How Tax Credit Strategies can Improve your Bottom Line

1. How Tax Credit Strategies can Improve your Bottom Line Stacy Day, HCCP Vice President of Compliance Gateway Management Company This Photo by Unknown Author is licensed under CC BY

2. Who is the front line of defense? • Community Staff! • Controls the application process – first point of contact • Pre-Qualifying - Be sure all applicants are qualified (don’t waste time on unqualified applicants) • Discuss documentation needed – let them know what is needed with each application (birth certificates/social security cards/etc) • Set appointments for applications so staff is ready with application paperwork

3. Who is the front line of defense? • Application Processing: • Begin processing applications immediately • Start with credit/criminal • Process Daily! Contact the applicant if sources are not cooperating for alternate documentation, if needed • Are files submitted as soon as the last document is received? Don’t wait until the applicant is ready to move in to submit for approval! • Are corrections addressed quickly and re-submitted?

4. Who is the front line of defense? • Self Auditing – are files looked at prior to submitting for approval? • Are you making the process easy on your applicants and residents? • Explain the full application process • Set reasonable expectations • Don’t “pass the buck” to the compliance department! • Have hours that make applications/recerts feasible

5. Compliance Policies • Why do we do what we do? • Is it required? • Is it reasonable? • It is in writing? • Are there unintended fair housing issues?

6. Compliance Policies • Internal Training • Classroom style/Webinars • How soon for new hires? • Tools for staff to self audit? • Compliance Set Up: • Self approval • Central processing • Central approvals

7. Compliance Policies • Conditional Approvals: • Technical issues • Follow up after move in • Improves vacancy loss! • Example: Monthly rent $600 ($20 per day) • Delayed move in by only 3 days = $60 • Average MIs per month: 3-5 ($180-$300) • Total Annual Vacancy Loss: $2160 - $3600

8. Compliance Policies • Recert Exemptions • Improves Resident Retention • Reduces Administrative burden on site staff AND compliance • Know state policies/consider company policies • Layered financing

9. Renewals • Are renewals being done on time? • State Non Compliance • Federal Non Compliance • Financial Impact: • Missed rent increases • Who is monitoring increases are actually being implemented? • Mid year rent changes: • Higher revenue • Poor customer service • Often prohibited by HFA or Landlord Tenant Law

10. Utility Allowances • Using Consumption Model or HUD Model? • Cost vs benefits • Cherry-pick from sources if needed • Are you at max? • Compliance risk associated with updates - is this really needed?

11. Credit Loss/Recapture • What is the real value of the credit? What are we actually protecting? • Credit Loss vs Recapture • Credit Loss: Loss of credits for the specific year • Recapture: Loss of credits for the specific year AND accelerated credits • How does recapture occur? • When there is a reduction in qualified basis • Reduction in applicable fraction • Reduction in eligible basis

12. Credit Loss/Recapture • How is Qualified Basis Reduced? • Disposition: • Sale of community and NOT maintained as an LIHTC community • Prior to HERA (2008) – owners required to post a surety bond to avoid recapture • After HERA, no longer required and no recapture as long as it is operated as an LIHTC community

13. Credit Loss/Recapture • Non-Compliance: • Failure to maintain applicable fraction (8823) • Gross Rents exceed maximum • Full Time Students not meeting an exception • Non Compliance for other qualification Issues • Applicable Fraction determined as of 12/31 (except for first year of credit period) • Exception: if the owner corrects non-compliance in a reasonable time after the non compliance is discovered or should have been discovered, the owner is not subject to recapture – CORRECT NON-COMPLIANCE ASAP!

14. Credit Loss/Recapture • Casualty Loss: • IRS Definition: Damage, destruction, or loss of property from any sudden, unexpected or unusual event such as a flood, hurricane, typhoon, tornado, fire, earthquake or even volcanic eruption. • In these cases, recapture does not apply if unit is brought back into service in a reasonable period. IRS has stated reasonable period is generally 24 months from the close of the tax year in which the casualty loss occurred (but not necessarily limited to this period)

15. Credit Loss/Recapture • Casualty Loss: • Credit Loss DOES occur, regardless of casualty loss unless unit is brought back on line during the same calendar year it occurs. **Exception: if the community is in a presidentially declared disaster area • What are your internal processes for casualty loss (is compliance on emails)? Must be reported to HFA!

