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10/18/02 - Daily Business Review

Housing tax credits are tough to get but they've opened the door to affordable housing alternatives
By: Brian McDonough

Today's affordable housing developers are participating in a carefully orchestrated evolution from governmentally run initiatives to public/private partnerships. Almost 30 years ago, the "Section 8 program" was enacted as part of the Housing and Community Development Act of 1974. This program was a radical departure from traditional public housing programs.

Under Section 8, the federal government contracted with private owners of new or rehabilitated units and paid the owners a rent subsidy equal to the difference between the fair market rent for the area in which the units were located and a specified percentage of the tenant's gross income. The program initially was successful, but it proved too expensive.

Still, a critical need remained for low to moderate-income housing for working-class families. In response, Congress created the engine for today's affordable housing production: the Federal Low Income Housing Tax Credit. This program allows investors in certain types of multifamily apartment projects to offset their federal income tax liability with dollar-for-dollar tax credits granted by the federal government, based upon a percentage of the cost of producing qualified affordable housing.

Typically, investors "purchase" these credits by investing in an entity, which develops and constructs qualified affordable housing. In exchange for housing credits, along with associated tax losses and a portion of resale profits, investors contribute significant equity, which the owner uses to build its apartment project. The federal government benefits from not needing to appropriate money on an annual basis, since the housing credit program "leverages" private investment. Tenants benefit by paying reduced annual rents. The federal government has provided an efficient mechanism for raising private capital, which reduces the funds an owner and developer of affordable housing would otherwise need to borrow to construct the particular development. This also reduces the owner's need to access federal funds such as grants or low-interest loans to keep rents "affordable" to its residents.

The federal government allocates housing credits to Florida developers through the Florida Housing Finance Corp., the FHFC. The application process is extremely competitive, time-consuming and complicated. In general, one out of every five applicants obtains a housing credit allocation. Factors such as local government support through the provision of low-interest loans or grants, proximity to transportation and shopping, and market needs typically are considered by the allocating agency in awarding housing credits.

Because of this fierce competition, developers often must hold on to property for several years and reapply for housing credits annually, in hopes of ultimately successfully obtaining housing credits.

Lawyers get deeply involved in the process of contracting to acquire properties that are "buildable" and convincing sellers to "hang in there with the buyer" ù sometimes for several years ù while the application maze is navigated.

Applications are submitted to the FHFC and are scored and ranked based upon numerous factors. Each year, the FHFC creates special "set-asides," which typically are geographically based or tenant based. If an application meets the criteria established for these set-asides, the application stands a significantly greater chance of obtaining housing credits. For instance, in 2002 special set-asides were created for rural developments, "Front Porch" developments in urban locations, and developments located in the Florida Keys.

Housing credit applications are reviewed by the FHFC and by competitors. If errors are found, developers are given an opportunity to correct them. This is a drastic departure from a few years ago when the smallest of defects in an application could result in an application's denial. If the amended application is still found lacking, the deficiency can trigger point reductions or outright rejection. Point reductions are critical, since a one-point reduction can make the difference between a successful and unsuccessful application.

As in many parts of the United States, the vast majority of the housing initially built in South Florida using the housing credit program was constructed in the suburbs. Jobs, people and the tax base have essentially "fled" to outlying areas. Miami, Fort Lauderdale and West Palm Beach, like most urban cores, lost their urban identities, resulting in inner city poverty and the decay of their core infrastructure. This trend is reversing due to the creation of special "set-aside" categories of housing credits for developers, combined with federal initiatives such as the HOPE VI Program, the HOME Program, the Community Development Block Grant Program and the Brownfields Initiative. The result hopefully will be the preservation, restoration and creation of affordable housing in the urban core.

In addition to the difficulty in successfully applying for housing credits, developers and their counsel face significant problems, particularly in South Florida, locating sites for multifamily projects. Land scarcity combined with the customary zoning and development challenges and NIMBY ("Not In My Back Yard") issues often make it a daunting task to bring an affordable housing project to the marketplace.

Opponents often fail to understand that today's multifamily affordable housing bears little resemblance to the public housing projects of yesteryear. Due to requirements imposed by syndicators, lenders, allocating agencies and the developers' own desire for a long-term investment, the end product is usually quality housing indistinguishable from market rate developments.

Still, addressing the needs of local citizens and illustrating the communitywide benefits of safe, attractive affordable housing go a long way toward garnering community support. Developers often must make concessions in the form of additional landscaping, road dedications, or shared entrance features to win acceptance from surrounding landowners.

Occasionally, neighboring property owners and residents have challenged these affordable housing developments in court after failing to block zoning approval at a public hearing before a local government.

In court, opponents typically argue that the development is not compatible or consistent with the applicable zoning district, that aspects of the development (from density and building layout, to traffic, parking or other site plan issues) are not consistent with the local zoning regulations and standards, that they were given insufficient or improper notice or opportunity to be heard, or that the developer-applicant failed to present substantial competent evidence warranting approval. Neighbors have been most successful in court when they can prove there was a lack of "substantial competent evidence" to approve the development.

Developer-applicants have been most successful when they can show the court that they met this legal standard at the public hearing level. To head off a possible court challenge later, developers should strengthen their application by presenting all the required materials, supporting documentation, testimony, staff recommendations and other pertinent "evidence." In addition, a developer-applicant should strive to verify that proper public notice of the zoning hearing has been provided.

Once the community is constructed, though, few neighbors of today's affordable housing developments regret their role in endorsing the production of high quality residential apartments for working families.