Contractual & Regulatory Compliance
A fundamental role of Asset Management is risk reduction, in an effort to promote realization of target investment return. Thus, asset managers play a major role in monitoring compliance. Two aspects of compliance are contractual and regulatory. Contractual compliance refers to all documents by which the investment partnership or developer is bound, with special emphasis on the syndicator’s operating (or lower tier partnership) agreement and related documents. However, contractual compliance by extension also refers to legal agreements (such as land use restrictions and mortgage documents) with external stakeholders including HFAs, lenders and professionals. Asset managers must understand all relevant contractual agreements and enforce terms pertinent to the operating agreement and other partnership documents.
Regulatory compliance refers primarily to conformity by the investment partnership / property owner with all affordable housing requirements imposed by any applicable programs, with special emphasis on IRS Section 42, since receipt of expected tax credits represents such a significant element of investor return. Thus, asset managers must be knowledgeable and certified in Section 42 compliance. Syndicators may use industry compliance experts to supplement staff or to entirely outsource regulatory compliance reviews.
- Annual compliance review consisting of site visit and HQS evaluation or to applicable housing code of some (typically 20%) of units and review of tenant lease files (typically 20%) for compliance with Section 42 and other applicable regulatory restrictions. File reviews often are “desktop” conducted offsite via electronic copies. Compliance Monitor creates written report of findings and follows up to resolve any issues cited.
- Increased frequency or scope of physical inspections or file reviews may be warranted for troubled assets. Similarly, scrutiny may be reduced for lower risk investments, perhaps as measured by size of equity investment, historic performance or other factors.
- Collect and review annual compliance reports required to be sent by developer to the HFA, including certification of program compliance and tenant activity summary for past year.
- Collect and review all management and compliance review reports produced by State HFA.
- Solicit any 8823s generated by State HFA, whether from developer, property manager or HFA.
- Solicit at least annually developer’s certification of compliance and affirmation that no violations have occurred.
- Confirm that property management firm has met any professional education requirements which may be imposed by State HFA or syndicator.
- Some syndicators retain the services of compliance professionals to provide ongoing technical assistance in Section 42 and other regulatory matters. Typically such service is free to partners and managers connected to investment properties in which syndicator holds interests. Such resources encourage avoidance of compliance problems and reinforce education for property operators.
Systems and procedures to regularly and thoroughly conduct compliance monitoring cover scheduling, communications with developers and property managers, reports on findings, corrective action and documentation of resolution of any problems identified. Asset managers and compliance specialists routinely work with property managers to promote understanding of reporting requirements and compliance issues.
Syndicators should consider requiring in the partnership documents immediate self-disclosure by developers of any notice of:
- Default from lenders or other contractual parties.
- Violation of law or local building/housing codes.
- Non-payment of real estate taxes.
- Filing of Fair Housing complaint.
- Litigation or initiation of bankruptcy proceedings which involve the General Partner or guarantor or investment partnership.
- Negative reports from State HFAs or the IRS regarding non-compliance findings, including issuance of any forms 8823 and any notices of audit or recapture from IRS.