to the production costs. To the extent that the loan proceeds are used to pay for
            costs associated with the production of depreciable assets, the portion of the
            amortized fees during the production of depreciable assets can be included in the
            project’s eligible basis. The Commission made no determination in the file of
            whether interest expense was capitalized, nor did it calculate what portion of the
            line item warranted inclusion in the eligible basis.

            Environmental Fees
            The Commission used TCAP funds to pay the environmental fee for 14 projects
            without evaluating the eligible basis portion. The TCAP Questions and
            Answers: National Environmental Policy Act (NEPA) & Related Laws states that
            the costs incurred by the grantee for conducting and completing environmental
            reviews are administrative costs of the TCAP program and therefore cannot be
            charged to the TCAP grant. The project owner’s costs for providing information
            to the TCAP grantee are eligible to the extent that the costs may be included in the
            eligible basis of the project under Section 42 of the Internal Revenue Code of
            1986, as amended. In addition, the Internal Revenue Service stated that costs
            associated with receiving an LIHTC credit or anything to do with securing the
            TCAP funds would not be includable in eligible basis.

Lack of a Reliable Review
Process

            The Commission did not have a reliable process in place for reviewing the
            eligibility of TCAP expenditures. The review process at the Commission was
            developed by the former director of the TCAP program and the program
            administrator. The reviewer used a list of eligible and ineligible TCAP items.
            However, the list showed items that we determined to be ineligible TCAP
            expenditures as eligible, such as market study fees and Commission inspection



                                              9
           fees. In addition, the list did not recognize items that need to be prorated to show
           the eligible basis portion of the expenditure. The reviewer did not follow the list
           consistently when reviewing soft costs. While the Commission had an LIHTC
           expert on staff, he was not involved in developing the TCAP eligibility review
           process or performing the review.

           After we started this audit, the Commission stated that it had developed a new
           review process. The LIHTC expert reviewed the existing process and determined
           that only hard construction costs would be paid with TCAP funds going forward.
           The Commission had decided not to pay soft costs such as legal and accounting
           costs.

3.6 Million Disbursed for
Ineligible and Improperly
Documented Expenditures

           The Commission disbursed more than $3.6 million in TCAP funds for ineligible
           and improperly documented expenditures. It spent over $137,000 of these funds
           on ineligible TCAP expenditures. In addition, it spent over $3.4 million of these
           funds on expenditures that lacked sufficient documentation of their eligible basis
           portion. HUD has no assurance that these funds were used for eligible TCAP
           purposes, and those that were not could have been made available for other
           eligible expenditures.

                    Expenditure category               Ineligible Unsupported
            Market study                               $ 59,762
            Commission inspection fee                  $ 75,000
            Construction draw fee                      $       800
            Application fee                            $     1,500
            Legal fees                                             $ 439,545
            Furniture, fixtures, and equipment                     $    33,064
            Accounting                                             $    96,948
            Closing costs                                          $ 149,708
            Financing fees                                         $ 426,878
            Developer fees                                         $ 2,145,585
            Construction interest                                  $     2,636
            Environmental                                          $   178,583
                                             Totals    $ 137,062 $ 3,472,947
                                         Grand total                 $ 3,610,009

           An accounting firm audited the Commission’s TCAP expenditures for three
           projects. During its review, it identified legal fees and financing and closing costs
           that did not meet the criteria for inclusion in the eligible basis. The Commission


                                            10
             reimbursed the U.S. Treasury line of credit for these ineligible costs. Therefore,
             these amounts are not included in the questioned costs in this report.

Conclusion

             The Commission did not have a reliable review process in place to determine the
             eligibility of TCAP expenditures and, therefore, may not have properly spent
             more than $3.6 million in TCAP funds. The TCAP notice states that the grantee
             must repay TCAP funds that were used for ineligible costs. During the grant
             period, the repayment must be made to the grantee’s TCAP line of credit in
             accordance with procedures established by HUD. Therefore, the Commission
             needs to reimburse its U.S. Treasury line of credit for the ineligible expenditures
             and also provide supporting documentation or reimburse for the improperly
             documented expenditures or provide supporting documentation. Additionally, we
             recommend that HUD verify the implementation of the new review process to
             ensure that only eligible TCAP expenditures are paid.

