New Developments: Doubling Down On The Public-Private Partnership
By Thom Amdur
4 min read
For more than 35 years, the success of the Low Income Housing Tax Credit (LIHTC) has hinged on the effectiveness of its public-private partnership (P3). We often talk about how private capital is leveraged to deliver public goods (safe, decent and affordable housing). The fact that the private sector has “skin in the game” is an important feature that drives financial and compliance accountability, and also resulted in historically low foreclosure rates. This month, I want to focus this column on a different aspect of the LIHTC P3 – the collaborative relationship between housing credit allocating agencies (HCAAs) and LIHTC developers.
When things are working well, developers and HCAAs are in constant communication throughout the life-cycle of an affordable housing transaction. They are providing feedback on policy priorities in the QAP process, coordinating pre-development and construction benchmarks and working together through the compliance period. NH&RA deeply values our long and collaborative partnership with the National Council of State Housing Agencies (NCSHA) and the work they spearhead to support our members and residents (more on some recent developments from NCSHA Executive Director Stockton Williams later in this issue).
When unexpected challenges arise in the course of developing affordable housing, we depend on strong relationships backed by common values and effective communication to design effective solutions. The success we have collectively achieved housing America’s most vulnerable citizens through the pandemic is a testament to the strength of this partnership and the adaptability of both HCAAs in the administration of their policies and developers and managers in their operations.
I think many of us hoped that as the pandemic winds down we would be able to relax the emergency response and get back to the normal business of bricks and sticks. Unfortunately, while the public health crisis is winding down the aftermath is presenting just as serious challenges that will require close communication and coordination between developers and agencies.
QAP policies and underwriting guidelines designed either pre-COVID or in the immediate onset of the pandemic simply could not have anticipated the remarkable run-up in construction materials and labor costs. The National Association of Homebuilders reports that building materials prices across the board are up 12 percent since January 2020. Lumber is driving this dynamic with framing lumber prices up 310 percent since April 2020 to today. But it’s not just wood – copper, aluminum and steel prices are all up substantially, as is drywall, concrete products and appliances. Double- and even triple-digit insurance premium increases are also commonplace today. All of these factors combined are creating significant financing gaps in projects, as well as construction delays. The dynamic is not helped by the likelihood of rising interest rates, rising inflation and depressed tax credit equity pricing.
Developers already are using all of the available tools to address these rising costs, including value-engineering, deferring additional fees and leveraging new procurement strategies. They are typically loathed to ask for relief from state agencies, but increasingly it’s what’s needed. There are many solutions states can take to work with developers. For example, Tennessee and Illinois are deploying new gap funding programs to support developers with rising construction costs funded from the American Rescue Plan Act. Likewise, Ohio and Georgia are allowing 2019 and 2020 projects to apply for additional LIHTCs to fill gaps brought on by construction cost increases.
HCAAs can also facilitate credit exchanges (Delaware is allowing developers to exchange 2020 LIHTCs for 2022 credits) to extend the timeline to identify gap resources without penalty. Another strategy that could be particularly effective for bond deals would be to allow waivers to claim additional credits on excess basis where per unit or per development credit limits exist or to allow for higher developer fees to generate additional tax credit equity. HCAAs and developers will also have to be particularly mindful of the 50 percent financed by test as costs increase.
HCAAs and developers have many tools to address these challenges, but we must work in concert and communicate clearly and often so that policymakers have enough lead time to draft solutions. Developers must also coordinate closely to advocate for the deployment of funds to the HCAAs. Congress appropriated $1.9 trillion in ARPA funds, much of which is specifically set-aside for housing; however, there are still many competing housing needs general ARPA funds can fill, including rental assistance, homeless mitigation or simply new construction. All are important constituencies, and we must work in concert with our HCAA partners to educate the various governors, legislatures and city councils to choose to set aside some amount for projects caught in the dramatic construction cost increase.
