Tax Credit Agencies Fine-Tune Allocation Priorities, Address Changing Needs

Battle between for-profits and nonprofits cools, but still simmers; QAPs reflect concerns about market weakness

• Refinements in policy
• New emphasis on market studies
• For-profit vs. nonprofit
• Higher credit allocations available for some areas
• Demand still high for tax credits

The tax credit allocation process moved slowly in 2001, with several large states delaying the final announcement of which projects would receive reservations until September or even October. This slowdown in the normal decisionmaking process was largely the result of recent changes in the federal government’s requirements for how credits are allocated.

Most states had already approved their 2001 Qualified Allocation Plans for awarding tax credits, when, in December 2000, Congress passed a law increasing the volume limit on tax credits and changing allocation requirements. The move slowed some states because they had to go back and revise their application procedures before accepting applications.

Despite a 20% increase in credit volume that went into effect in 2001, in most states, the demand for housing tax credits still outweighs the supply, according to the National Council of State Housing Agencies (NCSHA). However, a number of state credit allocating agencies reported that the 2001 allocation rounds were somewhat less competitive than previous competitions.

For the 13 states with the smallest populations, the increase went even further. Beginning in 2001, no state or territory will have less than $2 million of credits to allocate each year.

Refinements in policy

As they prepped to handle another 20% increase in tax credit authority in 2002, state allocating agencies were preparing allocation plans that included refinements to policy changes they had made in 2001 in a rush to implement the new law. Developers were anticipating that 2002 would also bring the full impact of changes in the definition Qualified Census Tracts (QCTs), which qualify for extra tax credits.

Another issue gaining importance in agency planning was how to deal with preservation of older affordable housing, including projects that received tax credits back in the ’80s and that are now nearing the end of their initial 15-year low-income use period. Many of those projects need fresh tax credits to raise money to make repairs or to allow for a change in ownership if they are to be maintained for low-income use.

One of the most controversial changes enacted by Congress in 2000 requires that allocating agencies may no longer give preference in the credit award process to projects sponsored by nonprofits. Some syndicators maintain that this mandate has not been followed in some states, which continue to give most or all their tax credits to nonprofit-sponsored projects. The agency in Rhode Island, for one, says it awarded all its 2001 tax credits to nonprofit groups, a policy that goes against the intent of the statutory change, one syndicator said.

Legislation in 2001 also requires states to give priority for allocations to projects located in qualified census tracts that contribute to “a concerted revitalization plan.” The question is how states will define this, since Congress did not specify how to define the terms it used.

The law required states to review a market study for each project before awarding it tax credits. Several states have worked on refining their methods for implementing this requirement. In several cases, they are planning to require analysis of the need for the project as a first step before submission of detailed tax credit applications.

New emphasis on market studies

In today’s slowing economy, look for allocating agencies to put even greater emphasis on submission of high-quality market studies to ensure that projects really are needed. Many agencies and investors are concerned that there may be an oversupply of affordable units in some markets.

Preservation continues to get more attention from state allocating agencies. In Wisconsin, for example, the 2002 Qualified Allocation Plan (QAP) will increase the set-aside for preservation projects from 20% to 35% of its credits for the year. It is not addressing tax credit projects nearing the end of their first 15-year compliance period because it has few if any in that category. Rather, it is trying to encourage developers to turn away from new construction, at least partly because some areas have a sufficient supply of projects.

Wisconsin’s set-aside funds are aimed at preserving housing units and strengthening neighborhoods experiencing extreme poverty and economic distress. This includes federally assisted housing, projects in certain Milwaukee census tracts, developments that have historic significance in the local community, adaptive reuse of existing buildings, and conversion of existing market-rate developments to affordable housing.

Other states that have set-asides for preservation include Arizona, Illinois, Massachusetts and West Virginia.

The year 2001 was a milestone year for the low-income housing tax credit program, which is credited with helping to produce about 70,000 affordable apartments for low-income families each year. Obtaining credits is still competitive, but a little less so in some states. Several reported receiving fewer applications this year, perhaps as a result of the many changes taking place in the industry. For example, California received 174 applications this year compared to 262 in 2000. The state cut back to a single allocation round this year. Washington received 46 applications this year when in past years it has received as many as 60, a fact attributed to the new market study that is required for the first time in the application process.

