How the Affordable Housing Tax Credit Improvement Act Would Affect QAPs

Published by Mark Shelburne on Friday, April 14, 2017 - 12:00am

If passed, the Affordable Housing Credit Improvement Act of 2017 would benefit the low-income housing tax credit (LIHTC) in many different ways. The changes the legislation proposes would have real-world implications for the affordable rental housing community, including state LIHTC agencies, investors, developers, property managers and tenants.

For example, three proposed changes to qualified allocation plans (QAPs) would affect the way state LIHTC agencies set up competition and distribute LIHTCs within a jurisdiction.

Determination of Community Revitalization Plan

Under Internal Revenue Code Section 42, LIHTC allocating agencies must give a preference for applications that contribute to a concerted community revitalization plan (CCRP) and are located in a qualified census tract (QCT). (The other preferences are serving the lowest income tenants for the longest periods.) This new provision would add a minimum level of expectation for CCRPs.

The question of what constitutes an adequate CCRP has been the subject of increased interest over the last year, largely due to advocacy from civil rights organizations. The current bill is not the first time this issue has been considered at the federal level. In December 2016, Internal Revenue Service (IRS) Notice 2106-77 said an application does not qualify for the preference unless the CCRP is more than the LIHTC development itself. While the IRS was interpreting Section 42, the legislation would change what it says.

The section starts with a recognition that the qualified allocation plan (QAP) definition “shall take into account any factors the agency deems appropriate” and then says a CCRP must also:

  1. be “geographically specific;”
  2. outline a “plan for implementation and goals for outcomes;”
  3. include a strategy for obtaining public and/or private investment in “non-housing” activities; and
  4. “demonstrate the need for community revitalization.”

Many agencies have these or similar provisions already in place in their QAPs.

There is no further specificity on the extent, which is appropriate: boundaries, timeline, infrastructure, and need vary even within a state, let alone across the country.

Prohibition of Local Approval, Contribution Requirements

Another proposed change in the bill also results from civil rights advocacy and was covered in IRS guidance published at the end of last year. But in this case, instead of adding expectations, the legislation would say what a QAP cannot contain.

One way agencies manage LIHTC competition is through evaluating applications against selection criteria (others are set-asides and threshold requirements); many QAPs’ criteria reward involvement by local governments. The concern is when these incentives impede fair housing objectives. Siting LIHTC developments in low minority and/or high-opportunity areas can be challenging under the best of circumstances, but some claim QAPs make it more difficult.

The scenario at issue occurs when a local government withholds support for an application, thereby effectively vetoing an opportunity to build LIHTC units outside an area of racial and/or poverty concentration. Usually the elected officials are responding to not in my back yard (NIMBY) opposition. The legislation addresses this problem (the extent of which is unknown) by precluding either of the following from being QAP selection criteria:

  • “support or opposition with respect to the project from local or elected officials” or
  • “any local government contribution to the project …”

The former would mean resolutions or official letters expressing viewpoints on the development do not matter.

On its own, the latter largely would end a widely recognized benefit to LIHTC developments: often local governments’ reason for providing subsidized financing, fee waivers, donated land, and other assistance with real financial value is to help an application win the competition. To preserve this motivation, the Act allows taking contributions into account “as part of a broader consideration of the project’s ability to leverage outside funding sources.” However, the local effort may not be “prioritized over any other source of outside funding.”

One point of uncertainty is that the legislation does not define local government. For example, are public housing authorities or utility providers included? The answer may depend on an interpretation of the applicable state law.

Selection Criteria under Qualified Allocation Plans

A third QAP provision in the bill would require LIHTC agencies to consider “the affordable housing needs of individuals in the State who are members of Indian tribes.”

In addition to the required preferences mentioned above, under Section 42 QAPs have to include 10 selection criteria: location, housing needs, use of existing housing, sponsor characteristics, populations with special housing needs, public housing waiting lists, households with children, eventual tenant ownership, energy efficiency, and historic nature. These are not the same as giving a preference; rather agencies simply must consider these factors in the competition.

The legislation would add an 11th criterion. Interestingly, as with local government, there is no definition of “Indian tribe,” meaning it could apply to more than the 566 with federal recognition (located in 35 states). Not surprisingly there are differences among them, but many experience:

  • more extensive poverty;
  • fewer major employers;
  • greater distances to amenities;
  • less interest from experienced developers;
  • a strong preference for single family structures; and
  • not selling the underlying land (ground leases instead).

Each of these factors, and many others, can be relevant to how a QAP determines outcomes. Taking then into account should help applications serving members of Indian tribes more competitive.

More to Come

In future discussions in this space, Novogradac & Company will describe how other provisions of the Affordable Housing Credit Improvement Act of 2017 would change the LIHTC, and what those changes mean for the people and companies who use LIHTCs to provide affordable rental housing.