State Agencies Take Different Approaches to Rising Costs, Green Standards
By Caitlin Jones & A. J. Johnson
6 min read
Tax Credit Advisor June, 2006: State allocators in California, New Mexico, and Washington are taking different approaches to address rising project costs in their low-income housing tax credit application cycles. These include varied kinds of cost limits, greater encouragement of “green” building characteristics, and more reliance on other subsidies.
Speaking on a panel May 16 in Dana Point, Calif. at the National Housing & Rehabilitation Agency’s 2006 Spring Forum were: moderator Jeanne Peterson, the Reznick Group, Sacramento, Calif.; Bill Paveo, Executive Director, California Tax Credit Allocation Committee, Sacramento; Linda Bridge, Director of Housing Development, New Mexico Mortgage Finance Authority, Albuquerque; and Paul Edwards, Deputy Director, Washington State Housing Finance Commission, Seattle.
Rising Development Costs
Peterson said the rising cost of new housing credit deals is a trend occurring “virtually everywhere.” Even though the 9 percent credit supply adjusts upward yearly, this rise has been outstripped by cost increases for proposed new projects for such items as land, labor, materials, and enhanced amenities and tenant services. The net result is fewer new credit units each year.
“We did see a significant increase in costs this year, more so than we had in prior years,” said New Mexico’s Linda Bridge. She noted the average per-unit cost (excluding land) for projects requesting credits in her agency’s 2006 housing funding round was $130,000, up from $99,000 in 2005. Moreover, some requests ranged up to $200,000 Ã a first for the state.
Bridge said her agency has a per-unit cost limit equal to the average per-unit cost of all projects requesting credits in the current funding round, plus a cushion. This year, she said the agency deleted this cap as an application threshold item but retained it as an underwriting criteria. Reasons included rising project costs and uncertainty about the cost impact of the agency’s design competition and, more recently, its encouragement of “green” building practices.
Paveo said California is seeing rising land and construction costs, and, like many states, utilizes HUD’s Section 221(d)(3) per-unit basis (i.e. cost) limits in its credit program. He indicated the agency, however, is exploring the possible development of regional cost limits, based on cost data from its sizable portfolio of completed projects. Paveo also said CTCAC staff are trying, without success so far, to see if the agency can figure a viable way to help projects with existing credit allocations hit by higher costs with supplemental credit awards, without undermining the program’s competitive nature. Now, developers in such cases must return their original credit award and re-apply for a new, larger allocation.
Edwards said Washington’s agency has a per-unit limit on credit amount. “Rising costs have been a very real and immediate issue,” he said, noting some developers incorporate a 25-35 percent cost escalation factor into their development budgets.
Emphasis on “˜Green’ Building
The officials described how their agencies are rewarding or encouraging use in new credit projects of sustainable or “green” building practices and standards, which include more energy-efficient building standards, materials, and appliances. These measures are designed to reduce long-term energy costs and/or be more environment-friendly, though some items increase project costs.
Bridge said New Mexico’s year-old green building standards were strengthened in 2006. One change is a new green building checklist with five categories of optional features developers can pick from to earn an extra 3-15 points, in areas such as water conservation, energy efficiency, and building plans/materials. Developers must also provide firmer supporting documentation than before for their green building checklist commitments.
Edwards said the Washington agency encourages sustainable building practices somewhat in its tax-exempt bond program. But he added many affordable housing projects make use of four separate statewide green initiatives. He further noted a new state law by 2008 will require all projects getting state housing trust funds to “achieve a certain green building standard.” Ninety percent of projects receiving 9 percent credits from the Washington agency also get state trust fund dollars, Edwards said.
Energy-Efficient Design
Paveo said California modified its credit rules this year to further encourage energy-efficient design and sustainable building methods. One change provides a 4 percent boost in the normal per-unit basis limits for projects that incorporate at least three items from a list of eligible improvements (e.g., use of high-efficiency air filters in the HVAC system). A second change adjusted the threshold to get extra points for exceeding stiffer general building code energy efficiency standards, and expanded the list of alternative design features that qualify an application for extra “green points.” A third change revised the agency’s minimum construction standards, including to mandate Energy Star appliances.
Search for, Use of Other Subsidies
Edwards said the Washington agency has also been looking for other subsidy sources to help offset rising project costs, but so far hasn’t yet found a “real solid solution.”
Bridge noted New Mexico’s credit projects rely heavily on federal HOME program subsidies for gap financing. She said nine of the 10 projects awarded credits this year by her agency also got HOME funds.
Additional Comments
In other areas:
- Bridge and Paveo indicated their agencies are open to suggested changes about how to treat applications that are incomplete or have mistakes. Bridge said New Mexico gives 15 points to applications for completeness, and has been urged to adopt some type of pre-review or correction period. She noted a past common mistake on applications was inadequate site control documentation; others mistakes have been use of an old version of a form, or omission of a document or checklist item. She advised developers to check their applications a second and third time before submitting them.
- Bridge and Paveo said their agencies struggle over penalizing applications that are incomplete or have minor errors. On the one hand, they indicated they don’t want to sink what otherwise would be meritorious projects. On the other hand, however, not penalizing these applications would be unfair to developers who submit complete and accurate applications, given the intense current competition for credits. “These are very tough policy calls,” said Paveo.
Paveo said California “is looking to do more at-risk deals using 9 percent credits.” He said the agency’s 5 percent set-aside for preservation projects ($3.4 million in 2006) has been under-subscribed for a while.