For-profit vs. nonprofit

The issue of for-profit vs. nonprofit sponsors has cooled off after previous public debates between the NCSHA and the National Association of Home Builders (NAHB). In fact, the NAHB is not taking a public position on the question of whether nonprofits are still getting too large a share of tax credits even after the law was changed.

“In our view, the number one priority for tax credit allocations should always be the quality of the housing produced,” said Greg Brown, director of affordable housing in the Multifamily Division of NAHB.

States that devoted more than 50% of their tax credits to nonprofits in 2000 included Colorado, Maine, New Hampshire, New Jersey, New Mexico, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Dakota and Vermont. The national average percentage devoted to nonprofit sponsors was 31%. This data is from the newly published State Housing Fact Book for 2000 from NCSHA. It is the most recent nationwide data available.

According to NCSHA, the statutory change stated that projects could not receive priority for tax credits only because of the tax status of the sponsor. It did not prevent agencies from implementing priorities that are more easily met by nonprofits than for-profits.

The question of how to flesh out the new federal priority for projects in revitalization areas has left some states to rely on subjective judgments. In Wisconsin, for example, state officials worked hard to get guidance from federal agencies on how to define this requirement but ended up leaving it very general and subject to interpretation.

One of the most detailed definitions can be found in the California Tax Credit Allocation Committee’s 2001 QAP. As in other states where the competition for tax credits is still intense, developers say a California project cannot win tax credits unless it wins the 10 points available for projects meeting the revitalization criteria.

This creates a disadvantage for projects in recently developed communities where housing is needed but community revitalization is not at issue, said Bill Witte, principal at Related Capital of California.

One developer in the state that specializes in developing the affordable housing component of master-planned communities is advocating that the state offset this bias by also giving points for projects that are planned in response to inclusionary zoning laws.

Higher credit allocations available for some areas

In a closely related issue, states will find in 2002 that there are more changes in the designations of QCTs, meaning that more QCT areas will qualify. Based on the Community Renewal Tax Relief Act of 2000, and fair market rents and income limit announcements for 2001, an additional 2,331 areas have been listed as QCTs.

Congress expanded the eligibility requirements for QCTs as part of the 2000 tax law, explained Stephen Erlich, an economist with HUD. Previously, the QCT designation had been defined by income limits. To meet the designation, at least 50% of households in the area had to have an income less than 60% of the area median income (AMI). Under the new law, any metropolitan area with a poverty rate of 25% of the population also qualifies as a QCT.

The QCT designation is designed to spur affordable housing development in underserved areas in conjunction with the federal low-income housing tax credit (LIHTC) program. The maximum amount of tax credits a project can receive is either 70% of the qualified basis for new construction or substantial rehabilitation, or 30% of the qualified basis for the cost of acquiring existing projects. [Qualified basis is defined as the result of applying the “applicable fraction” (the percentage of tax-credit-eligible units in the project) to the “eligible basis” (the costs of acquisition, rehabilitation or new construction).]

Buildings within QCTs or difficult development areas (DDAs) are entitled to have eligible basis increased by up to 30%. This results in higher equity proceeds since it allows investors to take more tax credits.

Developers should note that the next round of designations, scheduled for September 2002, will use data from the 2000 Census. This year’s designations use data from the 1990 Census.

Demand still high for tax credits

The increased supply of tax credits in 2001 also inspired more demand. Demand exceeded supply by three to one at New York State’s Division of Housing and Community Renewal (DHCR), according to a preliminary estimate by the agency. The 2001 credit increase brought DHCR’s authority for the year 2001 to $27.3 million. DHCR received approximately 170 applications in this year’s single round of competition, which closed May 31. That’s up from 150 the year before.

The need for tax credits also is keeping up with the supply in New York City, where the city’s Department of Housing Preservation and Development (HPD) received 80 applications for its $10.2 million authority, up from only $8.6 million in the year 2000. In 2001, demand outweighed supply by 1.3 to 1, which is consistent with the prior year.

California received about 175 applications in 2001, when it closed its one and only application round June 15, said Jeanne Peterson, executive director of the state’s Tax Credit Allocation Committee. The number of applicants was down from 262 last year when California held two funding rounds.

Florida received 134 applications in 2001, a slight increase from last year, with applicants requesting $3 for every $1 in available credits, according to the agency. The committee had $50.8 million in federal credits to award.

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