In January, the House of Representatives passed H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, which expands the allocation of low-income housing tax credits (LIHTCs) to states, making the development and preservation of affordable housing more attainable across the United States. Today, the bill is in the hands of the Senate for consideration and a vote.
H.R. 7024 includes provisions to enhance the Child Tax Credit, expand business tax credits for research and development, support communities impacted by disasters with small business tax credits, end a pandemic-era employee retention tax credit, and expand LIHTCs. Should this bill pass the Senate (and maintain its current provisions), it would be a considerable step forward for the affordable housing market, as it brings more capital to the space.
However, volume cap is also a “use it or lose it resource.” If states do not use their allocations within an annual period or by 2026, the funds will no longer be available to enhance, preserve, and create affordable housing. According to the Council of Development Finance Agencies (CDFA), tax-exempt multifamily bond volume rose from just over $6 billion in 2015 to about $17 billion in 2020. This has led to states being oversubscribed for private-activity bond (PAB) volume. For example, in 2021, California had about $7 billion of multifamily PAB applications and allocated about $3.5 billion to multifamily, suggesting a 2-to-1 oversubscription ratio. States like Colorado, Washington, and Georgia have an oversubscription ratio of closer to 3-to-1, according to Norris George & Ostrow’s “Volume Limited States and ‘Guesstimated’ Oversubscription Ratios—2023” report from April.
With so many states unable to keep up with applications to develop housing, it will be important to look at how states review and process affordable housing deals. At CPP, we’ve completed more than 49 affordable housing deals across the United States over the past five years. Through that process, we’ve identified some best practices that help to make the process seamless—and ultimately enable states to work with the development community to fully utilize their tax credits and create more affordable housing.
Better Defined Dates and Processes
The states that remove ambiguity from their underwriting and provide a detailed and defined process to allocate tax credits for affordable housing developers are much more successful in deploying funds than those without these types of benchmarks.
Understanding these types of dates and gates helps in two ways. On the developer side, it helps the team structure the deal with the timeline in mind. It also creates an understandable process for those reviewing and moving the deal forward, thus enabling the agency to provide clear expectations to developers and allowing them to estimate how much capital they can move through their pipeline in a defined period.
As developers and others in the real estate industry examine their options, they should consider how agency processes will impact their deals and encourage states to utilize these best practices so that more affordable developments can come to fruition.
Third-Party Deal Review
Agencies often find themselves with a backlog of affordable housing deals to review and process. While this can occur because of the sheer volume of deals, many times it occurs because of onerous and sequential (rather than parallel) deal review processes that require multiple approval stages within a state agency. Friction and delays further arise when reviews involve items that aren’t germane to the ability of the sponsor to perform and execute the development plan as determined by the project’s financing partners and the qualified allocation plan (QAP).
There are several states that rely on third-party support, reports, and underwriting by lenders, investors, and industry experts to ensure that the deal fundamentals are solid. With these financial documents in hand, agencies can instead evaluate higher-level projections and backups, ensuring compliance with the QAP standards and good stewardship of the tax credit program.
As developers are looking to complete affordable housing deals, they should consider partnering with lenders and investors with significant affordable housing and LIHTC experience—and especially those who have worked with state agencies before. These types of partners will be able to preemptively understand the state’s needs, provide comprehensive materials, and ultimately speed up the process.
Allow for Multiple Bond Issuers
Working with local and other statewide bond issuers within a state enables multiple deals to be processed at a time and creates a larger team for issuances. The more teams that can work on deals simultaneously (if those teams focus on their roles), the more efficient a state can be in closing deals and developing more affordable housing. For instance, a state agency can focus on defined QAP underwriting while the issuer of the bonds focuses on the feasibility from a financial perspective.
Use Required Minimums as Approval Standard
Volume cap is a “use it or lose it” resource with limited use for recycled bonds with agencies that are using them. Each state has its own QAP that defines metrics and criteria for awarding federal tax credits for affordable housing developments. Many criteria within QAPs are outdated based on how people live, work, and recreate.
For example, many QAPs provide higher scores to affordable housing developments that are within certain distances of parks, libraries, and other community cornerstones. However, many proposed affordable housing developments are looking to create those cornerstones within property lines—making the address’ location relative to existing cornerstones less important and the scoring mechanism outdated.
At a time when affordable housing is in desperate need around the country, looking at QAPs from a modernized lens and adhering to the most basic requirements of them will enable more housing product to be developed. Developers, industry leaders, and agencies must work together to focus on housing first.
Identifying best practices and processes that will help state agencies and real estate developers to effectively complete affordable housing deals is imperative. State agencies and the affordable housing community must work together to increase the creation and preservation of affordable housing across the country.
