A Review of the Mississippi Home Corporation’s Low-Income Housing Tax Credit Program
Executive Summary
Introduction
The purpose of this review is to follow up on findings contained in PEER’s 1998 report entitled A Compliance Review of the Mississippi Home Corporation’s Tax Credit Program and to address specific concerns over the Low-Income Housing Tax Credit Program that were expressed by a complainant.
Background
A tax credit is a federally authorized dollar-for-dollar reduction in tax liability. The federal government generally uses tax credits as an incentive for businesses to become involved in activities that might not otherwise be considered profitable. The Low-Income Housing Tax Credit (LIHTC) Program is a tax credit program created under the Tax Reform Act of 1986 that the Internal Revenue Service uses as an incentive to the private business sector in exchange for the development of affordable housing for low-income Americans.
The Mississippi Legislature established the Mississippi Home Corporation in 1989 to serve as a government instrumentality, separate and apart from the state, to finance the acquisition, construction, and rehabilitation of single and multifamily housing for persons of low to moderate income. In 1990, former Governor Ray Mabus selected the Mississippi Home Corporation to administer and oversee the Low-Income Housing Tax Credit Program utilizing federally established guidelines. The corporation receives no state funding for the implementation of the tax credit program.
Following are brief descriptions of the MHC’s three major roles in administering the Low-Income Housing Tax Credit Program:
Conclusions: Follow-Up on PEER’s 1998 Report on MHC’s Low-Income Housing Tax Credit Program
With respect to the follow-up on findings contained in PEER’s 1998 report entitled A Compliance Review of the Mississippi Home Corporation’s Tax Credit Program, PEER sought to determine the following:
PEER presents these questions below, with summary answers.
Does the Mississippi Home Corporation incorporate public review and comment into the Qualified Allocation Plan?
While MHC complies with IRS requirements regarding public review and gubernatorial approval of its annual Qualified Allocation Plan, language in the QAP allows the corporation to amend the plan without a public review and comment period prior to implementation of changes.
The Internal Revenue Service requires MHC to subject its QAP to public review and then have the plan signed by the governor. However, as noted in its 1998 report on MHC’s Low-Income Housing Tax Credit Program, MHC has amended the annually approved QAP several times during the program’s existence without obtaining public review and comment prior to implementation of the amendment. This practice has the potential to create the appearance of impropriety and could have a negative impact on the perception of fairness of administration of the program.
Does MHC’s administration of the program promote the best use of tax credits to provide low-income housing?
PEER found that in administering the Low-Income Housing Tax Credit Program, MHC has:
MHC annually establishes a maximum cost per unit for low-income housing developments by examining variations in construction and land costs and statistical cost data on completed developments. The maximum cost per unit guideline should help maximize the number of housing units that can be built to serve areas and tenants of greatest need. However, PEER found that during calendar years 2004 and 2005, MHC allowed 81% of the program’s approved developments to exceed its own maximum cost per unit guidelines. If MHC had enforced the guidelines, based on the average cost per unit, the corporation could have funded the construction of an additional 648 units for low-income residents.
In selecting developers to build low-income housing units, MHC utilizes a point system that incorporates the selection criteria in that year’s QAP. PEER found that MHC has awarded “developer experience” points during the application process to numerous developers who have failed to comply with program requirements in their previous MHC developments. This practice rewards poor performance and could result in a loss of tax credits should the IRS determine the pattern of noncompliance to be significant.
The IRS requires that developers participating in the Low-Income Housing Tax Credit Program stay within certain parameters of financial feasibility in order to receive an allocation of tax credits. To oversee this financial feasibility, the IRS requires that MHC monitor for compliance with these parameters. PEER found that MHC’s staff does not monitor developers’ compliance with debt service ratio requirements (one of the financial feasibility guidelines) throughout the fifteen-year compliance period. This creates the potential for developers that comply with the Low-Income Housing Tax Credit Program application’s financial requirements to come out of compliance and thus jeopardize tax credits.
Has MHC distributed tax credits to ensure benefit to areas of need throughout the state?
Through the incorporation of strong incentives into its QAP, MHC has had success in encouraging developers to serve the state’s lowest income tenants located within qualified census tracts. However, there are still needy areas of the state that the Low-Income Housing Tax Credit Program has not served.
The Corporation’s QAP provides incentives to encourage developers to build in low-income areas (i.e., qualified census tracts) and difficult development areas1. In calendar years 2003 through 2005, the majority of MHC’s low-income housing developments and units were placed in counties with the greatest number of substandard housing units as reported in the 2000 census (e.g., Hinds, Madison, Lauderdale, Harrison, Jackson, Forrest, Washington, Sunflower, Bolivar, Coahoma, Panola, Lowndes, and Lee). Also, from calendar year 2003 through 2005, MHC placed approximately 66% of the Low-Income Housing Tax Credit Program developments and units in qualified census tracts.
