State HFA Responses to the Equity Market

7 min read

If you’re reading an issue of Tax Credit Advisor, it’s probably safe to assume you have noticed a drop in equity pricing since the election. With President Trump in office and a Republican-controlled Congress, the prospect for tax reform has potential. Even if a complete overhaul fails to happen, a simple reduction of the corporate tax rate could be the win Republicans seek during this session of Congress. If corporations owe less taxes, then they have a decreased demand for tax credits and less demand means less value. How much less? The answer to that question is murky.

First, assuming the tax rate is reduced, no one can predict what the new tax rate will be. While President Trump has proposed lowering the rate to 15 percent, House Republicans have proposed a 20 percent rate. Keeping in mind that the current corporate tax rate is 35 percent, it’s likely that we see a reduction to somewhere between 20-30 percent. A ten percent window creates uncertainty for investors.

Second, every project is different. New construction or rehab, urban or rural, hot market or cold, the list goes on. Developers around the country have reported a drop in pricing anywhere from .20 cents on the dollar to no change in pricing at all. Some prices offered before November 8th survived the election due to the desire to maintain a strong working relationship. Some prices have stayed strong because several banks have CRA obligations to fulfill. These scenarios are well within the minority, however, and developers have been scrambling since November to fill their financing gaps. State Housing Finance Authorities have been churning out policy changes to help in any way they can, and because every state is different, the creativity and diversity amongst these policy approaches is vast.

Before going into specific state examples, it’s worth investigating a few common themes:

  • Amending the QAP: Making a change to a Qualified Allocation Plan is no small task. Think of the usual process your state utilizes in making annual changes to this document and what it requires – drafting, a period for public comment, a response to public comment, redrafting, another public comment phase, proposal to the Board of Directors…the point being this is a time-consuming process. Unfortunately, with projects facing the possibility of missing a federal placed-in-service date, time is not in high supply. Some states have an amount of elasticity built into their QAP (like discretion in determining the amount of basis boost). This elasticity can, depending on the state’s particular situation, lead to fast-response solutions not requiring a QAP amendment. For other states, the time-compressed process of QAP amendment can be tricky.
  • Delay: A common piece of many state solutions has been to delay the allocation process. Some states with two funding rounds have opted to only use the latter funding round date. Buying more time means allowing developers more time to fill gaps, and grants HFAs more time to explore solutions. A standard delay has been around 30 days, with some states, like Tennessee, implementing a 90-day delay.
  • Forgiveness: Penalties in place to discourage developers from returning their allocations have been lifted in many states. After all, if one project cannot succeed, it’s all the more reason to recapture those credits in the hopes they can help another struggling deal.
  • Soft Funds: Some states have them, others do not. State housing trust funds and any other soft funds are proving to be a big help in filling the gap, unfortunately not all states have extra funds at their disposal for this purpose, making the challenge that much greater.

California has embraced a four percent/nine percent hybrid structure as part of its solution. The structure has been employed by other states, such as Virginia, to encourage volume cap utilization. The authority to pursue a hybrid nine percent and four percent tax credit structure is granted to 2016 awardees whose projects have not yet closed construction financing. In addition, the state is allowing all 2016 new construction nine percent tax credit projects, in addition to any project seeking a hybrid nine percent and four percent tax credit structure, to reset their credit year to 2017 in order to extend the placed-in-service deadline and allow said projects to also reset state credits in order to “certificate” the state credits.

Indiana is offering both soft funds and additional credits as potential gap fillers. The Indiana Affordable Housing and Community Development Fund is on the table and IHCDA is working loan terms out on a case-by-case basis with projects. Indiana has also historically limited basis boost to 120 percent, using the ten percent savings to put towards a waiting list of unallocated projects. Now, that ten percent is held back internally by IHCDA for potential granting back to allocated projects as gap filler. The change results in less deals being funded but ensures higher ranking allocated deals have the resources needed for completion. Projects with a demonstrable gap can request up to the 130 percent they are eligible for, but requests for the credits must be accompanied by a request for money from the Development Fund at a 1:1 ratio of tax credits and Development Fund. Given these polices, the Development Fund is now fully committed.

To help bridge funding gaps for 2016 awarded projects, Ohio made several amendments to its QAP to harness the following year’s allocation. The 2017 competitive calendar was postponed four weeks. Of the $27.3M allocated for 2017, up to $4.59M was planned to be set aside (and under $3.3M was actually used) for 2016 allocated projects as gap filler. Owners of projects with “unused eligible basis” as listed in the final application could request additional tax credits in an amount not to exceed 15 percent of the previous binding reservation amount. Owners who requested additional tax credits had to comply with a new deferred developer fee schedule. 2017 pools were reduced proportionately in regards to the amount used as gap funding for 2016 projects. For applications submitted in the 2017 housing funding round, the maximum allowable tax credit award per developer and per application by funding pool were increased by ten percent.

New credit awards were issued to 35 housing developments, totaling under $3.3M. As a result of this, all 2017 pools were reduced approximately 12 percent.

Oregon has decided to forgo issuing a 2017 LIHTC and HOME NOFA, instead making more nine percent awards to additional 2016 applicants and using remaining credits to fill funding gaps for allocated 2016 projects. A gap funding process should be published by May 2017.

Virginia is offering up to $100,000 in additional credits to 2016 deals, and is using no less than .90 cents as a credit underwriting factor. This is done through returning 2016 credits and receiving 2017 credits with the additional credit amount. Virginia’s proposal includes penalizing any future upward adjusters by reducing credits if an upward adjuster should occur. Virginia is also increasing the REACH Virginia loan allocation limits for its 2017 nine percent and nine percent and four percent Hybrid LIHTC application round. The increase essentially doubles the standard allocation limits that have previously been in effect. REACH is a state resource used for homeownership, multifamily, and community outreach programs. (As a side-note, North Carolina is implementing solutions similar to Virginia).

Keep in mind that some of these states have already implemented changes, while some states remain in the research phase. Development will likely continue between writing this article and the time it is published. The above examples should give a good flavor for the differing challenges and policy solutions the states are facing. What’s important to realize is that just as every deal is different, so is every state. No one solution will work and likely no one solution will completely fill the gaps 2016 projects are facing. This is an effort that states and developers will have to work together on – each potentially making concessions.