Low-Income Housing Tax Credits: Agencies Implemented Changes Enacted in 2008, but Project Data Collection Could Be Improved
Published: 2012-12-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: IRS and state HFAs administer the LIHTC program, the largest source of federal assistance for developing affordable rental housing. HFAs are allocated tax credits on a per capita basis and award them to developers. By acquiring project equity from developers, investors may become eligible for the credits, which offset federal tax liabilities. As part of HERA, Congress made changes to the program that included increasing credits allocated to states, setting a temporary floor on the most common LIHTC rate (the portion of eligible project costs for which a developer can receive credits), and giving HFAs more discretion in "enhancing" (i.e., increasing) awards. HERA also required GAO to study the changes, including the distribution of credit allocations before and after HERA. This report discusses (1) how IRS and selected HFAs implemented the HERA changes, (2) what HUD's data show about the number and characteristics of projects completed from 2006 through 2010 and any data limitations, and (3) stakeholders' views on the effects of the HERA changes on LIHTC projects. GAO reviewed IRS and state guidelines, analyzed HUD data on LIHTC projects, and spoke with federal, state, and industry officials.
section_title: What GAO Found
paragraphs: Federal and state agencies implemented changes made in 2008 to the Low-Income Housing Tax Credit (LIHTC) program by revising program guidance and modifying plans for allocating tax credits. The Internal Revenue Service (IRS) implemented the changes made by the Housing and Economic Recovery Act of 2008 (HERA) by, among other things, issuing notices and revenue procedures. Program stakeholders that GAO contacted said that IRS's actions were generally sufficient. But as of October 2012, IRS and the Department of the Treasury were still working on implementation issues, such as developing guidance on the provision designed to ease restrictions on using tax credits to acquire existing federally or state-assisted buildings. At the state level, housing finance agencies (HFA) implemented the HERA changes by modifying their tax credit allocation plans, which provide criteria for awarding credits. For example, in their plans, some HFAs cited financial need as the only criterion for awarding HERA-created enhanced credits. Others planned to target specific types of projects, such as those using "green building" practices.
The Department of Housing and Urban Development (HUD) voluntarily compiles the largest public database on LIHTC projects, but the data it collects from HFAs are incomplete. Despite HUD efforts to improve its data collection process, the database may undercount projects, in part because HUD did not follow up on potentially incomplete information. For example, HUD's database showed that one state had between 23 and 49 completed projects each year from 2006 through 2009, but only 2 projects in 2010. However, officials from this state's HFA provided GAO with documentation showing that they had reported 37 projects for 2010. Further, much of the project data that HUD has received does not include characteristics such as the type of location, construction, and tenants targeted. A HUD official noted that a HERA provision requiring states to collect tenant-level data (e.g., race and income) had made collecting project data more challenging because HUD did not receive additional resources and available resources had to be divided between tenant and project data collection. Without more complete data on the LIHTC program, the federal government's ability to evaluate basic program outcomes--such as how much housing was produced--and overall federal efforts to provide affordable housing may suffer. Data from 42 HFAs that reported each year from 2006 through 2010 provide limited insight into the actual number and characteristics of LIHTC projects. The number of reported projects completed exceeded 5,300, and most were in metropolitan areas and were new construction. However, missing data prevented analysis of trends over the 5-year period. For example, the proportion of missing information on the types of tenants targeted increased from 5 percent in 2006 to 28 percent in 2010.
Program stakeholders told GAO that the broad effects of the HERA provisions on the LIHTC market were difficult to determine but noted that certain provisions enhanced the financial feasibility of some individual projects. For example, stakeholders said the temporary increase in per capita credit allocations, temporary credit rate floor, and discretion to use enhanced credits improved the financial viability of some projects by allowing states to award more credits per project. Some state officials also said that the larger awards especially benefited projects in rural areas that can be difficult to finance because they tend to have lower rents and are less attractive to investors than projects in urban areas.
section_title: What GAO Recommends
paragraphs: GAO recommends that HUD evaluate and implement additional steps to improve its LIHTC Database. HUD agreed with the recommendation but said the report could better describe the agencys efforts to improve data collection despite resource constraints. In response, GAO added further information on HUDs changes to its collection process.

section_title: Letter
paragraphs: The Low-Income Housing Tax Credit (LIHTC) program is the largest  federal program for building and rehabilitating rental housing that is  affordable to low-income households. It is estimated to cost $6.5 billion in  fiscal year 2012 in forgone revenue. The program is jointly administered  by the Internal Revenue Service (IRS) and state housing finance  agencies (HFA). Each state receives an annual allocation of LIHTCs by  statutory formula according to population. HFAs then competitively  award the tax credits to owners of qualified rental housing projects that  reserve all or a portion of their units for low-income tenants. Developers  typically attempt to obtain funding for their projects by attracting third- party investors that are willing to contribute equity to the projects, and the  project investors can then claim the LIHTCs. This process of providing  LIHTCs in exchange for equity is generally referred to as “selling” the tax  credits. The developers or investors can claim their share of credit each  year during the 10-year credit period, which can be used to reduce their  tax liability. Individual HFAs maintain data on the number of projects that  receive tax credit allocations each year, as well as the characteristics of  these projects. The Department of Housing and Urban Development  (HUD) has almost no direct administrative responsibility for the LITHC  program, but it voluntarily collects information from the HFAs on LIHTC  projects for its LIHTC Database, which is the most comprehensive public  source of information on LIHTC projects.
