What to Include in a Good Management Report for LIHTC Sites

One of the most important jobs for the manager of a tax credit site is keeping the owner informed of how well you’re managing the site. The owner wants to know on a monthly or quarterly basis how well the site is doing financially and to be assured that there are no compliance problems threatening the tax credits. To convey this information most effectively, you should prepare a written management report giving the owner the kind of information it needs to make informed decisions about the site.

Unfortunately, many management reports are inadequate—they’re only a few paragraphs long, and they include insufficient information for the owner to understand what’s going on at the site. Other reports contain too much detail about particular residents or day-to-day operations, which may annoy and frustrate some owners.

We’ll tell you what to put in the management report so that the owner can be sure the site is in good shape. We’ll also give you a Model Form: Give Owners the Information They Need in Comprehensive Management Report, which you can compare with the management report that you use now. If there’s something missing from your current management report, you might want to add it to your next one.

When to Send Report

Our Model Form can be used on a monthly or quarterly basis. The frequency depends on the reporting demands of the owner and whether the site is in the initial year of compliance. Lease-up and compliance during the first year or so are crucial to establishing the amount of tax credits that the owner can claim for the site. During this time, the owner will want to be kept apprised of the status of the site more frequently to make sure that no problems threaten its tax credits.

But once the site is leased up and the owner starts claiming tax credits on it, you can keep the owner sufficiently informed on how you’re managing the site by reporting on a quarterly basis. Most likely, owners don’t want to be inundated with detailed, day-to-day paperwork. They just want to know that the site is doing well financially and that every unit is in compliance with the tax credit law.

What Report Should Include

The management report that you give the owner should consist of four sections.

Financial report. The financial statement is the most important part of the management report. Owners need to know the bottom line or the net operating income. You arrive at the net operating income by subtracting the site’s total operating expenses from its total gross income.

When determining gross income, include only the money actually collected during the reporting period. The management report should break down the site’s income into line items that include:

• Rental receipts, including assistance payments (but excluding utility allowances);
• Late charges and other penalty charges; and
• Ancillary income from laundry, cable television, or other optional services that the site provides.

Expenses are the money actually paid out of the site’s bank account during the period. You can break down expenses as follows:

• Payroll, including salaries, commissions, and bonuses for all employees;
• Rental expenses, including advertising and turnover costs;
• Repairs and maintenance, both routine work and major items;
• Services—for example, utilities paid by the site, trash collection, and pest control; and
• Administrative expenses, including compliance monitoring expenses, auditing and legal fees, internet charges, insurance, and taxes.

The financial section of the report can be very general or very detailed depending on how much information the owner wants. Our report breaks down each expense category into specific outlays. For example, we’ve subdivided the repairs and maintenance category into plumbing, electrical, HVAC, and the like. But you may choose to include only general categories without subdivisions.

Some owners will want you to include certain items in the report every period, even if the site doesn’t collect or spend money on them. For example, an owner might require you to include the subcategory “Plumbing repairs” on the report, even if the site didn’t spend any money on plumbing. In this case, you would simply report plumbing expenses as zero. Other owners will want to see only the categories that had activity. For these owners, if there are no plumbing repairs in a given month, you should omit “Plumbing repairs” from that period’s report. What your report ultimately includes will depend on how much information the owner requests.

Occupancy report. The second part of the report details the site’s leasing activity and the status of move-ins and move-outs. The biggest occupancy issues for tax credit sites are whether each new move-in meets income eligibility requirements and whether the site is complying the with next available unit and vacant unit rules. Rather than detail this information in the body of the management report, attach a rental tracking log of next available units. Use the log to show that you’ve rented each next available unit to qualified low-income households at restricted rents during the reporting period.

The occupancy report should also tell the owner the number of vacancies, the number of rent delinquencies and evictions, and then “economic vacancy rate” for the reporting period. Calculate the economic vacancy rate by dividing the site’s actual income by its potential income. This formula is more useful in determining the vacancy rate than is dividing the number of occupied units by the number of total units at the site.

