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

VIRGINIA

BY BENDIX ANDERSON

AFFORDABLE HOUSING FINANCE • DECEMBER 2007

RICHMOND—Developers will have to do more to win low-income housing tax credits (LIHTCs) in Virginia in 2008.

Officials will only consider applications for LIHTCs that reach a minimum point score, according to the proposed qualified allocation plan (QAP) for the program. The draft QAP sets the minimum score at 500, though the final minimum score could be as low as 300, officials say. Applications can theoretically score as high as 1,000.

"We put that number [500] there to generate comments," said James M. Chandler, director of LIHTC programs for the Virginia Housing Development Authority (VHDA).

Fortunately for developers, the proposed QAP, which officials planned to finalize Nov. 7, includes new opportunities for developers to rack up points, Chandler said.

For example, proposed developments that meet the high standards for efficient use of resources and creation of healthy living spaces set by EarthCraft will be able to earn 30 points in 2008, up from 15 points. EarthCraft is a program developed by the Greater Atlanta Home Builders Association in partnership with Southface Energy Institute.

Those extra 30 points are in addition to the 25 points that already reward measures like energy-efficient windows and appliances and water submetering.

Considering that applications for LIHTCs in Virginia typically score only 500 to 600 points, the 55 extra points can make a big difference for an application.

Chandler hopes that VHDA’s incentives will eventually motivate as many as 70 percent of the winning deals to measure up to the EarthCraft standard, compared to 40 percent in 2007.

Another 25 points will reward projects that plan to use property managers certified by VHDA.

VHDA also plans to allow more projects to apply under its 15 percent set-aside for projects that preserve existing affordable housing. The setaside used to only target projects in Northern Virginia.

In 2008, VHDA will set aside 5 percent of its LIHTCs for preservation projects in any part of the state. Another 10 percent will be set aside for Northern Virginia.

In Virginia, most preservation projects involve the acquisition and rehabilitation of buildings that don’t have formal income restrictions but which house low-income residents who could potentially be displaced by rising rents, Chandler said.

VHDA will ask for more next year from projects that plan to acquire and rehabilitate existing properties. To qualify for LIHTCs, these projects must plan to spend at least $15,000 on average to fix up each apartment, up from $7,500. Chandler hopes the change will weed out of the competition what Virginia developers call "sweep and paint" rehabs.

The demand for LIHTCs in Virginia is high enough to support the extra demands VHDA plans to put on developers, Chandler said. Affordable developers applied for $27 million in LIHTC in 2007, nearly twice the $15 million the agency had to hand out.

That subsidy will only produce 2,654 affordable apartments at a cost of $57,000 per unit over 10 years. That per-unit cost is 21 percent higher than the $47,000 per-unit cost of apartments produced with 2005 LIHTCs.

Rising construction costs are making it much more difficult to develop affordable apartments, Chandler said. He estimates that the hard cost of construction has risen 5 percent to 10 percent in 2007 alone, as prices jumped for copper and steel.

Tax-exempt bonds
Rising costs have made it especially difficult to develop affordable housing using low-interest tax-exempt bond financing combined with equity from 4 percent LIHTCs, Chandler said.

"The biggest barrier to winning bond cap is getting a deal that pencils out," he said.

Virginia developers will probably only close four deals in 2007, even though the state has enough tax-exempt bond cap set aside for affordable rental housing to finance many times that.

Of Virginia’s $650 million in total tax-exempt bond cap, 41 percent is set aside every year to finance affordable rental housing. In 2007, that works out to $265 million split between VHDA and local housing authorities.

In addition, any cap not used for industrial development also flows to VHDA at the end of the year to use for housing.

But the four deals in VHDA’s pipeline will only use $36.8 million in cap to create 442 affordable apartments. Hundreds of millions in unused cap will flow into VHDA’s home loan programs.

In comparison, in 2006, VHDA used $100 million in bond cap to finance seven projects totaling 1,150 units of housing. That’s more than twice the amount of housing in the pipeline for 2007.

2008 LIHTC PROGRAM: