One of the Recovery Act programs we’re watching is the Housing Tax Credit Exchange program, a program supporting the production of affordable multifamily housing. This program builds on the infrastructure and processes of the traditional Low Income Housing Tax Credit (LIHTC) program. In the LIHTC program, investors receive tax credits for funding the construction of income-restricted multifamily housing. In the Exchange program, TDHCA replaces tax credit investors by directly funding the development of income-restricted multifamily housing and “exchanging” the tax credits available for such development for cash at the US Treasury.
At the July 30th 2009 TDHCA board meeting, the TDHCA board adopted a policy resolution outlining the HTC Exchange program in Texas. This policy envisioned TDHCA dropping directly into the role of a tax credit investor, buying equity in affordable housing developments with the funds provided by Treasury and receiving “not less than a 20% distribution to the Department of any net cash flow, residual funds and/or net sale proceeds” in return.
In short, if the state was going to play the role of an equity investor, TDHCA thought it should get the benefits due an equity investor. Discussion at the board meeting implied that the returned money would go to the housing trust fund to build affordable housing for people with low incomes.
Unfortunately, the Treasury Department had other ideas. In an early clarification of the program, Treasury stated that State agencies such as TDHCA are limited to a one percent or less de minimis ownership in a building receiving exchange funds, and the terms and conditions of the program made clear that TDHCA could not structure a deal to get money back. In short, Treasury requires that the funds be granted to the developments, not loaned through a note or equity.
TDHCA, to their credit, has attempted to work around this restriction. They recently released the LIHTC Exchange program Subaward Agreement which envisions (in section 8.3) that Exchange recipients set up a special reserve account “to assist current and future residents to provide assistance with expenses associated with their tenancy,” and fund that account with the money that would have otherwise gone to TDHCA’s equity share during the compliance period. (Under the equity structure, TDHCA would have also received 20% of any eventual sale of the property. The reserve account will not receive those exit funds). The idea is that if TDHCA couldn’t benefit from the funds, at least the residents could.
It is our belief that the language in the Subaward Agreement is overly broad and could easily be used by apartment owners to cover uncollected rent and invented expenses rather than provide actual incremental benefit to residents. We will be filing comments with TDHCA this week requesting the subaward agreement contain a tighter limitation on the uses for these funds. In our opinion, allowing “other purposes as approved by the Department,” when such approval “shall not be unreasonably withheld” is an big loophole which allows the special reserve account to be a slush fund for the developer.
Nevertheless, this problem was created by Treasury in their implementation of the program. The language in the statute indicates this funding is a grant to the state to “finance the construction or acquisition and rehabilitation of qualified low-income buildings,” and makes no indication that the state is limited to providing “cash assistance” to developments. If a state can structure the financing as a loan or equity and create additional resources for low-income housing, they should be allowed to do so.