This information paints a clearer picture of how well your site is doing in attracting and screening eligible households that the financial information alone does. And it helps demonstrate that you’re on top of tax credit requirements, such as eligibility requirements, the next available unit rule, and the vacant unit rule.

Marketing report. The financial and occupancy sections of the report show the owner how much money the site is making, but that’s only part of the picture. The owner also needs to see how effective the site’s marketing efforts have been in attracting eligible applicants and, at newer sites, reaching initial lease-up goals. That information is included in the third section of the report.

The marketing report should include a full traffic summary report. The traffic summary is a separate attachment telling the owner the number of email and telephone inquiries and visits, the conversion ratios, and the advertising sources that produced those inquiries and visits. This information shows the owner that you’re making “reasonable efforts” to rent any vacant units as required by tax credit rules.

Also, to show whether these efforts are attracting the right people, tell the owner what percentage of applicants to your site is eligible for the tax credit program.

Narrative report. The narrative section of the management report is your opportunity to explain any changes in income and expenses or any other aspects of the site and its operation that don’t fit into the other three sections. For example, you may have reported in the financial section that net operating income is down because of a decrease in rental income. The narrative is the place to describe what caused the decrease. For instance, more of your site’s tenants may be behind on their rent payments for pandemic-related reasons. As a result, you may report here how your staff have engaged the at-risk residents and documented repayment plans with them.

The narrative section has other uses too. You can use it to assure the owner that all units at the site are in compliance with the tax credit law. Or if any compliance issues have arisen, you can explain them here. And you can report the results of any audits or inspections by the IRS or your state housing agency in this section.

This is also the place to address other subjects that the owner should know about, such as market changes and any continuing or anticipated capital improvements and repairs. And use this section to explain any unusual incidents such as a fire or an act of vandalism.

First-Year Lease-Up Phase Goals to Maximize Tax Credits

The LIHTC program requires owners to meet two occupancy requirements in the first year of the site’s compliance period. If these requirements aren’t met, the site owner may have to forfeit some or even all of the tax credits it was allocated for the site. If you’re sending your site’s management report in the first year of your site’s compliance period, you’ll most likely be sending out your report more often during this important year to ensure that no problems threaten its tax credits.

Goal #1: Meet the minimum set-aside. To qualify for the tax credit program, a site must meet its “minimum set-aside.” This means that you must rent a certain percentage of your units to qualified low-income households. If you don’t meet the set-aside by the end of the first year of the compliance period, the building or site won’t qualify for the tax credit program. As a result, the owner won’t be entitled to claim any of the tax credits it was allocated.

Goal #2: Meet each building’s target or applicable fraction. The applicable fraction is the percentage of a building that’s treated as low-income use and generally eligible for the tax credits. The applicable fraction is the lesser of the unit fraction (the number of low-income units divided by the building’s total units) or the floor space fraction (the floor space of the low-income units divided by the total floor space of all units). For an owner to be entitled to claim all the tax credits it was allocated for its buildings, you must rent enough units to low-income households to bring each building’s first-year fraction up to the “target fraction.”

If your first-year fraction falls short of the target fraction, your building will still qualify for the tax credit program (assuming you meet the minimum set-aside). But the owner won’t be able to claim all the credits it was allocated for the building. For instance, if the owner’s target fraction is 90 percent, but you establish a first-year fraction of only 80 percent, the owner will lose credits for the 10 percent shortfall.

It’s important to note that the credits generated by units first occupied by eligible residents during the first year of the credit period are more valuable than the credits generated by units first occupied by eligible residents after the first year of the credit period. For a unit first occupied by an eligible household during the first year of the credit period, the owner may take 1/10th of the total tax credit for the unit each year of the 10-year credit period. However, if a tax credit unit hasn’t been occupied by the end of the first year of the credit period, tax credits can’t be claimed on that never-occupied unit in that year. Should the unit become occupied after the end of the first year of the credit period, two-thirds of the credit can be claimed each year for the remaining years of the 15-year compliance period.