Recommendations

             We recommend that the Director of HUD’s Office of Affordable Housing

             1A.    Require the Commission to reimburse its U.S. Treasury line of credit
                    $137,062 from non-Federal funds for the ineligible TCAP expenditures paid.

             1B.    Require the Commission to provide supporting documentation showing the
                    amount includable in the eligible basis for the $3,472,947 of unsupported
                    costs and reimburse its U.S. Treasury line of credit from non-Federal funds
                    for the amount it determined was ineligible or it could not support.

             1C.    Verify the implementation of the new review process for the approval of
                    draw requests to ensure that only eligible TCAP expenditures are paid.




                                              11
                        SCOPE AND METHODOLOGY

We reviewed the Commission’s TCAP expenditures to ensure that it paid eligible TCAP
expenditures in accordance with the applicable Recovery Act and HUD rules and regulations. To
accomplish our objective, we reviewed applicable HUD requirements; Commission requirements;
Internal Revenue Code, Section 42, eligible basis costs requirements; and the Recovery Act and
applicable implementing regulations. We interviewed HUD, Commission, and Internal Revenue
Service staff to obtain further guidance on specific program requirements.

On June 26, 2009, HUD awarded the Commission nearly $39 million in TCAP funds. Based on
HUD’s Integrated Disbursement and Information System report, as of July 26, 2010, the
Commission had awarded all of its TCAP funds to 24 LIHTC projects and disbursed more than
$23 million of these funds. We used these automated data for background purposes only and did
not rely on the data to support our conclusion. All conclusions were based on our review of the
Commission’s draw files and other supporting documentation for the LIHTC projects.

For our review of expenditures, we reviewed all 24 of the Commission’s LIHTC projects. We
reviewed all draw requests from August 2009 through July 2010 to ensure that the expenditures
were for TCAP-eligible activities. We expanded this period as necessary to address issues
identified during our review.

We also reviewed all 24 projects’ draws to ensure that the TCAP funds were expended within 3
days of being drawn from the project’s U.S. Treasury account. We compared the Commission’s
bank statements showing the date of the TCAP draw deposit to the disbursement summaries
showing the date of payment. During our review, we noted several instances of noncompliance
with the rule, which states that once funds are drawn from the grantee’s U.S. Treasury account,
they must be expended for an eligible TCAP cost within 3 days. These instances were noted in a
minor deficiencies letter to the Commission.

In addition, we reviewed the draw files for each TCAP project to determine whether proper
supporting documentation was present to support the draws. We identified the contractor’s
application for payment, invoices, and issued checks as proper support for the draws. During our
review, we noted several missing supporting documents. These documents were identified in a
minor deficiencies letter to the Commission.

Our audit period generally covered August 2009 through July 2010. We performed audit work
from August 2010 through January 2011 at the Commission’s office at 3435 Broadway, Kansas
City, MO.

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



                                              12
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

                     Controls to ensure that the Commission paid only for eligible costs under
                      TCAP requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency

               Based on our review, we believe that the following item is a significant deficiency:

                     The Commission did not have adequate controls in place to ensure that
                      reimbursements were only for eligible expenditures for TCAP.

 Separate Communication of
 Minor Deficiencies

               Minor internal control and compliance issues were reported to the auditee in a
               separate letter, dated April 1, 2011.