Since its inception in 1986, the program has helped to build or rehabilitate  more than 36,000 projects that help provide housing for low-income  households. In 2008 and 2009—in the midst of the financial crisis—the  program was severely disrupted when investor demand for tax credits  collapsed and developers could not obtain funding for projects that would  have qualified for the credit. The onset of financial struggles for large  banks and the exit of two large LIHTC investors from the LIHTC market— Fannie Mae and Freddie Mac—contributed greatly to decreased investor  demand.During that period, Congress took a number of actions to  improve the operation of the LIHTC program, including changes enacted  as part of the Housing and Economic Recovery Act of 2008 (HERA).  These changes generally went into effect after July 30, 2008, including  specific changes for projects placed in service—that is, suitable for  occupancy—after July 30, 2008.
HERA also required us to study and report on the implementation of the  changes, including analyzing the distribution of credit allocations before  and after the changes went into effect. This report discusses (1) how IRS and selected HFAs implemented the HERA changes to the LIHTC  program, (2) what HUD’s data on LIHTC projects show about the number  and characteristics of projects completed from 2006 through 2010 and  any data limitations, and (3) the views of program stakeholders about the  effects of the HERA changes on these projects.
To assess how IRS and HFAs implemented the HERA provisions, we  reviewed IRS guidance, memorandums, and planning documents, as well  as state qualified allocation plans (QAP), which contain detailed selection  criteria and application requirements for the LIHTC program. We also  interviewed officials from IRS, the Department of the Treasury (Treasury),  and nine HFAs about the implementation of these changes.  We selected  the 9 HFAs (out of the 56 that receive LIHTC allocations) to cover  different geographic regions and allocation amounts, but their  experiences are not representative of all states. To describe HUD’s  LIHTC data and what these data show about the number and  characteristics of LIHTC projects, we analyzed information contained in  HUD’s LIHTC Database, which was last updated in July 2012.conducted reasonableness checks on the data to identify any missing,  erroneous, or outlying figures. We also interviewed HUD about how it and  its contractor compile the data. These steps revealed that the data were  not complete, which limited what we could conclude from our data  analysis. Using the HUD data that were available, we examined the types   We  and locations of projects that states supported with their tax credit  allocations, including the proportions of projects that were in rural versus  urban areas, that were newly constructed versus acquired, and that were  targeted to specific kinds of tenants. In addition, we used the National  Council of State Housing Agencies’ (NCSHA) annual HFA Factbooks  from 2006 through 2010 to analyze the extent to which developers  returned credits that had not been exchanged for equity to the states. We  assessed the reliability of the HUD and NCSHA data and concluded that  these data were sufficiently reliable for our reporting objective. To obtain  the views of selected HFAs and industry participants about the effect of  the HERA changes on LIHTC projects, we interviewed the same nine  HFAs, as well as industry associations, investors, syndicators, and  housing developers. We also reviewed supporting documentation from  these entities about their views. Appendix I contains additional details  about our scope and methodology.
We conducted this performance audit from February through December  2012 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 objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Description of the LIHTC Program
paragraphs: LIHTCs follow a multistep process that begins with the allocation of tax  credits to HFAs. The process of allocating, awarding, and using LIHTCs is  depicted in figure 1.
As the figure shows, there are four primary steps in the LIHTC process.   1.  HFAs receive tax credit allocations. State ceilings for LIHTCs are  allocated by statutory formula to states annually according to  population, with a minimum amount awarded to states with small  populations. For 2012, the formula was $2.20 per capita or a  minimum of $2,525,000.    2.  Developers apply to the states for tax credits. To apply for tax credits,  a developer must submit a detailed proposal to an HFA. To qualify for  consideration, a project must meet certain requirements, such as  reserving specified percentages of available units for lower income  households and restricting rents for these households to 30 percent of  a calculated income limit.   3.  HFAs award tax credits to selected housing projects. The potential to  earn tax credits is competitively awarded to housing projects in  accordance with states’ QAPs. QAPs outline a state’s affordable  housing priorities and set out its procedure for ranking the projects on  the basis of how well they meet state priorities and selection criteria  that are appropriate to local conditions. The QAP must give  preference to projects that serve the tenants with the lowest incomes,  serve qualifying tenants for the longest period of time, and are located  in a qualified census tract (QCT) and contribute to a local community  revitalization plan. Developers receiving tax credit allocations have 2  years to complete their projects and may not claim the credits until the  projects are placed in service.  4.  Investors receive tax benefits. Investment partnerships are a primary  source of equity financing for LIHTC projects. Syndicators recruit  investors willing to become partners in LIHTC partnerships. The  money investors pay for the partnership interest is paid into the LIHTC  project as equity financing. Although investors are buying an interest  in a rental housing partnership, this process is commonly referred to  as buying tax credits because they receive tax credits in return for  their investment. Once the LIHTC project is placed in service, or ready  for occupancy, investors can receive their share of the credits each  year of the 10-year credit period and can use the credit to offset  federal income taxes otherwise owed on their tax returns, as long as  the project meets the LIHTC requirements.
The amount of tax credits a project can receive depends on several  factors, including the applicable fraction and the applicable percentage  (see table 1). The applicable fraction, or the percentage of units in the  building considered to be qualified low-income units, is the lesser of (1)  the total square feet of the low-income units divided by the total square  feet of all the units, or (2) the number of the low-income units divided by  the total number of units. Regarding the applicable percentage, there are  two credit rates (referred to as the 9 percent and 4 percent rates) for the  LIHTC program that determine how much of a project’s costs the  allocated credits can cover. The credit rate takes into account whether the  project is newly constructed or acquired and rehabilitated and the extent  to which it uses other federal subsidies. Most new construction and  substantial rehabilitation projects are eligible for the 9 percent rate, which  allows investors to claim credits for about 9 percent of the eligible basis  annually over a 10-year period.the 9 percent credit floated based on a statutory formula and often fell  below 9 percent.
