Effect of Elected Official Letters on the 2011 LIHTC Round

Abstract:  Letters written by Texas State Representatives and Senators regarding the development of low income housing in the state had the effect of moving development to lower income, higher poverty areas of the state.

As we’ve recently discussed here at Texas Housers, Governor Perry vetoed the 2011 Sunset bill for the Texas Department of Housing and Community Affairs (TDHCA), a bill which contained reforms of the Low Income Housing Tax Credit (LIHTC) program.

The LIHTC program provides tax credits for the production of affordable housing.  In Texas, these credits are awarded through a competitive process called the Qualified Allocation Plan (QAP).

Under the current statute and rules, applicants to the LIHTC program receive points in the competitive process for letters of support from the state representative and state senator representing the area of the proposed development.  Applicants lose points for letters of opposition from those elected officials.  The originally filed Sunset bill removed the storing of the “elected official” letters.  In the house hearing on this bill, Rep. Callegari asked that legislative letters be kept in the statute, and in the final bill as passed by the legislature, senate bills were removed and house letters were retained.  After Gov. Perry vetoed the bill, the legislature passed a two year “stop-gap” sunset bill that maintained the status-quo for LIHTC application scoring.

We recently requested, through a public information request, the letters of opposition from state officials received by TDHCA regarding applicants to the 2011 LIHTC round.  Elected State Officials wrote 14 letters regarding 9 applications in the 2011 credit round.  Those letters are summarized below and embedded in entirety at the end of this post.

Application Name City Author
Zion Valley Spring Rep. Riddle
Zion Valley Spring Sen Patrick
Spring Trace Spring Rep. Riddle
Auburn Lake Manor Spring Rep. Riddle
The Landings at Westheimer Lakes Houston Rep. Zerwas
The Landings at Westheimer Lakes Houston Sen. Hegar
New Hope Housing at Navigation Houston Sen. Gallegos
New Hope Housing at Navigation Houston Rep. Farrar
HomeTowne at Westheimer Lakes Houston Rep. Zerwas
HomeTowne at Westheimer Lakes Houston Sen. Hegar
Sansbury Senior Greatwood Sen. Hegar
HomeTowne on Morton Houston Rep. Zerwas
HomeTowne on Morton Houston Sen. Heggar
Villas at Mill Creek Humble Rep. Riddle

Interestingly enough, in 2011, every state elected official letter received regarding a proposed development was about a development in the greater Houston Region (TDHCA Region VI).  Rep. Riddle and Sen. Hegar both wrote four letters of opposition, with Rep. Zerwas writing three and Rep. Gallegos, Rep. Farrar, and Sen. Patrick each submitting just one.

The Letters

Most of the letters gave no policy justification for the written opposition to the development other than constituent opposition. Four letters from Rep. Riddle were identical, and cited traffic issues, “strain placed on emergency personal” [SIC], and “protecting the property values that usually decline as a result of these types of projects.”  The letters from Rep. Farrar and Sen. Gallegos focused on the existing concentration of LIHTC properties in the proposed neighborhood of the development, with Sen. Gallegos stating “Time and time again, my district is treated as a dumping ground for SROs, homeless shelters, and halfway houses.”

What we did

We looked at the impact of these letters on the characteristics of the affordable housing built in the state.  There is a 28 point spread between applications that get a support letter (+14) and applications that don’t (-14).   This spread is big enough to be an effective veto regarding almost any application.  In the Houston region in 2010, 16 points separated the highest scoring development and the high scoring development not awarded funds.  Only 4 points separated the lowest-scoring development awarded funds and the highest-scoring development not awarded funds..

To estimate the impact of the letters on the opportunities provided the residents LIHTC properties, we compare the characteristics of the opposed-developments with the characteristics of the next application in TDHCA’s pre-application log.  This log is ranked by score and then, for tied applications, alphabetically by application name.  The next application in the pre-application log competitively benefits from the point reduction in the opposed development because the point reduction either removes the application scored above it, or removes an application tied with it at that stage in the process.