16. Single Unit Risk Recapture 40 unit project with an annual credit allocation of $400,000 POTENTIAL CUMULATIVE REPACTURE POTENTIAL CUMULATIVE INTEREST OF REPACTURE POTENTIAL CUMULATIVE RECAPTURE WITH INTEREST CUMULATIVE CREDITS EARNED CUMULATIVE CREDITS TAKEN CREDITS EARNED CREDITS TAKEN YEAR $6,667 $6,667 $267 $10,000 $3,600 1 $10,000 $3,333 2 $6,667 $13,333 $821 $20,000 $7,488 $10,000 $6,667 3 $6,667 $20,000 $1,687 $30,000 $11,687 $10,000 $10,000 4 $6,667 $26,667 $2,889 $40,000 $16,222 $10,000 $13,333 5 $6,667 $33,333 $4,453 $50,000 $21,120 $10,000 $16,667 6 $6,667 $40,000 $6,409 $60,000 $26,409 $10,000 $20,000 7 $6,667 $46,667 $8,789 $70,000 $32,112 $10,000 $23,333 $6,667 $53,333 $11,625 $80,000 $38,292 8 $10,000 $26,667 9 $6,667 $60,000 $14,995 $90,000 $44,955 $10,000 $30,000 10 $10,000 $33,333 $6,667 $66,667 $18,818 $100,000 $52,152 11 $6,667 $73,333 $18,392 $100,000 $45,059 $26,667 12 $6,667 $80,000 $13,794 $20,000 $100,000 $33,794 $13,333 13 $6,667 $86,667 $9,196 $100,000 $22,530 14 $6,667 $93,333 $4,598 $100,000 $11,265 $6,667 15 $6,667 $100,000 $10,0000 $100,000 $100,000

17. Housing Choice Vouchers • Rent increases – know when you need to ask for these! • Charge highest rent, regardless of the unit set aside • Careful! Some HFAs say no! Know your QAP! • Not permissible with HOME funds

18. Additional Set-Asides • Do units float or are they fixed? • Move % percentages to maximize rent • Hard to maintain counts • Makes leasing difficult • Other funding – know how they are layered and when various requirements end

19. Additional Set-Asides • Talk to your HFA – may be able to ease restrictions • Post year 15 – discuss strategies available: • How can we preserve this housing? • Add MR units? • Income Averaging?

20. Technology • Calculation worksheets/property software (incorrect calculations are one of the top file corrections) • Make it easy! Can people apply on line? • Electronic signatures? Pen and Paper = Rock and Chisel! • Being an affordable resident doesn’t mean you live in the stone age!!

21. Rents • Discuss plans for evaluating rents within your company • Who controls the process • How are increases evaluated and determined • Who communicates increases • Site staff is not always eager to increase rents, but need to communicate where there is room for increases regularly to upper management

22. Budget Preparation • Compliance Involvement! • Discuss sites with known audits in the upcoming year – need to budget for costs associated with preparation and repairs • Provide maximum rents when discussing rent potential • Required amenities/services

23. New Development/New Business • Poor audits = point deductions for new apps (1 point can make the difference between a new project getting awarded) • Poor reputation • Syndicator review issues for new lease ups can cause delays in distributions – have calls early to know what is expected! • Syndicator relationships: Multisite Involvement

24. Being the Best! • Regularly evaluate policies • Read (and re-read) source materials! • Join HFA groups/coalitions/just make friends at this conference and start a group text!! • Need to question/dispute: • Use facts – state the reason why this is prohibiting us from meeting our intended goals of providing affordable housing to those in need • Don’t be afraid to question why – keep it reasonable, but showing a different perspective can lead to change!