September 30, 1995 - From the September, 1995 issue

Don Maddy: A New State Tax Credit Policy for Affordable Housing

The California Tax Credit Allocation Committee (TCAC) is changing the criteria they use to award tax credits to help finance affordable housing. Following up on last month's TPR Roundtable, which discussed existing tax credit policy, TPR presents an interview with Don Maddy, Executive Director of TCAC, on the new policy and its implications for Los Angeles. Don Maddy is the former Deputy Director of the State Department of Housing, and Deputy Assistant Secretary of the U.S. Department of Housing and Urban Development.

There has been a lot of uncertainty about applications queuing up for the December round of tax credit allocations. Can you give potential applicants any sense of clarity and predictability in the new policy as we move into the fall? 

Yes. We're conducting public meetings to get comments on a summary of proposed changes that the committee has released. We have also had some policy objectives circulating publicly for several months that people have been reacting to.

Most recently, we've put out a summary of proposed changes and have scheduled public hearings in September. The date set for the Committee to consider adoption of its allocation plan and regulations is September 27. In early November we expect to hold training sessions so that people can be ready to submit applications in December.

One of the most controversial issues from preliminary materials is related to your targeted census tract proposal. Tell us about status of that proposal and what you expect it to look like as we move into September? 

The targeted census tract proposal is an attempt to focus on the relative need of individual projects given their locations to other projects. To equate relative "need" we're looking at the rent burden of people—families and individuals in the census tract areas—and also overcrowded households. 

We took census data and examined the worst case needs in our state—people paying 35 percent of their incomes for rent, and those living in housing in which more than one person was in each room. An example would be four people living in a one bedroom apartment.

We proposed that a number of the census tracts with the greatest need—20 percent, which represents geographic locations containing about one-fourth of all rental housing—would be prioritized and receive 50 percent of our allocation every year. 

However, the oral comments that we heard during the September 17 public meeting in Los Angeles indicated that properties that had already been planned for development were not in those tracts. That caused problems for people who had been in the planning stages. 

Additionally, there was some criticism of using tracts as a determinant. Although I sympathize with the fact that there's no perfect geographic boundary to draw, I think using tracts is better than using entire regions, which are not indicative of specific housing needs. So, what we've done to address public concerns was to reduce the "need" criteria to a low-level tie-breaker. 

One of your goals is more objectivity. Tell our readers how you've tried to accomplish that through these proposals? 

I think that the best way that we accomplished being more objective is to have competitions as opposed to having predetermined selections. With the current system, it was easy to manipulate the process by achieving higher amounts of local assistance or equity from tax credit syndication without lower rents or a more efficient utilization of tax credits.

Lower rents and efficient credit utilization are two primary goals of this program: to get the rents as low as we can, and to get as many units funded as we can. 

We think those are more admirable goals, which are also more objective with respect to people being able to compete. What has to be sacrificed in order to have an auction or competition, where people are not sure what the other applicant is proposing, is the loss of some predictability with respect to certain projects or communities knowing that they're going to win. 

There has been a feeling that there's been a tremendous amount of control over the end of the process by certain communities who have the ability in the current system to put as much local financing into the process as they need in order to win. Within the current system, in my view, there's still a way for local financing and local communities who want to put money into low income housing to be victorious in the allocation. 

However, instead of simply putting in more of a percentage of the dollars, they're going to have to use those dollars to lower the rents or the amount of tax credits needed. We're trying to focus more on the bottom line objective, which is to get more households served and get the people at lower income levels served.

TCAC has also focused on the utility of using limited public resources, and clearly there will be fewer public resources than there have been to date. How are you going to try to accomplish that?

I think the competition for utilizing less credit will result in having more tax credit units funded out of our program. As far as other resources that are available, there were some comments made at the two public meetings that if there is less available, there will be fewer opportunities to lower rents and fewer opportunities to lower costs or the amount of credits required to develop the project. But the reduced monies are predicted right now to come from federal sources, and typically federal sources reduce funding for every jurisdiction, not just for one or two. The jurisdictions which typically receive the most money will continue to receive the most money. 

The way we've set up the program allows you to start at a threshold and compete down to a floor for affordability and for utility. If less federal and local resources are available, applicants may not get to the floor as is anticipated right now. Applicants will instead compete between the threshold and the floor.

