One of the TDHCA programs we are tracking with our new American Recovery and Reinvestment Act accountability initiative is the Tax Credit Assistance Program (TCAP).
The website for the program explains “The current economic crisis has decreased demand for [housing] tax credits [HTCs] by investors” and “TCAP provides funding through the HOME Program to compensate for the current devaluation of HTCs, which is jeopardizing the financial stability of affordable rental developments awarded HTCs in 2007 and 2008, as well as current program applicants.”
So in short, the stated purpose of the TCAP program is to “fill the gap” in funding created by the recent fall in prices for Housing Tax Credits. (For those just coming up to speed on Housing Tax Credits and how they are used to support affordable housing, stay tuned for a future article focused on demystifying the Housing Tax Credits. In the meantime, AARP recently released a short overview of the program.)
TDHCA recently posted the first round of TCAP applications (in response to an open records request by TxLIHIS, we note). These projects are requesting TCAP funds due to adverse changes since their original applications in 2007 or 2008. We’ve been reviewing these applications to see how the applicants have proposed to use the program. As expected, a fall in demand for Housing Tax Credits was cited to justify the requests for supplemental funds across almost all the applications. In general, applicants claimed an average 14% reduction in the value of their tax credits since their original applications, while some applicants claimed they couldn’t sell the credits they had been granted at all.
What we found that we didn’t expect is that all but three of the 28 applications claim that direct construction costs have materially increased since the original applications. All of the applications claimed total costs, including indirect fees and financing costs, increased. Total costs increased an average 8% across all applications. This contrasts with published construction cost indexes that show construction costs flat or decreasing since 2008 (see here, here and here, for example).
This inconsistency raises a red flag that some developers are taking advantage of the funding opportunity to pad their estimates–while we would expect some developments to discover higher costs due to site-specific problems, the almost universal claim of increased costs is a concern. It is unlikely that cost changes at all of the eligible projects are out of line of industry norms.
The choreographed shift in applicant’s estimates most likely related to a change in incentives in the program. In the normal competitive process, developers may underbid their costs to receive bonus points for lower costs per square foot. They may believe they can recoup these costs elsewhere, such as higher credit prices or rent (i.e. AMI) growth than projected in underwriting. Now that the process is no longer competitively scored, the incentive is to over-estimate costs to cut the chances that the project will run over budget and eat into developer profits.
TDHCA has stated that all currently pending 28 applications to the TCAP program are expected to be funded if they pass the underwriting process. We hope that in the underwriting process TDHCA demands recent documentation to justify increases in construction costs, and doesn’t provide additional funding just because it is available– Recovery Act funds should be used to provide jobs and housing, not a second bite at profit protection.
