Guidelines Altered for Obtaining Tax Credits to Build Affordable Housing
Private investors and nonprofit organizations that build affordable apartments and rehabilitate existing complexes will soon operate under a new set of rules for determining who gets federal tax credits that many of the builders depend upon for financing their projects.
The California Tax Credit Allocation Committee, which distributes more than $400 million a year in federal tax credits, adopted new rules last week that “are designed to be more objective” than the old rules, said state Treasurer Phil Angelides, who heads the committee.
The federal tax credits, along with tax-exempt bonds allocated by the state, are among the few sources of low-cost financing available for affordable apartments at a time when Southern California faces an acute and worsening shortage of affordable housing. Land and construction costs are so high that building affordable apartments is virtually impossible without low-cost financing, developers and housing experts say.
Both the system for distributing the credits and the amount of credits available have come under fire in recent years--the system because it is literally a lottery and the credits because they fall short of meeting the demand for affordable housing financing.
Angelides said the new system for distributing credits will be designed to be “as objective as possible” so that developers won’t have to depend on pure luck to win tax credits. In addition, Angelides said, his office is lobbying “very hard” to have Congress increase the state’s total of tax credits.
Demand for the tax credits suggests that plenty of private and nonprofit developers stand ready to build or renovate apartments if they could get the tax-credit financing.
“The dollar amount of applications for tax credits is about four times the amount we have to award each year,” Angelides said. Besides the $400 million in federal credits, the committee distributes about $50 million in state tax credits.
The competition for tax credits is so intense that many developers don’t even bother to apply. Instead, they turn to tax-exempt bonds, which are authorized by the federal government, allocated by the state and issued by cities. The tax-exempt bonds are easier to get, and developers who qualify for tax-exempt bonds automatically qualify for some federal tax credits, but the credits they get through bond financing amount to less than half of what they would get if they could qualify fully for the federal credits.
Angelides said the new system for allocating tax credits will be designed to eliminate much of the guesswork for developers.
“We’re designing a system that takes into account if the developer has had a good track record in building tax-credit housing and has followed the rules,” Angelides said. “The new system will work for them if they have a good history and against them if they have a history of violations.”
Among other criteria: The proposed new system will favor projects that offer extras, such as a family-oriented apartment with on-site day care or a senior housing project with programs to assist tenants. The system will favor developments that are part of a neighborhood revitalization effort, are located near mass transit or are within walking distance of schools.
“These will be pretty objective points--either you have day care or you don’t,” Angelides said. The new rules will go into effect for tax credit applications that are due by July 15. The next round of credits will be awarded in mid-September.
While developers applaud any changes that will improve the old system of distributing credits, they say that even the new distribution system and the proposal to boost the amount of credits will fall far short of filling the affordable housing financing void. Under current proposals in Congress, the amount of tax credits authorized in each state would increase to $1.75 per capita from the current $1.25 per capita.
“Even if Congress raises the limits for tax credit financing and tax-exempt bonds as proposed, I don’t think it will meet the demand,” said Paul Fruchbom, manager of Newport Beach-based KDF Holdings, a developer of affordable apartment complexes.
“Increasing the allocations will help, but it will only be marginal help,” said Bob Moncrief, housing and redevelopment manager for the city of Santa Monica.
Fruchbom said his company relies on the easier-to-get tax-exempt bond financing because the competition for tax credits is so strong.
“The odds of getting the tax credits are about 4 or 5 to 1. Smaller developers just can’t afford those odds. You go broke if you can only do one out of five projects that you put your heart and soul into,” Fruchbom said. “If they expanded the program enough to meet the demand, that would go a long way toward solving the housing crisis.”
Despite the uncertainty of winning credits, their availability has made renovating affordable apartments more financially feasible in Southern California during much of the 1990s than building so-called “market projects” that depend solely on private financing and market-level rents.
“During most of the 1990s, the rents that you could achieve for apartment units would not compensate a developer for building a project on a market basis,” said Kathleen Head, a principal at the Los Angeles office of Keyser Marston Associates Inc., a real estate consulting firm. “The only way you could make a project work was if you put income and affordability standards on it and then got assistance from the federal tax credits.”
Income standards require that all or a portion of a complex must be rented to tenants whose incomes fall within certain limits, based upon federal Department of Housing and Urban Development guidelines. The allowable incomes vary widely according to the number of individuals in a family, the county in which they are living, and other criteria.
One example: To qualify as low-income tenants in a building financed by the federal credits, a family of three living in a two-bedroom apartment in Los Angeles County could earn up to $27,220 per year. Affordability standards limit the amount of rent that owners of the federally financed apartments can charge. For example, for the family of three listed above, the standards would limit rent to 30% of annual income, or $8,316 per year.
While the terms “affordable housing” and “low-income” evoke pictures of slums and undesirable tenants in the minds of many, housing experts say those images are misleading.
“Most of the people living in apartments now would probably qualify as low- or moderate-income tenants,” Head said.
One of the drawbacks of the tax credit and tax-exempt bond programs, according to some, is that they are more suitable for large projects, yet many of the buildings that require renovation in Southern California are small.
“It’s very expensive to do a bond project, in particular, because the cost of issuing bonds is high, so you have to have a project of a certain size to make it work,” Fruchbom said. His company’s projects typically are about 100 units.
The need to rehabilitate small apartment complexes is a problem that will continue to face California even if the state smooths out the tax credit allocation process and gets a larger dollar allocation of tax credits, according to Stephen Cauley, a UCLA real estate professor.
“These things [bonds and tax credit financing] are designed for big jobs. You need to make it relatively easy, in terms of the permitting process, for someone to buy a small complex, finance it, rehabilitate it and get it back onto the market relatively quickly,” Cauley said.
For Southern California to make a real dent in its affordable housing shortfall, Cauley said, “There has to be relatively easy access to funds” for private developers of small projects.
