TPR Roundtable: New State Tax Credit Allocation Policy Considered

In the July issue of The Planning Report, BRIDGE Housing's Don Terner states that "The bottom line is that we need long-term lending, and well-oiled machinery capable of dispensing tax credits. The current tax credit round in Sacramento is an absolute disaster, riddled with problems—it's a scandal." What do you think of the current tax credit allocation policy? 

Ronne Thielen (RT): I think that this last allocation round ended up being pretty disorganized, and I don't feel that TCAC was tough enough in their reviews. The bonus point system was set up with very strict ideas of how those bonus points could be obtained. I don't think they were scrutinized as carefully as they might have been. I think this led to at least one set of the problems. 

What needs to be fixed in TCAC, or is it fine the way that it is? What do you expect to come out of the policy discussions this summer? 

Ann Sewill (AS): I think that the last couple of rounds, ever since the bonus point system was put in place, had the unintended consequence of shutting out too many types of projects. Only those projects that had a lot of public subsidy and those very few projects that could really ratchet up the investor equity dollars made it in these rounds. 

I think that where the process went wrong is that public money and investor equity are not the only indicators of a good project. Elderly and special needs projects weren't being chosen at all. I think that people felt that because of the public money points having such weight, there was no inducement to projects to be cost efficient. In fact it seems to have worked the other way around. If you had high costs, you got more public money, and you came out on top. 

I don't think that Ronne and others who participated in making a policy two years ago had this in mind. However, I also don't think that the system is a travesty. I think that if we get rid of the bonus points and take advantage of more cost controls and are careful to continue to reward projects that are truly affordable, the system would work well. I would be pleased to sec TCAC adopt a system similar to the one we had before this last QAP (Qualified Allocation Plan). 

Lance Bocarsly (LB): There were clearly unintended consequences and motivated behavior that resulted from the bonus point system. Financing commitments were issued to help score points under the bonus system, even though the issuer had little or no intention of honoring the commitment. A simpler system might avoid some of those problems by getting us back to funding the most number of low income units in the areas of the greatest need. 

Ronne and Ann, you have both been in discussions about the direction the QAP process is moving with Don Maddy. What can we expect this fall in the way of a new QAP?

RT: From what I'm learning, I think that Don has been taking seriously the input from the user group that has been meeting to provide him with suggestions. The user group has agreed that a lot of the point system is likely to be put into threshold; I suspect that he will go along with that. 

The two big issues will be development costs and some kind of a needs determinant. Those two will likely be the tie-breakers, with some adjustment to the current benchmarks. Meanwhile, no one can go very far in developing projects without knowing what kind of system it will be, even though we think it might be similar, just administered in a different way. 

How do you translate those issues—cost and need—into practical consequences for housing production and the funding of housing production in the future? 

RT: It's interesting because they're really dichotomous issues in some ways, and they really work against each other—the costs and the needs. It's hard to know until Don tells us how he wants to measure and apply them. We could end up with more projects outside of the city areas if he emphasizes lower cost and housing a greater number of families. But if he goes to deeper income targeting he will drive projects more into the city. A balance is critical. 

AS: I think that there has been a lot of concern, particularly from the Southern California non-profits active in urban areas, as well as from the non-profit developers who are used to holding their investment for a long time, that cost will be the only real criteria, and so we'll be driven to the cheapest of the cheap, and projects will suffer. Places like Los Angeles can't compete with places like Bakersfield in terms of cost; developments are going to suffer. 

At the same time, I think that Los Angeles has this sense that we will always have the same resources that we have had over the last several years, through either the Community Redevelopment Agency or the Los Angeles Housing Department, which both provide a lot of public money to support affordable housing projects. The CRA has had very deep budget cuts and LAHD's funds will be much more limited once the earthquake money is used up. 

We may in three years, sound a lot like the developers in the central valley sound now, saying that we just can't get enough money to subsidize projects without going to higher rents. 

Lance, as legal counsel, you represent a whole array of for-profit and not-for-profit clients. Can you give the for-profit perspective on what their views of the likely changes are and the likely consequences to them? 

LB: I don't think that they are materially different from what the non-profits are getting at. It is still an issue of cost. If, as Ronne suggests, developers are driven into the inner city because of lower rent targets, you may have a problem identifying investors because it is historically difficult to get investors to invest in some of the less desirable neighborhoods of Los Angeles. I don't think, however, that there is a material difference between for-profit and non-profit developers for those issues. 

In light of the ambiguity about where TCAC is going, how are proposed '95/96 affordable housing projects planning to be funded? Are any trends discernable? 

LB: It is important to note that notwithstanding the revisions to California’s QAP, as well as all of the questions that have been raised on the national level about housing policy and where housing dollars should go, tax credits have not, as yet, been put on the table by Congress. In fact, tax credits seem to have bipartisan support, which makes sense, since it is an efficient program. 

However, the trend that we have noticed over the last few months is an increase in developers who are looking at tax exempt bond financing, either solely, or together with tax credits, as an alternative form of financing. 

