A) In general Notwithstanding any other provision of this section, the housing credit dollar amount with respect to any building shall be zero unless—
(iii) a comprehensive market study of the housing needs of low-income individuals in the area to be served by the project is conducted before the credit allocation is made and at the developer’s expense by a disinterested party who is approved by such agency,
Section 42 of the IRS Code
What, exactly, does it mean to be a “disinterested” market analyst? Most everyone would agree that it precludes a market study from being provided by an equity partner affiliated with the developer. But is this all that the term means? The purpose of this article is to answer this question.
Let’s assume that a market analyst has been engaged by a for-profit developer for tax credit allocation purposes. Let’s also assume that after evaluating the developer’s proposed project, the analyst came to the conclusion that there is no market for the proposed development. The market analyst breaks the bad news to the developer. The developer wants the analyst to alter his conclusions, showing that his project is, in fact, feasible. In an effort to accomplish this, the developer offers the market analyst equity in his project, contingent on a favorable opinion.
Clearly, should the market analyst modify his conclusions to accommodate the developer, he is no longer acting as a disinterested analyst and his report no longer satisfies the “disinterested party” requirement of Section 42 of the IRS code.
Now assume that instead of offering equity, the for-profit developer offers the analyst future work to alter his conclusions, showing that the developer’s project is, in fact, feasible. Again, should the market analyst modify his conclusions to accommodate the developer, he is no longer acting as a disinterested party and his report no longer satisfies the “disinterested party” requirement of the IRS code. Although the analyst does not have an equity interest in the project, modifying his report accommodates the developer’s interest, namely to earn a development fee.
Now let’s assume that the market analyst is working for a non-profit developer who offers the analyst future work to alter his conclusions. The non-profit’s interest is philanthropic, not economic. Again, should the market analyst modify his conclusions to accommodate the non-profit developer, he is no longer acting as a disinterested party and his report no longer satisfies the “disinterested party” requirement of the IRS code. Modifying his report accommodates the developer’s philanthropic interest.
Now let’s assume that a for-profit developer hires the market analyst who, after he has completed his research, comes to the independent conclusion that the developer’s project is perfectly feasible. The developer is pleased with the analyst’s work and offers him several other projects. Has the analyst violated the “disinterested party” provision on the IRS Code? No, not at all. This is because the analyst’s conclusions were his own conclusions, regardless of what his client’s interest may be.
Here’s the point: Being disinterested is not a function of who the client is, what the client’s interests are, or whether the client offers additional work. Instead, “disinterested” means that the conclusions are entirely the analyst’s conclusions. In short, disinterested means independent.
The National Council of Affordable Housing Market Analysts (NCAHMA) recently adopted a code of ethics which spell out the analyst’s duty to be a disinterested, independent and unbiased professional. The code of ethics were carefully crafted to assure that the analyst always operates in conformance with IRS requirements. Users of market studies should look for the NCAHMA certification to be sure that reports were completed in conformance with Section 42 of the IRS Code.
State housing finance agencies have been known to engage analysts, pressuring them to deliver predetermined results in an effort to avoid litigation from developers and/or to streamline the underwriting process. Again, it does not matter who the client is or what the client’s interests may be, should a market analyst modify his conclusions to accommodate the state, he is not acting in a disinterested, independent and unbiased manner. Users of state-ordered market studies are advised to look for a NCAHMA certification to make sure that reports satisfy the requirements of Section 42 of the IRS Code.
Jeffrey B. Carroll is President of Allen & Associates Consulting. Mr. Carroll has over 20 years of real estate consulting experience. Since 1988, he has performed over 2,000 market study, rent comparability study, appraisal, environmental assessment, capital needs assessment, and utility allowance assignments throughout the country for affordable multifamily properties. Read more about the author here…