Accounting for Developer Fees and Guarantees in Affordable Housing: What You Need to Know

Developer fees and financial guarantees play a central role in the financing and risk management of affordable housing projects, especially those utilizing Low-Income Housing Tax Credits (LIHTC). However, accounting for these elements can be complex, and errors may trigger audit findings or noncompliance with investor or lender expectations.

In a recent McKonly & Asbury webinar, we explored the financial complexities affordable housing developers and sponsors face. This article expands on that discussion, focusing on key considerations and best practices for properly recording developer fees and guarantees under U.S. GAAP.

What Are Developer Fees and Guarantees?

Developer fees are compensation paid to the development sponsor or developer for overseeing and managing the development process, including securing financing, coordinating construction, and ensuring compliance with funding requirements.

Guarantees typically come in the form of:

• Construction completion guarantees
• Operating deficit guarantees
• Tax credit guarantees

These are often provided by the general partner (or an affiliated entity) to investors to mitigate risk and ensure timely project delivery and returns.

Accounting for Developer Fees

Developer fees in LIHTC partnerships are usually paid by the limited partnership (LP) to an affiliated developer. Accounting for these fees falls under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 606 which outlines a five-step revenue recognition model:

1. Identify the contract with a customer.

Although the developer and the project entity are often related parties, the third-party investor (usually a limited partner) is considered the customer because they receive the LIHTCs. The development agreement and partnership agreement together form the contract.

2. Identify the performance obligations in the contract.

The performance obligation in the contract is complete when the affordable housing development meets the requirements necessary to obtain a final allocation of tax credits from the awarding state tax credit agency.

3. Determine the transaction price.

The transaction price is typically the amount stated in the development agreement.

4. Allocate the transaction price to the performance obligations in the contract.

Developer fees are allocated to different performance milestones, such as:

• Predevelopment activities
• Construction oversight
• Completion and submission of the placed-in-service package

It’s common practice to:

• Recognize a portion of the fee at closing for time and effort spent on predevelopment activities.
• Reserve 5–10% until placed-in-service documentation is submitted.
• Recognize the remainder over the construction period based upon the percentage of construction completion.

Note: The issuance of IRS Form 8609 is considered an administrative step and not a condition for revenue recognition.

5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Revenue is recognized as each performance obligation is met. If cash is received before the related performance obligations are satisfied, the difference should be recorded as deferred revenue.

Accounting for Guarantees

1. Guarantee Obligations

Guarantees provided by the general partner or developer may require disclosure or recognition, especially if:

• The guarantee has measurable risk of being called upon.
• The guarantor is part of the reporting entity.

FASB ASC 460, Guarantees, provides guidance:

• A liability must be recognized at fair value when a guarantee is issued, even if the likelihood of loss is low.
• If the guarantee is not triggered and no liability arises, disclose the terms and potential exposures in the financial statement notes.

2. Monitoring and Disclosures

Guarantees are commonly seen in investor agreements. To stay compliant:

• Disclose the nature, terms, and potential cash flow impact of any guarantees in the financials.
• Evaluate whether any loss contingency exists under ASC 450, and accrue if probable and reasonably estimable.

Final Thoughts

Affordable housing accounting is full of nuances, and developer fees and guarantees are no exception. Whether you’re a development sponsor, CPA, or developer, understanding how to properly account for these items ensures transparency and compliance with GAAP, investor agreements, and regulatory bodies.

McKonly & Asbury, LLP is a leader in accounting for affordable housing entities. Our team has the specialized knowledge to help you ensure you comply industry requirements. For more information on these services and more, be sure to visit our Affordable Housing page, and don’t hesitate to contact us.

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