NRP Group explains its success in gaining low-income housing tax credits.
The Low Income Housing Tax Credit program (LIHTC) is a key incentive for the creation and preservation of affordable housing. Administered by state housing finance agencies (HFAs), the program provides tax benefits to investors and a source of construction funds to developers in exchange for building income-restricted affordable housing.
During the early years of the program, developers were slow to use the tax credit program because of their uncertainties with program administration and implementation. As the program became more established, and examples of successful developments multiplied, the competition for the credits has grown considerably.
Even during times of economic uncertainty, most tax credit programs are oversubscribed at application time. Some developers, however, are highly successful at receiving funding awards for their developments, leaving unsuccessful applicants to wonder how they do it.
Central to any successful tax credit application is an understanding of state housing finance agency goals and expectations. Agency requirements and policy guidelines are outlined in a Qualified Allocation Plan (QAP). Each QAP is unique to the allocating state agency and most QAPs change from year to year. Some QAPs outline very detailed requirements and others are broader in scope. No matter the style of the QAP, the successful applicant is usually familiar with the entire document and may have even developed business plans around the QAP process and the tax credit program.
QAP Checklists
David Heller of NRP Group, an Ohio-based developer and manager of multifamily housing, says NRP ensures it is familiar with each QAP by developing checklists based on the QAP.
Developing a good working relationship with the state housing finance agency is also critical to the successful application. The tax credit program requires that each QAP be presented to the public for comment. Developers who are involved with this process provide valuable information to the HFA regarding current market, development and economic trends. Such dialogue can impact the final QAP. “As we have matured, we realize how important dialogue is,” Heller says. Interactions with the HFA also can provide a developer with insight into how staff will interpret application requirements and materials, as well as how any changing policy trends may influence the shape of future QAPs. The HFA can be a valuable member of the development team.
Beyond process and relationships, experience cannot be discounted. Successful applicants have generally applied for and received credits in the state in which they are applying or in other states. Some QAPs even require applicants to have a certain degree of experience with the construction, development or management of affordable housing or the utilization of other state and federal financing programs. That is not to say that “rookie” tax credit developers cannot be successful. In many cases, the lack of direct experience by one development team member can be mitigated with the addition of the right partners.
Estimating Costs
Housing finance agencies are charged with managing resources to ensure the production and preservation of decent, safe and sanitary affordable housing. To meet this goal, HFAs must evaluate the financial sustainability of each proposed development. Successful applicants are adept at estimating project development costs and gauging the availability of financial sources to meet those costs.
Developers of a tax credit property must also successfully show a healthy relationship between programmatic income restrictions and anticipated operational expenses. To ensure financial viability for the duration of a mandatory compliance period, many HFAs prescribe project cost limitations, minimum debt service ratios and require reserve fund accounts. HFAs also may evaluate the financial strength of the development team and require legally binding operational guarantees. Though difficult at times, the successful applicant usually presents an application that meets all of these financial guidelines.
Project specific factors also impact the success of tax credit applications. Location, and more specifically the marketability of a product within a particular location, is essential to the development of any housing—affordable or market-rate. Successful applicants are able to demonstrate precisely the potential of their property to lease-up and remain stable in the proposed market area. Additionally, the site must be appropriate for the intended population. Even if the market can be shown to sustain a particular type of project, it does not mean the exact location is appropriate. While all real estate is good for something, it may not be good for the proposed development. For example, a family-oriented development located next to an industrial site—even if zoning is appropriate—may not pass muster under many QAPs.
Successful applicants pay attention to detail, follow application instructions and meet all deadlines. Heller suggests his company has successful applications because of attention to detail and a focus on quality. “I can’t stress enough the importance of quality,” Heller says. “We are up against other developers putting together quality product.”
Taking these steps does not guarantee success, but it guarantees that the application will not be rejected at the start:
- Follow all application instructions.
a. Submit all required documents.
b. Use the prescribed application formatting.
- Use spell-check. Errors of grammar and spelling indicate a lack of attention to detail.
- Solid writing helps. Provide the required information in a clear, concise manner.
- Make sure photos, drawings and other documents are crisp, clear and legible.
- Submit the application on time, using the appropriate method (e.g. hand delivery or electronic submission). If the housing finance agency does not have the application, it cannot review it.
Successful tax credit applications are part art and part science. While there is no “formula” for successful applications, by implementing the steps discussed above, a developer improves its opportunity for success.
Brian Carnahan is Director of the Ohio Housing Finance Agency’s Office of Program Compliance, where he manages the compliance monitoring of tax credit, HOME and Section 8 communities. He can be reached at 614/728-5608 or bcarnahan@ohiohome.org. Beth Long is a Development Analyst with the Ohio Capital Corporation for Housing, a nonprofit corporation, where she provides program and technical assistance for the construction, rehabilitation and preservation of affordable housing in Ohio. She can be reached at blong@occh.org or 614/224-8446.