section_title: IRS Revised Guidance and States Modified Qualified Allocation Plans to Implement the HERA Changes
paragraphs: Because the LIHTC program is jointly administered by federal and state  governments, agencies at both levels played roles in implementing  HERA’s changes to the program. At the federal level, IRS and Treasury’s  Office of Tax Policy provided new guidance for program stakeholders. At  the state level, HFAs modified their QAPs for allocating tax credits.
subsections: section_title: IRS and Treasury Have Issued Guidance and Are Considering and Acting on Implementation Issues
paragraphs: HERA made changes to the LIHTC program that affected various parties,  including taxpayers, HFAs, and project owners, and IRS and Treasury  provided guidance and took other actions into 2012 to implement these  changes. To better ensure that information on the HERA changes was  widely accessible, IRS issued revenue procedures and notices, made  changes to forms and form instructions, and circulated newsletters to  program stakeholders. More specifically, its actions included the  following:   Issuing (1) a revenue procedure for taxpayers to follow when  choosing to no longer maintain a surety bond, as permitted by the  HERA change described in table 2, item 6; (2) a notice that the 9 percent floor (table 2, item 2) would apply to eligible projects that had  committed to a lower rate before HERA; and (3) a newsletter to  program stakeholders describing new income limits related to the  HERA “hold harmless” provisions described in table 2, item 9. The  income limits are a percentage of the relevant area’s median gross  income and are the basis for calculating the gross rent that a LIHTC  project can charge.
Updating instructions for Form 8609, “Low-Income Housing Credit  Allocation and Certification,” to reflect changes involving the 9 percent  floor (table 2, item 2), federally subsidized buildings (table 2, item 4),  and the HERA basis boost (table 2, item 3). HFAs use the form to  report LIHTC allocations for buildings to IRS, and building owners use  it to certify such things as a building’s eligible basis, qualified basis,  and placed-in-service date.
Revising the Guide for Completing Form 8823, Low-Income Housing  Credit Agencies Report of Noncompliance or Building Disposition, a  guide intended to help housing agencies identify and consistently  report noncompliance issues to IRS.
Discussing through internal memorandums whether regulations  needed to be updated because of HERA and exploring  implementation issues that surfaced. For instance, IRS internally  considered questions from the division tracking its own  implementation of HERA’s LIHTC provisions about whether the  changes required updates to regulations governing general public use  requirements mentioned in table 2, item 8. An official from IRS’s  Office of Chief Counsel told us they determined that no updates were  needed.
Program stakeholders we spoke with, including HFAs, industry  associations, syndicators, and developers, generally said that IRS’s  actions to implement the HERA changes were sufficient, and that they  were satisfied with the agency’s efforts. However, they raised two  concerns in our discussions that IRS and Treasury have continued to  consider and act on.
The first involved the HERA provision noted in table 2, item 5, that eased  restrictions on using LIHTCs to acquire an existing building. Before  HERA, acquisition costs for an existing building generally would not be  eligible for LIHTCs unless the building had been placed in service 10  years or more before it was acquired. HERA waived this 10-year rule for  any federally or state-assisted building—that is, any building that was  “substantially” assisted, financed, or operated under certain federal or  state programs or laws.
In response to this HERA provision, the IRS Chief Counsel and Treasury  placed clarification of the meaning of “substantially” on priority lists of  guidance projects for July 2010 through June 2011 and July 2011 through  June 2012. With over 300 guidance projects on the priority list for 2011- 2012, IRS and Treasury had not issued any guidance defining  “substantially” as of October 2012. Agency officials cited the complexity of  the issue and other agency priorities as reasons for the delay.Treasury official was not yet able to tell us when the agency would  complete the guidance, what it was likely to say, or whether it would  resolve the definition of “substantially” for both federal and state subsidies  at the same time.
The relative importance of future guidance is unclear as stakeholders  disagreed on the need to clarify the meaning of “substantially.” Some  stakeholders said there was little need for clarification. However, one  organization sought guidance from Treasury in 2009 and 2010 because, it  said, the lack of a definition was delaying some acquisition projects. An IRS official agreed, saying the lack of guidance had delayed acquisition  projects and resulted in the substitutions of other projects, such as  construction of new buildings, for acquisitions. In addition, a Treasury  official told us that the lack of guidance had likely made attorneys for  potential LIHTC projects conservative in interpreting “substantially.” For  example, some may have decided that all the units in a building must be  federally subsidized in order to meet the definition.
A second concern—related to HERA’s hold harmless provisions on  income and rent limits—did not rise to the level of necessarily requiring  formal guidance, but has received continued federal attention because of  its complicated nature. The hold harmless provisions (table 2, item 9) are  aimed at bolstering the financial viability of LIHTC projects by preventing  rents from automatically falling when area income levels, on which the  rents are based, decline. In so doing, the provisions resulted in a system  in which, for instance, three projects on the same street could have three  different sets of income and rent limits if they were placed in service in  three different time periods. Accommodating all of the possibilities for  different placed-in-service dates required projects to use multiple tables to  find the applicable income and rent limits, and some program participants  have found this confusing. Furthermore, the income and rent limits  change annually when HUD publishes new area income levels. The  owner of a LIHTC project must use the correct table, based on the  building’s location and placed-in-service date, to determine the maximum  income that a household may have to be a qualified low-income  household, and the maximum gross rent that a household may be  charged, based on the number of bedrooms in the unit, for the unit to  qualify for the credit as a low-income unit.
