Advocates offer recommendations to improve the Texas Low Income Housing Tax Credit Program

The Low Income Housing Tax Credit Program is the program that produces, by far, the largest number of affordable housing units in Texas each year. The tax credits are awarded to housing developers by the Texas Department of Housing and Community Affairs (TDHCA) through a competitive process. The rules for that process are set out in the Texas Qualified Allocation Plan (QAP).  Once a year the QAP is revised and there is an opportunity for housing developers and the public to comment on the plan. It is that time of year.

Here are the comments we at the Texas Low Income Housing Information Service submitted to the Texas Department of Housing and Community Affairs. our recommendations address a wide range of issues with the current program.

We have reviewed the 2009 QAP to identify areas where the plan can be changed to address these issues. We have identified fifteen areas that could be changed. Each issue is set out individually below with my narrative discussion and the citation of what I think is the relevant section of the 2009 QAP.

ISSUE 1 — Definition of “At-Risk” development

(QAP page 4)

At-risk applications get a set-aside of 20% under the statute. The demand for these credits has been less than 20%. The result is that applications with relatively low scores are getting funded in this category because of the lack of competition.

This year there was a difference of 100 points between the high and low scoring projects in this set-aside. This means some marginal quality deals are getting funded in this set-aside.

The reason for creating an at-risk set aside should be to preserve high-quality existing affordable housing and especially to preserve the subsidies within those developments that make them affordable for lower income people. The downside is that many of these developments are old, poorly designed originally and located in economically depressed and racially segregated neighborhoods. There is a need for a more refined analysis to determine whether a particular at-risk development should be prioritized.

When we worked to create a statutory priority for TDHCA to prioritize at-risk developments we also proposed a department assessment and prioritization of each development in the pool of at-risk housing in the state. That recommendation was not put in place in the TDHCA statute but is nonetheless an important activity. It would allow TDHCA to assign a priority to those at-risk developments that are truly at risk and which were worthy of long-term preservation.

Our recommendation is for TDHCA to prioritize at-risk developments as contemplated in the original statutory language. If this proves impossible, then develop and incorporate standards for priority at-risk developments for inclusion in the QAP and only allow these prioritized units to compete in the at-risk set aside.

This is important in terms of improving the quality of tax credit housing as well as in promoting fair housing by not continuing to prop up old, undesirable HUD properties located in racially segregated housing in bad neighborhoods through the tax credit program. There are many priority at risk developments that have attached to them deep and important rent subsidies that merit redevelopment through the LIHTC program. There are also developments, located in areas proximate to a downtown and in gentrifying neighborhoods that the tax credit program needs to assist.

ISSUE 2 — High Opportunity Area

(QAP pages 6-7 and 53)

The provision of a 130 percent boost of tax credits is one of the most important tools available to TDHCA to affirmatively further fair housing. The problem is that the effect of this tool is diminished by an overly broad definition.

The state should conduct or commission a study to identify census tracts where affordable housing is lacking and where the presence of that housing would advance the state’s duty to affirmatively further fair housing. Careful consideration of the methodology for the study would need to be given.

For the purposes of the 2010 QAP, I recommend establishing two levels of boost: 115% and 130%.

• A 130% boost would be afforded to projects that are constructed in a census tract with less than 5% of the households living at or below the poverty level AND has an AMGI that is 120% higher than the AMGI of the county or place in which the census tract is located OR a school attendance zone that has an academic rating of “Exemplary” or “Recognized” rating (as determined by the Texas Education Agency) as of the first day of the Application Submission Acceptance Period.
• A 115% boost would be afforded to projects that are constructed in a census tract with less than 10% of the households living at or below the poverty level AND a census tract that has an AMGI that is 100% higher than the AMGI of the county or place in which the census tract is located.

ISSUE 3 — Market analyst

(QAP page 9)

Important program goals can be realized and a resolution of disputes over the need for a proposed development could be achieved if a market analyst associated with the application can be shown to be truly independent of the developer and in a position to render a completely objective and honest opinion regarding the market need for a proposed tax credit development.

An objective third party determination of need could be used as a basis for factually and independently resolving community and elected official anecdotal claims a development is not needed. By designing an assessment of need based on a range of needs defined within the QAP, the independent market analyst could help to ensure a better prioritization of tax credit awards.

The key here is to demonstrate true independence between the market analyst and the developer. While in theory that exists under the current system, few would argue that it is actually achieved. A developer chooses the market analyst they want to hire and the developer pays the market analyst directly. This opens up the opportunity for community organizations and local elected officials to make the argument the development is not needed.

It is my understanding that the state of Florida assigns a market analyst to the development and is paid by the department from a fee charged to the developer. This is the system I believe Texas should adopt.

