The National Council of State Housing Agencies (NCSHA) has strengthened its recommended practices for the administration of low-income housing tax credits (LIHTCs).
The move comes after an 18-month effort by a task force of 19 state housing finance agency (HFA) executives representing nearly 60% of the nation’s annual credit authority. The new Recommended Practices in Housing Credit Administration report bolsters many of NCSHA’s prior recommendations and adds 13 new ones, according to officials.
“This is probably the biggest revision that we’ve done since the initial creation of these practices in 1993,” says Jennifer Schwartz, NCSHA assistant director for tax policy and advocacy, calling the work a “top to bottom scrub” of the recommendations.
The new report consolidates the organization’s Recommended Practices in Housing Credit Allocation and Underwriting and its Recommended Practices in Housing Credit Compliance Monitoring into one document that covers the breadth of HFA program administration.
The recommended practices cover such key areas as cost containment, preservation, qualified contracts, and reducing local barriers to development.
Development costs
Development costs have been an area of focus for state HFAs, developers, and others in the affordable housing industry.
“In addition to carefully calculating the amount of housing credit allocated to eligible developments, as federal law requires, each allocating agency should develop a standard for limiting development costs to reasonable amounts,” says the report. “This standard may take the form of a development cost limit, calculated on a per unit, per bedroom, or square footage basis.”
The standard should be based on total development costs, including costs not eligible for housing credit financing and costs funded from sources other than the housing credit. The standard and the justification for it should be published in the allocating agency’s qualified allocation plan (QAP) or other LIHTC allocation guidelines, according to the recommendations.
The report also urges each allocating agency to have a general developer fee limit, including overhead. The limit should not exceed the lesser of an appropriate defined per unit dollar cap on developer fees or 15% of total development cost, says the report, noting that agencies may allow for certain exceptions.
“We recognize that it’s not just about controlling costs,” says Schwartz. “It’s also about getting high quality so that requires a balance. This isn’t about a race to the bottom, but it is about a careful look at costs.”
In addition, each allocating agency is advised to adopt and apply a definition of consultant fees that:
• Identifies those professional fees (such as architectural, engineering, accounting, legal, environmental consulting, and construction management) reimbursable through the housing credit;
• Excludes costs properly allocated to and payable by the syndicator (such as Securities and Exchange Commission registration and sales commissions); and
• Requires consultant fees, other than the types of professional fees discussed above, be permitted only within the developer fee limit.
Agencies are urged to review professional fees—including at minimum fees for architectural, engineering, environmental, accounting, legal, market analysis, construction management, and asset management services—at project application and compare them with professional fees charged in developments awarded credits in prior funding cycles and with current applications to assess reasonableness.
Preservation
The new report also takes a close look at the preservation of existing affordable housing, says Schwartz, noting that more and more developments are reaching the ending of their affordability periods.
“While agencies should approach preservation generally with the goal of preserving the housing stock as a long-term affordable housing resource, the best course of action for each development is a project-specific determination that considers the project’s current financial viability, physical condition, location, the population it serves, and its relative competitiveness in the local market,” says the report. “These project-specific determinations should be consistent with the agency’s strategic preservation objectives.”
The report says HFAs should develop QAP policies on the use of 9% and 4% LIHTCs for preservation, including specific policies on housing credit resyndication. It’s also recommended that agencies consider the cost effectiveness of consolidating scattered-site properties into a single transaction for preservation.
Qualified contracts
The report also addresses the treatment of qualified contracts.
To ensure that new LIHTC properties remain affordable at least through the extended-use period, the report says agencies “should require all applicants to waive their right to submit a qualified contract as a condition of receiving an allocation. The waiver requirement should apply to applicants for both 9% and 4% credits financed with tax-exempt multifamily bonds.”
The report explains that properties receiving housing credits are required by law to be rented to qualified residents at affordable rents for a period of 30 years. There are two exceptions to this requirement: 1) in the case of foreclosure; and 2) if, after year 14, the owner exercises its right to a qualified contract, and the agency is unable to find a qualified buyer.
Many HFAs have required applicants to waive the right to seek a qualified contract at the time a housing credit allocation is made, while others provide QAP scoring incentives to applicants that agree to forgo their rights to a qualified contract. Agencies without such requirements or incentives risk losing their housing credit properties from the affordable stock long before they would otherwise reach the end of their affordability periods, says NCSHA.
Reducing local barriers to development
NCSHA also seeks to address concerns about local requirements and support for LIHTC proposals.
While inviting local jurisdiction comment on proposed LIHTC developments is required by statute, agencies should not require local approval (for example, a letter of support) as a threshold qualification or allocate points for local approval as part of a competitive scoring system. Moreover, agencies should not require local financial contributions as a condition for receiving a housing credit allocation, says the report.
Construction monitoring
Construction monitoring is a new recommended practice.
In addition to visiting proposed development sites prior to allocation of credits, HFAs should inspect or require an independent third-party inspection of credit developments during the construction period to monitor construction progress, verify application commitments, evaluate compliance with fair housing and accessibility rules, and identify construction delays, says the report. To avoid duplication of efforts, agencies may coordinate with investors, syndicators, lenders, or other entities to receive copies of construction monitoring reports conducted by these entities.
Agencies have found that site visits to developments during the construction phase help monitor construction progress and identify potential timing delays. These visits also help make sure that developments adhere to commitments made at the time of application and with fair housing and accessibility rules.
The full report is available here.