What we found:

Twelve of the fourteen opposition letters had the effect of encouraging Texas to build affordable housing in lower- income areas of the state.  The proposed developments receiving opposition letters were in neighborhoods with a $15,000 higher average family income than the neighborhoods of the next development on the pre-application list.  The two letters citing over-concentration by Sen. Gallegos and Rep. Farrar were the only letters with the result of encouraging construction in higher-income areas of the state.

The average area poverty rate for proposed developments receiving opposition was 2% higher than the area poverty rate for the next development on the pre-application list.

Conclusion

The letters written by Texas State Representatives and Senators in 2011 regarding the development of Low Income Housing Tax Credit Housing in the state had the effect of moving development to lower income, higher poverty areas of the state.

It’s NIMBY Time…Again

“We realize that not all residents of an affordable housing development will, by default, be criminals.   However, we are also not ignorant to the fact, which is supported by real statistics, that many criminals (especially violent criminals, drug-related criminals, and sex-offenders) tend to come from a lower socio-economic class. […]  We feel that in this area, based on the types of newer developments we have seen being built, if another developer were to build on this land it would be apartments carrying a higher rental rate and would attract young professionals and business persons looking for a nice commuting neighborhood. […]

We think we can all agree that affordable housing solutions can and should be made for those individuals needing the assistance, we simply do not feel like this is the appropriate location for it. Milwaukee Ridge Homeowners Association President Grant Koertner.

Last year we highlighted how the scoring algorithm for the Low Income Housing Tax Credit (LIHTC) program resulted in neighborhood associations in high-income, low poverty areas sinking applications to the program by giving developments in their area the “cold shoulder.”  The Austin American Statesman then ran a story detailing how some LIHTC investors game the neighborhood letter system.  The Texas Sunset Commission followed up by advising that the rules be tweaked to insure that the bulk of the scoring for community support be related to a formal vote by the local city council or county commissioners court.  The Texas Legislature has not yet adopted those recommendations.

This year’s Neighborhood Letter’s have been released.  TDHCA received letters for 114 of 220 pre-applications to the program, 8 of which were in opposition.  The Milwaukee Ridge letter, quoted above, is unique in its unapologetic “Not in My Backyard” statement that low-income folks need housing, just not in “nice commuting neighborhoods.”  [The full MR-HOA letter is embedded below the jump.]

Milawaukee Ridge is a predominately white, non-Hispanic neighborhood on the western edge of Lubbock. (According to Remapping Debate’s analysis of ACS data, no African Americans live in this block group). The elementary school serving this neighborhood has been rated “Exemplary” by TEA.  The median income of the Census tract is 25% higher than the median income for Lubbock County as a whole.

These, in fact, are exactly the type of neighborhoods where affordable housing is needed in this state.  The nearest existing LIHTC property is 2.2 miles away, and has zero vacancies.

This letter exemplifies why the current Community Participation format for the LIHTC program is broken.  The state should consider many factors when deciding where to fund LIHTC properties in the state, but “Low-income folks shouldn’t live in ‘nice commuting neighborhoods'” is not one of them.

Update June 2011:

As noted by Mr. Koertner in the comment below, TDHCA’s final evaluation disqualified Milawaukee Ridge’s letter from being scored, with staff ruling “During the review of the documentation, staff verified that the proposed development is not located within the boundaries of the organization. Therefore, in accordance with §49.9(a)(2)(A)(iv) of the Qualified Allocation Plan, the organization does not qualify to provide comment QCP and the letter in ineligible for the purposes of scoring.” 

We also appreciate Mr. Koertner’s updated information on local area demographics.  At the original time of this post, the 2005-2009 ACS data was the most recent data available to researchers.

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Study of State’s Use of LIHTC Boost

This month the “Novogradac Journal of Tax Credits” included an article examining how different states utilize their ability to offer some Low Income Housing Tax Credit (LIHTC) developments a 30% “boost” in funding. (article link here).