I recommend that TDHCA develop a list of qualified market analysts and develop criteria and standards for the analysis they are asked to perform. The format of the analysis should be standardized to facilitate TDHCA’s own review and to allow comparison between the market analysis between applications. Developers would pay a market analysis fee directly to TDHCA. TDHCA would assign an approved market analyst to an application. The analyst could be called on by TDHCA to provide supplemental information and to be available to respond to issues of the need for a proposed development raised by neighborhoods or elected officials.

ISSUE 4 — Qualified nonprofit

(QAP pages 9-10)

The purpose for a nonprofit set-aside within the LIHTC program in Texas is poorly defined. The definition of a qualified nonprofit in the QAP in no way ensures that the nonprofit is competent or that it will be acting in a manner to enhance the quality of the development, provide valuable services to tenants or achieve an important community revitalization objective. Most of the nonprofits involved in Texas have no actual role in the development of the property. This is different from the successful role of nonprofits in many other large states.

TDHCA needs to begin by defining the added value nonprofits are expected to bring to the tax credit program. TDHCA should define the characteristics of nonprofits that are capable of providing these benefits and then write those characteristics into this definition.

Some of the things qualifying nonprofits should provide would include:

• Undertaking a development as a neighborhood based nonprofit community development corporation as part of a comprehensive community revitalization strategy.
• Creating the development for the purpose of providing special needs housing or housing with particular tenant services that the nonprofit has an interest and an expertise in providing.

In other words, the nonprofit should be bringing something to the transaction that relates to the mission of the nonprofit. A nonprofit that simply has a mission of building and providing affordable housing is qualitatively not different than a for-profit developer and should not receive preference in the allocation of tax credits. An exception would be a nonprofit that brings substantial additional financial resources to the tax credit development to either enhance the physical quality of the development or to substantially improve its affordability.

We recommend that this concept be incorporated into the definition of a qualified nonprofit.

A qualified nonprofit should also be in sole control of the general partnership, and earn and collect more than half of the developer fee at the same time and rate as any other development partner.

ISSUE 5 — Fail to return tax credits then developer is barred from future transactions.

This is an issue that is not included in the current QAP.

There needs to be a strong incentive to developers to turn in unused credits to the tax credit exchange program or face being barred from participations in future tax credit rounds.

ISSUE 6 — Size of development

(QAP page 17 and page 56)

Neighborhoods generally do not want extremely large apartment complexes and neither to tenants. There is no reason to allow tax credit developers to build 252 unit developments. These mega-developments attract community opposition.

TDHCA should be going in precisely the opposite direction and providing incentives and financing options to allow for mini tax credit developments that can be incorporated into existing neighborhoods and integrated into communities.

We recommend a limit of 150 units.

The requirement that the development should consist of at least 36 units should also be eliminated. If a developer can figure out how to do a smaller size development, TDHCA should encourage rather than prohibit the development.

ISSUE 7 — Rehabilitation levels

(QAP page 19)

A number of tax-exempt bond projects that have failed have involved the rehabilitation of older developments. In most cases those developments have failed to provide an adequate level of rehabilitation at the time of the transaction and that has undermined the long-term economic viability of the development. The lesson is that rehabilitation should be required to bring a development up to near new standards.

Many of the poorest conceived and most problematic developments are rehabilitation applications that involve $15,000 or less per unit in rehabilitation. Allowing these type of transactions encourages the flipping of older properties primarily for the purpose of gaining developer fees or reducing tax liabilities through transfer to nonprofit ownership. A mere change of ownership is not a compelling purpose to award tax credits except in a few exceptional circumstances that can be addressed in a proper definition of at-risk units.

The $15,000 minimum rehabilitation threshold is too low. We recommend that TDHCA review and consider increasing it. TDHCA should include a list a critical major components of the development that must be brought to a like new conditions.

An appraiser working for TDHCA who is independent of the developer should objectively and independently assess the proposed rehabilitation needs of the development.  No application should be financed with tax credits unless truly substantial rehabilitation is going to take place.

ISSUE 8 — Elected official letters

The Dallas public corruption case offers ample evidence that relying upon a single elected official to make a determination as to whether a tax credit development gets the points it needs to move forward opens the door for abuse, bribery and extortion. Local elected official input for purposes of awarding points to a tax credit development should only be considered if the local governing body as a whole provides the input.

TDHCA should develop objective standards that would form the basis of the request for elected official input. Presuming that a truly independent market analysis is put in place, the need for the housing should not be one of the requested areas for elected official input.

