CHICAGO Many excellent ideas for making the federal low-income housing tax credit (LIHTC) program more efficient were aired at a public meeting of the industry’s leading developers, financiers, accountants and attorneys here in October.
The leaders convened as part of a special public meeting of the Editorial Advisory Board of Affordable Housing Finance magazine at the start of AHF Live: The 2005 Tax Credit Developers’ Summit.
Board Chairman David Reznick opened the discussion by pointing out the fundamental mismatch between housing resources and housing needs. Reznick is chairman of the Reznick Group, P.C., in Bethesda, Md.
The following report outlines a series of changes that were proposed to address certain problems in how the program operates without requiring new federal resources. For a more detailed report on the policy proposals and a full transcript of the roundtable discussion, go to www.housing finance.com/ahf/articles/2005/
Affordable Housing Finance invites your input to help shape these ideas into well-reasoned and well-supported arguments for change.
Please send us your comments on the program issues and possible solutions described below to Donna Kimura at [email protected].
Encourage mixed-income projects.
Primary presenter: David Perel, Preservation Properties
Mixed-income projects have become desirable to many developers and state and local housing agencies because they offer social benefits, and in strong markets, they give projects the added financial boost of having some units that can attract high market-rate rents. However, there is no syndication market where you can efficiently place a mixed-income deal, and the difficulties with compliance are substantial. Many investors don’t want to do mixed-income because they don’t want to underwrite the real estate market too much, and if a deal has only 20% or 30% of its units eligible for tax credits, it may also be hard to syndicate.
Lift the cap on active-income tax liability that may be offset by LIHTCs, or allow segmentation of partnership interests (low-income vs. market-rate units) in a project.
This would facilitate the development of mixed-income projects. The proposal would allow general partners to use LIHTCs without the need to syndicate the credits, or it would enable syndicators to solely underwrite the LIHTC units.
Include land as part of eligible basis with a commensurate adjustment of the credit factor.
Presenter: David Perel
Areas with high land costs are generally the areas where rental housing demand is the strongest and where affordable housing is needed but is hard to deliver. In such areas, land costs constitute a greater share of development costs and are presently not included in basis.
Allow land to be included in basis for calculating tax credit benefits for investors. To be revenue-neutral, you would adjust the credit rate so that the total amount wouldn’t change, but where land is more attractive and rents are higher, deals would be a little bit more feasible. A related idea is to change state qualified allocation plans (QAPs) to reduce points for specific features of project sites, like being located near shopping centers, which tends to drive up land costs.
State agencies should be cautious about allocating credits to inexperienced developers and do more to enforce agreements and pledges used to win points.
Presenter: David Heller, The NRP Group
Each state has a limited amount of tax credits to allocate each year. As a result, allocating agencies like to spread the credits around to different projects and developers. This results in credits going to inexperienced developers, both nonprofit and for-profit.
Without careful scrutiny of their work by state agencies, this can lead to problems during construction and after completion and/or to noncompliance with agreements developers make during the tax credit application process.
Others raised the concern that it is important to have a diverse group of project sponsors and not to limit allocations to a small group of experienced developers.
The proposed solution:
While the National Council of State Housing Agencies’ best practices already state that agencies should make the experience of the entire development team a factor in project evaluation, Heller thinks states need to “look deeper at the developers and look at the financial capacity of the developer. Look at what guarantees the developers are providing on the projects.” He also called for ways to better monitor compliance with promises made during the application process and for allocating agencies to give negative points on applications to developers that have had troubled deals or failed to comply with prior agreements.
Other panelists said agencies should provide training and technical assistance for inexperienced developers, or match them with experienced developers in joint-venture partnerships.
Do not incentivize deeper income-targeting in QAPs without ensuring sufficient subsidies to make it economically feasible.
Presenter: Chris Tawa, MMA Financial
Many states require deep low-income targeting in order to win the competition for credits. This is increasingly stressing project finances because revenues are staying flat while operating and other expenses are increasing at a rapid rate.
