TxLIHIS Comments on Proposed 2011 QAP

October 23, 2010

Ms. Robbye Meyer

Texas Department of Housing and Community Affairs
P.O. Box 13941

Austin, TX 78711-3941

RE: Comments on the proposed 2011 Texas Qualified Allocation Plan

Dear Ms. Meyer:

We offer these recommendations regarding the Draft 2011 State of Texas Qualified Allocation Plan (QAP) for allocation of Low Income Housing Tax Credits (LIHTC) published in the September 24, 2010 Texas Register.

The QAP is the adopted process for reaching the goals and fulfilling the responsibilities of the state, the department, and of the Low Income Housing Tax Credit Program.  While the proposed language generally represents incremental improvements from the 2010 QAP,  the state can do better.

Our primary concern regarding the proposed 2011 QAP:

1)   The draft rules position the state to continue to fail to affirmatively further fair housing through this program.

a.     High Opportunity Area points are diluted with points for a financing-oriented goal.

b.     Proposed changes to 30% boost fail to improve targeting of boost

c.      Quantifiable Community Participation points are skewed against high opportunity areas

In addition, we have general comments and recommendations regarding the proposed language:

2)   Income and Rent Level changes represent an incremental improvement

3)   Signage requirement language is an incremental improvement

4)   Limits to Deferred Developer Fees are anti-competitive

5)   Fire sprinkler requirements should be universal

6)   Extend Marketing requirements to Farmworkers

7)   Elected official letters should be held to AFFH standard

8)   The QAP should require the use of independent market analysts and appraisers

9)   The quality of tenant services varies widely among developments with many tenant services being of poor quality.

10)  At risk developments should focus on loss of affordability of quality units, not loss of subsidy.

11)  Required Rehab levels are inadequate

12)  NIMBY forces, rules and state statutes are having a negative effect on the family unit/elderly unit mix (reducing the former, increasing the latter).

13)  Failure to return tax credits should bar developer from future transactions.

These areas of comment are discussed below.

1) The draft rules position the state to continue to fail to affirmatively further fair housing through this program

a. High Opportunity Area location points are diluted with points for a financing-oriented goal

High Opportunity Area location points at have been made interchangeable with points for “documented and committed Third-Party funding sources” for developments located outside of a QCT.  This dramatically undercuts the effectiveness of the High Opportunity Points by diluting them with a financing-oriented goal.  We are already concerned that a sufficient number of developments are not being constructed in non-minority majority and high opportunity neighborhoods, and this works against that goal.

Financing points such as this should be assigned to a separate category of points, perhaps incorporated in the scoring of “financial feasibility.  We also suggest making the available points for areas with low poverty, high area median-family income, and access to high performing schools additive, rather than exclusive (i.e. applications should be eligible for low-poverty AND high-income AND exemplary school points, not low-poverty OR high-income OR exemplary school points).

b. High Opportunity Area Boost is not structured to maximize impact

The draft language removes the 30% boost for access to exemplary or recognized schools.  We believe this language should be reinstated and updated to exclude magnet schools, matching the proposed language in section 49.9.a.16.B.

The High Opportunity Area boost remains for “Developments in census tracts which have an Area Median Gross Income that is higher than the Area Median Gross Income of the county or place in which the census tract is located.” This definition is too broad– fully 46% of Texans live in areas meeting the eligibility for this boost.

We recommend reserving the boost for high-income areas for developments in areas with a meaningfully higher than average income. We suggest using a more narrow definition of high opportunity area:  developments constructed in a census tract in the top quartile (when ranked by AMFI) of tracts in the county in which it is constructed. If the points in 49.9.a.16 are not made additive, this definition should extend to the higher-income area points in that section as well.

c. Quantifiable Community Participation points are skewed against high opportunity areas

The Quantifiable Community Participation (QCP) section language has been changed to remove the explicit assumption that the failure of an existing neighborhood organization to provide a letter is a neutral response and scored as a neutral response.  Given that our research suggests that, on average, higher-opportunity areas are less likely to provide such a letter, this suggests that developments located in higher-opportunity areas be, on average, penalized by this point structure.

We suggest scoring all applications with an assumption of support unless a negative letter is received, and meaningfully defining and enforcing the provision that “Input that evidences unlawful discrimination against classes of persons protected by Fair Housing law or the scoring of which the Department determines to be contrary to the Department’s efforts to affirmatively further fair housing will not be considered” when evaluating negative letters.