IRS issued explanatory newsletters about the hold harmless provisions,  and IRS officials said they made public presentations to stakeholders  about them, but some LIHTC program participants reported that the  provisions were complicated, confusing, and hard to administer. For  example, Texas HFA officials told us that the increase in the number of  possible rent limits complicated communications with property owners  and increased property owners’ compliance risks. A Vermont HFA official  described how staff had to learn to calculate new limits, publish and  distribute new tables, and explain the changes in their QAP. However,  some HFAs told us that while the provisions were complex and  burdensome, they had worked hard to understand them and had learned  to work with them. IRS has continued to provide explanatory newsletters  and IRS officials told us they made public presentations into 2012. A  Treasury official acknowledged the complexity of the provisions and said  further clarifying guidance might be warranted. However, the official also  said that making a change to hold harmless guidance would require  determining that the change merited more consideration than the many  non-HERA topics that Treasury also needed to consider.
section_title: HFAs Generally Implemented HERA Changes through Qualified Allocation Plans
paragraphs: HFAs we spoke with also took steps to implement the changes, including  one of the changes HFAs generally thought was significant—the HERA  basis boost. Our review of QAPs for nine HFAs and research by an  industry group found that HFAs often modified their QAPs to implement  the HERA basis boost but varied in how they used the new flexibility. Of  the nine states we examined, eight modified their QAPs by revising their  criteria for awarding the basis boost. According to a state official, the  remaining HFA also revised its criteria for the basis boost but conveyed  the changes to stakeholders through its website, public hearings, and  newspapers.
In general, states varied in the criteria they developed for awarding the  basis boost. We analyzed NCSHA summaries of the factors that HFAs  reported considering in awarding the HERA basis boost in 2009, the first  full year after HERA’s enactment. According to the summaries, 30 of the  54 HFAs reporting cited specific factors beyond the single criterion given  in HERA (financial feasibility). The other 24 HFAs cited financial  feasibility or other general guidance (17), did not report any factors (1), or  chose not to implement the HERA basis boost (6). Research by NCSHA  in 2010 noted that some states applied the boost statewide and some  applied it to more specific geographical areas, project types, or projects  with certain characteristics. NCSHA cited examples of states targeting the  basis boost to developments that had tenants of different income levels,  involved expensive land, were in rural or tribal areas or areas affected by  natural disasters, featured “green building” practices or preservation  initiatives, or were transit oriented.
States’ use of the basis boost also varied over time. Our analysis of  NCSHA summaries for 2008 through 2010 showed that HFAs’ use of the  HERA basis boost became more widespread over that period. More  specifically, while 12 HFAs reported not having implemented the basis  boost in 2008, this number dropped to 3 in 2010. For example, the Florida  HFA did not begin to use the boost until the change appeared in its 2011  QAP because until then, the state was still benefitting from Gulf  Opportunity Zone disaster credits and did not need the HERA basis  boost. California HFA officials said they did not use the boost as much as some other states because California already had a large number of  counties that were designated as difficult development areas (DDA) and  had a state LIHTC program covering projects that might have benefitted  from the HERA basis boost.HERA basis boost at all in 2012. The Massachusetts HFA began  implementing the HERA basis boost in 2009 and continued to use it into  2012. In its 2009 plan, the HFA identified 20 locations that were eligible  for the HERA basis boost, a number that rose to 35 in its 2012 plan.
The officials said they did not use the  HFAs also modified their QAPs and published technical information to  reflect other program changes in HERA. For instance, soon after HERA  was enacted, the Oregon HFA revised multiple sections of its QAP. In  accordance with HERA changes, it added the historic nature of buildings  and energy efficiency as criteria for awarding LIHTCs, updated policies on  the availability of LIHTC projects for general public use, and inserted new  policies on the use of the 9 percent floor. The Massachusetts HFA  incorporated the increase in per capita allocations as well as the 9  percent floor into its 2008 QAP. In addition, some of the states we  reviewed published technical information to help program stakeholders  comply with HERA program changes. For example, as they had done in  previous years, California HFA officials sent a memorandum to LIHTC  project owners and applicants in December 2011 on revised rent and  income limits the HFA had published, using information from HUD.
section_title: Available LIHTC Data Are Incomplete and Provide Limited Insight into Program Trends
paragraphs: HUD maintains a database of LIHTC-funded projects, which was last  updated in July 2012, but the information it contains is incomplete.  Although HUD has almost no direct administrative responsibility for the  LIHTC program, as the federal government’s lead housing agency, it has  been voluntarily collecting information on the program since 1996  because of the importance of these credits as a source of funding for low- income housing. HUD’s LIHTC Database, the largest source of federal  information on the LIHTC program, aggregates project-level data that are  voluntarily submitted by HFAs. HUD contracts with a consulting firm to  help compile the database, which is updated annually and is available to  the public on HUD’s website. Additionally, HUD sponsors studies of the  LIHTC program that use these data. IRS, which jointly administers the  program with HFAs, collects limited data that it needs to carry out its  mission of administering and enforcing the internal revenue laws. It  does not maintain the information needed to assess a housing production  program, such as the types of tenants targeted and whether projects are  in urban or rural areas.
subsections: section_title: HUD’s Database Is Incomplete Despite Efforts to Improve Data Collection
paragraphs: HUD’s LIHTC Database does not capture all LIHTC projects placed in  service, for three main reasons. First, although most HFAs voluntarily  report LIHTC project data to HUD each year, some do not report  consistently. Forty-two of 56 HFAs submitted project data to HUD for  each year from 2006 through 2010. In 2010, these 42 HFAs received  about 89 percent of all per capita LIHTC allocations. Of the remaining 14  HFAs, 2 did not report projects in any of the 5 years, while 12 did not  report each year, but did report for at least 2 of the years. For these 12,  all of the nonreporting was for 2008 through 2010 (the most recent  reporting year), a period in which some HFAs were struggling to comply  with a HERA requirement that they collect data on tenant characteristics  (e.g., race and income) for LIHTC projects, according to HUD and  NCSHA officials.
