HFA Roundtable: States Sound Off

Stephen Auger
Executive director, Florida Housing Finance Corp.

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

FHFC did not make any substantive changes to the 2015 QAP. Fifteen percent of Florida's tax credit allocation is set aside for preservation or acquisition and preservation projects, and up to 5% of the allocations will be reserved for high-priority affordable housing projects, as defined by the Corporation's board of directors, and another 5% will be reserved for projects that target persons who have a disabling condition. The remaining 85% will be used for applicants in the following categories: New Construction; Rehabilitation; Acquisition and Rehabilitation; Redevelopment; or Acquisition and Redevelopment.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

Florida has experienced strong pricing throughout the state for tax credits. Additionally, as the market has heated up, particularly in south Florida, construction costs are increasing.

What strategies are you implementing to preserve existing affordable housing?

FHFC makes 15% of the total LIHTC allocation available for the preservation of existing affordable housing.

Additionally, state-appropriated “gap” funding (State Apartment Incentive Loan Program) is allocated with the requirement that it be used in conjunction with tax-exempt bonds and 4% LIHTCs, resulting in preservation of affordable housing in Florida.

What is your agency doing to address cost containment?

Beginning in 2012, FHFC began making total development cost caps (tailored by development type) part of the allocation process for LIHTC and state funding provided by the Corporation.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

FHFC’s Request For Applications (RFAs) (used to determine which developers will receive the various Corporation allocations) have only a few basic requirements for applicants to be eligible for funding. Our advice to applicants is for them to thoroughly understand the provisions of the RFAs to preserve their eligibility for funding. Additionally, the Corporation is interested in funding applications for projects that are truly ready to proceed once the applicant receives an award.

Bryan Butcher
Executive director and CEO, Alaska Housing Finance Corp.

We developed a three-tiered system for per unit cost targeting based on a community’s geographic proximity to our major population center. Project costs vary widely around the state because of its five temperate zones and the vast geographic scale (3.1 times wider (east to west) and 1.9 times taller (north to south) than Texas). This change reduces the project cost implications of transportation and climate related variations allowing a more level playing field for developers around the state.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

People are swinging for the fences with 9% proposals. Fewer deals are being proposed, but the aggregate amounts requested on 9% deals are increasing.

Four percent program interest is marginally increasing, but we are seeing more.

What strategies are you implementing to preserve existing affordable housing?

In Alaska, we are focusing 25% of the 9% credit authority to be set aside for developments assisted through project-based rental assistance (U.S. Department of Agriculture Rural Development, Sec. 8).

What is your agency doing to address cost containment?

We are incentivizing construction and design efficiency through our several different rating factors versus using a one-size-fits-all cost limit. As a result, 2014 project costs are coming in at 2008 levels, which we’re really happy to see in a generally rising cost environment.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

Bring your A game. Submit as thorough an application as you can. A common mistake is assuming that deal terms and structures from five years ago will still receive an allocation in today’s environment. It takes a better project today to receive consideration than it did a decade ago.

Susan Dewey
Executive director, Virginia Housing Development Authority

Virginia’s 2015 QAP introduces substantial point incentives for developers to combine 9% and 4% credits on the same site. This incentive encourages developers to use 4% credits where they can make them work within their deals as opposed to seeking 9% credits for the entire development. By using fewer competitive credits, the hope is that more deals will have access to this valuable limited resource.

The points are on a sliding scale in which a minimum of 30% of aggregate units must be financed through tax-exempt bonds for 20 points. The maximum attainable points are 40, which are available if 50% of the aggregate units are tax-exempt. In the current application round, we have had six applicants apply for this point category.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

The Department of Housing and Urban Development’s efforts to preserve and renovate its aging public housing stock through the Rental Assistance Demonstration (RAD) program by using tax credits has increased demand for credits across the country. Use of the 4% credit with these properties, as had been initially envisioned, has not come to pass. In Virginia, nearly every development in the RAD program is applying for a 9% competitive award.

Although preserving public housing developments is a worthy objective, each state must address a wide array of needs, including preservation, adding new units, and providing targeted unit types to serve populations such as homeless veterans and persons with disabilities. VHDA endeavors to maintain a balance among all our housing partners and the different types of housing needs.

What strategies are you implementing to preserve existing affordable housing?

