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Why Compliance Is Indispensable in Asset Management

As the affordable housing portfolio grows, so does the responsibility to maintain property-level compliance. Asset management and compliance are areas that depend on each other to maintain the integrity of a property.

Compliance with asset management

Source: gocodes.com

The tasks associated with asset management in a company differ from one owner to the other. However, whatever organization it is, the asset manager’s responsibility is to monitor the long-term viability of the portfolio and property. They accomplish this responsibility through precise capital needs and reserve analysis, cash management, property goal-setting, and refinance management.

Compliance plays a vital role in each of these areas. Compliance is the typical act of accomplishing the conditions and requirements under the law and regulations that govern each funding source, such as the Low-Income Housing Tax Credit (LIHTC) program. Program noncompliance can lead to tax credits or losses in dollars, meaning the investor can withdraw its capital or the owner can return any investment. Considering that the asset manager is tasked with analyzing the long-term viability of a property, noncompliance can significantly affect financial viability.

Compliance and capital needs and reserve analysis

Source: freshbooks.com

Multiple tax credit Investors currently demand the completion of capital needs assessments (CNAs) on properties on a 5-year basis and when leaving a partnership. The asset manager’s responsibility is to record a property’s physical condition. The CANs provide a vivid picture of the capital needs and their incremental costs. Tax credits hold at least one reserve, including the capital replacement reserve, which requires deposits annually.

Sadly, the necessary annual deposits often don’t add to the capital needs of an aging property. Although a reserve analysis enables the asset manager to determine the required yearly deposits to cater for all the capital needs expenses at a property, they are also supposed to identify the annual deposit necessary to calculate the deficit. The asset manager must always monitor and meet a property’s required annual reserve for it to comply. Suppose there is a gap in the reserve and it needs balance; the asset manager’s responsibility is to find asset-compliant solutions for addressing those needs financially.

Compliance and cash management

An asset manager begins a property’s financial analysis by evaluating the revenue side. Maximum rent schedules are the most discussed and monitored area in the LIHTC compliance world. These schedules have been especially evident in the past few years when maximum rent limits haven’t increased. This setback can create a revenue issue for properties that rely on rent maximization. An asset manager makes specific assumptions every year, and if there is no way of increasing the rent, the property will experience negative cash flow. It is crucial to comply with the set rent requirements, especially if the property has multiple funding sources. Rising a household rent above the maximum limit is ultimately noncompliance and can negatively affect the property.

Compliance and property management goals

Source: verraterra.com

Consistent compliance on a property is only possible with property management. However, the asset manager or owner ought to identify the specific property requirements regarding a tenant’s eligibility. The customary one is the requirement of income restrictions for tenants who apply to set up a home at the property. If the property management company is not keen enough on verifying an applicant’s income and the applicant’s income moves above the required limit, it can lead to a loss of tax credits, which can greatly cost the owner.

The property’s regulatory agreement may also have specific stipulations outlining the required target population, such as seniors or formerly homeless families. If a property fails to comply with the target population requirements, the owner can attract a loss of credits, leading to a loss in the property’s financial viability. When working with property management, an asset manager must consider other areas of compliance, such as occupancy requirements, record-keeping requirements, and reporting.

No matter the position of an organization’s asset management, compliance plays a vital role in the long-term financial viability of a property. Owners who utilize third-party property management must comprehend the compliance requirements of each property in the portfolio. This responsibility ultimately falls on the shoulders of the asset manager or owner. Asset managers need to handle compliance with ultimate seriousness when performing their daily tasks because, as time goes by, compliance will become more restrictive.

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