The HERA provision containing this requirement authorized $6.1 million  for fiscal years 2009 through 2013 for HUD to, among other things,  provide technical assistance to HFAs and compile the tenant data, but  HUD never received any appropriations for these tasks. HUD is working  to fulfill the requirement with existing resources. For example, HUD  streamlined the project and tenant data collections by merging the two  efforts. It also required HFAs to submit data in a standardized electronic  format via a secure web portal. According to HUD, this change is  significant, as the prior data collection process involved a HUD contractor  that contacted each HFA and then standardized the collected data, which  HFAs often maintained in different formats. HUD said that although some  HFAs would need several years to make the transition, the new system  was the most cost-effective long-term solution. HUD also said it  recognized the problem of underreporting in recent years but that until the  transition to the new data collection method was completed, its options  were to either knowingly underreport properties placed in service or not  release any data for those years.
Second, in recent years, HUD has not identified or followed up on cases  in which HFAs reported a substantially lower number of projects than in  past years, although such information could potentially be incomplete. For  example, HUD’s database showed that one state had between 23 and 49  projects placed in service each year from 2006 through 2009, but only 2  projects in 2010. When we followed up with the HFA in this state, HFA  officials provided us with documentation showing that they had reported  37 projects for 2010. Similarly, HUD’s database showed that another  state had 2 projects placed in service in 2008, compared with 90 or more  in each of the 2 previous years. An official from this state’s HFA told us  that the actual number for 2008 was 96 properties. We provided HUD  with these and other examples for their review. According to a HUD  official, before 2008 its contractor followed up with HFAs on these types  of data anomalies but now places less emphasis on this function because  of resource limitations and the HERA requirement for tenant data.  Instead, the contractor now focuses on assisting HFAs with meeting the  tenant data requirement and follows up only with HFAs that do not report  any project data at all.
Third, at the time they reported to HUD, HFAs may not have had  information on all projects placed in service. Specifically, HFA officials  said that delays between the date when a project was placed in service,  the date a project owner reported it to the HFA, and the date the HFA  recorded it in its information system could result in underreporting of  projects. HUD instructs states to review the property information  previously submitted and include information for these omitted properties.  As a result, these omissions may be corrected in subsequent data  submissions.
Even when HUD did receive project data, much of it was incomplete,  omitting information on project characteristics such as the type of  location, construction, and tenants targeted. The proportion of missing  information on project characteristics increased after 2007 (see table 3).  For example, the proportion of missing information on the types of tenants  targeted increased from 5 percent in 2006 to 28 percent in 2010. A HUD  official noted that the HERA provision requiring HFAs to collect data on  the characteristics of tenants in LIHTC projects had made it more  challenging for HFAs to also report the project data with existing  resources. In addition, a HUD official explained that across HFAs,  different offices maintain tenant-level and project-level data. He said that  HUD’s data request was often completed by the offices with the tenant  data, which might not have detailed project information. The official added  that he had emphasized the need for HFAs to direct HUD’s request for  project data to the appropriate office in presentations to an HFA  association and in communications with individual HFAs. However,  according to HUD, resource limitations have prevented HUD and its  contractor from performing thorough follow up with HFAs about missing  information on project characteristics.
Having complete data on the LIHTC program is important because of the  program’s significance to overall federal efforts to meet the nation’s  affordable housing needs. As previously noted, the LIHTC program is the  largest subsidy program for constructing and rehabilitating low-income  rental housing. Additionally, the program is used in conjunction with other  federal housing programs, including HUD’s programs. For example, some  LIHTC projects receive grants through HUD’s HOME Investment  Partnership program and have mortgages that are insured by HUD’s  Federal Housing Administration. HUD’s LIHTC Database is the federal  government’s main source of information on LIHTC projects, and HUD  and others have used data from 2007 and earlier—prior to some of the  challenges discussed previously—to conduct research on the LIHTC  program. For example, one study HUD sponsored examined the  geographic distribution of LIHTC projects to assess whether program  rules contribute to clustering of subsidized housing in central city and  high-poverty areas. Another HUD-sponsored study examined whether  LIHTC projects continue to provide affordable housing after the 15-year  period in which they are required to do so. In addition, the Rental Policy  Working Group established by the White House’s Domestic Policy  Council has used the data to examine the potential for harmonizing and  streamlining property inspection requirements for rental properties with  multiple sources of federal funding, including LIHTCs. However, as we  have seen, a number of challenges faced by HUD and HFAs have  adversely affected the completeness of HUD’s database. Without more  complete data on the number, location, and characteristics of LIHTC  projects, the federal government’s ability to continue evaluating program  outcomes and overall federal efforts to provide affordable housing is  limited.
section_title: Available Data Provide Limited Insight into Trends in the Number and Characteristics of LIHTC Projects
paragraphs: According to HUD data as of July 2012, the 42 HFAs that submitted  information for each year from 2006 through 2010 reported that more  than 5,300 LIHTC projects were placed in service over the 5-year period  (see table 4). In total, these projects used more than $3 billion in  LIHTCs and contained more than 421,000 living units. The reported  number of projects and units placed in service declined over the 5-year  period, particularly after 2008; however, the lack of complete project data,  as discussed previously, prevents a reliable analysis of actual program  trends.
Although data at the national level are limited, information from the nine  HFAs we contacted provide some insight into changes in the number of  projects placed in service after HERA was enacted in 2008. Six of the  nine HFAs indicated that the number of projects declined substantially  between 2008 and 2009, while the other three experienced either modest  or no declines. For example, California HFA officials said they had 203  projects placed in service in 2008, compared with 140 in 2009. In  contrast, Massachusetts HFA officials said they had 21 projects placed in  service in both years. Of the six HFAs that had substantial declines, three  continued to see decreases in 2010, while the remainder experienced  modest to large increases in 2010.
