Tax Credit Allocations

States reflect on '01, mull QAP changes for next year

With many states having allocated their low-income housing tax credits for the year and others on the verge of making their reservations, officials are starting to see what worked well, what went wrong and what may be done differently next year.

It’s a milestone year for the program credited with helping to produce about 70,000 affordable apartments for low-income families each year. In its 15th year, the nationwide tax credit program received its first volume cap increase when the limit went from the original $1.25 to $1.50 per capita. It will rise to $1.75 in 2002.

While several major states had not announced this year’s allocation recipients at press time, others already were working on 2002 plans. For example, New York planned to make its 2001 reservations in September. In Missouri, officials expected to have its 2002 plans available for developers by then.

Obtaining credits is still competitive, but a little less so in some states. Several reported receiving fewer applications this year, perhaps as a result of the many changes taking place in the industry. For example, California received 174 applications this year compared to 262 in 2000. Developers in California sought more than $134 million in federal credits for about $50 million that is available. The state was scheduled to make its allocations Sept. 19.

California, which has traditionally held two funding rounds, cut back to a single round this year due to several factors, including uncertainties about what could be included in eligible basis, new legislative requirements and the late publication of income and rent limits from the federal government, explained Jeanne Peterson, executive director of the state’s Tax Credit Allocation Committee.

Washington received 46 applications this year when in past years it has received as many as 60, said Margaret Sevy, director of the tax credit division for the Washington State Housing Finance Commission. She attributed the drop to a market study being required for the first time in the application process.

The number of applications in Texas dropped from 188 in 2000 to 162 this year. It’s the third year in a row that the state has seen a decline. Officials said possible reasons for the drop include growing interest in other housing programs such as tax-exempt bonds as well as the reduction in pricing of tax credits.

Despite having fewer applicants, the demand in Texas was in keeping with the national average. Developers asked for $91.3 million in credits when roughly $30 million was available.

Washington, which will award about $9.1 million in credits also in September, had requests for more than $12 million worth of credits. Florida had requests for $78.1 million in credit when its authority is just less than $24 million this year.

In Virginia, however, the demand fell to the lowest it has been in quite a while, said James Chandler, development officer for the Virginia Housing Development Authority. Applicants requested about 1.8 credits for every one available.

Overall, however, nationwide demand continues to exceed the supply of credits, said Barbara J. Thompson, executive director of the National Council for State Housing Agencies in Washington, D.C. The issue was raised during a recent meeting attended by executive directors from 42 of the state housing agencies. “The answer uniformly back was ‘No, we have plenty of demand,’” Thompson said, noting that three credits are requested for every one that is available on average.

A review of 2001

For many states, it has been a tumultuous year. They had to scramble to implement new federal mandates, including a market study requirement, while introducing their own changes in their Qualified Allocation Plans (QAPs), the critical documents that set the priorities and criteria for the use of tax credits.

In Ohio, the 2001 plan indicated that if there was an increase, the first $2 million would go to “at-risk” projects, said Rita Parise, director of planning, preservation and development at the Ohio Housing Finance Agency. Those projects include expiring Sec. 8 homes, troubled rural developments and tax credit projects nearing the completion of their 15-year compliance period.

Those projects have previously not competed well in the 9% tax credit program. This year, about half of the developments that qualified as at-risk groups received a reservation, according to Parise.

Ohio also put in a new category called “ownership value-added,” which awards points based on the different attributes that an owner brings to a project. For example, if one of the general partner entities is a local organization with a central office in the same county as the project, the project can earn additional points. “It reinforces why we have nonprofits and local organizations involved,” Parise said. “It’s making their participation matter and real.”

In July, state officials awarded more than $17 million in credits to 50 developments that will produce about 2,981 units. A variety of projects were funded, including 13 that will house and provide services to income-eligible seniors, 22 developments that will provide homes for low-income residents and 14 lease-purchase developments that will allow qualified residents to purchase homes after the initial 15-year rental period.

Florida introduced a “cure period” this year to allow developers to correct mistakes in their applications. While there was an improvement in the documents, it wasn’t as much as officials had hoped for, admitted Mark Kaplan, executive director of the Florida Housing Finance Corp.

People still made numerous mistakes, he said. But, those who took the agency’s advice to turn in the best application on day one benefited by having fewer corrections to make, he said.

The state is expected to make its reservations in September. “We’re still so much in the middle of things,” Kaplan said, explaining that it is too early to gauge what worked well and what didn’t this year.

Another significant change that Florida made was to reduce the emphasis on leveraging. In 2000, the state measured dollar-for-dollar leveraging, but the problem with that was it was rewarding people for asking for the least amount possible. “Too many developers saw it as a race to the bottom,” Kaplan said. This year, the state still is looking at a project’s ability to leverage finances but only as a tiebreaker. The projects with the best leveraging were put in one group. The next one-third of the applications was put in another. If there was a tie score, the first tiebreaker went to those in the first group.

“Most developers liked this change,” Kaplan said. “I think it’s a concept we will keep.”

Federal legislation forced all states to require a market study. It was a new requirement for many, including Washington, which took the step of only accepting reports prepared by appraisers licensed in the state.