VHDA continues to incentivize preservation by providing points for Sec. 8 and RD Sec. 515 deals. Specifically, we still incentivize developments that are listed on Virginia’s RD Sec. 515 Portfolio Rehabilitation Priority List and get applications annually for developments on that list. Also, RAD deals get credit for new federal subsidies in the competitive pools.

Perhaps more interesting is our attempt to move beyond simply preserving units, as VHDA remains committed to modernizing preserved units and making them as energy efficient as possible. As a result, one new strategy for 2015 that addresses energy efficiency in rehab deals includes increased developer fees for tax-exempt developments that pursue LEED/EarthCraft certification.

What is your agency doing to address cost containment?

Perhaps because of its diverse urban/rural geography, VHDA was one of the first housing finance agencies to realize the need to implement cost limits in different geographic regions of the state. To that end, we began the cost containment effort with a third-party study of costs throughout Virginia, resulting in the current QAP’s strict cost limits and the ability to apply significant penalty points on future applications for tax credits if the limit is exceeded at cost certification. The limits are adjusted by geography, type of construction (new/rehab), and include increases for factors on sites such as structured parking. The limits are adjusted annually to take into account increases in construction costs.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

Anyone applying for tax credits in Virginia is strongly urged to attend VHDA’s annual “How to Apply” workshops. The LIHTC program staff is a highly engaged, customer-focused group that seeks to bring clarity to what can be a complex process. Also, there are annual forums for stakeholder feedback each year and applicants are encouraged to attend these events as well.

The most common mistake we see developers making is not reading the instructions thoroughly. Forms change from year to year, and if developers—or their consultants—don’t actually read the current year’s information, then they could miss important updates. This would put them at great risk of losing valuable points in the review process.

Brian A. Hudson Sr.
Executive director and CEO, Pennsylvania Housing Finance Agency

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

I think the biggest change is our emphasis on something I’d call smart site selection. Now more than ever, we’re looking for applications that build on existing community assets. By that I mean, in both urban and suburban locations, developments are encouraged that repurpose vacant buildings, are close to transit and job centers, or fill the “missing tooth” of a block, as examples. They need to maximize available housing services. Plus, they shouldn’t disrupt existing green space.

A second important emphasis for 2015 is the inclusion of more ambitious energy-efficiency goals. We do that in two ways: one, through points allocated for increased energy-efficiency beyond Energy Star and, two, through the use of Passive House standards that focus on the building envelope.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

Regarding our 9% projects, trends we’re seeing—and encouraging—are an emphasis on supportive housing that takes the importance of housing services more into consideration, plus more of a focus on the provision of special-needs housing intended to help groups like veterans, people with disabilities, and so on.

In the case of our 4% projects, trends we’re seeing are an emphasis on housing preservation in rural areas, and—interestingly—pooled projects whereby developers gain economies of scale and associated cost savings by applying for tax credits for combined projects (that formerly might have submitted separate LIHTC applications).

What strategies are you implementing to preserve existing affordable housing?

We are of the opinion that housing preservation has to be approached from a multidisciplinary perspective. In Pennsylvania, we have an extensive portfolio of older affordable housing stock and understand that new resources are scarce. There is no single best approach to ensure that affordable housing will continue to stay affordable and will be well maintained. As a result, our staff approaches each development on a case-by-case basis to identify factors that can help a development perform more efficiently and, thereby, remain affordable for both management and the residents.

What is your agency doing to address cost containment?

I think the main way in which we are addressing cost containment—and it is—is by arranging the QAP scoring criteria in such a way as to encourage competition among the applications, since projects with better cost efficiencies will gain scoring advantages. When projects are compared by project type (three-story, townhome, preservation, etc.), those projects that have costs 10% below the median cost are awarded five points. If a project is 15% below the median cost, it gets 10 points, and so forth. Those awarded points are the enticement—the carrot—we have to encourage and reward attention to cost efficiencies—and the process does make a positive difference in the outcome.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

I think there are some basic steps that developers can take that will dramatically improve the quality of their proposals. Most importantly, they need to take advantage of the opportunity to meet with PHFA staff and benefit from the technical assistance we can provide. Next—and this may be obvious, but it’s sometimes overlooked—they need to invest the time to get fully familiar with the QAP. Additionally, as they write their proposal, they need to make the effort to have their application reflect the true goals of their proposal. Another tip that may seem obvious but is valuable, nevertheless, is that applicants carefully run their numbers to be sure their project is financially viable.

