Audit Report on the Department of Housing Preservation and Development’s Controls over the Awarding of Housing Incentive Projects

The objective of this audit was to determine whether the New York City (the City) Department of Housing Preservation and Development (HPD) has adequate controls to ensure that its housing incentive projects are awarded to responsible property owners and developers that: (1) meet all program requirements; (2) have the requisite ability to create or preserve the required affordable housing units, in accordance with program guidelines; and (3) have the business integrity and reliability, including a satisfactory record of performance, that will assure good faith performance.

The mission of HPD is to promote the construction and preservation of affordable housing for low- and moderate-income families throughout the City.  Housing is considered affordable when a household spends no more than 30 percent of its income on rent.  The federal government calculates income limits for affordable housing programs using the Area Median Income (AMI), which is defined each year by the U.S. Department of Housing and Urban Development (HUD).

HPD’s Office of Development is charged with implementing the City’s Housing New York (HNY) plan to create and preserve 200,000 affordable housing units by the end of Fiscal Year (FY) 2024.   The Office of Development was responsible for overseeing 30 different affordable housing programs during our audit scope period, including eight real property tax benefit programs authorized by State and City laws to facilitate private and publicly-subsidized rehabilitation and new construction throughout the City.

To become an affordable housing sponsor (i.e., developer of affordable housing units under one of the HPD programs), interested applicants are generally required to submit a proposal that meets minimum program standards unique to each program, as specified in a program term sheet.  HPD program personnel assess the proposals, and if a proposal is accepted, aid the applicant in obtaining the support specified in the term sheets that will enable the applicant to become an affordable housing sponsor.  As part of the application and approval process, applicants must also submit to HPD’s Sponsor Review Unit (SRU) completed and satisfactory disclosure documents for the individuals and entities involved in the project[1].  SRU staff conduct a series of reviews and background checks on the sponsors.  Also, during the sponsor vetting process, HPD program staff analyze the physical condition and financial health of applicants’ other properties and work with those applicants prior to loan closing to ensure that corrective actions have been taken to address any outstanding violations and/or arrears attached to those properties.

According to HPD’s Affordable Housing Production data, during FYs 2015 and 2016, 624 HPD-related projects comprising 30,083 affordable units were either preserved or created.

Audit Findings and Conclusion

Our audit found that although HPD appears to have established adequate controls to ensure that affordable housing incentives are awarded to property owners and developers that meet program requirements and have the capacity to perform, the agency’s practices and procedures limit its ability to assess the quality of potential sponsors’ prior performance with affordable housing programs in which they previously participated.

We reviewed a sample of 12 program files for affordable housing incentive projects and found that the property owners and developers generally met program requirements, as outlined in each program’s term sheet, and that sufficient and adequate documentation was on file to support HPD’s determination.  We also found general compliance with HPD’s sponsor review process,  although HPD’s Assistant Commissioners did not always sign off on the sponsor review reports prior to closing, as required by HPD’s procedures.

However, we also found that none of the 12 sampled files contained evidence of assessments being conducted of the applicants’ performance as affordable housing sponsors except where the applicants were previously involved with one of two federally-funded programs—(1) federal Low Income Housing Tax Credits (LIHTC), and (2) the federal HOME funds[2].   HPD had no evidence in the 12 sampled files documenting that it systematically reviewed the proposed sponsors’ performance records to determine the quality of their performance in any of the many other affordable housing programs HPD administers.  Moreover, we note that HPD does not centrally track compliance information for affordable housing sponsors in any programs other than where LIHTC or HOME funds are involved.  Thus, the ability of analysts to seek such information is severely limited.

Audit Recommendations

Based on the audit, we make the following four recommendations:

• HPD should reinforce its requirement that the Assistant Commissioners sign the sponsor review reports and maintain the signed reports on file as a measure to ensure and provide assurance that they reviewed the report and approve the project to proceed to closing.
• HPD should centrally track the signed sponsor review reports to ensure that projects are not allowed to proceed or to close without the responsible Assistant Commissioner’s signature on the sponsor review reports.
• HPD project managers should review and assess applicants’ compliance with affordable housing program requirements on all prior HPD projects to ensure that they have complied with the requirements specified in previous regulatory agreements before being permitted to participate in new projects. Such inquiries and reviews should be formally documented in the project files prior to project closing.
• HPD should continually monitor and assess all affordable housing projects’ performance in meeting program goals and complying with program requirements and maintain a centralized database documenting its assessment results.

Agency Response

In its response, HPD expressly agreed with the recommendation that it reinforce the existing requirement of Assistant Commissioner sign-off on sponsor review reports and appears to agree in principal with the recommendation that it develop a centralized database that documents assessment results by stating that it is “investing in a suite of technologies that will . . . centralize compliance reporting.”  However, it disagreed with the remaining two recommendations, claiming that the agency was already in compliance.  HPD also disagreed with the audit’s finding that the agency’s practices and procedures limit its ability to assess the quality of potential sponsors’ prior performance with affordable housing programs in which they previously participated.  After carefully reviewing HPD’s arguments, we find no basis to alter the audit’s findings and conclusions.

[1] Disclosure documents include: (1) disclosure statements from individuals and entities that have not worked with HPD on a development project in the preceding 36 months;  and (2) an Affidavit of No Change issued by individuals or entities that have worked with HPD on a development project in the preceding 3 years.

[2] The LIHTC program provides tax credits intended to reduce affordable housing investors’ corporate federal income tax bill.  HPD is legally required to monitor compliance to ensure continued affordability and habitability, and to notify the IRS of non-compliance with LIHTC provisions.  U.S. Treasury Regulation §1.42-5(c)(2)(ii)(A) and (B) stipulates the conditions with which building owners receiving LIHTC must comply.

HOME funds are federal block grant funds designed exclusively to create affordable housing for low-income households in the nation, and are provided through the HOME Investment Partnerships (HOME) program administered by HUD.  HPD utilizes the federal HOME funds to finance the construction of new and the rehabilitation of existing housing, and requires owners to meet certain federal requirements.

The Comptroller performed an audit of these two federal programs that was released on June 29, 2016, Audit Report on the Department of Housing Preservation and Development’s Monitoring of Building Owners’ Compliance with Affordable Housing Provisions and Requirements (Audit #MG15-118A).