However, some counties with a relatively large number of substandard housing units and qualified census tracts (e.g., Leflore, Yazoo, and Jones) and many counties with a significant percentage of qualified census tracts and a smaller number of substandard housing units (e.g., Noxubee, Leake, Holmes, Tallahatchie, Quitman, Wilkinson, and Adams) received no new MHC low-income housing units during this period. Fifty-six counties with twelve or more substandard housing units (the minimum allowed size of an MHC low-income housing development) received no low-income housing units over the three-year period.
Conclusions: Status of Recent Complaints Regarding MHC’s Administration of the Tax Credit Program
PEER also addressed the following questions regarding MHC’s administration of the Low-Income Housing Tax Credit Program based on issues that were raised by a complainant:
PEER presents these questions below, with summary answers.
Does the MHC adequately inform citizens of proposed tax credit projects in their neighborhoods?
The MHC requires developers to inform the public of proposed tax credit developments in their area. However, the MHC’s 2005 Citizen Participation Requirements Checklist and Certification does not require MHC to verify the presence of written comments obtained from the public hearing (i.e., evidence that MHC has actively solicited public input) as specified in the QAP.
By MHC not including the written comment component on the checklist and certification form, there is no clear documentation available for MHC to verify the presence of any written comments from the public hearing, nor any written responses made by the developer to the attendees. Thus, the MHC may not actively solicit the viewpoints of concerned citizens within the target community of the proposed development.
Does the MHC physically inspect the suitability of proposed sites for tax credit developments prior to project approval?
Although the MHC physically inspects the suitability of proposed development site locations, one development MHC approved for a reservation of tax credits in 2003 is currently considered not suitable for occupancy by local government standards based on poor physical site conditions regarding drainage and location issues. However, until MHC performs a final site inspection for the development, the issue must be dealt with through the local governmental authority and must conform to local standards before receiving an actual allocation of credits.
MHC staff was not aware of the Certificate of Occupancy problem associated with this development until informed by PEER. This can be attributed to the limited communication that occurs between the MHC and the local governmental authority after the initial application process.
Does the MHC repeatedly approve developments for and award tax credits to the same developers?
Yes, but although 69% of the developments approved by MHC from 2003 to 2005 went to approximately 29% of the developers, these developers had submitted more applications and MHC followed established procedures in evaluating all of the applications.
The applicant rating system set in the QAP provides point incentives to developers with prior experience in the program, but MHC uniformly awards these incentive points to all developer applicants who qualify for them.
Because developers applying to receive low-income housing tax credits contract for their own market studies, does this compromise the objectivity of the studies?
No, because skewing a market study to overstate the market in a given area would not be in the developer’s best interest, since the development must remain profitable to continue to receive tax credits. As a further check on an area’s ability to support a proposed Low-income Housing Tax Credit development, MHC reviews the market studies of all applications in a given area to make sure that approval of multiple proposed developments in the same area would not exceed the area’s market capacity.
The Internal Revenue Service requires a comprehensive market study to be conducted at the developer’s expense before the MHC allocates credits. The market study must be conducted by a disinterested individual or entity that is qualified to prepare such market study and approved by the MHC. Should the market study be altered to show the need of the proposed development in a market area not suitable, which could either be saturation of low-income units in the proposed area or a lack of potential tenants with the ability to afford the proposed units, then the development could not generate enough revenue to remain operable, and therefore cause a potential recapture of credits.
Does the MHC hold developers accountable for maintaining their tax credit developments?
The MHC holds developers accountable for maintaining their developments by checking records of applicants’ previous developments for patterns of noncompliance with Internal Revenue Service regulations, by auditing tenant files and conducting physical inspections at least once every three years, and by reporting major issues of noncompliance to the Internal Revenue Service. If developers fail to comply with Internal Revenue Service regulations, the IRS may recapture those developers’ tax credits.
MHC also must ensure that developers comply with Internal Revenue Service regulations because repeated instances of developers’ noncompliance could lead to loss of the developer’s eligibility to participate in the Low-Income Housing Tax Credit Program in the future.
Does the MHC obtain feedback from the target population of the Low-Income Housing Tax Credit Program?
The Corporation does not specifically seek feedback from tenants residing in low-income units when developing the Qualified Allocation Plan, but specifically seeks feedback from the developers and syndicators. This creates the image that the MHC is more concerned with the needs of those involved in the administration of low-income housing units rather than those for whom the units are constructed.
Although the feedback from the tenants of low-income units may not always benefit the development of the annual plan or the allocation process, excluding this feedback could possibly limit the impact and effectiveness of the program if the program does not fulfill the needs of the target population.
Recommendations
1 A Qualified Census Tract is an area in which, based on the most recent census data available, either fifty percent or more of the households have an income of less than sixty percent of the area median gross income or which has a poverty rate of at least twenty-five percent. A Difficult Development Area has high construction, land, and utility costs relative to area median gross income. These designations are made by the U. S. Secretary of Housing and Urban Development.