September 30, 1994 - From the September, 1994 issue

Organizing the Business of Affordable Housing

Current affordable housing is financed by multiple sources of funding and timing of subsidy approvals is unpredictable. Ronne Thielen, Vice-President of Related capital, proposes two main improvements to affordable housing financing: 1) reduce number of funding sources; and 2) make timing of subsidy approvals predictable.

Development of affordable housing anywhere in the country is an extremely complex process. That the major federal program for housing — the low-income housing tax credit program — is governed by the tax code guarantees complexity. However, the process in California is made even more difficult and costly by inefficiencies in the delivery system. It is past time for all of us involved in the development of affordable housing to combine our individual efforts into a streamlined development process — to function as a well-organized business.

From my experience over the past three years as administrator of the federal and state low-income housing tax credit programs in California, I suggest that we focus on three areas to begin implementing improvements. First, the number of funding sources needed to develop an affordable housing project must be minimized. Second, the timing of subsidy approvals should be made more predictable. And thirdly, with the first two goals accomplished, developers must be willing to accelerate their development process. These changes will reduce development costs, increase the number of units produced, make housing units available sooner and helping to relieve the stresses involved in this business. 

Number of Sources

The number of funding sources (and the cost of doing business with multiple sources) could be reduced if public funding sources did not take the position that they are the gap funder of last resort. Rather than limiting subsidy to a specific per unit or other measurement, state and local subsidy providers should, after determining that costs are reasonable, provide funds for the full amount of the gap. While as a result, a provider may fund fewer units, the ones assisted will be developed more efficiently, both in terms of cost and time to get the units on line. Overall, more units will be produced as other public agencies use their funds to assist other projects. 

An important factor to keep in mind when implementing this policy, is that funding levels for both the low-income housing tax credit and HUD HOME program are restrained by federally mandated subsidy caps. While Congress believed that the tax credit program would be the gap filler, the California Tax Credit Allocation Committee (TCAC) recognizes that, in fact, it is the base of the financing plan and underwrites projects allowing the federal and state credits to be awarded at the maximum allowable level. Since other subsidy providers participating in tax credit projects can expect that the maximum allowable amount of credits will be allocated (assuming the project competes successfully and development and operating costs are reasonable), they can determine with some confidence the amount of their funds needed to fill the affordability gap. 

Congress has restricted the allowable amount of HOME funds from $61,950 for one bedroom units to $122,623 for four bedroom units in Los Angeles County. Those providing HOME funding should be prepared to provide the maximum allowed by law, if it's needed to fill the funding gap. Developers should not be sent elsewhere for funding if the allowable level of HOME funds is adequate to fill the gap. Likewise, those with other sources of subsidy that are not required by federal law to limit the subsidy per project should provide the funding for the entire gap (after tax credits and conventional financing have been calculated) rather than requiring the developer to seek out additional sources.

While I realize that this may not be an easy concept to sell to boards and commissions (everyone wants to get what is perceived as the most mileage out of their resources which generally translates into numbers of units of housing produced), arguments about dollar savings can be made. Many additional months and thousands of dollars can be spent in negotiations amongst the numerous parties; legal fees, extension fees and interest costs can add up considerably.

In fact, there have been numerous outrageous stories over the past several years regarding problems caused by having multiple funding sources — interminable loan closings, conflicting design, financing, reserve and guarantee requirements, missed deadlines, cost overruns, etc. The Legislative Analyst's office has many times during the current legislative session recounted to legislators the exorbitant costs of an affordable housing project that had funding from two conventional lenders (construction and permanent), the HCD Rental Housing Construction Program (RHCP), the California Housing Finance Agency, a local redevelopment agency and the tax credit investor. Financing plans like this can cost developers hundreds of thousands of dollars in additional legal, design, carrying and other costs (as well as years off their lives!). 

We should never again see a project that has such a plethora of funding sources. If we are fortunate enough to have a state taxable bond program like RHCP in the future, I would argue that those funds should be used in combination with local funds but not in tax credit projects. I also would advocate that a city agency providing funds for a tax measuring success simply by counting units produced by an agency is bad policy, causing inefficiencies and waste. 

Timing of Sources 

While in developer heaven, all subsidy providers would have one common application document and would simultaneously make determinations of funding, on earth this is simply not possible. Federal program restraints and insufficient staffing will continue to impair such coordination. It will remain the developer's responsibility to understand the constraints and requirements of the various programs and access funding sources in some reasonable order to meet their development schedules. 

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However, the process should be somewhat more predictable now that the federal tax credit program has been extended indefinitely. In June, TCAC announced its application cycle dates for 1995 (first cycle closing March 10th, the second on July 28th). These were established early so that developers and other subsidy providers could do long-term planning. 

In considering cycle dates, TCAC took into consideration the typical volume of applications received in a cycle (125), the amount of time it takes to review those applications given the constraints of staffing (4 analysts and a program manager - 8 to 10 weeks), and the federal requirement that applicants incur 10 percent of their costs by the end of the reservation year. The early announcement of the cycles should allow developers to plan their applications to avoid negative points under the TCAC system (negative points are given when needed subsidies are not yet committed by an agency), receive bonus points (awarded for significant subsidy participation) if they are proposing priority projects, and receive other approvals in a some­what more coordinated manner. For this to work, however, local subsidy providers must consider the TCAC dates when planning their awards If an agency can time its approval process so it can commit its funds before a developer has tax credits, the developer of a TCAC priority project can confidently continue and expedite the development process, including the commission of architectural drawings.

Probably the most difficult funding coordination will be realized by developers who access the HOME funds awarded by the state Housing & Community Development Department (HCD) to use with tax credits. The HOME and tax credit programs have drop dead dates for utilization of funds available in a year. Those dates are not the same nor can they be logically coordinated, so the cycles must be independently scheduled. That factor, combined with the historic difficulty of HCD closings, will likely remain a major challenge to developers. 

Accelerated Development 

If the first two improvements can be accomplished, developers will then have to be ready to move their projects along much more quickly than they have in the past. They should be prepared to begin construction within six months of TCAC reservation of credits. Congress imposed the requirement to incur 10 percent of costs by the end of the year of reservation in order to induce developers to begin construction sooner than later - yet practice has been for developers to purchase the land by the end of the year to incur sufficient costs and then incur the costs of holding the land for nine to twelve months before starting construction. 

Carrying those costs for such a long time only adds needlessly to the cost of producing affordable units. Another major benefit to expediting the process is that developers should receive higher equity pay­ins for their tax credits for projects that will begin to generate tax benefits sooner than later. A higher equity pay-in reduces the gap that must be filled by a subsidy provider, making the savings available to assist additional housing units. 

Getting to the Business 

TCAC established its current point system and announced its cycles for 1995 early in 1994 to encourage coordination and acceleration of the development process. If financing sources can be minimized by conventional lenders becoming one-stop shops for construction and permanent loans, if subsidy providers agree to fill the entire gap, and if the timing of approvals can become predictable, developers can do what they do best — build housing. Costs will be lower, units will be constructed more quickly, more units will be provided and the business of affordable housing development will be seen as effective and professional. 

If we don't accomplish these goals, we can expect to see strong criticism of the business and attempts by others to fix it for us. Now, that's a frightening thought! Let's do it ourselves, now! 

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