States are trying different approaches to address high development costs in their low-income housing tax credit (LIHTC) programs.

Indiana has turned to a new performance-based developer fee instead of a fee that’s calculated based on a project’s total development cost.

“Today, in our world, if you are going to work with the government you’ve got to be paid on performance,” said Jacob Sipe, executive director of the Indiana Housing and Community Development Authority (IHCDA). “It’s performance based. What we use is very simple: It’s how many units you produce. You get paid a certain dollar amount for that unit that you produce.”

The developer fee limits isn’t meant to be punitive, stressed Sipe, noting that developers continue to get paid about the same as under the old system. A few other states also use a similar fee model.

He explained that costs are often a perception issue, including when developers are paid based on the development cost. “Why should someone get paid more because they paid more for their wood or vinyl siding than someone who could get it cheaper?” he said.

Sipe said he believes developers should earn a fee and be fairly compensated. “If you’re not earning a developer fee and not being paid right, there’s an issue with that,” he said. “But the calculation that we use to determine the developer fee amount is wrong. It’s out of date.”

He was joined by officials from Illinois, Massachusetts, Ohio, and Washington on the "LIHTC Allocations: What’s Ahead in 2015” panel at AHF Live in Chicago.

Massachusetts has included recommended cost limits in its LIHTC program for a long time and recently increased those cost limits, said Cate Racer, associate director of the Massachusetts Department of Housing and Community Development (DHCD), which awarded federal and state tax credits to support about 2,000 multifamily rental units this year.

At the same time, coastal states like Massachusetts have high development costs and are extremely expensive to build in, noted Racer.

To contain costs, many states continue to have different caps in their housing credit programs, including limits on how much credit each development or developer can receive.

Ohio has cost-containment measures in place to remove developments with high costs that appear to be outliers from other applications, according to Sean Thomas, chief of staff, at the Ohio Housing Finance Agency. This past year, no projects were removed from the competition.

LIHTC allocators also discussed the latest changes in their qualified allocation plans (QAPs).

IHCDA recently took the bold step of setting aside 10 percent of its annual LIHTC authority for an invitation-only “innovative round.” Developers submitted letters of interest, explaining how their projects were innovative but may be at a scoring disadvantage in the regular competition. These deals may target a special–needs population, have a special location, or involve another unique feature.

The innovation was also internal at IHCDA, which created an outside advisory committee to look at the quality of the project and its impact. In the end, five deals were invited to submit applications and three were awarded credits. IHCDA plans to hold another “innovative round” in 2015.

Separately, Sipe noted that more communities are saying they want affordable housing. “I think a lot of that has to do with an understanding that affordable housing can have a community economic impact,” he said. “That’s what we really tried to promote with the QAP, with not just the creation of affordable housing but what kind of other impact can you have on the local economy with the development of affordable housing.”

Developers have to be much more engaged in their communities, including understanding their economic development needs. That’s a change in how the conversation about affordable housing can be framed, according to Sipe.

In Illinois, officials plan to introduce a new “opportunity area” concept into its 2015 LIHTC program. “We are going to incent developers to go into areas that are rich in employment and low in poverty, so traditionally areas that are difficult to develop in,” said Christine Moran, managing director, multifamily finance, at the Illinois Housing Development Authority.

Developers could earn up to 10 points for projects in an opportunity area, which is significant in the state’s 100-point scoring scale.

No major changes are expected in Washington’s program next year. However, the state is coming off a year that saw a drop in demand for credits. If that trend continues, it may open the door for new participants, according to Lisa Vatske, director of multifamily housing and community facilities at the Washington State Housing Finance Commission (WSHFC).

Some of out-of-state and for-profit developers appear to be exploring the possibility of applying for credits in the state.

Moderator Jeanne Peterson, director at CohnReznick and former head of the California Tax Credit Allocation Committee, quizzed the panel on how they handle deals that are either oversourced or undersourced.

When a funding gap arises in a deal, Massachusetts’ DHCD will take a careful look at the options, Racer said.  The agency may participate in helping fill the gap, but the developer and the local municipality will also be looked at to contribute.

In Washington, there will be a discussion between the developer and the public funding partners. “We’re seeing great pricing in Washington state, but we’re also seeing some major cost issues at the time of bidding,” Vatske said.

In the case of an oversourced deal, WSHFC would likely work with the various public funders to determine where funds can be returned to “get the most bang for the buck,” she said.

“We have a lot of negotiation,” Vatske said.

Connect with Donna Kimura, deputy editor of Affordable Housing Finance, on Twitter @DKimura_AHF.