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Untitled Document
25.03.2019
Low-Income Housing Tax Credits:  Building on Opportunity (Zones)
Introduction
The buzz around Opportunity Zones (OZs), enacted by the Tax Cuts and Jobs Act of 2017 and currently in the process of implementation across the federal government, received yet another boost last month when the Department of Housing and Urban Development (HUD) announced a Low-income Housing Tax Credit (LIHTC) Pilot Program (New Pilot Program). The New Pilot Program seeks to support affordable housing investment in OZs through complementary policy measures, including the streamlining of Federal Housing Administration (FHA) mortgage insurance application reviews. These efforts highlight the risk of fraud in the LIHTC program, but those risks can be addressed by incorporating rigorous oversight processes into implementation of the New Pilot Program at the federal, state and local levels.
The New Pilot Program

The New Pilot Program is designed to streamline the Federal Housing Administration (FHA) mortgage insurance application process for new construction and substantial rehabilitation projects under sections 221(d)(4) and 220, respectively, of the National Housing Act. It complements the traditional federal policy foundations of affordable housing support, namely 1) the LIHTC program and 2) federal loan and credit guarantee programs offered by HUD and the Department of Agriculture (USDA).

HUD’s key objectives with the New Pilot Program are to reduce processing time and redundant review for FHA mortgage insurance applications. The agency envisions consequent cost savings for affordable housing investors and developers due to improved interest rate certainty via rate locks (important during a rising rate environment) and reduced holding costs. The Department seeks to facilitate reduction of processing times to 30 days for expedited FHA application reviews and 60 days for standard reviews.

Streamlining the process, in HUD’s view, will support private sector investment in federally designated, economically challenged OZs. Such investment may offer substantial tax benefits for equity investors who reinvest realized capital gains therein (for more details on OZs, see Signet’s previous discussion), in addition to those conferred upon LIHTC program participants. Because FHA insured loans typically allow for higher leverage compared to private-sector financing solutions, the combination of OZ tax breaks, LIHTCs, and FHA mortgage insurance may allow limited equity investment to finance more and larger projects, ultimately making possible more affordable housing.

The New Pilot Program is the most visible effort to date at federal policy coordination efforts, led by the sixteen member agencies of the White House Opportunity and Revitalization Council, to support investment in OZs nationwide. In anticipation of demand for twinned LIHTC/OZ projects, the New Pilot Program has announced training for HUD program underwriters on OZ incentives, in addition to specifying steps for accelerated FHA application processing.

Ensuring Integrity in the LIHTC Program

However, a recent Government Accountability Office (GAO) report also highlighted fraud risks in the LIHTC program:

LIHTC program policies, while requiring high-level cost certifications from developers, do not directly address this risk because the certifications aggregate costs from multiple contractors. Some allocating agencies require detailed cost certifications from contractors, but many do not. Because the Internal Revenue Service (IRS) does not require such certifications for LIHTC projects, the vulnerability of the LIHTC program to this fraud risk is heightened…Weaknesses in data quality and federal oversight constrain assessment of LIHTC development costs and the efficiency and effectiveness of the program.

A Federal Tax Credit Fraud Investigation
In December 2016, the US Department of Justice announced that seven defendants had been sentenced in a scheme to steal federal funds intended for low-income housing.  As employees of a Miami-area development company, the defendants applied for HUD grants administered by the Florida Housing Finance Corporation (FHFC).  From 2006 to 2012, the conspirators submitted fraudulently inflated construction contracts on at least eight developments, resulting in $26 million of excess tax credits and grants.  The defendants were sentenced to up to 57 months in federal prison.
https://www.justice.gov/usao-sdfl/pr/seven-defendants-sentenced-federally-their-role-36-million-fraud-scheme-involving-low

As the LIHTC credit allocating agencies (generally state and local housing finance authorities) monitor development costs for affordable housing projects in their jurisdictions, they can benefit from rigorous and systematic process implementation and review to guard against potential fraud in this high-profile program.
How Signet Partners Can Help
With over thirty years of experience in the financial services and federal credit worlds, Signet Partners can help federal agencies, community development organizations, and investment firms navigate their compliance, business process development, underwriting and structuring needs in multifamily affordable housing. Our seasoned professionals offer decades of direct, proven experience working with federal lending and economic development initiatives, including:

Federal tax credit programs, such as New Markets, Low-Income Housing, and Historic Tax Credits
Federal investment support efforts, such as the Troubled Asset Relief Program (TARP) subprograms for Term ABS Lending Facilities (TALF) and Public-Private Investment Partnerships (PPIP), USDA’s Advanced Biofuels credit programs, and HUD’s FHA loan portfolio
Federal financial agencies and government-sponsored enterprises, such as the Federal Deposit Insurance Corporation, Treasury Department, Small Business Administration, US Department of Agriculture, Ginnie Mae, Fannie Mae, and Freddie Mac
Signet Partners is a small business that has served public- and private-sector clients in the financial services industry since 1988. With offices in metropolitan Denver, Colorado and Washington, DC, we provide a focused suite of advisory services that include:

Review and oversight of underwriting and compliance for financial asset portfolios, real estate (commercial, multifamily, and residential), and federal financing programs;
Analysis, design and implementation of business processes;
Investment property feasibility and turnaround strategies;
Financial and transaction advisory and structuring services.
We have been institutional investors, project managers, consultants, quantitative analysts, and federal regulatory officials. In these roles, our experience spans a wide range of relevant activities, including structuring and marketing of investment funds; oversight and review of federal initiatives; and valuation and compliance oversight of hard asset and tax credit portfolios. Signet Partners offers focused, relevant expertise at the intersection of public- and private-sector investment from the perspective of every seat at the table.
Contact
To find out more about what we can do for you, contact:


Timothy Lee
Senior Vice President
tlee@signetpartners.com
(646) 359-3710
  1. The interactive source data can be found at http://nlihc.org/gap
  2. Full parameter sets, available on request, reflect Signet Partners’ estimate of current market conditions for loan to cost ratio, interest rates, LIHTC and other parameters for each loan program in a characteristic US multifamily real estate market.
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