NAHP Financial Management & Reporting Standards 4 — Questions and Answers
Question 1: What is the primary purpose of a project-level audit under the Single Audit Act for affordable housing?
- To evaluate tenant satisfaction and occupancy rates
- To ensure federal funds are used in accordance with program requirements and regulations (Correct answer)
- To assess the physical condition of the property
- To verify that all units meet local building codes
Correct answer: To ensure federal funds are used in accordance with program requirements and regulations
The Single Audit Act requires organizations expending $750,000 or more in federal awards to undergo an audit ensuring compliance with applicable federal program requirements.
Question 2: In affordable housing underwriting, 'operating expense ratio' (OER) is calculated as:
- Total operating expenses divided by net operating income
- Total operating expenses divided by effective gross income (Correct answer)
- Net operating income divided by total debt service
- Capital expenditures divided by gross potential rent
Correct answer: Total operating expenses divided by effective gross income
The Operating Expense Ratio (OER) equals total operating expenses divided by effective gross income, expressing what percentage of income is consumed by operations.
Question 3: Under LIHTC compliance, what happens if a unit that was previously qualified becomes over-income?
- The owner must immediately evict the tenant
- The next available unit rule applies and the unit remains qualified until the tenant vacates (Correct answer)
- The tax credits are immediately recaptured for that unit
- The owner must convert the unit to market-rate permanently
Correct answer: The next available unit rule applies and the unit remains qualified until the tenant vacates
Under the Next Available Unit Rule, if a tenant's income exceeds 140% of the applicable income limit, the next comparable unit must be rented to a qualified tenant, and the over-income unit retains its qualified status until vacated.
Question 4: Which of the following best describes 'cash-on-cash return' in affordable housing investment analysis?
- Net income divided by total project cost
- Annual pre-tax cash flow divided by total cash equity invested (Correct answer)
- Total rent collected divided by mortgage balance
- Annual appreciation divided by purchase price
Correct answer: Annual pre-tax cash flow divided by total cash equity invested
Cash-on-cash return measures annual pre-tax cash flow as a percentage of the actual cash equity invested, providing investors with a return metric based on their out-of-pocket investment.
Question 5: A USDA Section 515 rural rental housing project submits financial statements to:
- HUD's FASS-MF electronic system
- USDA Rural Development state office using Form RD 3560-7 (Correct answer)
- State housing finance agency only
- IRS as part of annual tax credit reporting
Correct answer: USDA Rural Development state office using Form RD 3560-7
USDA Section 515 borrowers must submit annual financial statements to their USDA Rural Development state office using Form RD 3560-7 in accordance with 7 CFR Part 3560.
Question 6: What is the 'applicable fraction' used in LIHTC calculations?
- The percentage of total project costs funded by tax credits
- The lesser of the unit fraction or the floor space fraction of low-income units (Correct answer)
- The ratio of debt to equity in the project capital stack
- The percentage of the credit period remaining
Correct answer: The lesser of the unit fraction or the floor space fraction of low-income units
The applicable fraction is the lesser of the unit fraction (percentage of low-income units) or the floor space fraction (percentage of floor space in low-income units), used to calculate the qualified basis.
Question 7: In an affordable housing operating budget, 'management fee' is typically expressed as:
- A flat monthly dollar amount regardless of occupancy
- A percentage of effective gross income or collected rents (Correct answer)
- A per-unit annual fee set by the housing agency
- A percentage of net operating income
Correct answer: A percentage of effective gross income or collected rents
Property management fees are most commonly structured as a percentage of collected rents or effective gross income, typically ranging from 4% to 10% for affordable housing properties.
NAHP Financial Management & Reporting Standards 4
What is the primary purpose of a project-level audit under the Single Audit Act for affordable housing?