What is cost certification? 7 things affordable housing developers need to know.

Not planning for the cost certification process can significantly delay your affordable housing project. Here are the key things you need to know about cost certification, which is the process of determining exactly how much money was spent on development and construction.

Rehabilitating or developing an affordable housing property is a long journey with many steps. One of those steps is cost certification and understanding how cost certification works is key to making sure your tax credits or other subsidies are correctly calculated.

A cost certification is the process of determining exactly how much money was spent on development and construction. This sounds simple, but the government agencies involved in reviewing and accepting these numbers are known for being exceptionally precise, so it’s important to leave nothing to chance.

To successfully go through the process of cost certification, you must itemize all costs of construction and development costs by cost category in a specified format, and you must ensure that the total costs, as well as total eligible costs, are audited by an independent Certified Public Accountant.

Here are 7 important things to know about cost certifications:

  1. They can vary by state. In Florida, for example, a development using the Low-Income Housing Tax Credit (LIHTC) Program, you are required to submit a General Contractor Cost Certification (GCCC) and a Development Final Cost Certification (DFCC), as well as an unmodified audit report from an independent Certified Public Accountant regarding each certification as part of the Final Cost Certification Application Package (FCCAP). There are also additional required documents, which vary depending on the type of development and financing. Each component must be reviewed and accepted by Florida Housing prior to the issuance of a Final Housing Credit Allocation Certificate and IRS Form 8609 for each building in the project.
  2. It’s helpful to involve a CPA from the very beginning. There are numerous documents that need to be obtained and analyzed in order to have all the pertinent information available for the final submitted cost certifications. As examples, the developer may need to include the construction contract, development agreement, carryover allocation agreement, credit underwriting report (CUR), the Development Cost Pro-Forma, and other related costs.
  3. You can avoid a lot of headaches by being diligent about your recordkeeping. Some of the biggest pain points we have seen are from poor recordkeeping. It’s impossible to categorize expenses correctly if you haven’t itemized them precisely.
  4. Become familiar with the cost certification terms. We recommend keeping detailed records of all expenditures, by vendor and by category. And it’s important not to categorize things using general terms like “planning” or “plumbing,” as there are specific classification categories required for cost certification. If you are familiar with these categories, you can classify your expenditures based on these same categories.
  5. Plan ahead, down to the dollar. Sometimes the client may think they are done with the project only to realize that they haven’t spent enough money to get all their tax credits. At that point, they suddenly start submitting change orders to perform additional work. This is much less efficient than budgeting properly from the beginning with cost certification in mind.
  6. Some costs are ineligible. Payments to the government are ineligible, as are general overhead costs. Your CPA can share with you a more complete list of costs that may not be eligible.
  7. For HUD financing, you may need to do a separate cost certification. HUD has its own process, instructions, and format for cost certifications. Your CPA will be able to advise you on how to plan ahead for this additional step.

If you are considering the development of an affordable housing property and have questions about the cost certification process, we are here to help. Email us at info@sbfcpa.com.

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