Smooth Final Cost Certification – an Oxymoron?
By Robin Redding, CPA
One aspect of my career at BRC that I love is being able to work on final cost certifications related to low-income housing tax credit (LIHTC) projects. What is a final cost certification you ask? Let me explain. In order for an LIHTC project to be able to claim tax credits on its tax return, the entity must first receive IRS Form 8609 for each building in the project, which is issued by the state housing agency where the project is located. How do you receive a Form 8609? The developer/owner must submit a final cost certification (among other requirements) to the state housing agency, which is certified by an independent third party verifying the actual costs and eligibility of the costs of the LIHTC project. Doesn’t seem too difficult, right? Sure, on the surface, it’s easy-peasy. However, once we get into the details of all of the costs in a project, the challenge begins….
Developers, contractors, architects, appraisers, surveyors, attorneys, engineers, accountants, investors, lenders – these are just some of the players involved in creating a successful LIHTC project. Our job, as the accountants certifying the final cost certification, is to vouch that all of the costs incurred by the project are actual costs of the project. Along with this, we must determine which costs are “eligible” costs for tax credit purposes. So, we gather ALL of the invoices from the above-mentioned players (and then some) and proceed to sort through and analyze each invoice.
While every state housing agency has a different final cost certification format, the nuts and bolts of the report are generally the same. The costs of the project must be broken down into different categories and presented on the report in this manner. Why can’t each state have the SAME report? Well, that would make the process too easy. How can the process of preparing a final cost certification be made smoother? While there are many areas involved in the final cost certification process, I think focusing on the two “Cs” – Communication and Classification – can help make the process go more smoothly.
Communication, among all of the players noted above, is a key factor in the final cost certification process. While the accountants may not hear from the surveyors or appraisers, the developer definitely will be in constant contact with them. The developer is like the axle on a pinwheel: if the axle breaks, the pinwheel is a goner. Communication on every player’s part is a must, but is even more relevant for the developer of the project. If there is no communication with the developer, the project will most likely run into significant issues or possibly fail. For example, if the developer is uncertain if a cost is an eligible cost, he/she should contact the accountants. There are many different facets in determining whether a cost is eligible, so getting clarification on the front end can help minimize uncertainties on the back end. The developer strives to deliver the promised tax credits to the investor, and if this falls short, that can negatively affect the project.
Classification of costs on the final cost certification report is another key aspect that can help make the process smoother for everyone. If the books show all of the development costs in one account, not broken out into different categories, then this will make the process more difficult for the accountants. Classifying all of the costs into the correct category will improve efficiency and help speed up the certification of the costs for the final cost certification. Probably the easiest way to determine the cost categories is to look at the final cost certification report for the state in which the project is located. The categories listed on this report should correlate to how the costs are broken out on the books. There may be some unusual costs that aren’t listed on the report. What should you do? Don’t panic. Communicate with the accountants to determine in which category those costs should be recorded.
Communication and classification – two very important aspects of the final cost certification process that have the potential to help make the process go more smoothly. Is a smooth final cost certification an oxymoron? As we like to say in the accounting world, it depends. While I would love to think that it is not an oxymoron, it really depends on the accuracy of cost classification and quality of communication.
Robin Redding Principal, CPA
Robin is a tax principal in our firm’s taxation area with over 23 years of experience in public accounting. She works primarily with clients in the affordable housing industry, including tax credit properties, U.S Department of Housing and Urban Development and U.S. Department of Agricultural Rural Development Sites. In addition to reviewing tax filings […]