TAX CREDITS

2008 QAPs Push Green Policies

BY DONNA KIMURA

AFFORDABLE HOUSING FINANCE • DECEMBER 2007

State housing finance agencies continue to incorporate sustainable design measures into their qualified allocation plans (QAPs) that determine which developments receive tax credits.

More than a dozen states reported increasing the number of points available or adopting other policies to encourage green design into their affordable housing projects.

For example, the New Hampshire Housing Finance Authority was proposing to double the number of points that developers can receive for green building in 2008. The New York City Department of Housing Preservation and Development anticipates that its biggest move will be to establish green threshold requirements. The Massachusetts Department of Housing and Community Development expects to dedicate a significant number of points within its scoring system for sustainable design features. The Texas Department of Housing and Community Affairs (TDHCA) has added green building features to its threshold requirement points, and the Washington State Housing Finance Commission has put developers on notice that all LIHTC projects starting in 2009 will have to meet certain new green building standards.

"For projects to be competitive, applicants will need to incorporate green or sustainable design into their projects," said officials with the Michigan State Housing Development Authority (MSHDA). A similar message was delivered by other states.

The “greening” of QAPs is one of the big themes to emerge in the 2008 plans. A survey of state housing finance agencies also found a number of states making moves to encourage the development of supportive housing and revealed growing interest in preservation projects in several states.

Another huge issue is the increasing cost of development.

The gap financing sources have not grown along with increasing costs, said Jonette Hahn, a principal with the Reznick Group, who analyzed a majority of the surveys for AFFORDABLE HOUSING FINANCE. In 2007, allocators on average reserved about 13 percent more credits per unit than in 2006, and about 25 percent more than in 2005, said Hahn.

In 2007, the average amount of credits reserved per unit was $10,284.

Hahn also noted that state agencies on average are estimating that the price per dollar of tax credit will fall approximately 1 cent in 2008 from this year. State agencies said the median price per dollar of tax credit was 92 cents in 2007.

Several leading tax credit syndicators predict the decline in pricing will be even greater, making it tougher for developers to pencil out deals.

There were some interesting results out of individual states.

In California, which has the most tax credit authority of any state, about $68.5 million in LIHTCs financed 4,791 tax credit units in 2005. That number fell to 4,098 tax credit units in 2006 despite the amount of LIHTC reservations increasing to more than $72.5 million. However, there was a jump this year—5,374 tax credit units were reserved with $76.8 million in credits.

In Texas, about $48.6 million in LIHTCs were reserved to help build 5,782 tax credit units in 2007. That’s about a 19 percent drop from the 7,145 tax credit units that were funded in 2006 with about $48.3 million in credits.

Arkansas went from funding 1,305 tax credit units in 2005 to just 735 in 2006, about a 43 percent decline in the number of units, despite reserving roughly the same amount each year—$6.9 million in 2005 and $6.7 million in 2006. In 2007, the state funded 992 units but reported reserving $7.6 million in LIHTCs.

QAPS get more green
Affordable housing has been at the forefront of a movement to encourage the development of energy-efficient and environmentally friendly homes. Housing industry consultant James Tassos has worked with Enterprise Community Partners, Inc., to analyze how states are using the LIHTC program to advance green home building.

All states promote sustainable development in some way through their LIHTC plans, according to Tassos in Greener Policies, Smarter Plans: How States Are Using the Low-Income Housing Tax Credit to Advance Healthy, Efficient and Environmentally Sound Homes. His review of 2007 QAPs found that 42 states employ "threshold criteria" that address sustainable development, and 48 states encourage green development through selection criteria incentives.

The New Mexico Mortgage Finance Authority reported that all projects receiving 2007 LIHTC reservations received points for sustainable design. "The most noticeable trend has been an increase in developers including green initiatives in their application," said the Illinois Housing Development Authority (IHDA).

The New Jersey Housing and Mortgage Finance Agency said that adding green design features as a point category this year will ensure that almost all 9 percent tax credit projects, with the exception of preservation deals, will implement such features.

Serving special populations
Several states are tailoring their programs to develop more permanent supportive housing for the homeless and for other special-needs populations. This seems to be happening more on a state-bystate basis than as a sweeping trend.