                                                 13
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                Recommendation             Ineligible 1/   Unsupported
                       number                                       2/
                               1A             $137,062
                               1B                            $3,472,947


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation                    Auditee Comments

                                                          March 25, 2011




                        Mr. Ronald J. Hosking
                        Regional Inspector General for Audit
                        U.S. Department of Housing and Urban Development
                        Office of Inspector General
                        Region VII Office of Audit
                        Gateway Tower II – 5th Floor
                        400 State Avenue
                        Kansas City, KS 66101-2406

                        Re:      Discussion Draft of HUD OIG Audit of
                                 Missouri Housing Development Commission’s
                                 Tax Credit Assistance Program

                        Dear Mr. Hosking:

                        Thank you for providing to the Missouri Housing Development Commission (the
                        “Commission”) the opportunity to respond to the Discussion Draft Audit Report
                        issued on March 10, 2011 (the “Audit Report”) prepared by the Office of Inspector
                        General (the “OIG”) of the U.S. Department of Housing and Urban Development
                        (“HUD”) with respect to the Commission’s administration of funding provided
                        pursuant to the Tax Credit Assistance Program (“TCAP”).

                        Among its other functions, the Commission administers the Federal and the
                        Missouri Low Income Housing Tax Credit (LIHTC) programs for the State of
                        Missouri. The American Recovery and Reinvestment Act of 2009 (the “Recovery
                        Act”) included an appropriation in the amount of $2.25 billion to provide funds for
                        capital investments in LIHTC projects. The Commission received nearly $39
                        million in TCAP funds and had disbursed more than $23 million of this amount by
                        July 26, 2010. The Commission awarded its allocation of TCAP funds to 24 LIHTC
                        developments, consisting of 12 family and 12 elderly projects, which involved the
                        creation or rehabilitation of 1,474 housing units in the State of Missouri.

                        A major purpose of the Recovery Act was to jump-start the Nation’s economy, with
                        a primary focus on creating and saving jobs in the near term while also investing in
                        infrastructure that will provide long-term economic benefits. Thus, the purpose of
                        the OIG audit was to review the Commission’s transactions to ensure that proper
                        disbursements were made for eligible expenditures in connection with the 24
                        LIHTC projects mentioned above. On Friday, March 18, 2011, staff members of the
                        Commission participated in a conference with OIG representatives to discuss the
                        Audit Report. The Audit Report contains several findings, together with
                        recommendations for appropriate corrective actions. It is the intent of the
                        Commission to comply with the recommendations as indicated herein.


                                            15
Ref to OIG Evaluation                              Auditee Comments


             Mr. Ronald J. Hosking
             March 25, 2011
             Page 2




             Ineligible Expenditures

             The Audit Report found that the Commission had expended $137,062 of the $39 million in TCAP funds
             on certain expenses (market study costs, construction inspection fees, construction draw fee, and
Comment 1    application fee) that the OIG considered to be ineligible under the TCAP program. The OIG
             recommended that the Commission reimburse this amount to its U.S. Treasury line of credit from non-
             Federal funds. The Commission agrees with this finding and recommendation and is in the process of
             providing the recommended reimbursement.

             Insufficient Documentation of Ineligibility

             The Audit Report found that the Commission disbursed $3.4 million of the $39 million in TCAP funds for
             legal fees; furniture, fixtures, and equipment; accounting and auditing fees; closing costs and financing
             fees; developer fee; construction interest; and environmental fees without obtaining sufficient
             documentation of their eligible basis portion. The OIG recommended that the Commission provide
             supporting documentation showing the amount includable in eligible basis (and reimburse its U.S.
             Treasury line of credit from non-Federal funds to the extent the eligible basis of any such expenditure
             cannot be documented).

             The Commission believes that the amounts it disbursed for these expenditures are eligible expenditures,
             and it is currently working to provide the appropriate supporting documentation. This supporting
Comment 2    documentation will include detailed invoices from project owners as well as independent support from
             third parties in the form of cost certifications or letters from Certified Public Accountants (if the cost
             certification has yet not been completed), confirming the items and amounts includable in eligible basis.
             The Commission will work with HUD to provide this documentation on a timely basis and on a schedule
             agreeable to HUD. To the extent the eligible basis cannot be documented to HUD’s satisfaction, the
             Commission will reimburse its line of credit as recommended.

