North Carolina Makes Large-Scale Credit Exchange to Aid Challenged Deals

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Tax Credit Advisor, February 2009: The North Carolina Housing Finance Agency (NCHFA) in December made a large-scale exchange with developers of old credit awards for new, to try to help assure that proposed low-income housing tax credit (LIHTC) projects will actually be built.

Under the initiative, the agency accepted voluntary returns of 2007 and 2008 credit awards from developers and provided them with 2009 housing credits. The agency also provided additional credits to some of the sponsors to restore their projects to economic viability.

In all, more than $30 million in credits, including about $5 million in supplemental credits, were provided to developers in 64 approved recycling awards, NCHFA executive Mark Shelburne told the Tax Credit Advisor. Shelburne said the action was the first large-scale credit exchange ever by NCHFA. Developers had until 12/1/08 to submit a request to exchange their credits.

He noted that NCHFA decided to make the recycling offer to developers with past credit awards “because we understood that they needed more time because of having difficulty securing equity.” Shelburne said some developers had secured LIHTC equity but an insufficient amount because of pricing; some were in the process of securing equity but hadn’t finalized; and some hadn’t made any progress. With the exchange for 2009 credits, the developers will now have more time to secure and finalize equity and move forward.

Shelburne said NCHFA didn’t re-underwrite each of the deals but rather just re-evaluated their current funding sources. “We looked at either their current equity situation or what their equity situation might be in the near future,” he noted, “and took a look at what we could do to change around their credit amount for some of their other sources.”

In some cases, for 2007 credit deals, Shelburne said the agency provided a full 9% credit percentage, and (if not already in a high-cost area) approved up to a 30% boost in the eligible basis – program changes authorized by the Housing and Economic Recovery Act of 2008. He noted these credit-boosting steps had already been utilized by NCHFA in its 2008 credit awards, which were made in August 2008.

“We now have a lot of projects that have been enhanced and are ready to go,” Shelburne noted about the recycling initiative. “So we look forward to equity investors taking a look at them and taking a look at our state.”

2009 Program Underway

NCHFA is already underway with its 2009 housing credit program. The agency has finalized its qualified allocation plan (QAP) for 2009 and opened its single funding round. Pre-applications were due 1/9/09. The full application deadline is 5/8/09.

Shelburne said the agency has made a number of substantial changes to its LIHTC program for 2009 compared to 2008. These include:

  • Establishment of standards for determining the agency-designated increase in eligible basis of up to 30%. Proposed projects with high land costs, extensive site preparation, or off-site costs will be considered for the boost.
  • Requiring ENERGY STAR for new construction projects. Adaptive re-use projects must comply to the extent this is economically feasible and permitted by historic preservation rules.
  • Changing underwriting assumptions for annual income and expense growth to 2% and 3%, respectively.
  • Increasing the operating expense minimums for new construction and renovation projects to $3,000 and $3,200 per unit, respectively.
  • Allowing applications to include an additional contingency, to cover overruns in any project development cost, of up to the greater of $500 per unit or $30,000. Amounts not used for cost overruns may be taken as additional developer fee.
  • Increasing the hard cost contingency to 5% for new construction projects and to 10% for renovation projects.