Back to Basics : Compliance Reviews
BY SCOTT MICHAEL DUNN , CEO OF COSTELLO COMPLIANCE
At any given time , Low-Income Housing Tax Credit ( LIHTC ) properties all over the country are helping tens of thousands of households by providing decent , safe and sanitary affordable housing . A property can continue to do so if the responsible management professionals follow the basic rules of the program .
Past articles in this series discussed building a library to assist in understanding the compliance rules , as well as specific rules relating to determination of income and student status for the LIHTC program . This article will cover how the government ensures that properties are compliant and how to get ahead of this process to fix any problems that arise . Specifically , the article outlines how LIHTC properties are monitored by the government through regular inspections and how LIHTC professionals can be prepared for visits from regulatory monitors even before being notified .
Inspection Basics
The IRS delegates the task of conducting regular visits to LIHTC properties to state Housing Finance Agencies ( HFAs ). Each state has an HFA . Among other tasks , the HFA visits each property in its state at least once every three years . The IRS expects the HFAs to monitor and interpret the federal rules and allows them to impose rules beyond the federal requirements , so it is important for new LIHTC professionals to get familiar with their state HFA . They should also locate and familiarize themselves with any state HFA LIHTC compliance manual , FAQs or newsletters . This helps management know how to meet the state agency ’ s requirements and will help make visits from the state go smoothly . States report noncompliance they find to the IRS on form 8823 . The IRS ’ 8823 Guide provides instructions to the HFAs for completing this form and is very useful in understanding the IRS ’ expectations for LIHTC properties .
On their triannual visits , the state HFA will review tenant files , and check the physical condition of the property and units . In the past , the requirement was that a minimum of 20 % of the LIHTC units ( rounded up to the next whole unit ) had to be reviewed , and the same units had to be chosen for file and physical review . In 2016 , the minimum standard was temporarily adjusted to the lesser of the 20 % or the number on the new chart to the right . Analysis of the numbers show that the minimum was 20 % of the LIHTC units until a project has 105 units . After that , the new chart provides a lesser minimum of unit . As noted below , this standard was reinstated in 2020 .
Except for properties with HUD or Rural Development funding , physical inspections will be conducted using the HUD standard Uniform Physical Conditions Standards ( UPCS ) protocol OR a local code . UPCS is part of the HUD REAC physical inspection system . HUD provides UPCS documentation on its website that explains that protocol .
The final compliance monitoring regulation , published in 2019 , eliminated the 20 % aspect of the rule , and states were required to pick a minimum sample size based on the chart . This would have substantially increased the percentage of units inspected for smaller properties . This met with substantial objection in the industry and the IRS listened . In July 2020 , it re-instituted the 20 % ceiling . The new regulations also no longer required that the state HFA examine the same units when conducting the file reviews and physical inspections . If units that are selected do not cover all buildings , the HFA must select some aspect to inspect of each building that will not have any units inspected . These can be building exterior , HVAC or similar . An exception exists for properties monitored by HUD REAC inspections , which may use
22 | TRENDS OCTOBER 2021 www . aamdhq . org