             Lack of Reliable Review Process

             The Audit Report found that, prior to the audit, the Commission did not have a reliable process in place
             for reviewing the eligibility of TCAP expenditures, and the OIG recommended that HUD verify the
             Commission’s new review process for approving draw requests, which was implemented during the
             course of the audit. Specifically, the Commission has strengthened its review process by requiring the
Comment 3    approval of each draw by the Commission’s Tax Credit Administrator before TCAP funds are processed
             and drawn from HUD’s IDIS system. The Tax Credit Administrator’s review is facilitated by the detailed
             documentation provided by the Commission’s Construction Disbursement Department personnel. In
             addition, the Commission will continue to provide additional training for its staff members who are
             involved in the processing of TCAP funds.

             Once again, the Missouri Housing Development Commission would like to thank the U.S. Department of
             Housing and Urban Development, as well as its Office of Inspector General, for their oversight of the




                                                      16
Ref to OIG Evaluation                          Auditee Comments

             Mr. Ronald J. Hosking
             March 25, 2011
             Page 17



             Commission’s administration of TCAP funds to ensure their proper disbursement in support of our
             Nation’s recovery from the current economic crisis.


                                                Very truly yours,




                                                 




                                                    17
                         OIG Evaluation of Auditee Comments

Comment 1   Once the Commission completes the reimbursement, it will fulfill our first
            recommendation. HUD will review the reimbursement prior to closing the
            finding.

Comment 2   If the Commission implements the planned actions, it will fulfill our second
            recommendation as long as the review includes a line by line analysis of the costs
            on the detailed invoices with a breakdown of which costs are includable in the
            eligible basis. An overall review of each eligibility category is not acceptable to
            fulfill this recommendation; rather, each line item on the invoices must be
            reviewed to determine the eligible basis portion of the costs. HUD will review
            the documentation prior to closing the finding.

Comment 3   The Commission has taken positive steps to implement the final recommendation,
            including the approval of each draw by the TCAP administrator before the funds
            are processed as well as providing additional future training for its staff. We were
            told during the audit that the Commission was only going to use TCAP funds
            going forward on hard construction costs. HUD needs to verify the
            implementation of this process as well as the administrator’s review of the draws
            and the additional training. With the implementation of this process, the
            Commission will have better oversight of the TCAP expenditures.




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Appendix C

                                          CRITERIA


                                      Internal Revenue Code

The Internal Revenue Code, Section 42(m)(1)(A)(iii), states that a comprehensive market study
of the housing needs of low-income individuals in the area to be served by the project is
conducted before the credit allocation is made and at the developer’s expense by a disinterested
party who is approved by such agency.

The Internal Revenue Code, Section 42(d)(1), provides that the eligible basis of a new building is
its adjusted basis as of the close of the first taxable year of the credit period.

The Internal Revenue Code, Section 42(d)(2)(A), states that the eligible basis of an existing
building is “(i) in the case of a building which meets the requirements of subparagraph (B), its
adjusted basis as of the close of the 1st taxable year of the credit period, and (ii)zero in any other
case.”

The Internal Revenue Code, Section 42(d)(2)(B), states that a building meets the requirements of
this subparagraph if “(i) the building is acquired by purchase (as defined in section 179(d)(2)),
(ii) there is a period of at least 10 years between the date of its acquisition by the taxpayer and
the date the building was last placed in service, (iii) the building was not previously placed in
service by the taxpayer or by any person who was a related person with respect to the taxpayer as
of the time previously placed in service, and (iv) except as provided in subsection (f)(5), a credit
is allowable under subsection (a) by reason of subsection (e) with respect to the building.”

Internal Revenue Code, Section 42(d)(2)(C), states that for purposes of subparagraph (A), “the
adjusted basis of any building shall not include so much of the basis of such building as is
determined by reference to the basis of other property held at any time by the person acquiring
the building.”


                            Low-Income Housing Credit Newsletter
                (Issued by the Internal Revenue Service, #39, issued April 2010)

The developer fee should also be allocated based on associating the services provided with an
asset includable in eligible basis. Examples of services likely to be performed by the developer,
which are not includable in eligible basis include (but are not limited to):

               Securing undeveloped land,
               Forming the partnership or syndicating the partnership to investors, and
               Securing the credit allocation.