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It will be a healthy system. There's been criticism of the past systems in which people were getting all the points necessary and competing on criteria that was strictly based on the credits per bedroom. The proposed system does not compete strictly on the amount of credits. In this system we compete on both affordability and the credits, so you have two different options depending on what type of project you're proposing. 

Don, there's also been a lot of discussion about distribution among housing types. Do you want to comment on where your proposals and the public comment are going in that area? 

With very few exceptions, I've received little input on what percentage people would like to have go to each of the different targeted housing types. I need to make a proposal soon, but I would like to hear more comment. 

There haven't been any specific percentages proposed, but the special needs housing providers have made many requests for allocation for special needs housing. However, they've been more generic in their requests for allocation. Senior citizens housing is something to which many developers want to have allocation allotted. 

Reading from the "Additional Changes" section of the summary, staff recommends the following: "eliminate the large project additional thresholds, and limit project size to 175 units, eliminate points for physical facility and service features, eliminate bonus points, and limit developer fees to the lower 15 percent of non-adjusted requested eligible basis and 10 percent of total development cost or $1.2 million." How are those staff recommendations being responded to, and can you give us some sense of which will be there at the end of September? 

For the first area, which is eliminating large project additional thresholds, without having projects exceed a certain unit count, we don't believe there needs to be a separate track for those projects. We've used numbers between 150 and 200 units as being the possible maximum size of the projects. We have gotten requests that go from 175 to 200 units. The current QAP calls 150 to 200 units a "large project," so we may end up with a maximum of 200. I propose to not allow phasing, so that applicants would not be eligible to apply for future years' credit. 

Facility and service features and amenities have been moved for the most part into the thresholds as opposed to competitive criteria. 

And bonus points? You're eliminating bonus points?

Bonus points are being eliminated. They are problematic in terms of the ability to follow up on an applicant's promises—to be sure that the proposals are firm proposals as opposed to preliminary. They arc problematic and very poor policy.

And the developer fee issue? 

On the developer fee we are going to propose for the committee a series of different paths for project reviews which arc related to subsidy layering. Subsidy layering is a federal statute that applies to HUD projects and tax credit projects and requires any project that has FHA insurance (many now have FHA insurance that are coming through the committee because they're using the risk sharing program) to determine that appropriate allocations are made to the project. Instead of having two different systems for reviewing projects, and to be sure there's no more funding than is necessary to produce the housing, we would like to adopt application review requirements consistent with subsidy layering. We are asking developers if we should limit developer fees to 10 percent of total development costs, which is what's in the subsidy layering requirements. There is also the option of adopting our own developer fee limits. 

I've received some comments suggesting we eliminate the 10 percent of development cost fee limit. I've not received too many comments on the $ 1.2 million limit. The current policy allows up to $1.5 million, but $1.2 million in my view, is sufficient. 

Don, this is obviously a new assignment for you. Has it met your expectations? Has it been more frustrating than you thought it would be? 

Well, I would never say it's easy, because we're going through major policy changes. After working at the State Department of Housing, HUD, and at the Housing Finance Agency in California, I am familiar with the policy issues. I am familiar with the tax credit program, and have spent a great deal of time working to understand the tax credit program beginning in 1986 when it was first being considered. It's fulfilling to be working on this program that I spent a lot of time with, and which I think is a very important program for Califor­nia. 

A good deal of the concern this past year and into the future relates to whether this new policy is more or less complicated for the non-profit and for-profit providers who have to deal with it. When you're done in September do you think it will be less complicated than it has been? 

I think the tax credit program itself is a complicated program. But I don't want that to be confused with the way we're administering the program. As far as the allocation, I think it's going to end up being simpler. I think that will occur once people get used to the notion that the only two things they have to be concerned with in the competition are how low the rents are and how many credits they're going to need. 

But I think that the predictability of the program, and the desire by many to know whether they're going to win or lose, is being confused with what people call complexity. I understand the problem of not having predictability; but I think applicants will find after one or two allocation rounds that they'll be able to apply knowing the approximate rent levels and credit utilization needed to be successful. I think there's going to be a bit of a learning curve on how to compete, but I believe the staff proposal will be less complex than the current program, and will more directly achieve our policy objectives.

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