A Potential Step Forward: Rating Affordable Housing Providers

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6 min read

In March 2013, the Housing Partnership Network released a set of proposed affordable housing reforms[1] that included a recommendation to “create a rating system for affordable housing providers.”

The rationale would be to create a standardized system for assessing and verifying the capacity of affordable housing providers (e.g., developers, owners, management companies) in order to facilitate more effective and efficient decision-making for various purposes. One purpose might be for state housing finance agencies (HFAs) to evaluate developers seeking low-income housing tax credits and other resources for proposed new affordable multifamily rental projects.

As compliance director at the Ohio Housing Finance Agency (OHFA), which awards housing tax credits, federal HOME dollars, and other resources, I routinely assess the capacity of developers and certain other housing providers. Because of this, I am intrigued by the idea of a rating system that might help eliminate uncertainty and paperwork in the LIHTC program, and believe it is useful to explore the factors that might be considered in shaping such a mechanism.

Current Practice

State HFAs use diverse methods for verifying the capacity of developers applying for housing tax credits for new proposed projects. At OHFA, we utilize a review process similar to that at many state HFAs.

We make sure that each developer applicant – if not a past program participant – has some experience with housing credits. Toward this end, OHFA reviewers check resumes and organizational charts and reach out as needed to other HFAs by phone to verify developer capacity and experience. There is added scrutiny of nonprofits, particularly those proposing to develop a project without partners.

OHFA considers loan and equity commitments from lenders and investors to be sufficient evidence of the financial capacity of developers, since these funders already ascertain financial capacity in their own reviews.

OHFA uses a comprehensive questionnaire to assess the management capacity of the property management companies that developers say will operate their completed project.

Our agency also maintains a “not in good partnership” log of developers that have consistently failed to operate by principles established by OHFA, such as to be accountable, collaborative, and professional. In addition, we keep a “watch list” of individual projects that are exhibiting, for example, high vacancies, recent patterns of non-compliance, or significant tenant complaints. Both of these documents bolster capacity checks.
Provider Rating System

  • Pros
  • Standardization
  • Transparency
  • Greater efficiency

 

Cons

  • Potential costs
  • Barriers to entry
  • Failure to address state preferences

 

Rating System

There is always room for improvement in any review process, and a rating system for housing providers offers an opportunity to achieve this.

The rating of a housing provider – whether a numerical score or another indicator of competence – should signal qualification and ability so that organizations relying on the rating do not need to perform additional due diligence. To be effective, a rating system must have “buy-in” from all of those who will use it.

A rating system effectively is a regulation with a set of standard criteria that an organization must satisfy in order to do business in a certain industry. These criteria generally are: technical- or rule-based, meaning a certain standard must be met in a set manner; (2) performance-based, meaning specified outcomes or benchmarks must be achieved; or (3) management-based, meaning there is flexibility in how the regulated entity can comply.

In crafting a rating system, one must decide whether the generated rating should be rule-based (i.e. directing organizations to do certain things) or principle- or value-based (i.e. allowing significant flexibility in meeting the applicable standards).

Some of the critical questions to address in creating a rating system include:

 

  • What body or organization should develop it?
  • What types of organizations will be rated (e.g., developers, property managers, owners)?
  • Should the rating standards and review procedures vary for different types of organizations?
  • Should the rating be voluntary?
  • Should the system provide for a self-assessment that is then validated by a third party?
  • How should the rating be determined (i.e. the process)?
  • What factors will be assessed and how much weight should each be given? For example, will the number of IRS Forms 8823 filed on an applicant’s completed projects be taken into account? Or will intangible factors such as the quality of partnership or staff experience be more important?
  • Should the organization’s finances be reviewed?
  • Will interviews with past partners or customers be conducted?
  • How will the system be funded? Will rated organizations be charged a fee? If so, how much? Will the fee differ by type of housing or type of organization (nonprofit, for-profit)? What happens if an organization cannot afford the fee?
  • Will the rating of a provider be reviewed in the future on a set schedule or episodically, such as when the organization experiences a positive or negative change?
  • What uses should be allowed (and disallowed) for a rating?
  • Should there be an appeals process?

 

Additional Issues for Consideration

The type of rated organization will impact the types of information required, the analysis of this information, and the conclusions that are drawn. No matter how efficient, a rating system will require participating organizations to prepare reports, organize documents, respond to surveys, and set aside time for meetings and interviews.

There are also many additional issues to consider. These include whether fees would create a barrier for less capitalized developers, such as nonprofits; whether self-assessment would be worthwhile; whether any subjectivity should be permitted in reviews; transparency; and possible policy implications, jurisdictional issues, or potential conflicts of interest.

What are the prospects for nationwide adoption of a housing provider rating system?        This could be difficult, if the experience in the LIHTC program is any indication. State HFAs differ widely in their qualification allocation plans and LIHTC program policies, reflecting their diverse housing needs and preferences.

Still, the Housing Partnership Network should be applauded for its proposal and the concept of a rating system for affordable housing providers merits consideration and further discussion. This presents an opportunity to standardize how HFAs and others assess and verify the capacity and experience of organizations involved in the LIHTC program and other housing programs. Action in this area could help ensure that our limited affordable housing resources are used even more effectively and efficiently – something that would benefit everyone.

Brian Carnahan, SHCM, HCCP, is Director of the Office of Program Compliance at the Ohio Housing Finance Agency. He may be reached at [email protected].

 

[1] “Toward a Housing Policy Reform Agenda” (http://housingpartnership/policy/policy-paper/). The Housing Partnership is a collaborative of leading nonprofit organizations involved in affordable housing and community development.