Executive directors from five state housing finance agencies (HFAs) share their insight on the equity market and the key moves they are making to boost affordable housing production. Stephen Auger of Florida Housing, Tim Kenny of the Nebraska Investment Finance Authority, Doug Garver of the Ohio Housing Finance Agency, Susan Dewey of the Virginia Housing Development Authority, and Kim Herman of the Washington State Housing Finance Commission take part in the roundtable.
Q: What's the best move that your agency has made in the last 12 months?
Auger: The best move Florida Housing made during the last 12 months was our creative deployment of our Tax Credit Assistance Program (TCAP) and Tax Credit Exchange Program funding. In January 2009, Florida's Legislature held a special session to balance the state's current year budget, which resulted in severe cuts to the state funding we receive for affordable housing. We had 30 transactions that appeared infeasible due to this cut. At that time, we had more than 30 competitive low-income housing tax credit (LIHTC) transactions—mostly from our 2008 application process—that also were stuck with insufficient equity investor interest. Using the stimulus funding made available through the American Recovery and Reinvestment Act (ARRA), we were able to put most of those transactions back on track. Additionally, we were able to use exchange funding as much needed gap financing for another 40 LIHTC transactions awarded through our 2009 application process.
We've used stimulus funding in nearly 90 transactions, representing an overall total development cost of more than $1.4 billion. It's unlikely that many, if any, of those transactions would have closed without the stimulus funding.
Kenny: With four LIHTC programs to administer (regular, TCAP, exchange, and disaster area credits), NIFA adopted a “dynamic supply” allocation model. As applications for resources arrived, we mixed and matched our supply of LIHTC resources to optimize utilization of resources and minimize duplication of applicant compliance responsibilities.
Garver: As we have developed innovative strategies and policies to effectively allocate federal stimulus and other funding, we have been collaborative and transparent with our partners and stakeholders. By communicating openly and regularly and getting frequent feedback, we have been able to implement the policies necessary to get past this crisis.
Dewey: Quickly and effectively using federal resources: VHDA staff took part in early meetings with the Department of Housing and Urban Development (HUD) to gain a deeper understanding of their expectations for TCAP. We also participated in industry conference calls and exchanged information with other HFAs. In addition, we quickly drafted documents that allowed us to effectively and fully use TCAP and exchange funds. We integrated the TCAP and exchange programs into our qualified allocation plan (QAP) to ensure an equitable and speedy allocation of funding. In fact, we were one of the first two HFAs to fully allocate funds. Similarly, we are participating in the Treasury New Issuance Bond Program to enable us to continue to fund our first-time home buyer program.
Herman: We decided to allow credit investment to go where it wanted and guided ARRA dollars to the geographies and deal types investment equity would not consider.
Rather than continuing the endless search for the most creative way to use the ARRA resources, while also reacting to ongoing discussions and guidance from HUD, Treasury, and the industry at large, we decided to focus on the “stimulus” objective of ARRA. Our decision to put the TCAP and exchange capital in the hands of the developers quickly, creating jobs and putting units in service has proven to be a good one for us.
Q: Give us your assessment of TCAP and the exchange program so far.
Auger: The TCAP and exchange programs have helped to stimulate Florida's economy by helping to generate viable financing to otherwise competitively strong developments that completely lost investor interest or did not provide adequate investor equity. Our primary concern about the programs is the removal of the HFA's ability to generate income to cover the administrative responsibilities that would otherwise be permitted (which further strains the limited resources of the HFA).
Kenny: We like the simplicity and clarity of the exchange program. It was easy to deploy. The TCAP model is a regulatory Gordian knot, so it has less programmatic utility.
Garver: Both the exchange and TCAP have been great resources to help get critical affordable housing projects in Ohio moving. The overall flexibility of both programs was important. Our question about recapturing funds from either program remains a concern.
Dewey: Overall, we are very appreciative of these additional resources, although it has required substantial work for HFAs without any compensation for these efforts.
Regarding TCAP, HFAs are very willing to follow guidance; however, job-count guidance has not been clear, and there is concern that reporting is not comparable across HFAs.
The exchange program has been the easier of the two funding types to implement, both from HFA and developer perspectives, since it requires fewer deadlines and regulations. However, our overall concern is that the deadlines for expending funds may cause problems, as the housing industry had basically come to a halt in some states. Although the funds are welcome and will be put to good use, restarting the development process for affordable multifamily deals is not an easy or quick process.