Kathryn Peters
executive director, Kentucky Housing Corp.

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

The biggest changes KHC has made in the 2015 QAP is addressing fair housing concerns by restricting the creation of new affordable housing units in Qualified Census Tracts (QCTs). KHC now requires developments that propose the creation of new units in QCTs to undergo a thorough review and justification process prior to an application for funding being accepted. KHC incorporates local input by giving weight and guidance to the local Analysis of Impediments to Fair Housing. Additionally, KHC has dedicated the majority of the 9% LIHTC resources to the preservation of affordable multifamily housing. In 2014, the Corporation made the preservation of existing affordable housing an overarching corporate strategy and developed the 2015 QAP to support increased preservation efforts.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

KHC continues to see high demand for 9% housing credits, and investor pricing has increased to the high-80 cents range to mid-90 cents range. Additionally, the Corporation has seen an increase in the utilization of 4% housing credits with tax-exempt bonds. KHC has made concentrated efforts over the years to promote the utilization of tax-exempt bonds with 4% housing credits. In efforts to expand KHC’s multifamily production beyond the 9% housing credit program, in 2014, KHC began offering GAP funding for tax-exempt bond projects, which has resulted in an additional 2,176 units being assisted as compared with last year.

What strategies are you implementing to preserve existing affordable housing?

In October 2014, KHC hosted a Preservation Summit with over 130 housing industry stakeholders to find new approaches to sustain the preservation of more than 49,000 rent-restricted apartment units that could be lost over the next five years in Kentucky.

Many concerns in addressing the preservation of affordable housing stock were identified. Property owners foresee problems with their maturing portfolios at a time when federal housing program funding is being reduced.

KHC is encouraging industry partners to use tax-exempt bonds with 4% housing credits and is working with other affordable housing providers to coordinate funding rounds and incentivize the leveraging of funds.

What is your agency doing to address cost containment?

KHC established cost-containment limits based on the Department of Housing and Urban Development 221(d)(3) per unit limitations. In prior years, adherence to KHC’s cost-containment limits was incentivized in the application scoring process. In 2015, cost containment was made a threshold item to be eligible for consideration. If a project proves to exceed the applicable cost containment limit at final cost certification, the gap is the responsibility of the owner.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

Applying for 9% housing credits is very competitive, and there is little room for error in an application. Applicants should seek and obtain technical assistance from a KHC Multifamily Programs representative prior to submitting their application to ensure all submission requirements are met. The most common mistake that occurs is when applicants do not fully read the documentation standards for application submission and provide only a portion of a requirement.

Dennis Shockley
Executive director, Oklahoma Housing Finance Agency

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

The addition of the new Oklahoma State Housing Tax Credit, effective for 2015. The state credits are restricted to counties with populations of less than 150,000, so they are for rural counties. It currently is restricted to $4 million in state credits. They are 10-year credits. The Oklahoma Legislature enacted the state tax credit into law in 2014.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

Elderly developments with more open and spacious living. The trend seems to be toward more rentals, less homeownership—not just out of necessity, but many times by choice.

What strategies are you implementing to preserve existing affordable housing?

Additional scoring criteria points can be awarded to proposed developments that will acquire and rehabilitate these properties.

What is your agency doing to address cost containment?

Currently, OHFA uses the 221(d)(3) as measurement. If a proposed development exceeds that, we ask for justification. We fail the applicant on threshold (cost) if none is provided or the cost is over 15% of the 221(d)(3) limits. It is becoming a challenge for OHFA to measure this as the Department of Housing and Urban Development is modifying its cost calculation. We tried to move to square foot and received pushback from the developers. We are trying to maintain a historical base on square foot for possible use in the future. OHFA’s biggest concern is the soft costs in a development it seems to increase more than the hard costs.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

Make sure your market study reflects the actual market. Our rural areas are challenged as most rural America is by the changing demographics. And, pay attention to the application requirements—too many mistakes take up staff time in getting the correct information to review and underwrite an application.

Jacob Sipe
Executive director, Indiana Housing & Community Development Authority

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

The 2014-2015 QAP introduced a new measure of cost containment in response to industry-wide concerns about rising costs. We added a total cost per square foot scoring category. Developments are divided into three categories: new construction, preservation, and adaptive-reuse. Each development competes for up to eight points under the category.