As regular readers know, the LIHTC program is a federal program that supports the production of affordable multifamily housing.  Despite the federal funding source, many rules for this program are set at the state level. In Texas, the Texas Department of Housing and Community Affairs (TDHCA) adopts the program rules, including which developments are eligible for the 30% boost.  These rules are known as the Qualified Allocation Plan (QAP).

Historically, the boost was only available to rent-restricted developments in census tracts with high construction costs vs. projected rental income.  The Housing and Economic Recovery Act of 2008 (HERA) allowed State housing credit agencies to make this boost more broadly available.  Most LIHTC developments are normally eligible for tax credits equivalent to 70% of the construction cost (not including the land cost).  A 30% boost to the credits awarded raises this to 91% of the construction cost (70% x 130% = 91%).

The Novogradac article shows that while many states, such as New Jersey, broadly offer the boost under a loosely defined where “necessary to achieve financial feasibility” rules, most have explicit categories for who can obtain the boost.  Among those states, Texas offers the boost for more categories of developments than any other state.

In turn, the boost is widely claimed by applicants to the Texas program: We calculated that last year (i.e. the 2010 tax credit cycle) 118 of 119 regional allocation applications applied for the boost, or 99.2% of the applications.

Here’s the unfortunate downside of the boost: the Federal government doesn’t give Texas additional tax credits for offering the boost, so increasing the funding to one development reduces the funding available elsewhere in the state.

This makes changes to the boost definition a sensitive subject.  In our comments on the 2011 QAP, we suggested the tightening the definition used for the “High Opportunity Area” boost catagory.  Under the current definition fully 46% of Texans live in “High Opportunity Areas.”  We suggested adjusting the definition such that only 20% of the population of each county would live in “High Opportunity Areas.”  Our change was designed to reserve the boost funding for developments in areas that are meaningfully better than “average.”

Our proposition was not included in the 2011 QAP adopted by the TDHCA board, but TDHCA staff’s response to our comments suggested that changes to the definition of “high income” areas should be considered for 2012.

We look forward to that conversation.  In the meantime, the Novogradac Journal article is an opportunity to compare Texas’s use of this funding tool to that of other states.  Check it out.

Reference:

Shelburne, Mark, “States’ Use of Basis Boost Reflects Their Priorities.” Novogradac Journal of Tax Credits. February 2011, Volume II, Issue II, Internet Source: http://www.novoco.com/journal/2011/02/novogradac_jtc_2011-02_lihtc_pg15.pdf

Housing Credit Update

A couple of changes in the prospects for the Low Income Housing Tax Credit program in the last few days.

The Tax Credit Exchange (i.e. 1602 Grants in Lieu of Tax Credits) program was not extended in the final “tax extender” compromise bill that passed the Congress yesterday.

This program was used as leverage by the state last year to obtain hundreds of additional tax credit units for Extremely Low Income Texans, and funded many of the LIHTC developments that moved forward last year.  TDHCA announced at the board meeting today that they had closed on 100% of the existing Exchange funds, and that 40% of the funds had been drawn.

The removal of this funding source will be a challenge to the LIHTC program over the next year.

Here in Texas, the Texas Sunset commission adopted their final report on TDHCA’s sunset process yesterday.  The LIHTC program was the most contentious issue, garnering several amendments to the staff reports.  We’ll have more comprehensive TDHCA a sunset-recap post next week, but one of the most notable changes was a recommendation that the “Legislator Letters” be removed from the QAP scoring.  Rep. Hodges was referenced in the discussion.  The staff recommendation that neighborhood association letters be replaced with letters from local city council or county commissioners court was tweaked, with neighborhood association letters maintained in the mix, although at a lower point value than currently in statute.

Study: Leading Subsidized Housing Program in Texas Limits Economic Opportunity of the Poor

New report finds that Low Income Housing Tax Credit housing is more likely than other rental housing to be built in low-income, predominantly minority neighborhoods.

 

Austin, TX – The Low Income Housing Tax Credit program, the #1 producer of affordable rental housing in Texas, concentrates its new developments in low-opportunity neighborhoods, according to a report released today by researchers at the University of Texas at Austin.