While a portion of LIHTC projects in HUD’s database lack information on  location type, the data do indicate that the majority of LIHTC projects  placed in service from 2006 through 2010 were located in metropolitan  central and noncentral cities (e.g., suburbs). For each of these years, at  least 69 percent of reported projects were in metropolitan areas, but given  the proportion of projects with missing information on location type, trends  in this characteristic cannot be precisely determined (see table 5).
According to HUD data, the majority of reported LIHTC projects placed in  service from 2006 through 2010 were newly constructed (see table 6).  However, the amount of missing data on construction type after 2007  makes it impossible to draw accurate conclusions on potential changes in  the proportion of projects that were newly constructed and those that  were acquisition and rehabilitation projects.
According to data reported to HUD, the most common types of tenants  targeted by LIHTC projects in 2006 and 2007 were families and elderly  tenants (see table 7). However, as previously noted, the proportion of  projects in HUD’s database with missing information on tenant types  increased substantially after 2007. As a result, any reported changes in  types of tenants targeted are not definitive. In addition, HUD officials told  us that HFAs may have used different criteria for determining whether a  project was targeted to particular groups of tenants, potentially resulting in  inconsistencies across HFAs.
section_title: Stakeholders Said HERA Provisions Helped the Financial Feasibility of Some LIHTC Projects
paragraphs: State and industry officials we spoke with said that isolating the effect of  the HERA changes on the overall LIHTC market was difficult because of  other program changes (e.g., creation of the Exchange Program) and  economic developments (e.g., the recession and financial crisis) that  occurred around the same time. Nonetheless, state and industry officials  we spoke with identified specific LIHTC projects that they said would not  have been completed without certain HERA provisions. In particular, they  cited the temporary increase in per capita credit allocations, the  temporary 9 percent floor, and the HERA basis boost as three provisions  that helped the financial feasibility of some projects and likely prevented  even further decreases in LIHTC projects after 2008. In addition,  stakeholders said HERA changes particularly helped the financial  feasibility of rural projects.
subsections: section_title: Stakeholders Identified HERA Changes That Enhanced Project Feasibility
subsections: section_title: Temporary Increase in Per Capita Credits
paragraphs: Because of HERA’s temporary increase in per capita credit allocations,  HFAs received tens of millions of dollars more in allocations in 2008 and  2009 than they would have otherwise. By statute, LIHTC allocation  amounts are adjusted for inflation each calendar year, but for calendar  years 2008 and 2009 only, HERA further increased allocations to each  HFA. Adjusted for inflation, the per capita allocation in 2008 would have  been $2.00, but HERA increased the amount to $2.20 that year and to  $2.30 in 2009. The minimum allocation for small HFAs was increased to  $2,555,000 in 2008 and $2,665,000 in 2009. Without HERA, HFAs would  have received $61,836,050 less in per capita credits than they did in 2008  and $62,408,937 less in 2009. For 2010, LIHTC allocations returned to  the path that would have been in place if HERA had not been enacted  (see table 8).
Some state officials we spoke with said that they allocated the additional  credits to projects already under development and to new projects. For  example, HFA officials in Michigan and Oregon told us that they used the  additional credits to both fill funding gaps for projects that had previously  received LIHTC allocations and to fund one or two additional projects in  their states. Massachusetts HFA officials told us that they used the  additional credits to finish projects that were in danger of not being  completed because of drops in prices that investors were willing to pay for  LIHTCs.
Although HFAs received additional credits in 2008 and 2009, developers  also returned more unused credits to HFAs in these years. According to  data from NCSHA, the total amount of credits developers returned to  HFAs increased substantially in 2008 and 2009. The amount of returned  credits in 2009 was more than 6 times the amount in 2006 (see table 9).
An NCSHA official explained that developers returned credits for several  reasons. For example, the NCSHA official noted that in 2008, developers  had trouble finding LIHTC investors, resulting in a higher-than-normal  amount returned to the HFAs. Also, in 2009, the Recovery Act’s  Exchange Program allowed HFAs to exchange returned credits for cash  grants, resulting in a very high amount of returns that year. For 2009, the  amount of returned credits included those that were returned and  exchanged, as well as those returned and possibly reallocated to other  developers. According to the NCSHA official, virtually all of the returned  credits that were not exchanged were reallocated either the same year or  the following year.
Some state housing officials and industry stakeholders said that HERA’s  temporary floor for the 9 percent credit helped the financial feasibility of  individual projects. Owing to the floating credit rate prior to HERA,  developers that received the 9 percent credit actually received a credit  approximating 8 percent. By setting a floor of 9 percent for projects  placed in service by the end of 2013, HERA increased the amount of  credits these projects could receive. For example, if a pre-HERA project  had an eligible basis of $1,000,000 and the floating rate for the 9 percent  credit was 8 percent, that project would be eligible to receive $800,000 in  credits ($80,000 per year for 10 years). In contrast, by setting a floor of 9  percent for the 9 percent credit, that same project would be eligible for  $900,000 in credits ($90,000 per year for 10 years).
Also, as previously noted, the HERA basis boost provision gave HFAs the  ability to designate any building, regardless of location, as eligible for an  enhanced credit of up to 130 percent of the building’s eligible basis rather  than just those in a DDA or a QCT. One developer told us that every  LIHTC project he had completed since the passage of HERA used the  HERA basis boost, and that it and the 9 percent floor together had made  a significant difference in his ability to complete projects. This developer  cited a project in which these two provisions reduced a funding gap of  $1,680,000 to $450,000, which the developer was able to close by other  means. Another LIHTC developer noted that the 9 percent floor allowed  LIHTC deals to be engineered with fewer funding sources and that in  many cases such deals would not have been completed without this  provision. In addition, North Carolina HFA officials told us that some  projects had received tax credit awards in 2007 and 2008, but had  funding gaps when the tax credit market collapsed and prices for tax  credits fell before developers could secure equity from investors. For  these projects, the HFA allowed developers to return their allocated  credits and receive new credits with the 9 percent rate and the HERA  basis boost, thus filling the funding gaps. According to the North Carolina  officials, these HERA provisions helped in completing a total of 46  projects that likely would not otherwise have been completed.
