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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
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
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.