                                                  19
                           IRS Technical Memorandum 200043017

PARTNERSHIP SYNDICATION AND FORMATION
[3] If Developer 2 engaged in organizational or syndication activities relating to and on behalf of
the Taxpayer, then the corresponding percentage of the developer fees paid by the Taxpayer
should be treated as nondeductible expenses incurred in either the organization or syndication of
the partnership under section 709(a), and would not be includable in eligible basis under section
42(d)(1).


                       TCAP Guidance on Fees and Asset Management

Section II - Grantee Administrative Costs
The Recovery Act did not authorize the use of TCAP funds for administration of the TCAP
Program. Therefore, TCAP grantees must pay for the cost of administration of their TCAP
program. Furthermore, a TCAP grantee cannot reimburse its administrative costs by charging
fees to TCAP projects. 24 CFR 85.22(a)(2), which applies to many federal programs, including
TCAP, prohibits the use of TCAP funds awarded to a project for payment of fees to TCAP
grantees. In addition, fees charged to TCAP projects, paid for by other sources of funds, are
considered “program income.” Program income can only be used to pay for TCAP eligible costs
and cannot be used to pay for a grantee’s administrative costs

If a TCAP grantee does not have the appropriate staff to perform required administrative tasks, it
may choose to contract with a third party to perform certain administrative functions. However,
regardless of whether a TCAP grantee performs these administrative functions itself or hires a
contractor to do so, a TCAP grantee may not charge any fees to the TCAP project owner in an
attempt to recoup all or a portion of the TCAP grantee’s administrative costs. For example,
some TCAP grantees have proposed to charge “pass-through fees” that they plan to charge
projects to pay third-party contractors to perform (NEPA [National Environmental Policy Act])
environmental reviews. This is not permitted because the grantee’s costs for performing required
functions, such as environmental reviews, are not reimbursable from any outside source of funds
(i.e., TCAP funds, other project funds).

The following are examples of required TCAP grantee administrative functions:

              General management, oversight and coordination. Reasonable costs of overall
               program management, coordination, monitoring, and evaluation.
              Preparing reports and other documents related to the program for submission to
               HUD.
              Travel costs incurred for official business in carrying out the program.
              Administrative services. Services such as general legal services, accounting
               services, and audit services.
              Staff and overhead. Staff and overhead costs directly related to carrying out the
               project, such as work specifications preparation, loan processing, inspections, and
               other services related to assisting potential tenants.


                                                20
              Compliance Monitoring, such as
               o     NEPA: Conducting “environmental reviews” of proposed projects to meet
                     the requirements of the National Environmental Policy Act (NEPA) of
                     1969 (and related laws) before committing TCAP funds to projects.
               o     Federal Labor Standards: Monitoring to assure compliance with federal
                     labor standards during construction, such as the Davis Bacon Act.
               o     Lead-based Paint: Monitoring projects during construction to ensure
                     compliance with the Residential Lead-Based Paint Hazard Reduction Act
                     of 1992 (where applicable).

IV. Asset Management
The Recovery Act requires that TCAP grantees perform asset management functions for TCAP
projects “to ensure compliance with section 42 of the IRC [Internal Revenue Code] of 1986, and
the long term viability of buildings funded” by TCAP.

TCAP grantees may charge fees to TCAP project owners for the asset management activities
described below. Because asset management for TCAP projects is statutorily required, asset
management fees are the only fees charged to TCAP projects that are not considered program
income. 24 CFR 85.22(a)(2) prohibits project owners from paying eligible asset management
fees with TCAP funds, therefore project owners must identify other funding sources to pay these
fees.

Asset management activities for a project may begin when TCAP funds are first committed to a
TCAP project. The following is the list of activities eligible to be paid for with fees charged for
asset management, organized by project stage. Note: not every activity on this list must be
performed for every project, as some activities will not be applicable or necessary to every
project.