Local elected officials commenting on an application should be invited to submit any community revitalization plans, HOME plans, etc. and indicate whether, based on these plans they feel the development should be approved or denied and why. The state and local government obligation to affirmatively further fair housing should be a topic they are invited to address in the context of their recommendation.

ISSUE 9 — Bribing neighborhoods

(QAP page 34)…

The penalties need to be enhanced for violation of this section. We recommend a three-year debarment.

This practice appears to be ongoing. See: http://texashousers.org/2009/07/29/50000-was-the-price-for-community-support-for-affordable-housing-in-dallas/

ISSUE 10 — Area resident notification through signage and letter

(QAP page 40)

Low income housing is one of the few activities that a private developer can undertake in the state of Texas that triggers public signage and notification processes. You can drill a gas well next door to somebody’s house and you don’t have to put up a sign to notify them in advance. What is it that these notification requirements concerning affordable housing are protecting the public from?

The truth is that the signage requirements represent an official expression that the State of Texas believes that there is something for surrounding property owners and the public at large to fear from low income housing. Otherwise, what is the point of providing this extraordinary level of public notification?

Do homeowners living adjacent to a proposed elderly housing development need to live in fear that old ladies with walkers will threaten the peace of their neighborhood? Are not the protections of city ordinances and zoning powers supposed to control proposed development? If so, why is this extra level of notification necessary for affordable housing? Why are these notices required only of developments financed through the Texas Department of Housing and Community Affairs? Why are not privately financed housing developments required to provide the public the same type of notices?

This is absurd and offensive. The property is not being zoned. Presumably that has already taken place.

Any public notice provisions not strictly required in state law should be struck from the QAP.

ISSUE 11 — Appraiser should be selected by the department

There is no reason to allow a tax credit developer to shop around for an appraiser who will provide an inflated value estimate. Banks do not allow this. TDHCA should not either.

ISSUE 12 — Community input standards

(QAP pages 46-47)

Many hours of contentious community debate occurs over whether an individual application should be denied based on the need for the housing, its impact on schools and community services and the traffic impact. There are no standards for evaluating these factors or for deciding what constitutes a basis for denying an application on the basis of these factors. We recommend that this be addressed in the QAP.

The independent market analyst, working for TDHCA should also prepare, or contract to have prepared, a school, community service and traffic impact statement for the development based upon objective standards set out in the QAP. The criteria to be used in conducting these assessments and the thresholds to be used uniformly for disqualification of an application based on these factors should be incorporated in the QAP.

Provided the QAP requires an independent market analysis that is expert and unbiased, the public needs to be informed of the independent nature of the market analysis. The public should be informed that the rebuttable presumption is that these independent assessments are correct and that the threshold for disqualification of an application is set out in the QAP.

Community input and award consideration should be given project design factors, tenant services and the like.

ISSUE 13 — Quality of the units

(QAP page 48)

We recommend including points under amenities if a development is built in conformance with the Green Community Initiative, http://www.greencommunitiesonline.org/

HUD, housing authorities and affordable housing builders are embracing this initiative as a reasonable and practical alternative to LEED.

ISSUE 14 — Tenant services

(QAP page 51)

TDHCA should award points to developments at two levels of tenant services: basic services (required of every development) and enhanced services.

Basic services should receive no points; enhanced tenant services, funded at a minimum of $5,000 per month in 2009 dollars, adjusted for inflation, should receive eight points. Tenant services agreements should be included in the Land Use Restriction Agreement (LURA) and monitored through the regular compliance monitoring process.

We propose that TDHCA employ a Tenant Opportunities Coordinator (TOC). The TOC would have a MSW or better and be knowledgeable about anti-poverty programs and strategies. Supporting the TOC would be an advisory commission known as the Tenant Initiatives Commission (TIC) composed of social workers and other experts. The TIC would work with the TOC to develop a list of baseline services that all developments would be required to provide. TDHCA would require each development to provide a fixed amount of funds from income to fund tenant services with an inflation-escalating clause. A tenant services plan would be submitted yearly to TDHCA detailing how these funds would be spent in conformance with the list of approved baseline tenant services. As part of the regular monitoring for compliance, TDHCA would ensure that the services were actually provided.

A development proposing enhanced tenant services would, at the time of initial tax credit application, submit a plan for those services. A range of points would be available based on a list of programs approved by the TOC. The developer’s plan would be reviewed and scored by the TOC. Any deficiencies in the plan would be noted and the developer would have an opportunity to address those deficiencies prior to final scoring of the application.

ISSUE 15 – Reduce incentives for senior only housing

There are too many senior applications being approved relative to family developments. TDHCA’s policy should be to encourage intergenerational developments. To accomplish this we recommend reducing incentives for elderly segregated housing in the QAP.