GAO Publishes Final LIHTC Report on Development Cost

The U.S. Government Accountability Office (GAO) recently published a new report called “Low-Income Housing Tax Credit: Improved Data and Oversight Would Strengthen Cost Assessment and Fraud Risk Management.” This report is the last of four reports prepared at the request of Senator Charles Grassley. The senator had asked the GAO to review the cost-efficiency and effectiveness of the LIHTC program. This particular report analyzed the development costs for LIHTC projects completed in 2011–2015 in selected locations and factors affecting these costs; steps allocating agencies have taken to oversee LIHTC development costs; and factors limiting assessment of LIHTC development costs.

To complete the study, the GAO compiled and analyzed a database of costs and characteristics for 1,849 projects completed in 2011–2015 from 12 allocating agencies. The agencies span five regions and accounted for about half of the LIHTCs available for award in 2015. The GAO also reviewed the most recent allocating plans and related documents for 57 allocating agencies and reviewed federal requirements.

GAO findings. The GAO identified wide variation in development costs and several cost drivers for LIHTC projects completed in 2011–2015. Across 12 selected allocating agencies, median per-unit costs for new construction projects ranged from about $126,000 (Texas) to about $326,000 (California). Within individual allocating agencies, the variation in per-unit cost between the least and most expensive project ranged from as little as $104,000 per unit (Georgia) to as much as $606,000 per unit (California). After controlling for other characteristics, GAO estimates that:

• Larger projects (more than 100 units) cost about $85,000 less per unit than smaller projects (fewer than 37 units), consistent with economies of scale.
• Projects in urban areas cost about $13,000 more per unit than projects in nonurban areas.
• Projects for senior tenants—nearly one-third of all projects—cost about $7,000 less per unit than those for other tenants, potentially due to smaller unit sizes.

Allocating agencies use measures such as cost and fee limits to oversee LIHTC development costs, but few agencies have requirements to help guard against misrepresentation of contractor costs (a known fraud risk). LIHTC program policies, while requiring high-level cost certifications from developers, don’t 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 IRS doesn’t require such certifications for LIHTC projects, the vulnerability of the LIHTC program to this fraud risk is heightened.

The report also found that weaknesses in data quality and federal oversight constrain assessment of LIHTC development costs and the efficiency and effectiveness of the program.

The GAO found:

• Inconsistencies in the types, definitions, and formats of cost-related variables 12 selected agencies collected.
• Allocating agencies didn’t capture the full extent of a key indirect cost—a fee paid to syndicators acting as intermediaries between project developers and investors that IRS requires be collected.
• IRS doesn’t require allocating agencies to collect and report cost-related data that would facilitate program-wide assessment of development costs. Further, Congress hasn’t designated any federal entity to maintain and analyze LIHTC cost data.

Even without a designated federal entity, the GAO points out that opportunities exist to advance oversight of development costs. In particular, greater standardization of cost data would lay a foundation for allocating agencies to enhance evaluation of cost drivers and cost-management practices.

GAO recommendations. The GAO notes that no federal agency monitors or assesses LIHTC development costs, and not having an agency evaluating the housing credit’s performance is a shortcoming in the long-standing program. The report recommends designating an agency to collect and maintain cost-related data to periodically assess development costs.

The GAO also says that the IRS should require general contractor cost certifications for LIHTC projects to verify consistency with the developer cost certification. However, IRS officials disagreed with this recommendation and said it’s not clear if the recommendation would uncover any misrepresentations of costs. In addition, some state agencies have implemented similar controls.

The GAO also recommends that the IRS encourage allocating agencies to collaborate with LIHTC stakeholders on the development of more standardized cost data. Again, the IRS disagreed with the recommendation.