Points are awarded based on the following distribution:

Developments with more than one construction type will compete in the category that represents the majority of their square footage.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

Rising total development cost for 9% has been a consistent trend. We will be analyzing our cost per square foot scoring category described above to determine what (if any) effect it is having in promoting cost containment. Demand also continues to be very strong for 9% credits, as we have only been able to fund about one of four applications. Our 4% activity has picked up considerably. The increase in demand for 4% credits has coincided with a growing demand for gap and soft financing.

What strategies are you implementing to preserve existing affordable housing?

We annually set aside 10% of our 9% credits for the preservation of existing affordable housing. We also encourage developers interested in preserving existing properties to explore the use of 4% credits if their development wouldn’t be competitive in the 9% round. Lastly, we are working closely with the Indiana U.S. Department of Agriculture Rural Development Office to find efficiencies that can align its requirements with our 4% credit program.

What is your agency doing to address cost containment?

In addition to the cost-per-square-foot scoring category, we have a pay-for-performance developer fee policy. Traditionally, IHCDA’s developer fee calculation policy was based on a percentage of total development cost. However, this methodology is counter-intuitive to containing cost because it promotes cost to determine the developer fee amount. For example, if a developer pays more for its lumber, then its fee is higher or easily achieves the maximum fee rather than a developer who purchases lumber at a lower cost. IHCDA’s pay-for-performance developer fee is simple; we pay for each unit produced. The maximum fee is determined by the construction type: new construction and rehabilitation or adaptive-reuse. This methodology also promotes our priorities of preservation and adaptive-reuse because the amount per unit is slightly less for new construction. For example, the 9% maximum developer fee for rehabilitation or adaptive is $1.2 million. The pay for performance is $20,000 for the first 15 units, $15,000 for the next 30 units, $12,500 for the next 30 units, and $6,000 per unit for units above 75.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

We recommend developers schedule a meeting with us prior to submitting an application to discuss their development, especially if they’re new to Indiana. A development team with tax credit experience is critical. Common mistakes include omitting threshold items or scoring documentation with the application. Even though common mistakes are often a minor technical oversight, their impact is significant as it results in a loss of points. With the highly competitive nature of 9% credits, every point counts, and a minor oversight is often the deciding factor of an award or denial.

Wyman Winston
Executive director, Wisconsin Housing and Economic Development Authority

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

Major changes include: (a) modification to the Supportive Housing Set-Aside to support projects addressing homelessness to support the Wisconsin Plan to End Homelessness; (b) allow projects in cities with up to 20,000 residents to apply in the Rural Set-Aside (had been limited to 10,000), which makes our LIHTC program more consistent with Rural Development programs; and (c) allow applicants to receive points in the High Need Scoring category if they were selected in a competitive municipally issued RFP, which will help those cities who are making efforts to solve a particularly important housing and job siting problems in their community.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

A recent increase in the Wisconsin Historic Tax Credit rate from 10% to 20% led to a dramatic increase in the number of historic rehabilitation projects submitted in 2015. Additionally, an increase in scoring options in WHEDA’s Credit Usage scoring category (which awards more points for smaller per-unit LIHTC requests) led applicants to find as many funding sources as possible for their property—therefore, reducing the amount of LIHTCs necessary to complete the property. Pricing in metropolitan areas of our state continues to be strong.

What strategies are you implementing to preserve existing affordable housing?

For many years, WHEDA has set aside a significant portion of its 9% LIHTC for the preservation of federally assisted housing. Currently, that set-aside is 20%. When possible, we combine existing WHEDA below market-rate funding sources with tax-exempt bonds to encourage the use of the 4% LIHTC program for housing preservation. Future National Housing Trust Fund resources may be good tools to support 4% LIHTC preservation transactions.

What is your agency doing to address cost containment?

