November 2009

Financial Integrity of a

Rental Property – Whose

Responsibility?2010 North Carolina Affordable Housing Conference

September 17, 2010

Jill Odom, CAHEC

Question - Who’s Responsible for achieving and Maintaining Financial

Integrity?

Answer

…Anyone with a vested interest in the property.

This would include:• The owner• The management agent• The syndicator/investor• The lender(s)• The State allocating agency• Who else?

Financial Integrity cannot be achieved without a coordinated team effort

Integrity

1.The state or quality of being entire or complete;

wholeness; entireness; unbroken state;

2. Moral soundness; honesty; freedom from corrupting

influence or motive; -- used especially with reference to

the fulfillment of contracts, the discharge of agencies,

trusts, and the like;

3. Unimpaired, unadulterated, or genuine state; entire

correspondence with an original condition; purity.

 

Syn: Honesty; truthfulness, veracity, reliability, honor.

What is Financial Integrity? – From the Investor’s

perspective

Financial Integrity

• Synonymous with Financial Stability, or Financial Viability• The ability of a property to achieve or exceed all of the

financial projections relating to its development and operational phases

• Adhering to or exceeding expectations with regard to timing and delivery of projected tax credits

• Maintaining property performance standards in accordance with IRC regulations, Federal, State and local laws

• The ability to generate revenue and absorb costs with minimal variances using a realistic and achievable budget.

Tools for determining Financial Integrity

• AHIC Watchlist Criteria• Development Phase, including lease-up

• Construction Delays over 3 months• Construction cost overruns exceeding15% of contract or contingency

reserves spent• Leasing delays over 3 months• First mortgage closing delays over 3 months• Mechanics Liens• Revenue & Expense variances• Any change in qualifying units• Litigation• Bankruptcy

Tools for determining Financial Integrity

• AHIC Watchlist Criteria• Operational Phase

• High Receivables/High Vacancies• Debt Coverage• Unpaid real estate taxes• Insurance coverage• Mortgage or guarantee delinquency or default• Deferred Maintenance or extraordinary repairs not budgeted• Physical Inspection/Physical Deterioration• Significant life-safety issues• Unauthorized debt• Required Deposits and adequate funding of reserves• GP Removal/replacement• GP/management agent failure to perform• Litigation or Bankruptcy

Tools for determining Financial Integrity

• Industry Best Practices – Risk Rating Policies• Development Phase

• Construction/Lease-Up Schedules• Financial (sources and uses)• Construction Loan status• Permanent Loan status• Program Compliance• General Contractor• GP/Sponsor/Management• Recapture risk

Tools for determining Financial Integrity

• Industry Best Practices – Risk Ratings • Stabilized Phase

• Debt Service Coverage• Occupancy• Benefits (tax credit and losses)• Reserves• Physical issues• GP/Sponsor/Management• Program Compliance• Insurance/Taxes• Reporting• Recapture/Foreclosure risk

Tools for determining Financial Integrity

• LIHTC Program regulations• Contracts

• LIHTC Application and Awards letters• Partnership Agreements• Management Agreements• Guarantee Agreements• Loan Documents

• IRS 8823 Audit Guide

Tips to Achieving and Maintaining Financial

Integrity

Tips to Attain Financial Integrity

• To the Owner• Be aware of the terms and conditions of your agreements

and contracts – insuring that they are reasonable and achievable

• Timing is EVERYTHING!• Use realistic and achievable revenue and expense

assumptions – Voodoo math can cripple a project• Communication is CRITICAL – share the important details

with your entire team, especially your property management agent

Tips to Maintain Financial Integrity

• To the Management AgentThe success or failure of the first year of operations almost

always determines the long-term viability of the project• Hold a “kick off” meeting with your owners (and syndicator)

– to confirm all the specifics of a new property• Set-asides• Rent/utility schedules• Tax Credit delivery/lease-up schedule• Review marketing plan• Reserves: Funding amounts and timing• Review budget• Review all promises made in the TC application and pertinent terms of

the partnership agreement (ie: reporting requirements)

Tips to Maintain Financial Integrity

• To the Management Agent• Use a “By the Book” methodology of management

• Know which housing program handbooks are applicable and which regulations to follow for determining initial and continued compliance• HUD 4350.3 Handbook• 8823 Audit Guide• State Allocating Agency guidelines and requirements• Landlord/Tenant laws • Fair Housing Laws• Local Codes• ADA/Accessibility & design requirements

• Know your market and advertise pro-actively.• Focus on lease enforcement and resident retention• Recruit experienced site staff: provide on-going training,

support and motivation!

Questions or Comments?Jill Odom, CAHEC

jodom@cahec.com