Blogs| Why Do You Need LIHTC Asset Management Software?
Written by
Anuj Pratap
Published
Aug 29, 2024
Topics
Asset Management
Navigating the complexities of Low-Income Housing Tax Credit (LIHTC) investments is a nuanced task, often riddled with pitfalls that even the most seasoned institutions can fall into. This is why many tax credit investors or syndicators often use third-party asset managers to ensure the health of their portfolios.
However, to manage LIHTC compliance better, syndicators and investors must use modern LIHTC asset management software.
This article explains why investors need asset managers, the value asset managers add to a portfolio, and how asset management software can add an additional layer of protection for tax credit investments.
Even in the most proactive company, the allure of revenue generation can sometimes overshadow the intricate demands of LIHTC asset management, leading to a series of common yet critical mistakes.
Many organizations, particularly those with a strong focus on front-end processes like acquisition and underwriting, need to pay more attention to the ongoing management needs of LIHTC assets.
This oversight is particularly evident in institutions where the rapid expansion of LIHTC portfolios outpaces the capacity of an acquisition-centric team. The result is a portfolio that’s robust in quantity but vulnerable in qualitative, long-term asset health.
Institutions not primarily engaged in LIHTC investments may inadvertently assign asset management to teams without LIHTC specialization. Banks or insurance companies, where LIHTC assets are just a fraction of a varied portfolio, risk a competence mismatch.
For example, the finance team is ideal for financial oversight of LIHTC properties, and the real estate divisions are adept in property management of LIHTC assets. However, organizations relying on one of these teams exclusively to manage and monitor tax credit investing might miss LIHTC-specific nuances, especially intricacies of LIHTC compliance and regulations.
Even departments well-versed in real estate property management can stumble when faced with LIHTC-specific challenges.
These include navigating the complexities of construction and initial leasing phases, identifying and addressing compliance issues, conducting thorough third-party reviews, and accurately handling critical financial aspects like cost certifications.
In addition, LIHTC regulations vary by state, so LIHTC can be a layered subject. The lack of LIHTC-specific expertise can lead to significant compliance risks and financial discrepancies.
A fragmented approach to managing LIHTC investments is another common pitfall. Dividing responsibility among various departments without a central oversight mechanism can lead to a lack of cohesive strategy and accountability.
This fragmentation often results in missed opportunities and a higher risk of compliance failures as no single team or individual holds complete accountability for the asset after acquisition.
Effective LIHTC asset management demands a balanced approach that combines financial acumen with a deep understanding of LIHTC-specific regulatory and operational requirements. The role of third-party asset management becomes a crucial element for success for many institutions in the low-income tax investment industry.
However, institutions can’t offload the responsibility to ensure compliance and profitability in their LIHTC investments.
Using an Asset Manager not only simplifies the investment and management lifecycle but also brings many benefits that can significantly enhance the performance and value of LIHTC projects.
Managing LIHTC projects comes with many restrictions and legal requirements, making their management complex. Third-party asset managers specialize in navigating these complexities, ensuring compliance, and preventing violations arising from mismanagement.
Effective asset management is critical to maintaining the timing of investment benefit flows and avoiding unplanned capital contributions. Third-party managers are adept at preventing delays in construction and lease-up processes, safeguarding the estimated investment yield.
Many LIHTC projects generate excess cash flow. Professional asset managers ensure these are processed promptly and share these among the partners, enhancing the value of the investment.
Poor construction, tenant problems, or inadequate property maintenance can lead to negative publicity. By helping maintain high standards, asset managers can protect the project’s reputation and its investors.
Mistakes in cost documentation or tenant leasing can reduce the project’s qualified basis, potentially triggering tax credit recapture and associated penalties. Investors need someone skilled in avoiding such pitfalls.
With proper asset management, investors may avoid unexpected capital demands. A third-party asset manager can intervene to mitigate additional capital requirements, reducing the need for more investments.
Relying solely on developers or general partners for investment oversight can lead to conflicts of interest. Like asset managers, someone without any vested interest in the development process can impartially manage the investment, making decisions in the project’s and its investors’ best interest.
Professional LIHTC asset management firms offer various services, including monitoring through construction, fiscal review, project inspections, and ensuring compliance throughout the 15-year federal LIHTC compliance period. Their expertise and specialized tools, like LIHTC Asset Management Software, enable oversight and management efficiency.
Asset managers can not only preserve but enhance the value of LIHTC investments. With the right asset managers, investors may get a higher resale price and better investment performance.
While third-party asset managers play a vital role in the lifecycle of a LIHTC investment, the ultimate responsibility for maintaining compliance rests with the portfolio owners and investors.
This is where LIHTC asset management software becomes indispensable, bridging the gap between third-party management and compliance oversight.
Compliance in the LIHTC sector has many touchpoints. These include cash management, capital needs, reserve analysis, and setting property management goals.
In this context, compliance means adhering to both federal and state regulations, which are often stringent and complex, and noncompliance results in the loss of tax credits and investment returns. Tax credit investors can maintain effective compliance oversight easily using LIHTC asset management software.
Cash Management: Revenue generation from a LIHTC project needs to adhere to maximum rent schedules. Investors must also understand the implications of multiple funding sources on rent limits.
Capital Needs Assessments (CNAs): Analyzing the gap between the capital needs and available reserves ensures that annual reserve deposits meet compliance standards and address any financial shortfalls in maintaining the property.
Property Management and Compliance: Compliance with tenant eligibility, income restrictions, and target population requirements is vital to prevent the loss of tax credits due to noncompliance.
Understanding and monitoring compliance requirements across their portfolios is critical for owners and tax credit investors using third-party property management. Asset management software provides a centralized platform for this oversight, helping investors consistently meet all aspects of LIHTC compliance.
It’s a tool that facilitates compliance and enhances third-party asset managers’ effectiveness in safeguarding the financial health and regulatory integrity of LIHTC investments.