Developers from across the country are in a Lone Star state of mind this year.

Drawn by a large pool of low-income housing tax credits (LIHTCs) and strong demographics, they have their sights set firmly on building in Texas.

Miami-based Pinnacle Housing Group opened an Austin office last year. Columbus, Ohio-based National Church Residences (NCR) opened a San Antonio office two years ago. And, several other developers are also making a big push in the state.

The overall strong interest can be seen in the large number of LIHTC applications this year. The Texas Department of Housing and Community Affairs (TDHCA), the agency that oversees the financing program, received a whopping 388 pre-applications for credits this year, a 55 percent spike from the year before. However, the number continuing to the full application stage has dropped to 162.

In addition to the state's roughly $55 million in annual LIHTC authority, developers also like the state's demographics, led by a fast-growing population of 25.7 million and counting.

Texas gained more people than any other state between April 1, 2010, and July 1, 2011, according to the Census Bureau, which reported that the state's population grew by 529,000 people during that period.

Four large metro areas were among the 20 fastest growing from 2010 to 2011: Austin (2nd), San Antonio (16th), Dallas-Fort Worth (17th), and Houston (18th).

“We are making a real commitment to the market,” says David Deutch, a partner at Pinnacle. “We like the fundamentals there.”

Pinnacle received a LIHTC reservation for one project in 2010 and followed up with reservations for two more developments last year. Located in Tyler, Denton, and Abilene, these three projects are under construction.

“The Texas economy seems to have weathered the overall recession better than many areas,” Deutch says.

He points to the state's economic diversity, which goes beyond its wellknown oil and gas industry. Texas' unemployment rate has remained below the national rate for 63 straight months.

Big year for LIHTCs

NCR has had a strong presence in Texas for many years as an owner of about 30 properties in the state, mostly Department of Housing and Urban Development Sec. 202 developments for low-income seniors.

The nonprofit has recently made a push to become a more active LIHTC developer in the state, with a new San Antonio office. In 2011, NCR submitted two housing tax credit applications to rehabilitate a property near Houston and another near Dallas. Both applications received funding, and NCR continues to look for more opportunities, says Michelle Norris, senior vice president.

Texas' large pool of LIHTCs presents good opportunities to develop affordable housing in the state, according to Norris.

The amount of federal housing tax credits that each state has is based on population. As a result, Texas is second only to California in annual authority. The state's $55 million in annual LIHTC authority is significantly more than what is available in nearby states. Louisiana has about $10 million in housing tax credits. Georgia has $22 million, and Florida has about $42 million.

Some states may also give an advantage to their local developers in their competitions.

Under the Texas qualified allocation plan (QAP), the document that guides the awarding of LIHTCs, a developer can receive up to $3 million of credits in a round.

Herman & Kittle Properties, Inc., an Indianapolis-based firm that works in nine states, made a decision to move into Texas two years ago. The developer had been working in Louisiana, so expanding into the neighboring state allows the developer to achieve some economies of scale, says R.J. Pasquesi, vice president of development.

The firm received an approximately $1 million LIHTC allocation to build a 75-unit seniors housing development in Taylor last year and has plans for additional projects.

Despite the many opportunities in Texas, there are some big challenges in the state.

First, it is such a large state that it can be a two-day drive to reach some communities. That distance becomes a factor in a company's development strategy, says Norris.

Another is the unique nature of each state's QAP. Herman & Kittle has worked with a local consultant to help the firm be up to speed on the process.

Not surprisingly, Texas-based developers don't like the recent trend. One Houston-based builder said he fears that some of the newcomers don't know the local markets or won't stick around when a deal goes south.

Eyes now turn toward this year's LIHTC competition, which again drew nearly 400 pre-applications.

In comparison, TDHCA received 251 pre-applications in 2011, with 161 moving to the full-application cycle. In 2010, the department received 230 pre-applications, with 137 continuing to the full-application round.

TDHCA plans to make its 2012 reservations in late July. The 162 applications that remained active in early April have requested $181.2 million in credits, according to authorities. That's more than three times the state's annual authority. TDHCA leaders made about $10.5 million in forward commitments last year, so the department has $44.8 million available this year.

Court Rules Against TDHCA in LIHTC Case

The Texas Department of Housing and Community Affairs (TDHCA) unintentionally discriminated in its allocation of lowincome housing tax credits (LIHTCs), ruled a federal judge.

