Developing affordable housing is challenging for many reasons including NIMBY issues, land prices, building material costs and complex financing structures.
For those developers that utilize the low-income housing tax credit, an even more daunting challenge can be looming . . . the qualified allocation plan (QAP).
The QAP has become an amalgamation like none other. Why has this happened; how is this helpful to the production of affordable housing, and what can be done about it?
The LIHTC has been riding a popularity wave for many years with multiple applications submitted for every one awarded. State housing finance agencies (HFAs) have attempted to create a fair process for evaluating applications that relies upon an objective scoring system. On the surface this seems like a reasonable approach.
Unfortunately it’s not so simple.
The Christmas tree effect
The HFAs are under enormous pressure on multiple fronts.
Politicians at all levels are exerting a great deal of influence on HFAs to add provisions that create a hodge-podge of requirements that can be self-serving for special-interest purposes, or are simply reactionary to isolated situations. Certain constituencies advocate for consideration of their needs in the QAP process because there really aren’t any other housing programs to accommodate them. And HFAs continue to seek differentiating factors to avoid making subjective judgments when awarding credits.
The result of these factors was never contemplated by Congress when it created the LIHTC program in the Tax Reform Act of 1986. At the time, the LIHTC program was intended to meet the housing needs of citizens earning 60% of the area median income (AMI).
Today, through the QAP process, the LIHTC program has become a catchall for a wide range of social programs—the “Christmas Tree Effect” as I’ve begun calling it. There is deep-skewing of income and rents to as low as 30% of AMI. Points are awarded for green-building elements, homeless units, market-rate units—the list goes on and on.
Some QAPs are obviously trying to protect home-state developers and restrict competition from out-of-state developers.
HFAs are constantly tinkering with the QAP. One state decided in 2015 to impose a requirement that a developer’s historic building must have Part 2 approval from the National Park Service to be able to compete for LIHTC, effectively shutting down historic redevelopment using LIHTC for that year. Then in 2016, that state removed the provision from the QAP.
In some states, HFAs offer points or impose threshold requirements that drive up costs, and then implement cost-containment caps that have no correlation whatsoever to the costs that have been added. One state has become so obsessed with accessibility issues for those with disabilities that the QAP makes it virtually impossible to redevelop existing affordable housing stock.
Because of QAP requirements, it’s become increasingly more difficult to develop a LIHTC property based upon basic and fundamental real estate principles. Developers are forced to cobble together projects that are points-driven which doesn’t necessarily produce the best product for the customer. Unfortunately the focus has become less on the customer (resident) and more about checking boxes on a form.
One state requires a minimum level of debt for LIHTC projects. When a capital structure was proposed that required no debt and would have delivered significantly lower rents, the HFA response was that if debt wasn’t needed, then there were too many LIHTCs being awarded.
How is this thinking in the best interest of the customer?
A better mousetrap
So what’s the answer?
As an industry we must educate our elected officials to the fact that the LIHTC program can’t solve all of the affordable housing needs for our country. This also means saying no to their requests that add more ornaments to the Christmas tree. In fact, we need to begin removing some of the ornaments that are already hanging or risk having the tree fall over at some point.
Proposed projects should be evaluated on how creatively and effectively they solve a housing problem to the benefit of the customer that earns 60% (or maybe slightly less) of the AMI.
And it’s OK if there’s some subjectivity to the evaluation process. I’m in favor of forming a task force composed of a few experienced developers and HFA representatives who could sit down and hammer out a model QAP that would serve as an industry standard for all HFAs to adopt.
Let’s look at what works and doesn’t work with QAPs and build a better mousetrap.
The article is the fourth installment of "The Great QAP Debate," a series exploring multiple perspectives about qualified allocation plans, culminating in a panel session at AHF Live! Housing Developers Forum.
R. Lee Harris is president and CEO of Cohen-Esrey, a Kansas City-based family of companies involved with affordable housing development, market-rate apartment acquisitions, property management, tax credit syndication, construction and building services. His e-mail is email@example.com.