Let’s take care to avoid developer windfalls in the new LIHTC program

I haven’t discussed it much yet, but there’s a lot to be said about the new Low Income Housing Tax Credit Exchange Program (TCEP) recently authorized by the federal government. One of the things that needs to be said immediately is that as the state begins to structure how it is going to operate the program it needs to be careful to prevent the program from  becoming a financial windfall to developers that deprives the program of funds to build more affordable housing.

I’m not going into a lot of detail here about the TCEP. I’ll be talking a lot about it a lot in coming weeks. But I do want to lay down my marker regarding considerations for Texas Department of Housing and Community Affairs (TDHCA) should be taking to operate the program in a financially prudent manner.

TDHCA will be in a position to determine how much of a developer’s fee LIHTC housing developers are allowed to collect. In prior years, large urban LIHTC development had the potential to allow a developer to collect a $2 million-$3 million fee.

Under the TCEP program TDHCA is basically baling developers out who were unable to sell tax credits into the private market because of the recent financial downturn. A number of developers with pending applications had counted on receiving $.75 on the dollar or more by selling their housing tax credits. But nowadays nobody is buying tax credits. So the TCEP program allows TDHCA to sell the tax credits that are turned back into the state housing agency by private developers to the federal government. This is instead of private developers having to continue the fruitless effort to sell the tax credits into the private sector and the housing tax credits eventually being lost because they cannot be sold.

Once TDHCA recovers the tax credits from a developer whose application cannot go forward, TDHCA needs to carefully consider the public interest in how it utilizes these recaptured tax credits. TDHCA should not move forward under an assumption that it has a moral obligation guarantee high profit margins of housing developers who cannot make their deals work because of the current financial situation. The  state agency’s moral obligation is to maximize the effective use of the public funds and to create the highest quality and most affordable housing that it can with the limited public tax credit resources.

Therefore, TDHCA needs to tell the developers returning tax credits that it is not going to give them the same level of developer fees that were built into their applications many months ago before the current financial crisis. The economic realities of the country and the economy of the development industry has changed in profound ways. Profits that were available to housing tax credit developers two years ago should not be guaranteed by the government.

I would favor that the developer fees paid under the TCEP program be capped at a reasonable profit level of 5% to 10%. I know that’s going to make some developers scream, but that’s plenty of profit to continue to attract developers to continue to participate in the program.

The taxpayers money should not be doled out by a state agency to guarantee housing developers profits at levels that ignore the current economic reality.