Proposed Changes in FHLB’s AHP Program Would Make it a More Valuable Tax Credit Tool

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Tax Credit Advisor March, 2006: While the Federal Home Loan Bank System’s Affordable Housing Program (AHP) has been used with some success in combination with the Section 42 Program, it has not been a well-known or often-used adjunct to tax credit developments. However, a recent proposed rule of the Federal Housing Finance Board published in the Federal Register on December 28, 2005 would make the program more user-friendly for tax-credit developers.

This overview of the Program and the changes being proposed is written to encourage developers to look at the AHP as a potential tool for improving project feasibility. While the program may be used for either homeownership or rental housing, we will examine the elements of the program that make it a potential player in successfully developing affordable rental housing when combined with the tax credit program. Comments on the proposed rule are due on April 27, 2006.

Enhancing Feasibility of AHP Loans Combined with LIHTC

One of the most important proposed changes greatly enhances the feasibility of AHP loans combined with the Low-Income Housing Tax Credit (LIHTC). This revision will permit banks to rely on monitoring by a State Housing Credit Agency (HCA) when a project has tax credits, even if the tax credit set-aside is 40/60. This is because experience with AHP and tax credit properties has shown that even on 40/60 tax credit properties (i.e., the income level for residents is 60 percent of median), the properties generally meet the AHP requirement of 20 percent of households at or below the 50 percent income level.

The new regulation also proposes to allow projects with other federal, state or local funds to be monitored by the entities administering those programs if they demonstrate monitoring competence. This is a terrific change for tax credit developers and will make the monitoring process significantly less burdensome.

As in the current rule, owners will still have to submit annual certifications of compliance to the Bank, but the individual banks will have much greater flexibility in establishing policies and procedures for monitoring. Under the current rule, the procedures are prescribed by regulation and banks have no discretion. The new rule still requires a bank’s monitoring policies and procedures to include provisions requiring bank review of back-up documentation regarding household incomes and rents, but it appears that this duty could also be delegated to the State HCA.

The proposed rule also removes the requirement that banks monitor project habitability.

Program Background

Since the inception of AHP, more than $2 billion has been awarded to assist in the development of affordable rental and owner occupied housing. Nearly 430,000 rental units have been subsidized, 39,800 units in 2004 alone.

AHP is funded by 10 percent of the annual net income of the Federal Home Loan (FLB) Banks, or $100 million, whichever is greater. The Federal Home Loan Bank System, authorized by Congress in 1932, consists of 12 regional Federal Home Loan (FHL) Banks with approximately 8,100 members, including commercial banks, savings and loans, insurance companies, and federally insured credit unions. The regional Federal Home Loan Banks are supervised by the Federal Housing Finance Board, an independent agency of the federal executive branch.

The AHP is a competitive program used for the benefit of households with incomes at or below 80 percent of the median income (HUD income limits are used). The program provides affordable housing developers with gap financing that enhances the development of affordable multifamily and single-family projects. In order to be awarded AHP funds, a project must:

  • Target low and very low-income households;
  • Be feasible and have a demonstrated need;
  • Enhance the community; and
  • Provide resident services.

The AHP is a shallow subsidy program that is used to leverage additional public and private resources for housing. The program has been useful in financing projects that present underwriting challenges, including projects for the homeless and special needs populations, such as the elderly and disabled. The program has also been used effectively in combination with the Low-Income Housing Tax Credit Program (Section 42).

AHP-Assisted Projects

Approximately two thirds of units assisted with AHP funds have served very low-income households (those with incomes at or below 50 percent of the area median gross income). The projects are required to remain affordable for at least 15 years (the “retention period”), and more than 96 percent of units developed to date have had non-profit or government sponsors, although funds may be provided to either non-profit or for-profit entities.

The current rule gives banks the discretion as to whether or not to adjust incomes by family size, but the proposed rule will require that incomes be adjusted by family size. This will provide a better fit with other affordable housing programs, including the LIHTC program.