According to the study, tax credit housing is more likely to be built in lower-income, racially segregated communities, compared to rental properties overall.   Additionally, evidence indicates that 2005 reforms to how tax credits are allocated — intended to put more housing in high-opportunity neighborhoods — have been ineffective.

“The tax credit program should be designed to break — not continue — existing patterns of racial and economic segregation,” said John Henneberger, co-director of the Texas Low Income Housing Information Service. “By keeping the poor in poor neighborhoods, in neighborhoods without good jobs or quality schools, we are actively blocking the social mobility of families trying to escape poverty.”

The competitive application process for tax credit developments was changed in 2005 to add points for developments in high-opportunity neighborhoods. Yet the study finds that the new point incentive made no difference in the quality of the communities where tax credit housing is built.

In fact, the study shows that residents of tax credit housing in Houston, Dallas, Ft. Worth, San Antonio, and Austin have significantly lower access to exemplary and recognized schools than other residents of those cities.

“The program’s failure to provide housing in good neighborhoods is a problem that aggravates the crisis in public education, relegating low-income kids to the same failing schools,” Henneberger said. “We call on the state housing agency to restructure the program to ensure children living in tax credit housing have equal access to quality schools and families have equal access to quality neighborhoods and jobs.”

The full report can be found at: http://txlihis.files.wordpress.com/2010/12/lihtc_report_november_2010.pdf

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The Texas Low Income Housing Information Service is a 501 c(3) nonprofit policy organization that works to support low-income Texans’ efforts to obtain a safe, decent, affordable home in a quality neighborhood.

Recap of TDHCA’s QAP Adoption

Last Thursday the board of the Texas Department of Housing and Community Affairs (TDHCA) adopted the rules governing the allocation of the Low Income Housing Tax Credit Program (LIHTC) in 2011.  These rules are known as the Qualified Allocation Plan, or QAP.

Regular readers may recall we recently posted our comments regarding the Draft QAP language published in the Texas Register.

What impact did our comments have on the process?  Well, by and large, the board adopted the recommendations of staff, as presented on page 652 of the board book for the meeting.

Three of our concerns/suggestions were addressed in the staff response: (1) the substitutability of financing points with “high opportunity area” points, (2) changes to the 2010 QCP rules which increased the ability of neighborhood associations to give the “cold shoulder” NIMBY rejection for a development (staff clarified that this change was a typo in the published rules), and (3) increasing the minimum threshold score for “at-risk” developments.

The rest of the changes were rejected, although staff suggested several should be considered in the 2012 QAP.

Point by point recap of our comments and the staff response:

TxLIHIS Comment Results
1.a     High Opportunity Area points are diluted with points for a financing-oriented goal, and the items currently scored under high opportunity should be separated out into separate additive categories. Staff acted to address our concerns regarding the scoring for “Third Party Funding Outside of a QCT.”While rejecting changes for 2011, Staff suggested that making the High Opportunity points additive should be considered for the 2012 QAP

 

1.b    Proposed changes to 30% boost fail to improve targeting of boost. Specifically, high performing schools should be kept in the boost, and the definition of “high income” should be tightened. Staff rejected any changes to the published language.  They rejected maintaining the boost which had been available in 2010 for high quality school eligibility to the boost without comment, and suggested that changes to the definition of “high income” areas should be considered for 2012. 
1.c    Quantifiable Community Participation points are skewed against high opportunity areas Staff acknowledged that the published language contained a typographic error which disadvantaged developments for which no letter was received.  The correction of this typo partially addressed our concern regarding “cold shoulder” NIMBYism.  Our request for more aggressive changes to the scoring was not addressed, with staff deferring to the board’s direction to maintain the 2010 status quo. 
2)   Income and Rent Level changes represent an incremental improvement Language maintained in adopted rules.
3)   Signage requirement language is an incremental improvement Language maintained in adopted rules.
4)   Limits to Deferred Developer Fees are anti-competitive Staff rejected the suggested changes, stating “Additionally, Developments with higher levels of deferred developer fee are less likely to be syndicated in the current market.”The board did not respond to our oral testimony that this concern could be addressed by exempting developments with syndication commitments from the limitation.