Herman: Any assessment must first be placed in the context of an unprecedented capital market collapse. With that table set and, in acknowledgement of the tremendously complex task at hand for HFAs, HUD, Treasury, and the entire tax credit development and investment industry, both the TCAP and 1602 exchange programs delivered big time for affordable housing in Washington state.
Each HFA had to reconcile the challenge at hand with the opportunity presented by these ARRA resources. For Washington, this meant understanding ARRA with respect to the timing of our allocation round, the status of other committed funding, policies and processes, politics, etc. Washington state fortunately has evolved a very collaborative, communicative, and transparent development and funding culture and thus we can point to a number of ARRA successes in the face of extreme adversity.
Q: Is the LIHTC market better or worse than expected this year? Why?
Auger: We've seen improvements in the LIHTC investor market in terms of equity pricing and overall interest. Much of this improvement seems driven by Community Reinvestment Act (CRA) investment. However, there are still many areas of the state that still lack economically viable investor interest.
Kenny: The market is about as we expected; strong in urban areas and weak in rural areas. There is not much appetite for special-needs projects. Our disaster area credits, without the exchange eligibility, are harder to allocate effectively.
Garver: The market seems to be improving but is not as strong as it needs to be to attract investors. The changes to the program the industry is proposing would help to make the market a stronger option for potential investors.
Dewey: In Virginia, the market has remained constant and is perhaps a bit better in 2010 than 2009. Our state is fortunate in that we continue to be attractive to banks for CRA purposes, business activities may not have dipped quite as low economically as in other states, and we also have very active investors that are well-funded and remain committed to the tax credit program.
Herman: Better, although only time will tell. Our 2010 round deals have thus far attracted solid investor interest. That said, concerns remain about investment appetite and opportunity in some rural deals.
Q: What's the biggest change to your QAP this year?
Auger: Florida is more finely tuning our application to encourage development in geographic regions that have shown investor interest and, at the same time, discourage development in areas where there appears to be relatively low demand for new housing units. We're also incorporating new preferences for better-located developments, including transit-oriented developments, and for more sustainable developments with further emphasis on green and universal living design features.
Kenny: We have changed and will change as little as possible. The LIHTC community needs a period of stability and predictability to successfully use these assets. Accordingly, this is a time for small incremental improvements.
Garver: The biggest change for our 2011 QAP is our application review process. We will begin accepting applications six months earlier than in previous years so that staff can have more time to meet and discuss deals with applicants in a more collaborative process. This will also enable us to announce results earlier in the year and allow projects to start construction sooner. We are also dramatically shifting more resources to the preservation of affordable housing.
Dewey: We implemented point categories to target allocation of new construction tax credits to areas of growth and encourage renovation of existing housing in areas with little or no growth.
Herman: For 2010, we made few changes other than an increase to our credit per unit limits to help offset the continued decline in pricing. For 2011, given all the change happening around us, we are considering no change as the best approach.
Q: What are your big concerns going into the second half of the year?
Auger: Currently, Florida has already awarded its 2010 housing credits and all of its TCAP and exchange program funds. For the remainder of the year, our challenge is to monitor the progress of investor interest in each transaction, to close tax credit transactions, and to expend, in a timely fashion, stimulus/development funds.
An additional challenge for Florida Housing will be the implementation of the funding and strategies approved by Treasury through the “HFA Hardest Hit” initiative.
Kenny: We are concerned that applicants may not be able to meet the upcoming deadlines for spending. Further, we are concerned that Congress will continue to be unreceptive to the need to address the outdated and unworkable LIHTC income-eligibility model that precludes HFAs from using this resource to preserve and recover jobs in 77 percent of the nation's counties. The inability to use the LIHTC for the working poor negates much of its effectiveness as a tool of economic recovery.
Garver: The second half of the year will involve ensuring all of the projects in the pipeline move forward now that many of the additional resources such as exchange, TCAP, and Neighborhood Stabilization Program funds have been allocated.
Dewey: Our concern is the general state of the economy. For example, the reemergence of turmoil and higher yields in the municipal bond market resulting from state and local government fiscal stress as well as concerns over the credit worthiness and the amount of debt outstanding of many sovereign nations may impact our ability to raise capital, particularly for our single-family program. The impact of unemployment and underemployment continues to adversely impact delinquencies and foreclosures. With the discontinuance of the federal home buyer credit and lack of consumer confidence, demand for single-family housing is likely to weaken. We remain hopeful that the exchange program will be extended another year and thus minimize the impact of the economy on the LIHTC.
Herman: We will know whether or not our investment opportunities have translated into actual and adequate equity commitments.