“I think that we’re on the verge of a greater stress test for these portfolios than we’ve ever seen before as expenses associated with inflationary pressures really increase,” Tawa said.
Variations on that theme:
Several speakers pointed out that market studies show that the greatest need in many markets is for housing affordable to persons earning substantially less than the maximum tax credit income level (60% of the area median).
Tawa proposed that state agencies not require deeper income-
targeting if it would hurt project feasibility in the long run.
Others pointed out that states should link any such priorities for deeper targeting with subsidies to make it feasible.
For example, the Pennsylvania Housing Finance Agency recognized early in the history of the program that subsidies were going to be needed to make projects work for very low income people, and it began using its reserve funds to that end.
Another idea is to change the tax credit authorizing statute that currently sets the same maximum tax credit amount for all eligible units, regardless of the income group they target. Deep income-targeting could be facilitated by allowing a higher credit amount for units targeted to very low income households.
To make it budget-neutral, it could be offset by providing lesser credit amounts for units targeted to people at the upper end of the eligible income level.
This idea of a flexible credit percentage could be combined with a focus on mixed-income projects by changing the income limits, allowing some units to be rented to persons earning more than 60% of median income, but getting a lower credit amount than units aimed at lower-income groups.
Related issue: Encourage more use of tax-exempt bonds.
Presenter: David Perel
Tax-exempt bond authority is going unused in many states and cities, largely because the bonds and the 4% tax credits that go with them do not provide a deep enough subsidy to make projects feasible.
Allow a flexible credit percentage for bond deals so more tax credit equity could be raised.
For most tax-exempt bond projects, particularly new construction, the 4% tax credit is insufficient to completely finance the project. It is often a case of “throwing the life preserver halfway.” These projects require substantial additional public capital contributions.
If states were permitted to allocate higher levels of tax credits with a commensurate reduction in private-activity cap allocation (to make it budget-neutral), a more efficient affordable housing finance execution would be possible. The amount of capital subsidy now required for these projects could be reduced, with the savings made available for 9% projects. There might also be a more balanced competition for the two types of tax credit financings.
Reduce the uncertainty involved in property tax appraisals.
Presenter: Judy Calogero, New York State Division of Housing and Community Renewal
Local tax assessors have different methods of valuing property, which can mean unpredictable and expensive tax assessments for affordable housing owners.
New York Gov. George Pataki signed a law in 2005 that will help ensure uniformity, predictability and fairness in assessments, said Calogero.
The legislation requires local assessors to establish the assessed value of an affordable housing project based upon the actual net operating income of the project. This income approach, compared to a traditional market approach, is expected to lead to more consistent, and possibly somewhat lower, assessments for affordable housing properties.
Private sector, developers and lawyers should exercise more discipline and care in deal-structuring for tax purposes.
Presenter: Jana Blackman
In today’s competitive syndication market, there is pressure to cut fees to syndicators, and that often results in reduced asset management. This leads to the risk of project failure.
A closely related problem is stretching the boundaries of normal accounting procedures by including in basis such things as loans that really never have to be repaid and developer fees that don’t get paid off for many years, or sometimes are not expected to be paid at all.
“I’m seeing far too aggressive lower-tier structures and the lack of policing because there is still too much money chasing too few deals,” Blackman said.
Blackman advocated going back to contractual remedies in multi-investor funds, so the investors have real rights to look over the shoulder of the syndicator, to make sure the asset management is being done. Contractual remedies at the lower tier are where developers stand behind their deals.
She also called on lawyers serving the tax credit business to “step up to the plate” and set standards for what practices are acceptable and which are not.
Congress should revise method for identifying difficult-to-develop areas.
Calogero proposed taking management of the difficult development areas away from the Department of Housing and Urban Development and giving it to the states. The flexibility that would result would be tremendous.
Eliminate the 10-year rule.
Set the tax credit rate at a fixed amount instead of having it vary every month, as it does now.n