Low Income Housing Tax Cronyism

May 10, 2017

The Low Income Housing Tax Credit (LIHTC) is a federal program that subsidizes the construction of housing for poor tenants. The $8 billion program suffers numerous failures, as discussed in this study. One problem is that the program’s subsidies may flow more to developers and financial institutions than to the needy population that is supposed to benefit.

National Public Radio investigated the LIHTC for a show aired yesterday. The joint investigation with PBS found that the program has “little federal oversight” and is producing “fewer units than it did 20 years ago, even though it’s costing taxpayers 66 percent more.” The investigation discovered that “little public accounting of the costs exists, even among government officials and regulators charged with monitoring the program.”

Here’s how the program works:

Every year, the IRS distributes a pool of tax credits to state and local housing agencies. Those agencies pass them on to developers. The developers then sell the credits to banks and investors for cash. Often, to find investors, developers will use middlemen called syndicators. The banks and investors get to take tax deductions, while the developers now have cash to build the apartments.

With lots of groups on the federal gravy train—state and local housing bureaucracies, developers, banks, syndicators, and investors—the LIHTC program has fortified itself politically. Developers apparently take a 15 percent cut on the total value of housing projects, while syndicators earned more than $300 million in fees last year.  

Some share of LIHTC subsidies disappear in corruption and fraud. NPR profiles a Miami-area criminal enterprise led by Biscayne Housing and Carlisle Development Group, which is “one of the country’s top affordable housing developers.” The companies stole $34 million from 14 LIHTC projects. Biscayne’s former head Michael Cox admits, “It was a construction kickback scheme … The scam was to submit grossly inflated construction numbers to the state in order to get more money than the project required and then have an agreement with the contractor to get it back during construction.”

NPR interviewed Assistant U.S. Attorney Michael Sherwin, who has spent five years investigating the LIHTC program in Florida. “This program has been described as a subterranean ATM, and only the developers know the PIN,” he says.

The IRS runs the program at the federal level, but its oversight is “minimal” says the GAO. The IRS relies on local housing agencies to prevent corruption, but those agencies don’t put much effort into program integrity. “It’s really a program of trust,” Sherwin noted to NPR.

The man who ran Florida’s housing agency at the time of the Biscayne/Carlisle crime spree, Steve Auger, defended the LIHTC and assured NPR such scams would not happen again. He said, “It’s probably the most efficient tax housing program that has ever existed.”

So far, this blog has had a serious focus. But now it’s time for the comic relief:

After the interview with NPR and Frontline in late 2016, Auger was forced to resign from the agency after an audit revealed he spent more than $50,000 on a steak and lobster dinner for affordable housing lenders and gave his own staff almost half a million dollars in bonuses.

I guess Auger was lying about the efficiency thing, but he was also wrong about scams not happening again:

A few months later, Sherwin charged a Miami-based shell company called DAXC LLC belonging to the owners of Pinnacle Housing Group, another one of the largest developers in the country, with the theft of $4 million from four tax credit developments. In an agreement with prosecutors, a DAXC representative acknowledged that the company “inflated costs” for its own “personal benefit.”

Is LIHTC corruption confined to Florida? The Assistant U.S. Attorney doesn’t think so:

Sherwin says he is not done investigating the LIHTC program. He says he is turning his investigation to more developers with projects in other states and also to the banks, lenders and syndicators. “I know that this fraud doesn’t just reside in South Florida,” he says. “There’s too much money involved, and based upon other information that we’ve looked at, this fraud exists in other jurisdictions.”

The vast majority of housing agencies have never been audited. There have been only seven audits of the 58 state and local housing agencies that the IRS relies on to watch the program since it began in 1986. And when you trace the tax credits of LIHTC properties upward to syndicators and investors, the profit structure becomes even more obscure.

Congress is considering tax reform this year to cut rates and eliminate loopholes. The LIHTC is a corporate loophole that should be chopped. Tax reform means less steak and lobsters for the insiders and more income and opportunity for average families.

Kudos to NPR and PBS for their investigation. Further discussion of the LIHTC here and here. Discussion of reforms to reduce housing costs here


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