We often refer to affordable housing as a public-private partnership, in that it often takes public and private resources working together to create lasting affordable housing. Generally, affordable housing includes some form of government involvement, ranging from direct subsidies (e.g., the Section 8 rent subsidy program) to financing programs (e.g., low-income housing tax credits( LIHTCs)), which bring with them substantial compliance obligations.
As a refresher, it is important to be mindful of how the actual or perceived lack of compliance is manifested. The Inspector General Act of 1978 authorized inspectors general to audit program operations and examine waste, fraud, and abuse. Often, seemingly innocuous activities can be questioned as inefficient, ineffective, or occasionally incorrect. Any such finding can bring with it significant issues, ranging from civil to criminal penalties.
The HUD Office of Inspector General (HUD OIG) has been in existence since before the 1978 act. The HUD OIG has a three-step audit process. If you are contacted by the HUD OIG, this is what you should expect. The first step is the entry conference, where OIG representatives explain what they plan to review. The second step is a review of the books, records, and condition of any property in question. The last step is the exit conference, where the OIG reveals findings.
It is very important to prepare for the OIG in advance, because preparation will help avoid misunderstandings. Ideally, you should consult experienced counsel, because even parties confident that they are complying with agency rules often receive adverse OIG findings, which can bring sanctions. These sanctions can range from 2530 flags to administrative and even criminal sanctions. Administrative sanctions can include debarments, suspensions, and fines, such as civil money penalties (CMPs). Suspensions become effective upon issuance of HUD OIG findings and before any appeal may be taken, but debarments become effective only after administrative appeals are exhausted. CMPs are initiated through a letter process. If a target fails to respond to a CMP letter, it may inadvertently waive the right to respond later on, when HUD files a formal administrative complaint.
HUD rules allow the imposition of these sanctions for a variety of violations, but program participants should pay special attention to certain catch-all provisions, which provide that sanctions may be applied for any material breach of a contract related to a HUD project, any violation of an applicable HUD regulation, or the making of any false statement in connection with a HUD-financed project. Sanctions against a person or a company generally extend to all of the subsidiaries and affiliates of that person or company.
Similar rules exist in other non-HUD housing programs. The largest single multifamily housing loan program outside of HUD is at Rural Development (RD), which is part of the U.S. Department of Agriculture (USDA). RD programs are subject to audit and review by the USDA’s Inspector General, also under the Act, but also USDA specific procedures. RD does not utilize 2530s to the same extent as HUD but does have an informal review of borrower qualification to perform new transactions.; RD also can assess CMPs.
Affordable housing owners receiving LIHTCs also must meet low-income housing eligibility and compliance requirements under the LIHTC program. This includes cash grants or loans under the recently enacted Section 1602 Credit Exchange Program, and the Tax Credit Assistance Program (TCAP Program) under the American Recovery and Reinvestment Act of 2009.
State agencies are responsible for compliance monitoring for these programs throughout the 15-year compliance period. Compliance issues include: meeting health and safety standards, rent ceilings and income limits, and tenant qualifications. Failure to meet these requirements may result in recapture of the housing credit or, in the case of the Section 1602 Credit Exchange Program, the full amount of the 1602 award minus 6.67 percent (1/15th) for each full year of the building’s 15-year compliance where a Section 1602 recapture event has not occurred.
When noncompliance is identified or there has been disposition of a building (or interest therein), state agencies must notify IRS using Form 8823, “Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition.” In the case of the Section 1602 Credit Exchange Program, where no tax credits are involved, no Form 8823 is sent to IRS to report noncompliance. However, states may use Form 8823 to notify owners of compliance issues. Upon receipt of Form 8823, the IRS sends a Notification Letter to the owner, identifying the type of noncompliance reported on Form 8823. The Notification Letter states that owner may not include any nonqualified low-income units when computing the LIHTC and that the noncompliance may result in recapture of the LIHTC. The Notification Letter instructs the owner to contact the state agency to resolve the matter. Forms 8823 are routinely analyzed by IRS and may result in an audit of an owner’s tax returns.
The Internal Revenue Service recently updated its Guide for Completing Form 8823: Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition as of October 2009. This publication provides in-depth analysis, including examples of the categories of noncompliance as identified on Form 8823. The guide also incorporates the changes to the LIHTC program enacted under the Housing and Economic Recovery Act of 2008, revisions to HUD’s Handbook 4350.3, and the amended IRS utility allowance regulations published in July 2008. (For more information on the new utility allowance rules, see Nixon Peabody Tax Credit Alert, May 17, 2009).
As the affordable housing programs continue to evolve, HUD, RD and IRS vigilance should be expected to continue to be felt through audits and reviews and owners, managers and other housing providers will have to be mindful of ongoing and perhaps new compliance requirements.