NAHP Financial Management & Reporting Standards 5 — Questions and Answers
Question 1: What is the purpose of an 'escrow analysis' in affordable housing financial management?
- To evaluate tenant security deposit accounts for compliance
- To review escrow accounts for taxes and insurance to ensure adequate funding (Correct answer)
- To audit replacement reserve contributions against capital needs
- To assess compliance with LIHTC income restrictions
Correct answer: To review escrow accounts for taxes and insurance to ensure adequate funding
An escrow analysis reviews the funds held in escrow for property taxes and insurance to ensure the account balance will be sufficient to pay these expenses when due.
Question 2: Under HUD's Uniform Financial Reporting Standards (UFRS), what chart of accounts format must HUD-assisted multifamily properties use?
- Generally accepted GAAP chart of accounts used by the owner's CPA
- HUD's prescribed Standard Chart of Accounts for Multifamily Housing Programs (Correct answer)
- The AICPA's not-for-profit chart of accounts
- Any format approved by the state housing finance agency
Correct answer: HUD's prescribed Standard Chart of Accounts for Multifamily Housing Programs
HUD's Uniform Financial Reporting Standards require HUD-assisted properties to use HUD's prescribed Standard Chart of Accounts to ensure consistency and comparability across the portfolio.
Question 3: Which document outlines the specific financial reporting requirements, fee structures, and reserve obligations for an affordable housing project financed with tax-exempt bonds?
- The Regulatory Agreement
- The Land Use Restriction Agreement (LURA)
- The Loan Agreement and Indenture (Correct answer)
- The Partnership Agreement
Correct answer: The Loan Agreement and Indenture
The Loan Agreement and related Trust Indenture for tax-exempt bond financing detail specific financial covenants, reporting requirements, reserve funding obligations, and fee structures the borrower must maintain.
Question 4: In the context of affordable housing, what does 'net operating income' (NOI) exclude?
- Property taxes and insurance
- Vacancy and credit loss
- Debt service (mortgage principal and interest) (Correct answer)
- Management fees and payroll
Correct answer: Debt service (mortgage principal and interest)
Net Operating Income (NOI) is calculated before debt service; it equals effective gross income minus total operating expenses, but does not include mortgage payments.
Question 5: A housing authority's Section 8 Housing Choice Voucher program is financially reported under which accounting basis?
- Full accrual basis under GAAP for private entities
- Modified accrual basis under GASB standards for governmental entities (Correct answer)
- Cash basis only, as required by HUD
- Tax basis accounting to match IRS reporting
Correct answer: Modified accrual basis under GASB standards for governmental entities
Public housing authorities are governmental entities subject to GASB standards, which generally use the modified accrual basis for governmental funds and full accrual for enterprise funds.
Question 6: What is the 'break-even occupancy rate' in affordable housing financial analysis?
- The occupancy level at which net operating income equals zero (Correct answer)
- The occupancy level at which operating expenses equal debt service
- The minimum occupancy required by the lender covenant
- The occupancy percentage at which vacancy loss equals credit loss
Correct answer: The occupancy level at which net operating income equals zero
Break-even occupancy is the occupancy rate at which total revenues equal total expenses (including debt service), meaning the property neither earns a profit nor incurs a loss.
Question 7: When a LIHTC property is sold during the 15-year compliance period, what is the primary financial risk to the investor?
- Loss of future depreciation deductions on the sale
- Recapture of previously claimed tax credits plus interest (Correct answer)
- Acceleration of the deferred developer fee repayment
- Forfeiture of replacement reserve funds to the state agency
Correct answer: Recapture of previously claimed tax credits plus interest
If a LIHTC property is disposed of or fails compliance during the 15-year compliance period, the investor faces recapture of a portion of previously claimed tax credits plus interest under IRS Section 42(j).
NAHP Financial Management & Reporting Standards 5
What is the purpose of an 'escrow analysis' in affordable housing financial management?