The California Tax Credit Allocation Committee (CTCAC) plans to make homeless assistance a priority for the nonprofit set-aside and to fund the set-aside outside of the current geographic apportionment process. This would make about 10 percent of the state’s tax credits available for homeless-assistance projects.

Officials there will be watching to see what emerges on this issue nationally. "California is interested in how other states are using tax credits to address homelessness and to house special-needs populations," said Joe DeAnda, spokesman for state Treasurer Bill Lockyer. Lockyer is chairman of CTCAC. "Homelessness is a large issue in California, especially in our major urban centers, and combining federal tax credits with other state and federal resources is a priority."

The Ohio Housing Finance Agency is considering adding $500,000 of annual credits to its permanent supportive-housing pool.

IHDA also plans to increase incentives for developers to provide housing for supportive- housing populations.

The North Carolina Housing Finance Agency (NCHFA) has been a leader on this front. Since 2002, it has partnered with the state Department of Health and Human Services to integrate persons with disabilities and homeless populations into tax credit properties. NCHFA originally offered bonus points to developers that targeted 10 percent of their tax credit units to the populations. In 2004, the 10 percent set-aside became a requirement.

The program was recognized by the National Council of State Housing Agencies (NCSHA) in 2006.

"One of the keys is using standard leases that do not require the acceptance of services," said Mark Shelburne, NCHFA counsel and policy coordinator. "People get the services they need independent from the housing unit."

People with disabilities have a great need for housing, and the LIHTC program is by far the largest affordable housing production program, Shelburne said. "We wanted to have the latter serve the former."

The Maryland Department of Housing and Community Development was recognized for a similar program by the NCSHA in 2007.

For 2008, MSHDA is also considering having projects give leasing priority on 10 percent of all units to supportive-housing tenants.

Two states made moves involving assisted-living properties. The Arkansas Development Finance Authority boosted the set-aside for assisted-living developments to $850,000 from $400,000. In 2007, it received requests for more than $1 million in credits in this set-aside. The Nevada Housing Division added assistedliving as a project priority.

Going into 2008, a few states reported plans to increase deep income targeting.

IHDA, TDHCA, and the Montana Board of Housing all noted proposals to increase the incentives for developments that target tenants earning no more than 30 percent of the area median income.

On the other hand, the South Carolina State Housing Finance and Development Authority is de-emphasizing lower income targeting. The change was made in response to developer comments that the income restrictions were hurting projects because rents were not rising.

Push for preservation
The competitive 9 percent LIHTC is predominantly a financing vehicle for the production of new affordable housing units, while the 4 percent credit and taxexempt bonds are used more for the preservation of existing properties with rental assistance, said Hahn.

However, a number of states are anticipating more preservation projects being funded through their 9 percent LIHTC programs.

Tax credit syndicators and developers speaking at AHF Live: The Tax Credit Developers’ Summit called on state housing agencies to revise their qualified allocation plans to accommodate severe challenges to the economic feasibility of tax credit deals. They said that flat rental income resulting from stagnant incomes in many areas, coupled with declining pay-ins from equity investors, make it harder and harder for sponsors to meet enough selection criteria to win tax credits and still deliver an economically viable project.

Jeanne Peterson of the Reznick Group criticized states for imposing “unfunded mandates” such as requiring a certain percentage of units in every deal to serve people either at 30 percent of the area median income or below or special-needs populations without having extra funding available. She also criticized states that require Davis-Bacon wages to be paid on every development.

In the current challenging economic environment, state agencies should simplify their allocation plans and go back to focusing on good real estate fundamentals, said David Heller, principal of The NRP Group.

He called on more states to do what Ohio recently began doing—visiting the sites of proposed LIHTC developments. “I have to say that going out and looking at the real estate was the biggest positive, and grading the deals on how good the land is, how good the development is, is something that I would encourage all states to do,” he said.

Jonette Hahn is a principal in the National Affordable Housing Finance division of Reznick Group, based in the Baltimore office. Hahn specializes in structuring and obtaining financing for affordable housing and economic development projects involving leveraged financing and public/private partnerships. She is an important team member responsible for financing activities and works closely with other team members such as the developer, contractor, management agent, architect, accountants, lawyers, consultants, and public and nonprofit participants involved in affordable housing development.