The agency has been ordered to prepare a remedial plan to address the issue.

The ruling by Judge Sidney Fitzwater, chief judge of the U.S. District Court for the Northern District of Texas, comes as a result of a lawsuit filed by nonprofit Inclusive Communities Project (ICP), which challenged TDHCA's allocations of tax credits in the Dallas area.

Both sides were reserved in their comments following the March 20 ruling.

“We are pleased with the opinion and look forward to working with the state on a remedy,” said Mike Daniel, one of the attorneys for ICP, a fair housing and civil rights organization.

ICP said that while 19 percent of all renter-occupied units in Dallas are in predominately white census tracts, only 2.9 percent of TDHCA's LIHTC units are in these neighborhoods. And, while 51 percent of all renter-occupied units in the city are in minority- concentrated census tracts, 85 percent of TDHCA's LIHTC units in Dallas are in these neighborhoods where minorities make up at least 70 percent of the population, according to the group's complaint.

TDHCA issued a written statement following the court decision. “The Texas Department of Housing and Community Affairs is ever mindful of, and dedicated to, its responsibilities to all Texans to comply fully with all state and federal laws which govern the administration of our programs,” said the agency. “In light of Judge Fitzwater's ruling issued this week, we are carefully reviewing the decision and considering next steps. Moreover, we remain committed to fair housing choice for all Texans as the Department carries out its mission of helping all Texans achieve an improved quality of life through the development of better communities.”

Fitzwater ruled that ICP had proved its “disparate impact” claim under the Fair Housing Act. However, in a victory for TDHCA, the court found that there was no intentional discrimination based on race.

ICP alleged that TDHCA discriminated based on race by disproportionately approving LIHTC developments in predominantly minority neighborhoods and disproportionately denying LIHTC developments in predominantly Caucasian neighborhoods.

The group cited examples, but the court found credible evidence of nondiscriminatory reasons for approving or denying the applications.

For example, there was a project denied 4 percent tax credits in a majority Caucasian area. The court found that TDHCA denied the application because the proposed project consisted of only three-bedroom units, and that the agency was using its allocations for projects that had a mix of different sized units so that, among other reasons, single mothers could afford an apartment in the development.

The judge also noted there were instances when the agency attempted to use its discretion to deconcentrate tax credit developments in high-minority areas and encourage development in “high-opportunity areas.”

However, TDHCA fell short when it came to another key part of the lawsuit. ICP challenged that the agency's allocation decisions had a disparate racial impact in violation of the Fair Housing Act.

Fitzwater said the agency failed to prove that it has adopted the least discriminatory alternative in carrying out its work of allocating LIHTCs. As a result, the court ruled in favor of ICP.

Developer Tied to Controversial Mailings in Texas

A developer who had applied for lowincome housing tax credits (LIHTCs) in Texas was allegedly involved in controversial mailings sent to local residents alerting them about affordable housing projects being proposed in their neighborhoods.

The alerts, which came from a group called “Notifications for Texans, LLC,” caused a firestorm because they were seen as a smear campaign aimed at generating opposition to competing developments while gaining an advantage for the sender's own projects.

This is significant because receiving local support is a key part of the competition for housing tax credits in the state.

The notices were creating an impression that a Sec. 8 or other low-income housing project for families was being proposed instead of a seniors community or other LIHTC property, according to people familiar with the situation.

The Texas Department of Housing and Community Affairs issued a notice informing people that it had no ties to Notifications for Texas.

The Texas Affiliation of Affordable Housing Providers (TAAHP), a statewide organization, investigated the matter on behalf of its members. Fourteen members have said they had been targeted by the notices, according to Jim Brown, executive director.

He says he has never seen anything like this happen before.

Apparently no rules were broken, but the mailings have left a bitter taste in many developers' mouths. After all, they often spend tens of thousands of dollars in securing a site and preparing a LIHTC application.

Alan Naul of the Dallas-based Javelin Group, who applied to receive tax credits for a seniors community in Amarillo and for another seniors project in Lindale, was allegedly involved in Notifications for Texas and recently met with housing officials on the matter. He declined to be interviewed.

TDHCA says he has withdrawn his applications from this year's tax credit competition. Naul had also submitted a LIHTC application for a project in Missouri City during the preapplication phase.