QAP Set-Asides (post 2 of 10)

Published by Mark Shelburne on Wednesday, September 15, 2021 - 12:00am

This post is part of a series on QAPs:

  1. Introduction
  2. Set-Asides
  3. Thresholds
  4. Selection Criteria
  5. Underwriting
  6. Creating a Competition
  7. Special Case of Cost Policies
  8. 114 Different Criteria
  9. Drafting Considerations
  10. Providing Effective Input

A common assumption is set-asides necessarily promote certain types of developments. While that can be the effect, set-asides’ true function is to create a distinct competition for a state’s low-income housing tax credits (LIHTCs).

Federal Law

Section 42 prevents agencies from allocating more than 90% of their LIHTCs to properties that do not involve material participation by tax-exempt entities (phrasing as a double negative is unavoidable). Because states want to use all housing resources, this requirement is known as the 10% nonprofit set-aside. Many qualified allocation plans (QAPs) use a higher percentage. Otherwise there are no federal mandates in this area.

State Administration

Whether a distinction encourages or limits particular activities depends on the surrounding context, including if it establishes a minimum or maximum and how applications would compete otherwise.

Set-asides can be for a percent of the state’s annual per-capita ceiling, specific dollar figures, or a number of awards. Each approach has benefits and drawbacks. For example, percentages automatically adjust with changes in LIHTCs available (like if Congress enacts the Affordable Housing Credit Improvement Act). However they can be difficult to administer precisely in small states if the amounts do not correspond closely to applications received.

Generally speaking, the ceiling agencies have to allocate and the number of set-asides are correlated. Being larger means the ability to create more competitions with enough LIHTCs to be worthwhile.

The following are types listed in NCSHA’s 2019 State HFA Factbook, which is a compilation of results from an annual survey of its members:

  • Preservation/Rehabilitation
  • Large Metro (e.g., Seattle)
  • Suburban
  • Rural
  • Native American
  • Senior/Elderly
  • USDA Rural Development
  • Public Housing Authorities
  • Permanent Supportive Housing
  • HUD Choice Neighborhoods Initiative
  • HUD Rental Assistance Demonstration

Conclusion

The main value of a set-aside is using different selection criteria to assess different kinds of proposals. In other words, sorting comparable applications together, creating “like versus like” competitions. Doing so is particularly important to distinguish between rehabilitation and new construction, since most policy considerations do not overlap (e.g., quality of site, development costs). In many states there is also a need to separate geographies to avoid rural areas being at a disadvantage.

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