When Congress created the low-income housing tax credit program in 1986, initial response from developers was less than overwhelming.
"If you were a multifamily player from 1987 to about 1993, a lot of states would be calling you to see if you could utilize the credits," says Michael Costa, president of Simpson Housing Solutions in Long Beach, Calif., which has developed 22,000 units of affordable housing nationwide. "They were having a hard time allocating them all."
How times change.
CAROLINA CREDIT: NRP Group used tax credits to build Falls Pointe, a mixed affordable community in Durham, N.C. Today, application-to-award ratios for the lucrative 9 percent tax credit run 2-to-1 on a national level, according to the National Council of State Housing Authorities, with states such as California bumping up to a 6-to-1 ratio in recent years.
"Now it's fierce, fierce competition," says Sharon Lee, executive director of the nonprofit Low Income Housing Institute in Seattle. "A few points on your application can make a huge difference."
Why the big turnaround? After tax credits received permanent status in 1993, investors were eager to put money into a stable government program with long-term visibility. Then, in 2001 and 2002, Congress boosted each state's credit cap from $1.25 to $1.75 per resident, amounting to a 40 percent increase over two years. Congress tied future caps to the Consumer Pricing Index, ensuring automatic increases down the road, just as other affordable housing funding sources, such as Section 8 subsidies, fell victim to the federal budgeting ax.
"It's a growing, versus a diminishing, program," says David Heller, principal of NRP Group in Cleveland, which has developed more than 6,000 tax-credit units in more than 100 projects nationwide. "But I think the real reason there's such high demand for the credit is because it's really the only affordable housing game in town."
The program's success has also gained the attention of savvy developers who have seen competitors make money in the affordable housing market, with vacancy rates and debt service payments that are often lower than market-rate projects.
Then there's the fact that major corporations want tax credits, too. When tax credits are awarded to a developer, he can turn around and sell them to investors for cash to build his project. Those investors, often large corporations, can use the credits to lower their own tax bill and improve the bottom line for shareholders.
With all those factors in play, it's no wonder developers have to work harder than ever to win tax credit allocations today. Here are seven ways to help boost your application's chance for success.
TULSA UNTAXED: Michaels Development built Country Club Gardens, a 466-unit, mixed-income community in Tulsa, Okla., using tax credits. Mind your QAPs. Most states use a scoring system to award tax credits to developers. The total number of points an application receives is based on how closely it reflects the state's affordable housing needs, which are spelled out annually in each state's qualified allocation plan, or QAP. Because needs vary by state and change each year, studying your state's plan is essential.
"If you want to be successful in this highly competitive environment, you have to become a student of the game–and the game is the qualified allocation program," says Jeff Faile, principal with San Francisco-based tax credit consultant Novogradac & Co., which steers clients through the application process.
"Sit down and study that QAP," says Costa. "You need to know every single element that will get you an additional point. Every single element." You can get a jump on the process by attending the public comment meetings states hold before releasing their final drafts each year. "The most successful developers and owners in this business are at those meetings," says Faile.
Go local. Nothing derails a low-income project faster than NIMBY opposition, and today, many states require a letter of approval from the highest elected local official before they'll grant an allocation. So make sure you get the mayor or city council on your side.
"Without that support, you won't be competitive at all," says Manish Verma, vice president of development at Galaxy Builders in San Antonio, which started leasing 450 tax-credit units in two developments in May. "That is by far the biggest challenge to overcome. If you don't, it's really a lost cause."
Partner with a nonprofit. This is a great way to gain points in many states, while combating NIMBYism at the same time. "The community seems to listen more to a nonprofit than they would to a for-profit developer," says Verma. "In those cases, I think the developer just tries to get out of the way."
While not all states give points for such partnerships, there can be other advantages, such as the tax-exempt status the groups bring to your organization.
"Our philosophy is to use a nonprofit in every single one of our developments," says Costa. "They make the best partners, because they're local, they understand the community, and they're there to do the right thing. It's the best thing you can do from a community standpoint."
Use multilayered financing. Already having the nod–and financial backing–from other agencies can greatly enhance your application.
"Look to local governments," says Robert J. Greer, president of Michaels Development Co. in Marlton, N.J., which has developed 35,000 tax-credit units in 180 projects nationwide. "Can we get some community development block grant money into the site? Can we get some HOME money to help? Can we go to the Federal Home Loan Bank to see if we can get some additional funding from that source?"
Aside from putting a positive slant on your application in many states, gaining funding from community sources is another way to combat any public opposition. Just make sure you can line up all your funding concurrently, a requirement in many state tax-credit plans.
Consider preservation projects. States are increasingly leaning toward deals that aim to renovate or maintain an existing low-income housing development. "Preservation projects" are in focus because developments built under the tax-credit program in the early 1990s are now becoming eligible to convert into market-rate housing.
"More and more states are setting aside a greater amount of 9 percent tax credits for preservation work," says Greer. "And it can be a little easier. If I already own the property, then it's already in my management and I know I can react very quickly to put together an application for preservation."
Alternatively, preservation deals can be used to purchase existing low-income projects from a third party, with the buyer pledging to keep rents affordable for an extended period.
Remember the three Ls. Don't disregard real estate's thrice-uttered "location" mantra just because you're pursuing a tax credit deal. In fact, in many states, affordable developers are competing with market-rate agencies to get the best land possible.
"With all the competition for the credits, states can dictate where these developments should go," says Costa.
"The people scoring the sites are looking for certain amenities," says Heller. "Is it on a bus line? How close is it to shopping? If it's a senior facility, how close is it to a senior center? All those things improve your chances."
Be ready. Finally, make sure you can prove you'll be ready to go if you receive an award. The last thing state officials want to see are tax credits lying dormant for a year while you're getting your ducks in a row. In fact, many states' "readiness requirements" have ramped up in recent years.
"You have to have your financing lined up, your community support letter, and all necessary approvals on a specific plan," says Costa. "They want to see that so they know you can start building within 90 days of receiving your allocation."
Whatever you do, though, don't make promises you can't keep.
"It's very tempting for a tax credit developer to go in there and say, 'Well, let me just try to get as many points as I can by offering all these amenities,'" says Gary Robinson, director of acquisitions at Raymond James Tax Credit Funds, a St. Petersburg, Fla.-based tax-credit syndicator. "The problem is, you may end up winning an award, and now you've got to build and lease up what you promised. It's not always that easy."
Of course, no one said it was going to be easy. But there's a fundamental reason whhttp:/ The low-income housing tax credit program works. Since its inception, the program has spurred the development of 1.4 million units in communities across the nation, providing high-quality, affordable housing to low-income families while producing sustainable profits for developers.
"It sometimes still baffles me that the program actually balances out as well as it does," says Costa. "The value of those credits brings in just enough equity to allow us to develop and build market-rate-quality communities that are affordable. But as you drive by that community, you don't know if it's affordable or not, and that's exactly the way that we have always wanted these programs to be. And the people who live there want that, too. They want to feel accepted as part of the community."
–Joe Bousquin is a freelance writer in Newcastle, Calif.