New State Low Income Housing Tax Credits: Does Urban LA Win/Lose?

The first round of tax credits for 1996 took place in December, 1995. This fact alone speaks to the overhaul of the system initiated by Donald Maddy, the new Executive Director of the Tax Credit Allocation Committee (TCAC). 

Maddy, who was appointed by the new State Treasurer, Matt Fong, has embarked on a campaign to improve the previous allocation system, called the "Qualified Allocation Plan" (QAP). The new QAP is designed to allocate credits earlier, to allocate them across a more equitable geographical basis, to target the neediest areas, to serve more people at lower rent levels, and to control construction costs. 

Some of these objectives appear to conflict with each other. Time will judge which results are actually achieved. 

Earlier this year a User's Group was formed to review the tax credit program and provide suggestions for the new QAP. This group, in which Thomas Safran & Associates participated, consisted of both non-profit and for-profit developers. While some of the user group’s suggestions were accepted by TCAC, there were many in the group who believed that the system wasn't "broken'" in the first place, and questioned why it needed to be fixed. 

The final plan developed for this year's funding cycle divided all applications into two funding categories: 50 percent of the credits going towards developments in the "project cost" or credit utilization category, and 50 percent of the credits set aside for the ''affordability" category.

The "project cost" category is likely to divert many dollars from urban areas to suburban and rural areas where costs are lower. Consequently, the Los Angeles County market area is expected to suffer in this category, although certain segments of Southern California, such us northern Sun Diego, San Bernardino and Riverside Counties, should do well. As a result, nearly all projects submitted from Los Angeles will attempt to compete under the affordable rent category. 

Applications are scored on a point system. To obtain the highest number of points in the affordability category, rents must be reduced to at least 46 percent of median income. If projects have rents at the same 46 percent level, the application will then progress to the tie breaker stage. The affordability factor, or the rent differential (the difference between the rents being charged and Fair Market Rents for the locality), will be the criteria used to score projects under the first tie breaker. 

If projects are subsidized to a maximum of 46 percent of rents, this should enable developers to reach the first tie breaker. As a result, Los Angeles County should fare well, as its rent differentials are high, and are exceeded by only two other areas in Northern California. Nevertheless, considering that approximately 50 percent of the State’s low-income families live in Los Angeles County, it certainly appears that the County will not receive its proportional share of available credits. 

The second tie breaker in this category will be project readiness, with priority given for those requesting final reservation (final working drawings, and ready to start construction) or placed in service (ready for occupancy) designations. The last of the three tie breakers will be by determining the "neediest" census tracts. The census tracts are measured in land area, not population base. 

As a result, this third tie-breaker is subject to being skewed by circumstance. If a particular census tract included 100 low-income farm workers, but few other people, this census tract could qualify as a high need area because 100 percent of its residents are low-income. However, an urban census tract with 10,000 persons, 5,000 of whom were low-income, would lose out to a rural census tract.

As we have indicated, the Los Angeles area should compete well in the affordability category; but with high land costs and wages and expensive "infill" construction, it will, for the most part, be excluded from the cost portion. 

Furthermore, the pressure to produce competitive projects in urban areas has now been transferred from TCAC to the soft-second lenders—City and County Housing Departments or Redevelopment Agencies. As a result, it appears that the 46 percent rent floor in the affordability category will become a threshold that everyone will strive for. 

Last year the credits were oversubscribed by a 3-to-1 margin. For this funding cycle our understanding is that a 5-to-I ratio is expected. One of the significant problems California must now deal with is the economic slump, which has caused rents to decrease. In many communities, tax credit rents are actually competing with market rents. 

We expect that as markets begin to tighten up, there will be less pressure to lower all rents in urban areas to 46 percent or less of median income. This type of deep targeting requires significant subsidies both from TCAC and local agencies. 

A balance must be achieved between the need to serve those at the very lowest income levels and the desire to maximize the number of low-income units provided.