The National Council of State Housing Agencies (NCSHA) has updated its “Recommended Practices in Housing Credit Administration” standards, aimed at helping guide each state’s administration of the federal low-income housing tax credit (LIHTC) program.
According to officials, the seventh edition of the guidelines responds to the most critical issues impacting affordable housing:
· Skyrocketing development financing, insurance, and operating costs;
· Escalating pressures on the continued long-term affordability of existing properties; and
· Siting considerations related to renter opportunity, community revitalization, and disaster risk.
NCSHA’s recommended practices were last revised in 2017.
To help ensure reasonable development costs, the guidelines have been revised to suggest appropriate flexibility in the application of cost standards and to suggest agencies consider opportunities to reduce costs through alternative construction methods or materials, says James Tassos, deputy director of tax policy and strategic initiatives at NCSHA.
Specifically, the language reads, “To respond to periodic and temporary volatility in development and operating costs, construction material shortages, increased financing costs, and unanticipated development delays that contribute to cost increases, agencies should allow flexibility in the application of cost standards, including opportunities for waivers and/or exceptions to such standards when appropriate.”
In addition, a recommended practice on operating and replacement reserves “was revised to suggest agencies consider increasing minimum reserve requirements to acknowledge recent significant increases in multifamily operating costs,” Tassos tells Affordable Housing Finance.
This recommendation reads, “Minimum replacement reserves should generally be no less than $300 per unit per year for new construction developments for seniors and $350 per unit per year for new construction developments for families and developments involving rehabilitation.”
In another move, NCSHA suggests agencies consider trends in operating expenses, including property insurance costs, projected energy usage, utility rates, labor costs, real estate taxes, and other expenses in developing underwriting assumptions.
The new edition also includes, for the first time, guidance on how housing credit administration can encourage and ensure meaningful renter protections that are also workable for landlords and developers.
A few other recommended practices state:
· Allocating agencies should require a minimum debt-service coverage ratio of 1.15x (1.10x in U.S. Department of Agriculture properties) until initial stabilized occupancy for debt financing that would result in foreclosure if not repaid. For purposes of this standard, debt-service coverage is defined as the ratio of a development's net operating income (rental income less operating expenses and reserve payments) to foreclosable, currently amortizing debt-service obligations. In determining appropriate debt coverage up to and beyond the point of initial stabilized occupancy, agencies should consider other underwriting variables, such as vacancy rates, the ability to raise rents, and historic operating cost escalations customary in the marketplace, to improve the development’s ability to maintain viability for its period of low-income use;
· Allocating agencies should establish a minimum rehabilitation threshold to assure meaningful, rather than simply cosmetic, rehabilitation of properties. Rehabilitation should be adequate to ensure the long-term physical viability of the property and supported by a capital needs assessment. Allocating agencies should only consider “hard” rehabilitation costs in determining whether a property meets the minimum rehabilitation threshold; and
· Each allocating agency should include in its qualified allocation plan or other housing credit allocation guidelines a general developer fee limit, including overhead. The limit should not exceed the lesser of an appropriate defined per-unit dollar cap on developer fee or 15% of total development cost. Agencies may allow exceptions to the developer fee limit for developments meeting specified criteria.
The process to revise and expand the recommended practices began in June 2022 and was led by a task force of state housing finance agency executive directors co-chaired by NCSHA board members Maura Collins, executive director of the Vermont Housing Finance Agency, and Christopher Nunn, commissioner of the Georgia Department of Community Affairs and Georgia Housing and Finance Authority.