AHP funds may be used for the purchase, construction, or rehabilitation of housing, and at least 20 percent of units must serve residents with incomes at or below the 50 percent income level. Virtually any type of multifamily housing may apply for the funds, including standard garden and town home developments, SRO projects, high-rise and mid-rise. The funds themselves are very flexible, and may be used for construction financing, permanent financing, principal reduction, and interest rate buydowns. Loans normally mature in 20 years with rates slightly higher than the FHLB cost of funds and loan amounts are negotiable.

One of the proposed changes in the December 28 notice clarifies that the term “affordable” means rent that is actually paid by a tenant household and not necessarily “rent charged to a household.” This makes clear that Section 8 rents will be deemed affordable, even if such rent exceeds the usual rent limit for the AHP Program. AHP rents are calculated in the same way as tax credit rents, using an “imputed” income based on 1.5 persons per bedroom.

Scoring of AHP Applications

Applications for funding are scored on a 100-point system. Forty points are designated by the local bank across nine categories. Additional points are provided for:

  • Donation of land or units;
  • Non-profit of governmental sponsorship; and
  • Housing for the homeless.

Several strategies have been exhibited by developers that have successfully obtained AHP funding, including:

  • Obtaining early review of application by Home Loan Bank staff;
  • Submitting very detailed applications; and
  • Having Home Loan Bank personnel do presentation for development staff prior to application submission.

The main lesson here is that early involvement of the lending bank can significantly enhance the potential for subsequent improvement.

Further Changes

Several further changes in the program proposed in December will make it easier to use for developers and more likely that for-profit developers will show more interest in AHP funds.

The current rule requires that projects demonstrate a need for the subsidy and the proposed rule maintains this requirement. However, the new rule would eliminate a related requirement that the estimated sources and uses of funds analysis that is part of the application include estimates of the market value of in-kind donations and volunteer professional labor and services. Such non-cash costs rarely affect the need for subsidy, and the proposed change will make the need for subsidy requirement independent of the project developmental and operational feasibility requirements. This should provide more opportunities for smaller projects and projects with higher production or operating costs such as projects with multiple services or more common use areas.

The current rule requires that project costs be “customary” and determined in accordance with “industry standards.” The proposed rule clarifies that the determination or project costs is a separate eligibility requirement and directs banks to determine whether a project’s costs are reasonable by taking into account the location of the project, development conditions, and other non-financial project characteristics, such as housing for the elderly or persons with disabilities. This change will increase the feasibility of projects serving special needs populations

The proposed rule removes the existing provision that allows a bank, at its discretion, to have a requirement that a project assisted with AHP subsidy must be located in the bank’s district. This change will help ensure that all funds are used and feasible projects that might otherwise go unfunded can proceed to development.

The proposed rule will also permit a bank to award additional points for projects that would provide housing in disaster areas, including housing for low or moderate-income households that have been displaced from a federally declared disaster area, regardless of the households current residential location. For example, this would allow a property to be built in Georgia for persons displaced in Louisiana.

Under current regulations, if a property is sold or refinanced before the end of the affordability period, the AHP subsidy must be repaid. The proposed regulation states that the subsidy does not have to be repaid if households are relocated to another affordable property with the same deed restricted income requirements as the AHP financed property. For example, an AHP property could be refinanced without penalty if the residents were relocated to a nearby tax credit property with the same income limits as the refinanced property.

AHP loans will also be monitored by the lending bank to ensure compliance with the loan requirements. There will be a Regulatory Agreement or Deed of Trust and regular reporting will be required during the retention period. The Bank will also monitor the property during construction and rent up. Compliance monitoring of rental projects will commence in the second year after project completion, and will continue for the 15-year retention period. This is also a proposed rule, which is designed to ensure that developers are adhering to the requirements of the loan over the long-term.

While it is unlikely the AHP program will become a major funding source for most privately-developed tax credit properties, it is a program that should not be overlooked by developers when searching for ways to improve project feasibility and close those tough funding gaps. The changes in the proposed rule, as outlined here, will make the AHP more user-friendly and developers should examine the program’s utility for upcoming projects.

Developers interested in specific information on the AHP in their area should contact a local member of the Federal Home Loan Bank system, or go to www.FHFB.gov for more information.

By A.J. Johnson