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A Review of the State Housing Finance and Development Authority's Low-Income Housing Tax Credit Program
September 2001

FOLLOW-UP (PDF)     REPORT (PDF)     SUMMARY (PDF)

Members of the General Assembly requested that we conduct a review of the State Housing Finance and Development Authority’s low-income housing tax credit program. The requesters were concerned about the authority’s efforts to monitor compliance with program requirements and its role in reviewing and scoring applications for tax credits. In addition, the requesters asked us to determine whether the authority maximizes the use of tax credits. Our findings are summarized as follows:

  • Authority staff has not provided adequate oversight to ensure that developers who successfully compete for tax credits comply with project plans and specifications. In evaluating proposals, the authority awards points based on the developer’s plan to use certain materials and amenities. However, agency staff does not directly verify developer compliance with these requirements. We found that other states conduct on-site inspections of tax credit projects to verify compliance during the construction process.
  • Developers are required to submit progress reports as a means to keep the authority informed about tax credit projects throughout construction. Developers have either not submitted reports or have submitted inaccurate reports to the agency. For instance, a developer submitted a progress report stating that foundations were being laid on the project site. However, following the developer’s failure to complete the project and nine months after the report was submitted, an authority official confirmed that no foundations had been laid on the property. We concluded that the authority has not terminated tax credit projects and rescinded credits when it appeared that projects could not be completed.
  • After a tax credit project is completed, the Internal Revenue Service requires the authority to monitor compliance regarding tenant rents, tenant incomes, and housing standards. The authority has adequately monitored compliance with these requirements.
  • The authority has not maximized the use of tax credits. Developers who have failed to meet carryover (expend 10% of estimated development costs within six months) or failed to complete projects must return tax credits to the authority. Between 1998 and 2000, approximately $2.3 million in credits were returned. Of this amount, $475,000 was lost to a national pool and is no longer available to developers in South Carolina. In addition, there has been a steady increase in returned credits in recent years, from no credits returned in 1997 to four returns amounting to $1.4 million in calendar year 2000. This increase may be due to the lack of penalties against developers who fail to meet program requirements yet continue to participate in the tax credit program.
  • We found that 46 of the 48 tax credit projects that were allocated credits in 1997 and 1998 were completed. Credits amounting to $710,336 were returned to the authority for the two failed projects. We concluded that authority staff did not adequately monitor these projects.
  • In calendar year 2000, authority staff attempted to enforce penalties that would disqualify developers from participating in the tax credit program for two years if they failed to meet carryover and for three years if they failed to complete a project. However, because staff did not include these penalties in the agency’s 2000 qualified allocation plan, the penalties would have been difficult to enforce.
  • Tax credit projects tend to be located in areas of the state with high median incomes. An agency official stated that the rents that can be achieved in poorer areas of the state are often below allowable rents, making tax credit developments infeasible in these areas. We recommend that the authority evaluate alternatives and seek funding to reduce rental rates for the program in poorer areas.
  • Market studies assess the economic viability of a project. In 1999, the authority began requiring developers to submit independent market studies. However, the agency does not clearly define what constitutes an unacceptable relationship between a developer and a market analyst.
  • Since the authority does not retain denied applications, we were unable to compare criteria used in the scoring of denied and successful applications. The practice of not retaining records makes the agency vulnerable if decisions are legally challenged and does not allow the audit of records to ensure compliance with tax credit selection criteria.