QAP Underwriting (post 5 of 10)

Published by Mark Shelburne on Saturday, September 18, 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

To recap the previous three posts:

Before the process is complete, agencies must complete a thorough underwriting.

Federal Law

Under Section 42(m)(2)(A), an allocation “shall not exceed” what the agency determines is necessary for a development’s financial feasibility and viability throughout the low-income housing tax credit (LIHTC) period. Congress provided no further specificity on what these terms mean.

In making this assessment, Section 42(m)(2)(B) directs agencies to consider:

  1. the sources and uses of funds,
  2. equity invested for tax benefits,
  3. the percentage of LIHTCs used for costs other than intermediaries, and
  4. the reasonableness of the developmental and operational costs.

Developments using tax-exempt bonds and 4% LIHTCs also must go through the process described above. For 9% LIHTC properties, the determination happens at application, allocation and placed in service. At each step, the applicant/owner must certify the “full extent of all Federal, State, and local subsidies.”

As is true for other aspects, there is very little official guidance. However, after the discretionary boost in eligible basis became law in 2008, the Joint Committee on Taxation made the following statement:

It is expected that the state allocating agencies shall set standards for determining which areas shall be designated [for the boost] and which projects shall be allocated additional [LIHTCs] in such areas in the state allocating agency's [qualified] allocation plan. It is also expected that the state allocating agency shall publicly express its reasons for such area designations and the basis for allocating additional [LIHTCs] to a project.

The explanation is not law but instead indicates Congressional intent.

State Administration

Agencies conduct extensive evaluation of LIHTC proposals, including all of the items below:

  • vacancy rate
  • rents and utility allowances
  • amount of operating expenses
  • rent and expense trending
  • debt coverage ratio (DCR)
  • calculation of the developer fee
  • amount of deferred developer fee
  • lease-up, operating, and replacement reserves
  • equity investment and debt terms
  • appraisal of real estate
  • development costs
  • extent of rehabilitation

Many of these have the effect of being a threshold. For example, inability to show a 1.15 DCR means the application will not go forward.


Carrying out underwriting, especially at application, involves balancing an unavoidable tension between efficiency and being robust:

  • Reducing allocations to the absolute bare minimum per property means more LIHTCs to spread around, thereby creating/rehabilitating more units.
  • Awarding the maximum amount possible provides the greatest likelihood of the development being sustainable for many decades.

Generally speaking, making awards at either extreme can be problematic. Otherwise, like with many aspects of LIHTCs, there is no one-size-fits-all answer.

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