TAX CREDITS & TAX-EXEMPT BONDS: STATE-BY-STATE PREVIEW

NORTH CAROLINA

BY LIZ ENOCHS

AFFORDABLE HOUSING FINANCE • DECEMBER 2007

RALIEGH—North Carolina housing officials may have mercy on cost-strapped affordable housing developers next year. The North Carolina Housing Finance Agency (NCHFA) is proposing to allow owners of projects that will be placed in service in 2008 to apply for additional 9 percent low-income housing tax credits (LIHTCs) if their development costs have increased since the project’s inception.

Rising land and construction costs in North Carolina over the last few years have pushed the budgets for many apartment developments to the breaking point. The most interesting affordable housing trend in the Tar Heel state over the past year was “the number of previously awarded projects that are having difficulty making the numbers work,” said Mark Shelburne, NCHFA counsel and policy coordinator.

The move to allow developers to apply for additional credits, outlined in the state’s proposed qualified allocation plan (QAP) for 2008, could provide some relief for those facing rising development costs. The catch is that both the initial credits and any subsequent credits reserved would count toward the maximum per-project award.

The 2008 QAP would also eliminate the per-unit limit on tax credit awards, which was set at $8,000, in favor of setting a maximum amount per project. That amount would increase to $1 million next year from $800,000 previously. The QAP was expected to be final in November.

The agency also proposed increasing the maximum number of units per project to 120 from 100 for developments funded with 9 percent LIHTCs and to 200 from 180 for those funded with 4 percent credits. The 2008 QAP would also return to a practice the state followed before 2006: assessing negative points for construction costs that rise above certain limits. Those limits would be set at either $78,000 or $92,000, depending on the project characteristics.

In addition, the draft QAP puts loans made through the state housing trust fund or through HOME funds under the same limitations as other loans, which must have a fixed interest rate and no balloon payments for at least 18 years after the project’s completion. Also, projects meeting all Energy Star standards would no longer be awarded additional LIHTCs; instead, they would earn an extra five points in the QAP scoring. "Green/sustainable design features have been an increasingly important aspect of our program each year and have been part of our design requirements for over a decade," said Shelburne.

The maximum possible score for LIHTC applicants would be 205 for new construction and adaptive reuse developments. Rehabilitation projects would not be scored. The point thresholds for applications to be considered for funding would be 110 points for projects seeking 9 percent credits, down from 200 in 2007, and 100 instead of last year’s 160 for developments applying for 4 percent credits.

Unlike some other states, North Carolina awards the lion’s share of its LIHTCs to new construction projects rather than using them as a tool to preserve the existing affordable housing stock. "We are able to devote 70 percent to 80 percent of our state ceiling to new construction projects with a high market demand, and still have more than a 2-to-1 application-award ratio," said Shelburne.

North Carolina has both a state tax credit and a housing trust fund, which NCHFA expects will award $4.5 million to housing developments in 2007. At press time, the amount of state tax credits expected for next year was undetermined.

NCHFA projects it will have $18 million in LIHTC authority next year, or about the same as in 2007.

2007 recap
Applicants requested a total of $41 million in credits in 2007, putting the state’s demand-to-supply ratio at more than 2 to 1. The state’s application deadline for LIHTCs next year is Jan. 11, 2008, and the reservations will be made in August.

In 2007, 44 projects representing 2,403 tax credit units and 2,405 totalunits received reservations of 9 percent LIHTCs. New construction developments received $14.4 million of the total, while acquisition-rehab projects garnered $3.7 million in reservations. Seniors projects received $5.4 million of reservations, rural projects took $7.2 million, and projects serving the homeless were awarded $330,000. At least 10 percent of all units were required to serve the physically or mentally disabled.

Nearly a quarter (23 percent) of North Carolina’s LIHTCs went to units with deep income targeting, serving tenants with incomes at 30 percent of the area median income (AMI) or below; 10 percent were targeted to those at 40 percent of the AMI; 12 percent at 50 percent of the AMI, and 55 percent at 60 percent of the AMI.

The median tax credit award was $360,000 and the median project size was 48 units. The median equity amount per tax credit dollar was 88 cents.

Tax-exempt bonds
North Carolina’s total taxexempt bond volume cap this year was more than $600 million. Still, only one affordable housing development in the state received a reservation of 4 percent LIHTCs and an allocation of tax-exempt bonds.

"There are only a few markets in our state than can support projects that are large enough to support bonds," said Scott Farmer, director of rental investment for the NCHFA. Tax-exempt bond issuance costs are too steep to allow bond issuance to pencil out for projects needing less than about $5 million in bonds, experts say.

The one development that received bond financing this year was a 176-unit project located in Charlotte that received $19.6 million in bond financing and a reservation of $185,816 in 4 percent tax credits.

2008 LIHTC PROGRAM: