Housing finance agencies (HFAs) across the nation are engaged in a balancing act, trying to meet the significant affordable housing needs of their states while working with a limited amount of resources.

They are the critical link between affordable housing developers and essential financing.

These agencies vary widely in their funding programs and strategies, with each charting a unique course for helping developers deliver more housing for low-income families. No single HFA has all of the answers to the industry’s challenges, but ideas can be found at each one.

A select group of new and veteran HFA leaders from big and small states were asked by Affordable Housing Finance magazine to discuss today’s housing production challenges, the growing concerns over deal feasibility and the opportunities for policy improvements.

Different challenges

The complexity of producing affordable housing is underscored by the diversity of challenges cited by HFA leaders. They range from rising development costs to anti-affordable housing biases to the preservation of existing housing stock.

Rising land and building costs have become a particularly difficult issue.

“In the last two years, Florida has seen unprecedented increases in construction, land, utilities, and insurance costs,” said Steve Auger, executive director of the Florida Housing Finance Corp. “Unfortunately, incomes have not kept pace with these costs, making affordable housing transactions as difficult as they’ve ever been. We’ve had eight hurricanes in Florida in the last two seasons – six of them major storms – and that’s only exacerbated the cost issues.”

Florida is also one of the nation’s hottest real estate markets, pushing home prices and rents further out of reach for many, according to Auger. In addition, the state’s condominium boom has taken many rental units off the market.

Florida Housing has tried to respond by increasing the amount of subsidies that a project can request and by targeting subsidies to the markets where they are most needed, Auger said.

While Florida is one of the priciest real estate markets, Oklahoma has some of the most affordable real estate in the nation. That’s presenting a unique challenge for Dennis Shockley, executive director of the Oklahoma Housing Finance Agency.

Because the land is less expensive in his state compared to some other parts of the country, he has to convince policymakers that there is an affordable housing problem in Oklahoma. “How am I addressing it?” Shockley asked. “Education, education, education.”

Negative stereotypes about affordable housing remain an issue in many places. As a result, numerous HFAs are working to change stubborn not-in-my-backyard (NIMBY) attitudes.

“We are undertaking a major public awareness campaign led by local business and philanthropy entitled HousingWorks,” said Richard Godfrey, executive director of Rhode Island Housing. He said one out of every three families in his state is in “housing crisis,” meaning people are living in overcrowded or substandard conditions, or paying more than 30% of their income for rent.

Opposition rises out of misconceptions, so education is vital, Godfrey said.

Another move that Rhode Island Housing has made is to help developers land-bank property that they have identified as potential sites for affordable housing development. Land banking helps cover the long lead time necessary for development, according to Godfrey.

The NIMBY attitudes have persisted for years and continue to be an obstacle to development, agreed Susan Dewey, executive director of the Virginia Housing Development Authority (VHDA), which is a partner in Housing Virginia, a nonprofit that provides public education on affordable housing needs.

Another challenge for Dewey is the diversity of need in her state, which ranges from the high-cost areas around Washington, D.C., to some of the poorest Appalachian regions.

Doug Garver, executive director of the Ohio Housing Finance Agency, painted a similar picture. A big challenge, he said, is addressing the varied needs of a state that has several major urban areas as well as the largest number of “micropolitan” communities – cities with 20,000 to 50,000 people – of any state in the nation. In addition, Ohio has 29 Appalachian counties.

“We are a manufacturing-based economy and have suffered 200,000-plus job losses in the last couple of years,” Garver said, making the point that affordable housing is among several big issues in the state.

Booming population, soaring prices

In Arizona, the story is different. There, the challenges include a fast-growing population and limited privately held land. The state’s Maricopa County, home to Phoenix, is seeing 375 new residents every day, said Sheila Harris, director of the Arizona Department of Housing and executive director of the Arizona Housing Finance Authority. In addition to the population growth, the cost to buy a home in Arizona has increased almost 60% since 2002, while incomes rose less than 3%, she said.

Harris said that disparity is leading her agency to partner more with private and public-sector groups.

Keeping up with the demand for affordable housing is also a big issue on the West Coast.

“Creation of housing stock in totality is the biggest problem, as California has produced fewer units relative to its growth and population,” said Theresa Parker, executive director of the California Housing Finance Agency (CalHFA). “This problem continues to compound affordability in our state. One of the newest initiatives to address this is the introduction of the Residential Development Loan Program, providing below-market-rate-interest loans to developers of single-family housing. In addition, CalHFA has continued to use variable-rate debt to offer the lowest cost of funds for construction lending and permanent loans for affordable rental housing.”

For Antonio Riley, executive director of the Wisconsin Housing and Economic Development Authority (WHEDA), the challenge is preserving existing affordable housing properties. Some 800 properties in the state, with almost 36,000 units, were recently identified as being at risk of leaving the affordable housing program, he said.

WHEDA is responding by setting aside 40% of its annual low-income housing tax credit (LIHTC) authority toward preservation. It’s the largest preservation set-aside of any state in the country.

Coping with deal feasibility

To meet the many challenges to housing production, HFAs have an assortment of financing tools, most notably the federal housing tax credits, which are awarded to affordable housing developers. LIHTCs are then sold to investors to generate equity for housing developments.

The successful LIHTC program allows HFAs to design their own qualified allocation plans (QAPs), which spell out how the tax credits will be awarded. The demand for housing tax credits far outweighs the supply in nearly all states.

In the fierce competition for tax credits, developers are often rewarded for targeting the lowest-income populations. This, however, can make it difficult for deals to pencil out. Striking a balance between serving the neediest and creating the strongest properties is one of the growing issues in the industry.

Deal feasibility is also being hampered by rising land and development costs. There’s general consensus that it’s taking more subsidies to build affordable housing units.

“Ultimately, deals have to be feasible,” said VHDA’s Dewey. “That’s the over-reaching parameter. We do give some points for serving lower incomes. At the same time, we have our REACH Virginia funds.”

Through REACH (Resources Enabling Affordable Community Housing) Virginia, the agency’s multifaceted housing initiative, VHDA can help subsidize properties with lower interest rates and targeted lending programs. VHDA also gives points in the QAP to developments that accept housing vouchers. “There’s no one easy answer,” Dewey said. “It’s really a combination of a lot of things.”

On the flip side, Dewey said, the buzz words in many communities are “mixed income.” She’s trying to strike the right balance of incomes that are being served by affordable housing projects. Having every property aimed at the same income level isn’t in the best interest of all communities either, she said.

A move recently taken by the Kansas Housing Resources Corp. (KHRC) is to provide priority points in the QAP for applications pledging that all rents will be below fair market rents, according to Erica Dobreff, executive director. “We also plan, in our next funding round, to use HOME funds and a small amount of KHRC reserves for long-term financing. This has not been done at KHRC in the past.”

In Chicago, John Markowski, commissioner of the Chicago Department of Housing, sees the biggest need at the lower-income levels.

“We have a relatively plentiful supply of rental units for people who earn between 40% and 60% of the area median income [AMI], so our primary concern is for the 220,000 renter households in the city who earn under $20,000 a year and who need affordable rental housing,” he said. “Without rental subsidies or innovative financing, it is a challenge to find new ways and resources to help these renters.”

In Florida, Auger said there is an effort to produce more units for families making extremely low incomes. The deep income targeting means more subsidies are needed. Florida Housing has tried a couple of different approaches to layering subsidies.

Like Dewey, Auger emphasized the importance of making sure a deal makes sense.

“It’s [deeper-income targeting] something we’ve made a priority and have been willing to pay for,” he said. The compromise, however, may be that fewer overall units are built because transactions are requiring more money per unit.

Florida, Rhode Island and California are among the states where fewer tax credit units have been delivered recently despite an increase in the amount of credits.

“Escalating [development] costs are making California tax credit deals much more difficult to do,” said William Pavao, executive director of the California Tax Credit Allocation Committee. “Subsidy lenders, including local housing departments and the state Department of Housing and Community Development have raised their per-unit loan maximums to help with increasing costs. The Committee raised the credit limits for 4% tax credit deals. Without additional equity, subsidy debt, or rent subsidies, deep income targeting is becoming increasingly difficult.”

Illinois has responded to the issue of deal feasibility with its Rental Housing Support Program.

“It’s a new resource that will provide rental assistance to households earning no more than 30% of the area median income,” said Kelly King Dibble, executive director of the Illinois Housing Development Authority (IHDA). “This program, which is funded through real estate-related document recording fees, is expected to have about $25 million a year, and IHDA will be able to use the resource to help underwrite some new developments.”

The agency is also working with local public housing authorities to provide project-based vouchers for tax credit projects. In IHDA’s allocation plan, when a project comes to the table and has 20% of its units receiving project-based subsidies, it receives additional points.

Construction costs have only added to the challenge, Dibble noted. “We are also trying to meet some of the rising costs by layering soft financing – HOME funds, state housing trust fund and state housing tax credits,” she said. “In Illinois, we are working hard to coordinate our actions with our sister state agencies that provide service dollars. When other social service agencies are able to forward commit service dollars for when a development is complete, it makes it easier for us to underwrite and finance the development.” This is because officials will have a better understanding about the development’s cash flow.

Ohio and Arizona are among the many states that also have housing trust funds that are providing additional subsidies to fill a financing gap.

Underwriting moves

To address some of these deal issues, HFA executives are taking a closer look at underwriting.

Many agencies have adopted the recommended practices of the National Council of State Housing Agencies, which include requiring a minimum debt-service-coverage ratio of 1.15x until initial stabilized occupancy for tax credit projects. The recommended ratio is 1.10x for Rural Housing Service properties.

The Chicago Department of Housing has allowed the staged pay-in of equity. “We’re also exploring the feasibility of deferring developer fees over the life of the projects to encourage strong management and long-term commitments to our multifamily projects,” Markowski said.

Rhode Island Housing plans to increase operating and reserve cost levels.

Housing officials in Arizona report looking more closely at the reasonableness of operating expenses.

“We are focusing more on the market analysis and capture rate,” said Shockley in Oklahoma.

At Florida Housing, officials recently added flexibility to the agency’s credit underwriting requirement for its state-funded gap financing in order to make it easier to use with tax-exempt bonds and 4% tax credit transactions.

Requests for additional credits

As development costs have escalated in the past few years, more deals are unable to meet their budgets. As a result, some allocating agencies have seen LIHTC recipients come back and request additional tax credits or subsidies.

States are handling this in different ways.

In Virginia, VHDA allows developments to compete for additional credits, but the agency does not maintain a special pool of credits for developers who need to supplement a prior allocation. “Developments needing additional credits must compete with new applications in the regular allocation pools under the regular scoring process,” Dewey said.

Ohio has received a few such requests, reported Garver. There, developers must also apply in a scheduled funding round and compete against all other applicants.

In California, tax credit awardees must turn in their 9% reservations and reapply to receive additional credits, according to Pavao. “In 2005, the Committee declined to augment awards to petitioners who requested additional credits in the face of increased costs,” he said. “For 4% tax credits, we have also seen additional credits requested at the placed-in-service stage and have accommodated those on a case-by-base review of their cost certifications.”

In Arizona, officials have created a “director’s discretionary” category to help projects that received a prior allocation, said Harris. “This move was important in providing additional equity for projects that would have otherwise had to return the allocation and units would have not been created,” she said.

Florida also saw some LIHTC awards returned after the 2004 application cycle because transactions no longer worked with the original reservation in the changing cost environment, Auger said. One way that Florida Housing responded was to increase the amount of housing tax credits that a project can request for the 2005 and 2006 application cycles, he said.

In Chicago, the Department of Housing hasn’t had many requests for additional credits. Markowski said this is likely because the department requires fixed-price construction contracts. Also, it does not finalize its underwriting until all of the soft-cost contracts are in place.

Policy ideas

The LIHTC program, which celebrates its 20th anniversary this year, is the nation’s chief affordable housing production program. It has created nearly two million affordable housing units. HFAs enthusiastically praise the program, but they also see opportunities to make it even stronger.

Ask HFA leaders what changes they would like to see in the tax credit or tax-exempt bond program, and a common answer is that housing bond and credit investments should be exempted from the alternative minimum tax (AMT). This would attract more investors and help raise more money for housing.

“Since the enactment of the Tax Reform Act of 1986, the interest on tax-exempt private-activity bonds, including qualified mortgage revenue bonds and tax-exempt multifamily bonds, has been subject to the AMT,” Dewey said. “This means the interest received on these bonds that would otherwise be exempt from federal income taxation must be included in the taxpayer’s income that is subject to the AMT.”

As a result, for taxpayers who are subject to the AMT, the after-tax return on these bonds is less than it would be for bonds not subject to AMT, she explained.

Exit-tax relief is also at the top of the list of the changes that HFA executives would like to see enacted. This could help facilitate the transfer of affordable housing properties to nonprofit organizations that would maintain them as affordable housing, according to Markowski.

He would also like to see more flexibility in the programs. He suggests exploring the ability to “swap tax-exempt bond authority in order to create ‘enhanced’ low-income housing tax credits.” “By ‘enhanced’ credits, I mean creating low-income housing tax credits at a 12% level versus a 9% level,” he said. “With enhanced credits, we could reduce or eliminate the need for secondary financing to serve low-income households.”

Legislation that would make some of the changes has been introduced by Rep. Jim Ramstad (R-Minn.) in H.R. 4873.