 

5)   Fire sprinkler requirements should be universal. Staff rejected the suggested changes, stating “The requirement for Developments to be equipped with fire sprinklers ‘where required by local code’ was intended to address single family Developments where fire sprinklers are not mandated by local code.”The board did not respond to our request in written testimony that the rule be clarified to reflect this intent and to require sprinklers in all multifamily properties funded through the LIHTC program.

 

6)   Extend Marketing requirements to Farmworkers Staff rejected the suggested changes, suggesting it could result in false certifications by urban developments. 
7)   Elected official letters should be held to AFFH standard Staff rejected the suggested changes, stating, “Staff believes the legislature has spent much time contemplating the points for letters from elected officials. While a letter that violates law would be called into question staff believes it would be inappropriate to further expand on this section of the rule because of its extensive legislative history.” 
8)   The QAP should require the use of independent market analysts and appraisers Staff rejected the suggested changes.
9)   The quality of tenant services varies widely among developments with many tenant services being of poor quality. Staff rejected the suggested changes
10)  At risk developments should focus on loss of affordability of quality units, not loss of subsidy.  We recommend an increase in the minimum threshold score. “Staff concurs and recommends the increase in the minimum score across all applications and set-asides from 118 to 130 points.” 
11)  Required Rehab levels are inadequate Staff rejected the suggested changes. “Staff believes there was insufficient evidence submitted to suggest an alternative amount for rehabilitation costs per unit.” 
12)  NIMBY forces, rules and state statutes are having a negative effect on the family unit/elderly unit mix (reducing the former, increasing the latter). Staff rejected the suggested changes
13)  Failure to return tax credits should bar developer from future transactions. Language maintained in adopted rules. “Staff believes there is currently a provision in the draft QAP regarding penalties associated with returning unused credits in an untimely manner.”

TxLIHIS Comments on Proposed 2011 QAP

October 23, 2010

Ms. Robbye Meyer

Texas Department of Housing and Community Affairs
P.O. Box 13941

Austin, TX 78711-3941

RE: Comments on the proposed 2011 Texas Qualified Allocation Plan

Dear Ms. Meyer:

We offer these recommendations regarding the Draft 2011 State of Texas Qualified Allocation Plan (QAP) for allocation of Low Income Housing Tax Credits (LIHTC) published in the September 24, 2010 Texas Register.

The QAP is the adopted process for reaching the goals and fulfilling the responsibilities of the state, the department, and of the Low Income Housing Tax Credit Program.  While the proposed language generally represents incremental improvements from the 2010 QAP,  the state can do better.

Our primary concern regarding the proposed 2011 QAP:

1)   The draft rules position the state to continue to fail to affirmatively further fair housing through this program.

a.     High Opportunity Area points are diluted with points for a financing-oriented goal.

b.     Proposed changes to 30% boost fail to improve targeting of boost

c.      Quantifiable Community Participation points are skewed against high opportunity areas

In addition, we have general comments and recommendations regarding the proposed language:

2)   Income and Rent Level changes represent an incremental improvement

3)   Signage requirement language is an incremental improvement

4)   Limits to Deferred Developer Fees are anti-competitive

5)   Fire sprinkler requirements should be universal

6)   Extend Marketing requirements to Farmworkers

7)   Elected official letters should be held to AFFH standard

8)   The QAP should require the use of independent market analysts and appraisers

9)   The quality of tenant services varies widely among developments with many tenant services being of poor quality.

10)  At risk developments should focus on loss of affordability of quality units, not loss of subsidy.

11)  Required Rehab levels are inadequate

12)  NIMBY forces, rules and state statutes are having a negative effect on the family unit/elderly unit mix (reducing the former, increasing the latter).

13)  Failure to return tax credits should bar developer from future transactions.

These areas of comment are discussed below.

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