In addition, HFA officials in Oregon and Michigan noted that they used the  HERA basis boost for permanent supportive housing—long-term housing  projects with supportive services for homeless persons with disabilities or  other barriers—which have lower income tenants. Similarly, HFA officials  in Florida said that the HERA basis boost helped fund three projects that  will be placed in service in either 2012 or 2013 for tenants that were  homeless and had lower incomes. According to the officials, such projects  are typically difficult to develop because project cash flows are limited  because tenants may not have any income when they move in. HFA  officials in Minnesota said that without the 9 percent floor, it would have  been difficult to fund projects serving the long-term homeless, those with  special needs, and those with lower incomes.
section_title: Stakeholders Said HERA Changes Helped Rural Projects
paragraphs: According to state housing officials and industry participants, certain  HERA provisions helped mitigate some of the challenges associated with  developing projects in rural areas. For example, the maximum amount of  rent a project owner can charge is based on the area’s income limits.  According to officials from the Council for Affordable and Rural Housing,  because rural areas often have lower income limits compared with urban  areas, rural projects also often have lower cash flows from rents. They  noted that the HERA provision that allowed projects in rural areas to base  tenant income limits on the greater of the area median gross income or  the national nonmetropolitan median gross income was one of the most  significant HERA provisions for rural housing. In cases where the national  nonmetropolitan measure is greater than the local area measure, project  owners can set higher rent levels than they would have prior to HERA.  This flexibility, in turn, can give project owners access to a broader pool of  qualified tenants and increase cash flows from rent, potentially making  the projects more attractive to investors. Additionally, according to some  industry stakeholders, investor demand for LIHTCs is often weaker in  rural areas than in urban areas in part because rural LIHTC projects tend  to be smaller in scale. As a result, fixed transaction costs are spread over  fewer units, and a few vacancies can have a relatively greater impact on  the viability of a small project. Some state officials told us they applied the  HERA basis boost to rural areas to help strengthen the financial viability  of projects in these locations. For example, Michigan HFA officials said  they applied the HERA basis boost to rural areas because rural projects  would not have been desirable to investors without it.
section_title: Conclusions
paragraphs: The LIHTC program is the largest federal program for building and  rehabilitating affordable rental housing and provides billions of dollars in  tax credits each year. Through HERA, Congress made a number of  changes to the program and sought analysis of credit allocations made  before and after the act’s implementation. However, limitations in  available program data hamper this type of analysis and potentially other  research that could be useful to policymakers. HUD is not required to  collect data on LIHTC projects and has very limited administrative  responsibility for the program, but it has collected some information from  HFAs for many years. We commend HUD for taking steps as the lead  federal housing agency to collect and disseminate project information.  This information has been used to examine important issues, such as the  extent to which subsidized housing remains affordable over the long term  and the potential for harmonizing requirements across federal housing  programs. But, in recent years, the completeness of HUD’s LIHTC  Database has worsened, due partly to resource constraints and  challenges HUD and HFAs face in meeting new requirements for  compiling information on tenants in LIHTC projects. In addition, HUD and  its contractor have not followed up on data anomalies that could indicate  incomplete reporting. Our work suggests that HUD’s database may be  missing many projects that could be captured through additional follow-up  efforts. Without improvements in the database, the federal government’s  ability to evaluate basic program outcomes—such as how much housing  was produced—and other aspects of federal housing policy may suffer.
section_title: Recommendation for Executive Action
paragraphs: HUD has taken steps to improve its data collection process and faces  resource constraints. However, the importance of the LIHTC program to  federal housing policy underscores the need for continued attention to  data quality and completeness. Therefore, we recommend that the  Secretary of Housing and Urban Development (1) evaluate options for  improving the completeness of HUD’s LIHTC Database, including  following up on data anomalies and enhancing the role of HUD’s  contractor in data collection and quality control; and (2) based on this  evaluation, take additional steps to improve the data.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to HUD, IRS, and Treasury for their  review and comment. We received written comments from HUD’s Acting  Assistant Secretary for Policy Development and Research that are  reprinted in appendix III. We also received technical comments from IRS  and Treasury, which we incorporated into the final report where  appropriate.
In its written comments, HUD agreed with our conclusions and  recommendations but expressed concerns about the draft report’s  characterization of HUD’s LIHTC Database and data collection efforts.  HUD said that our draft report did not adequately explain either the  transition HUD was experiencing in its data collection or changes it had  made to the collection process. HUD noted, as did our draft report, that  while HERA required the agency to compile data on tenants in LIHTC  units and authorized $6.1 million for this purpose, Congress did not  appropriate these funds. HUD stated that to more cost-effectively collect  both the tenant and property data, it merged the two efforts and required  HFAs to submit all of the data through a secure web portal in a  standardized electronic format. HUD said that it understood that this  requirement would entail a multiyear transition for some HFAs, but also  noted that in the long run this solution was the most cost-effective way to  collect the information. Additionally, HUD said it recognized that its  database had suffered from underreporting in recent years but said that  until the transition to the new data collection method was completed, its  options were either to knowingly underreport properties placed in service  or to not release any data for those years. In response to HUD’s  comments, we added language to the final report clarifying the connection  between resource constraints for the implementation of the tenant data  requirement and the completeness of the project data. We also added  language describing how HUD had modified its data collection process  and its rationale for reporting incomplete data rather than no data.