The State has a duty to consider the extent to which QCP is an impediment to fair housing and to discount those comments that have the effect of acting as an impediment.  For example, a claim of school overcrowding is directed against families with children (a protected class under fair housing).  The instructions for commenters should include a statement that the state is under an obligation to Affirmatively Further Fair Housing and that QCP letters that urge or demonstrate an act that would amount to a prohibited act under the fair housing act cannot be considered.  The stats should provide examples of such statements to commenters.  The State should also limit the scoring of negative points to letters which address specific concerns regarding the specific proposed development at that location, and not concerns regarding the LIHTC program in general.

While the Fair Housing impacts of the QAP are our primary concerns with the proposed language, the QAP addresses all aspects of the program.  We address these other aspects below:

2) Income and Rent Level changes represent an incremental improvement

An inadequate number of units affordable at less than 40% median family income have been created under the LIHTC program under previous QAPs.

We support staff’s recommendation regarding the Income and rent level scoring  (§49.9(a)(7)).  This proposal represents a carefully balancing of the competing incentives for gross rent and income targeting, and encourages deep targeting of units at residents earning 30% or less of AMFI. Given the severe unmet housing need in the state’s Extremely Low Income population, the relative scoring of 30% and 50% units is an important factor in the state’s QAP.

We encourage the state to maintain feasible income targeting, and discourage the board from attempting to re-calculate the optimal relative points on the fly during the November board meeting.  Either adopt this language or return to the 2010 status quo.

3) New signage requirement represents an incremental improvement

The signage requirements of the 2010 QAP implicitly endorsed the viewpoint that developments funded through the LIHTC program are a public hazard, acting effectively as a “warning label” that encouraged NIMBY opposition to project placement.  Such opposition has a negative effect upon site selection and the family unit/elderly unit mix, discouraging development in high opportunity areas and discouraging family-oriented developments.

We support the proposed change of the required language in the signage requirements in the draft 2011 QAP.  The proposed language (the sign must identify that a residential development is being proposed” is more neutral than the previous language and represent an improvement over the status-quo.

Nevertheless, the signage requirement in the QAP does not appear to be statutorily required, and retains the possibility of adversely affecting the state’s progress towards affirmatively addressing fair housing.  Developments receiving LIHTC funding should be held to the same notification standards as other residential developments.  Any public notice provisions not required by state law should be struck from the QAP.

4) Limits to Deferred Developer Fees are anti-competitive

The discussion of these rules at the September 9, 2009 board meeting included comments proposing that a limit be placed on deferred developer fees to “rehabilitat[e] the balance sheets of the developers.”

We strongly disagree with such a proposal, which amounts to the department setting a floor on the risk to developer fees.  This proposal is anti-competitive and threatens to sacrifice unit affordability to keep a handful of developers from making a bad financial decision.

A blanket proscription of fee deferral is the wrong tool to address a concern regarding financial feasibility.  The right way to deal with developers who over-promise is through underwriting.

5) Fire sprinkler requirement should be universal.

The Draft 2011 QAP moves sprinkler systems from a scored amenity to a threshold item, but adds language limiting the applicability to “where required by local code.”  This limitation makes the requirement superfluous.

TDHCA has an interest in protecting the lives of the residents of multifamily properties built in the Low Income Housing Tax Credit Program wherever the development is located.  Extensive data demonstrates that fire-suppression system saves lives.  We recommend the phrase “where required by local code” be struck.

6) Extend marketing requirements to Farmworkers

We recommend including farmworkers in Section (3)(N) by altering the language to read

“A certification that the Development Owner will affirmatively market to veterans and farmworkers (as defined by USDA) through direct marketing or contracts with veteran’s organizations and organizations that serve farmworkers.

7) Elected official letters should be transparently adopted and held to AFFH standards

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.

Rather, local elected officials should be invited to submit any community revitalization plans, HOME plans, etc. developed by their community and indicate how the proposed development meets or fails to meet their community guidelines.  TDHCA should request the all written comments address how the official’s recommendation advances or does not advance the state and local government obligation to affirmatively further fair housing.

The Quantifiable Community Participation section of the QAP contains the following language: “Input that evidences unlawful discrimination against classes of persons protected by Fair Housing law or the scoring of which the Department determines to be contrary to the Department’s efforts to affirmatively further fair housing will not be considered.”  This AFFH language should also be explicitly applied to the evaluation of elected official letters.

8) The QAP should require Independent Market Analyses and Appraisals

Under the proposed QAP rules (§49.9 (h)(14)(B) and (D)), a comprehensive market analysis report and an appraisal report are prepared by qualified professionals selected by the applying developer.

Because the market analyst is chosen by a party with an interest in the outcome, the market analysis performed is not seen as truly independent by community organizations and local elected officials.  This perception restricts the ability of the analysis to meaningfully inform stakeholders who may otherwise doubt the need for affordable housing in their neighborhoods.