Ronne, in September of 1994, you wrote an article for The Planning Report. The theme was what affordable housing had to do, in terms of streamlining and simplifying its funding process, to be more productive. Has anything changed since the Fall of 1994 regarding what needs to be done? Have we made any progress in reforming the process? 

RT: My thoughts haven't changed. I spent a good part of the winter on a state-level tax force put together by the legislature to look at that issue—better coordination, less leveraging, and more coming in from fewer sources. I think the task force made a lot of progress, but it was focused on financing programs that are no longer available: primarily the RHCP program at HCO and the Century Freeway program, and using those funds along with local money, syndication money, AHP money, and traditional lenders. 

Ann and Ronne, how tough is it now, from the perspective or a non­profit developer in Los Angeles, to put the financing together for a new project? 

AS: It is not impossible to put the potential sources of financing together, but no one will actually close until we at least see an outline of a tax credit system. The LAHD issued a memo to all of its community partners a few weeks ago, indicating that it was not closing any acquisition loans or giving new approvals on projects requiring tax credits until we know what the system will be. 

RT: The Housing Department of San Jose has just come out with a draft point system, and they coordinate with  the December application cycle for TCAC. Interestingly, they have set up a system similar to the previous point system before the bonus points were in the tax credit program. But they also have a very clear caveat in the application that if TCAC goes off in a different direction, even though the applications are already received by the city, they may change their priorities. That's one way to handle it, I suppose, but not very useful, for planning the type of project that is most likely to succeed. 

Given your collective experience with funding affordable housing projects, what suggested modifications in the current process would you like to convey to Don Maddy and the TCAC administration? What are the practical aspects of the process that are crucial for them to understand and appreciate? 

RT: Being somewhat biased, I feel that the program that we had in place, put together over the years since 1990 by the entire community, really was a very well-targeted program. It didn't try to target too deeply; it didn't try to do things that were impossible. At the same time, the previous policy was serious in the way of income targeting and meeting the priorities of the state legislature—large families and SROs. 

Other than the bonus point system, my recommendation to the current administration of the credit program is to look at where the level of targeting was, and the kinds of projects that were built—maybe they weren't so bad. Perhaps trying to do anything much deeper than what was already done is going to cause more problems than it is going to solve.

LB: I think that the essence of the program ought to be balance, with appropriate income targeting that allows and encourages development in high-cost areas like Los Angeles and San Francisco without prohibiting development in other areas. I think that the program ought to allow for development of special needs and seniors projects, which are near-impossible under the current policy. 

AS: I think that one of the things the committee was able to do over the last four years was serve as a great model for a focused program that dealt with tax credit issues without interfering in other agencies' issues. It is not TCAC's place to take over the role of the bank or the developer. 

For many of us, we felt the program, except for the bonus point system, wasn't broken, and didn't need fixing. I would really hope TCAC doesn't get into the underwriting interventions that Don's staff was involved with at HCD. I hope that he doesn't translate the different role of TCAC to be that of HCD, and take an HCD type of approach. The committee has done very well at just doing the tax credit program and leaving lending to the lenders. 

Lastly, what additional, if any, issues also need to be addressed by TCAC? 

RT: The committee needs to be sure that it continues to be predictable. Now that I’m on the other side, I know how important it is to go into a closing room and know that we have TCAC behind us—that we have no question about whether the developer has met its TCAC requirements. For example, from the bonus point system, each time before we close a project that received bonus points, we're going to have to be absolutely sure that we are complying with the bonus point requirements. They have to be predictable, be hardline about deadlines, but not so hardline that it makes it impossible to confidently go to the closing table. 

LB: Over the last several years TCAC has been the model state agency in terms of efficiency and non-bureaucracy. I would hate to see that change, whether as a result of administrative changes or policy changes. 

AS: In terms of the allocation plan itself, I am a little concerned about the type of lending that is being used by different members of the staff and the committee.

The statement that TCAC wants to house as many Californians as possible translates to "spread the money across as many units as possible," as if that were automatically the greatest good for the state. One of the things that is interesting, that not that many people think about, unless you happen to live in Los Angeles or New York, is that 29 percent of the people in the state live the County of Los Angeles; 40 percent of the people under the poverty level live in the County of Los Angeles.

I work in the County, so I'm sure I'm a little biased. However I'm concerned that there's a sense that funding two 2-bedrooms in Fresno is housing more Californians than one 4-bedroom in LA . Not necessarily. They may be housing more people on a straight number scale, but they may not be addressing the greatest need. I want to see the need issue really addressed. 

RT: I'm going to take a little different point of view from Ann. While 40 percent of those below poverty live in Los Angeles, I'm not sure that defines the need. I think the need is also at the bottom of the pay scale—the minimum wage earners—those who are working, but just barely getting by—whose child care and housing costs impoverish them. I truly don't believe that targeting the lowest of incomes should represent the biggest need.