In 2013, WHEDA implemented a maximum cost limit model for all LIHTC applicants—the model contains detail variables measuring project size/type, geographic location, and construction type, and is based on actual LIHTC construction data, across key construction divisions, that WHEDA has collected over the past decade. Like most states, the Wisconsin LIHTC program is quite competitive—one of our largest point categories (Credit Usage) awards more points for smaller LIHTC requests. The necessity of scoring points in this category has required developers to keep development budgets at a reasonable level. It allows WHEDA to precisely to know what building components that have higher than comparable cost.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

With ongoing, strong demand for LIHTCs, securing every possible point is very important—one point is often the difference between an LIHTC award and a position on our ‘on-hold application’ list. The first piece of advice is a straightforward one: Carefully read the application requirements. In every LIHTC cycle, we have to reduce scores for a few applications in which the required supporting materials were missing or incomplete. Second, while the multifamily market is strong in Wisconsin, we have some pockets of the state that are especially price sensitive, so we encourage developers to look closely at current rent levels. And be sure that the proposed rents in your application are below those found in the market. Finally, for those developers who are new to Wisconsin, spend the time necessary to accurately document similar development successes in other states. Our ability to evaluate new developers in our state is certainly enhanced when we have a list of similar properties, along with contact information for the appropriate HFA.

Mark Stivers
Executive director, California Tax Credit Allocation Committee

What’s the biggest change you’ve made to the 2015 qualified allocation plan (QAP), and why?

Treasurer John Chiang and his housing team took office in January 2015 and are currently reviewing California’s QAP with the goal of increasing the production of affordable housing while maximizing affordability. As a result of this change in leadership, the changes to California’s QAP for 2015 were relatively minor. Nonetheless, TCAC altered its QAP to:

• Include the state’s Veteran’s Housing and Homeless Prevention Program on the list of priority homeless assistance projects within the nonprofit set-aside.
• Apply the 15% senior housing goal within the rural set-aside.
• Allow higher early year cash flow if necessary for a 15th year positive cash flow.
• For purposes of meeting energy efficiency goals, permit new construction projects to achieve set percentages of a zero net energy standard and rehabilitation projects to count certain recent energy-efficiency improvements.

What trends are you seeing in your 9% and/or 4% credit low-income housing tax credit (LIHTC) programs?

California continues to see very strong pricing for federal credits, particularly in Community Reinvestment Act territories. Pricing averaged $1.04 across the entire portfolio of 2014 9% deals, with five projects receiving $1.15 or more.

Resyndications are also growing. In 2014, TCAC awarded credits to 33 resyndication projects, up from 26 awards in 2013. Nine of the 33 awards were 9% credit awards.

AB 952, enacted in 2013, permits TCAC to allocate state credits to special needs projects in Difficult Development Areas (DDAs). Coupled with a TCAC regulation change to designate all special needs housing as DDA projects, this allows such projects to get the 130% federal basis boost and access state credits. As a result, the volume of applications for 9% credits for special-needs projects increased significantly in 2014.

What strategies are you implementing to preserve existing affordable housing?

Given California’s extreme housing shortage, our priority in the 9% program is new construction. Nonetheless, preserving existing affordable housing through the 4% program, and the 9% program when necessary, is very important. Treasurer Chiang is supporting legislation, AB 35, to increase the amount of state tax credits by $300 million annually to help fill gaps on 4% projects, which will make 4% preservation projects more feasible. This bill also proposes a 95% state credit on rehabilitation costs for projects that have high needs but minimal acquisition value to help fund repairs.

What is your agency doing to address cost containment?

Addressing costs is a very challenging task in California where land costs are high and construction costs keep rising in booming employment markets. Nonetheless, TCAC recently adopted a policy whereby staff would not recommend a project for 9% credits if the total eligible basis exceeded 130% of the total adjusted threshold basis limits. To date, no application has exceeded that threshold.

As mentioned above, TCAC is currently reviewing its QAP with an eye toward how to contain costs further in order to increase production. Under consideration are ideas to: 1) relax minimum construction standards; 2) lower amenity thresholds; 3) expand the geographic definition for scattered-site projects; 4) incentivize reduced parking requirements; and 5) create greater cost-efficiency incentives through the tiebreaker and or the threshold scoring criteria. However, TCAC must also balance this goal with ensuring geographic equity and the competitiveness of special needs projects.

What advice do you have for developers applying for LIHTCs and/or other financing in your state? What’s a common mistake developers make when applying for funding?

California has very sophisticated development entities. As a result, we see few mistakes. In each round, however, we do reduce point and tiebreaker scores due to creative interpretations of our regulations. TCAC appreciates when developers raise interpretation questions with us prior to the application deadline so that projects enter the competition with a common understanding.

In addition, developers sometimes submit lengthy documents in an application without clearly explaining how the documents serve to meet a particular scoring or application requirement. Concise submittals that clearly respond to the requirement save time for both TCAC and the developer.