Likewise, TDHCA because the appraiser is chosen by a party with an interest in the outcome, the public may lack confidence in the value provided by that professional.

Stakeholders would have more confidence in these reports if TDHCA engaged the independent market analyst and appraiser for each application directly.  TDHCA could pay for the engagement with a fee charged to the developer.  The state of Florida uses such a system for the market studies and appraisals it relies upon in its housing tax credit underwriting process.

This is the language of Florida Housing Finance Corporation rule 67-48.0072.10):

(10) A full or self-contained appraisal as defined by the Uniform Standards of Professional Appraisal Practice and a separate market study shall be ordered by the Credit Underwriter, at the Applicant’s expense, from an appraiser qualified for the geographic area and product type not later than completion of credit underwriting. The Credit Underwriter shall review the appraisal to properly evaluate the proposed property’s financial feasibility. Appraisals which have been ordered and submitted by third party credit enhancers, first mortgagors or Housing Credit Syndicators and which meet the above requirements and are acceptable to the Credit Underwriter may be used instead of the appraisal referenced above. The market study must be completed by a disinterested party who is approved by the Credit Underwriter. The Credit Underwriter shall consider the market study, the Development’s financial impact on Developments in the area previously funded by the Corporation, and other documentation when making its recommendation of whether to approve or disapprove a SAIL or HOME loan, a Housing Credit Allocation, or a combined SAIL loan and Housing Credit Allocation or Housing Credit Allocation and HOME loan. The Credit Underwriter must review and determine whether there will be a negative impact to Guarantee Fund Developments within the primary market area or five (5) miles of the proposed Development, whichever is greater. The Credit Underwriter shall also review the appraisal and other market documentation to determine if the market exists to support both the demographic and income restriction set-asides committed to within the Application. For the Credit Underwriter to make a favorable recommendation, the submarket of the proposed Development must have an average occupancy rate of 90 percent or greater.

We recommend Texas adopt such a system.

9) The quality of tenant services varies widely among developments with many tenant services being of poor quality.

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 2010 dollars, adjusted for inflation, should receive six 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.

10) At risk developments should focus on loss of the affordability of quality units, not merely loss of subsidy to a property.

At-risk applications get a set-aside of 15% under the statute. In many years, the demand for these credits has been less than 15%. The result is that applications with relatively low scores have gotten funded in this category because of the lack of competition.

In 2009 there was a difference of 100 points between the high and low scoring projects in this set-aside.  The lowest scoring non-Ike project in the regionally competitive application process to receive funding was 37 points higher than the lowest scoring project in the At-risk set aside to receive funding. This indicates marginal-quality deals are getting funded in the at-risk set aside.

While this is an issue that should also be addressed thorough statutory change by the legislature, TDHCA has authority to reduce the danger of funding low-quality development by raising the minimum threshold criteria for all projects.

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 minimum threshold criteria for all developments, including the at-risk set aside, should include evidence the development will provide high-quality housing to its residents.

We recommend that the minimum final score threshold be raised 10% from 118 to 130 and that this threshold be applied across all set-asides. In 2009 at least one development with a score below 118 was funded in the at-risk set aside.

111) Required Rehab levels are inadequate

A number of the tax-exempt bond projects that have failed in recent years 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.

12) NIMBY forces, rules and state statutes are having a negative effect on the family unit/elderly unit mix (reducing the former, increasing the latter).

There are too many senior applications being received and approved relative to family developments.  In 2009, 40% of the regionally allocated developments funded were Qualified Elderly Developments.  In region 6, some 60% of the Low-income units funded by the regionally allocated credits were targeted at Elderly residents.  According to data provided by the Texas State Data center, in 2007 only 12% of the Texas population was 62 or older.

TDHCA’s policy should be to encourage intergenerational developments. To accomplish this we recommend reducing incentives for elderly segregated housing in the QAP, perhaps by awarding points directly to intergenerational or family housing.

13) Failure to return tax credits should bar developer from future transactions.

There needs to be a strong incentive to developers to return unused credits to the tax credit exchange program (or similar programs developed in the future) or face being barred from participations in future tax credit rounds.

In conclusion, under the Proposed Rules, the program is on path to continue to fail to affirmatively further fair housing in Texas

An insufficient number of developments are being constructed in non-minority majority and high opportunity neighborhoods.  While some of the proposed changes in this draft represent incremental improvement, this rule represents another missed opportunity to significantly reinvent this program to meet the state’s goals and responsibilities.  Many opportunities for direct and indirect discrimination remain embedded in the proposed 2011 QAP.  The state can do better than this.

Thank you for your consideration of our comments.

Sincerely,

John Henneberger, co-director