Development/Construction Activities

      Conduct periodic construction inspections and quality reviews, if needed. Confirm
       construction completion guarantees.
      Monitor construction to ensure the development is progressing as scheduled (e.g. actual
       construction start date compared to original projections, projected construction end date
       compared to original projections).

 Implementation of the Tax Credit Assistance Program (TCAP) - Notice: CPD-09-03-REV

A. Eligible Grantees, Projects and Uses of Funds
TCAP funds must be used for capital investment in eligible LIHTC projects. Capital investment
means costs that are included in the ‘eligible basis’ of a project under Section 42 of the IRC,
costs of land acquisition, on-site demolition costs, and hazardous material remediation costs.
Section 1604 of the Recovery Act specifically prohibits the use of grant funds for swimming
pools. TCAP funds cannot be used for the administrative costs of TCAP grantees, including the
cost of operating the program or monitoring compliance.




                                                21
The TCAP assistance provided to a project must be made in the same manner and subject to the
same limitations (including rent, income, use restrictions and compliance monitoring) as required
by the state housing credit agency with respect to an award of LIHTC to a project (i.e., as
required under Section 42 of the IRC and its implementing regulations), and all other
requirements of the Act. The TCAP grantee must enforce these LIHTC requirements by seeking
specific performance.

The grantee must repay TCAP funds that were used for ineligible costs, or for a project that is
never completed or for a project that failed to meet the requirements under Section 42 (i.e. so
that the project is considered a LIHTC project). During the grant period, the repayment must be
made to the grantee’s TCAP Line of Credit, in accordance with procedures established by HUD.
After the grant period, HUD may take action in accordance with 24 CFR Part 85, Subpart D. If a
project fails to maintain compliance with TCAP requirements, the grantee must seek specific
performance to obtain compliance in accordance with the required TCAP written agreement.
The grantee has no repayment obligation in the event of foreclosure of a project if the grantee
was performing asset management and took reasonable actions to ensure compliance and the
long-term viability of the project.

G. Asset Management
The Recovery Act requires state housing credit agencies to perform asset management functions,
or contract for performance of these services, at the owner’s expense, to ensure compliance with
Section 42 of the IRC and the long term viability of projects funded by TCAP. However, costs
associated with this required asset management are not eligible to be paid with TCAP funds.

      TCAP Questions and Answers: Program Income, Fees, and Asset Management

Question 2:
Can TCAP grantee charge fees to LIHTC projects receiving TCAP funds? Are these fees
considered program income?

Answer:
Yes, TCAP grantees can charge fees to LIHTC projects which will also receive TCAP funds.
However, fees charged by the tax credit allocating agency to LIHTC project, such as fees
normally charged in conjunction with applications for LIHTC awards, cannot be paid for with
TCAP funds. Fees associated with LIHTCs are not considered TCAP program income, as these
fees are not generated by the use of TCAP funds in a project. If a TCAP grantee charges
additional or incremental fees related to TCAP such fees cannot be paid for with TCAP funds.
Furthermore, fees charged in connection with TCAP, other than asset management fees, are
program income, because they are attributable to TCAP funds. (See Question 5 regarding asset
management fees). However, unlike LIHTC’s fees, TCAP program income cannot be used for
administrative costs incurred by the TCAP grantee. (See Question 3 for more information about
eligible uses of program income).

  TCAP Questions and Answers: National Environmental Policy Act (NEPA) & Related
                                            Laws




                                               22
Question 12:
Can the cost of conducting and completing federal environmental reviews be charged to the
TCAP grant?

Answer:
The costs incurred by the grantee or subgrantee for conducting and completing environmental
reviews are administrative costs of the TCAP program and therefore cannot be charged to the
TCAP grant. The project owner’s costs for providing information to the TCAP grantee or
subgrantee are eligible to the extent that the costs may be included in the “eligible basis” of the
project under Section 42 of the Internal Revenue Code of 1986, as amended.




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