“I knew we wanted to be conservative the first year,” said Sevy. “I wanted people who are familiar with our area doing the market studies.” The reports, she said, have met the agency’s requirements.

States are paying close attention to the studies, especially to evaluate any potential competition between new tax credit projects and old ones in the same area, said Jerry Breed, a partner at Powell, Goldstein, Frazer & Murphy in Washington, D.C. Housing officials don’t want to jeopardize the economic viability of an existing project by locating a new development next door, he explained.

A legal expert on the tax credit program, Breed is seeing more and more developers fighting the states over their scores as well as the administration of the QAPs. For example, there is litigation in Pennsylvania, where a developer is challenging his score, and last year Iowa was challenged that its actions weren’t consistent with its QAP, he said. The growing willingness of developers to take on housing agencies is resulting in states placing more emphasis on consistency, he said.

“I think the better state agencies, and most do a good job, are aware of this issue and do things consistently,” Breed said. “I think the state agencies that don’t are more likely to be challenged.”

States are increasingly aware of lawsuits, agreed Ann Soja, president of First Sterling Financial, Inc., in Manhasset, N.Y. “It was a much more distant concern two years ago.”

Soja said states also are reviewing a project’s financial feasibility closer than ever. Not only do they look at the gross factors that influence a development, they are attuned to the subtleties. She expects this trend will continue as development costs increase and financing becomes more complicated.

Syndicators, who follow the states closely, noticed several trends in allocation priorities this year.

Mirko Jokanovic, director of acquisitions for the National Partnership Investments Corp. in Beverly Hills, credited the states for trying to simplify complicated procedures.

“We are pleased with the progress made by some states, California particularly, in simplifying the goals of the QAP,” he said. “Tax credit investors have been increasingly buried over the last five years in paperwork designed to ensure the developer’s compliance with its scoring and adherence to the QAP. By streamlining the application scoring process, California’s average 2001 application still includes about four inches of paperwork, but it is manageable and fluid. The agency gets its desired level of due diligence while the investors get to purchase an understandable and manageable real estate investment.”

Other syndicators pointed out that it is difficult to find investors who can use both federal and state credits. With state-specific tax credits, only firms with a tax liability in the state can use them.

Looking ahead to 2002

State housing administrators often view their programs as a continuous process. States regularly modify their QAPs in an effort to reward the best and most needed housing developments.

A number of changes already are being mulled for next year.

California will likely go back to two funding rounds, one in March and the other in June, said Peterson, head of CTCAC. “Developers seem to prefer it,” she explained. “We give points for readiness. We see projects getting ready at different times of year.”

Colorado is exploring the possibility of accepting applications on a continuous basis.

“It’s hard to find sites in Colorado, and when you do find them it’s hard to hold on to them,” said Ron LaFollette, manager of the tax credit program at the Colorado Housing and Finance Authority. An open allocation process would help developers by accelerating the process of obtaining a credit reservation.

Virginia officials said it is still too early to know what will be different next year, but they have some things to think about after a recent meeting. Some applicants told them they want the state to place more emphasis on developer experience, said Chandler. A few years ago, Virginia reduced the number of points a project can receive for developer experience.

A more controversial suggestion that came up during the public meeting was to reduce the number of points given to projects with nonprofits that are managing partners, but Chandler stressed that no decisions have been made. At this point, the state is in the early stages of listening to public comments regarding next year’s QAPs.

In Florida, there is a statewide housing needs study under way. Information gathered in the report could help the state target the most needy geographic areas next year, said Kaplan.

Minnesota officials also are looking for new ways to provide credits to areas in need of housing. The state used to give some consideration, a small number of points, to projects in locales that never had a tax credit project before, said Katherine G. Hadley, commissioner of the Minnesota Housing Finance Agency.

Now, the focus is on areas of household and job growth. “It’s a tough policy, but it’s what we need to do to sustain economic growth in the state,” she said.

Developers in Minnesota already have submitted applications for the first of two funding rounds in 2002. Housing officials expect to approve the first round of allocations around October, and a second round will follow around April or May 2002.

For the last few years, Minnesota also has focused on larger projects with higher density to take advantage of the economies of scale, and that will continue, Hadley added.

Officials at the South Dakota Housing Development Authority report that they are looking at the possibility of awarding points for preservation projects next year.

They are seeing more new construction developers looking at doing rehabilitation projects.Wisconsin housing leaders also said they may increase the preservation set-aside in their state.

In Texas, officials recently approved $27.9 million in credits to 66 affordable housing developments this year and a forward commitment of $5.5 million from the 2002 state credit ceiling.

A breakdown of this year’s allocation reveals that $4.3 million went to applicants competing in the nonprofit set-aside; $3.9 million went to applicants competing in the rural set-aside; $2.3 million went to senior housing; and 57 developments represent new construction.

Next year, the 10% elderly set-aside may be removed while a 15% preservation set-aside is being created, according to housing officials. Texas also is looking at several new areas that might be included in its scoring criteria, including costs per square foot, unit sizes, location in economically distressed areas and an extended compliance period.

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