HUD also expressed concern about our use of the word “inaccurate” to  describe potential shortcomings in some of the information in the LIHTC  Database. HUD said that it would never publicly release information that it  thought might be inaccurate and suggested that we substitute  “incomplete” for “inaccurate.”  Our draft report generally used the word  “incomplete” to characterize the information in the LIHTC Database but in  three places used the phrase “potentially inaccurate information” to  describe cases in which the LIHTC Database showed substantially fewer  projects for an HFA than the number we obtained from the HFA directly.  We agree that “incomplete” is a more appropriate term and revised the  final report to use that word throughout.
We are sending copies of this report to interested congressional  committees, the Secretary of the Treasury, the Commissioner of Internal  Revenue, and the Secretary of Housing and Urban Development. This  report is also available at no charge on the GAO website at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  us at (202) 512-8678 or garciadiazd@gao.gov, or (202) 512-9110 or  whitej@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made major contributions to this report are listed in  appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report discusses (1) how the Internal Revenue Service (IRS) and  selected housing finance agencies (HFA) implemented the Housing and  Economic Recovery Act of 2008 (HERA) changes to the Low-Income  Housing Tax Credit (LIHTC) program, (2) what the Department of  Housing and Urban Development’s (HUD) data on LIHTC projects show  about the number and characteristics of projects completed from 2006  through 2010 and any data limitations, and (3) the views of program  stakeholders about the effects of the HERA changes on these projects.
To assess how IRS and selected HFAs implemented HERA changes to  the LIHTC program, we reviewed IRS guidance, memorandums, and  planning documents. We also interviewed IRS and Department of the  Treasury officials. In addition, we interviewed officials from nine HFAs:  California, Florida, Massachusetts, Michigan, Minnesota, North Carolina,  Oregon, Texas, and Vermont. We selected these HFAs to cover different  regions of the country and amounts of tax credit allocations. The selected  states are not representative of the entire LIHTC market. For the selected  HFAs, we reviewed qualified allocation plans (QAP) that contained  detailed selection criteria and application requirements for LIHTCs. To  further learn how HERA changes were implemented, we interviewed  other industry stakeholders, such as industry associations, investors,  syndicators, and housing developers.
To examine HUD’s data on LIHTC projects and what these data show  about the number and characteristics of LIHTC projects completed from  2006 through 2010, we analyzed information from HUD’s LIHTC  Database. HUD collects these data from HFAs and maintains  information on LIHTC-financed projects once they are placed in service.  We conducted reasonableness checks on the data to identify any  missing, erroneous, or outlying figures. We also asked the nine HFAs  previously mentioned to check HUD’s numbers of projects placed in  service from 2006 through 2010 against their own records, and  interviewed HUD about how it and its contractor compiled the data. As  discussed in the body of this report, we found that HUD’s data may not  contain all LIHTC projects placed in service as of 2010 for several  reasons, including (1) challenges states face in implementing new  requirements for reporting tenant data and (2) delays between when a  project is placed in service and when that information is entered into the  state’s data system and reported to HUD. As a result, the number of  reported projects placed in service as of 2010 may be understated. We  also found that a substantial proportion of projects in the database had  missing values for key project characteristics. For this reason, changes in  the reported number and characteristics of projects over time should be  interpreted with caution. While we acknowledge these limitations, we  chose to present the LIHTC data as reported by HUD because they  provided the broadest coverage of LIHTC projects placed in service  through 2010. We concluded that the data elements we used were  sufficiently reliable for describing limitations of the data and presenting  the project information HUD had compiled as of July 2012. For each year,  we totaled the number of projects placed in service. Due to the limitations  of HUD’s data, we supplemented this analysis by examining information  from the nine HFAs we contacted to identify any state-level trends. Using  the HUD data, we calculated the proportion of projects with certain  characteristics, including location type (metropolitan/central city,  metropolitan noncentral city, nonmetropolitan), construction type (new  construction, acquisition/rehabilitation, both new construction and  acquisition/rehabilitation), and the type of tenants targeted (elderly, family,  disabled, homeless, other). In addition, because HERA increased the  amount of credits allocated to states in 2008 and 2009, we analyzed  trends in annual LIHTC allocations from 2006 through 2010 using data  collected by the National Council of State Housing Agencies (NCSHA). In  order to assess the reliability of the NCSHA data we analyzed, we  reviewed documentation and interviewed NCHSA officials about their  methods for collecting and reporting the data. We concluded that the  NCHSA data were sufficiently reliable for our purposes.
To obtain the views of selected HFAs and industry participants about the  effects of the HERA changes on LIHTC projects, we interviewed officials  from the HFAs and industry stakeholders noted previously. We obtained  their views on which HERA changes were most significant, the extent to  which the HERA changes helped complete projects that otherwise would  not have been feasible, and the extent to which the HERA changes  affected the characteristics of projects that received LIHTC allocations. In  addition, we reviewed documentation on projects that industry  stakeholders said had been affected by the changes.
We conducted this performance audit from February through December  2012 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 objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Specific 2008 Changes Related to the Low-Income Housing Tax Credit
paragraphs: Table 10 summarizes the changes related to the LIHTC program made in  the Multi-Family Housing subtitle of HERA.
section_title: Appendix III: Comments from the Department of Housing and Urban Development
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contacts named above, Steve Westley and Joanna  Stamatiades (Assistant Directors), Emily Chalmers, William Chatlos, Lois  Hanshaw, Lawrence Korb, May Lee, John McGrail, Marc Molino, Edward  Nannenhorn, Winnie Tsen, and Jason Wildhagen made important  contributions to this report.