The National Council of State Housing Agencies (NCSHA) released an updated edition of NCSHA’s Recommended Practices in Housing Credit Administration, consensus standards that guide how states administer the federal low-income housing tax credit (LIHTC) incentive. NCSHA’s recommended practices are voluntary standards in Housing Credit allocation, underwriting, and compliance monitoring that all states should consider adopting regardless of other differences among them. The standards were last revised in 2017.
The new edition of the Recommended Practices includes expanded guidance to inform state administration in the most critical issues impacting affordable housing today:
• Skyrocketing development financing, insurance, and operating costs;
• Escalating pressures on the continued long-term affordability of existing properties; and
• Siting considerations related to renter opportunity, community revitalization, and disaster risk.
The new edition also includes, for the first time, guidance on how state Housing Credit administration can encourage and ensure meaningful renter protections that are also workable for landlords and developers.
Important Recommendations
Project Selection
Reducing Barriers to Local Development: While inviting local jurisdiction comment on proposed Housing Credit developments is required by statute, Agencies should not require local approval (for example, a letter of support) as a threshold qualification or allocate points for local approval as part of a competitive scoring system. Moreover, Agencies should not require local financial contributions as a condition for receiving an allocation of Housing Credits. In the course of developing a competitive scoring process, Agencies may choose to encourage developers to obtain additional funding sources for the project, including local contributions and tax abatement, but Agencies should not prioritize local contributions over any other source of outside funding.
Facilitating Rural Housing Development with the Credit: Agencies should consider opportunities to encourage use of the Average Income Test minimum set-aside in rural areas—when informed by a market study that confirms that an appropriate band of eligibility exists within the community—to expand the eligible pool of qualified tenants, and to identify financial tools to enhance financial feasibility of rural developments.
Sustainable Development: In developing Housing Credit development priorities for new construction, Agencies should consider the extent to which certain locations present greater risk of exposure to natural disasters and hazards and the potential impact of such locations on Housing Credit residents as well as on construction materials and requirements, insurance premiums, development costs, and investor interest.
Project Underwriting & Development
Ensuring Reasonable Development Costs: To respond to periodic and temporary volatility in development and operating costs, construction material shortages, increased financing costs, and unanticipated development delays that contribute to cost increases, Agencies should allow flexibility in the application of cost standards, including opportunities for waivers and/or exceptions to such standards when appropriate.
Developer Fee and Builder Fee Limits: Agencies should limit developer fees to the lesser of an appropriate defined per-unit dollar cap or 15 percent of total development cost, with limited exceptions for developments meeting specified criteria. Agencies should cap builder’s profit, overhead, and general requirements to a combined 14 percent of construction costs, in line with standard industry practice, with discretion to make adjustments based on project characteristics.
Issuance of IRS Form 8609: Each Allocating Agency should establish a process for requiring and analyzing cost certifications for all developments as part of the final feasibility evaluation, prior to issuing IRS Form 8609. As part of this analysis, the Agency should judge the reasonableness of the cost components. Agencies should strive to issue Form 8609 in a timely manner, ideally within 90 days of receiving complete required documentation.
Operating and Replacement Reserves: Agencies should require operating reserves of no less than four to six months of projected operating expenses plus debt service payments and annual replacement reserve payments, and replacement reserves of no less than $300 per unit per year for new construction developments for seniors and $350 per unit per year for new construction developments for families and for rehabilitation.
Operating Expense and Vacancy Rate: Projections Agencies should promote long-term economic viability by requiring owners to provide realistic itemized anticipated operating expenses. Agencies should also consider trends in operating expenses, including property insurance costs, projected energy usage, utility rates, labor costs, real estate taxes, and other operating expenses and adjust their underwriting cost assumptions accordingly. Agencies should establish and maintain operating cost databases based on historic and current Housing Credit property experience and use them in their underwriting.
Minimum Rehabilitation Threshold: Agencies should establish a transparent minimum rehabilitation threshold to assure meaningful, rather than simply cosmetic, rehabilitation of properties, ensuring that such threshold is not so high as to inadvertently impede preservation of an existing development at risk of converting to market rate.
Preservation
Encouraging Preservation with the Housing Credit: To encourage preservation of existing affordable housing reaching the end of its affordability period, Agencies should assess the development’s current financial viability, physical condition, capital needs, location, the population it serves, and its relative competitiveness in the local market.
Compliance Issues in Resyndication: Agencies should develop policies on compliance issues encountered in resyndication of existing Housing Credit developments, including policies on tenant qualification, amendment of extended use agreements, and applicable income limits to use in resyndication.
Asset Management & Compliance Monitoring
Transmittal of Development Information: Agencies should develop procedures for transmitting critical development information from allocation to monitoring staff, including the completed IRS Form 8609 for the development and any extended lowincome housing commitments that document tenant income or other property restrictions.
Utility Allowances Agencies should permit Housing Credit developments to select from all utility allowance options available under IRS regulation, specify requirements for application of alternative utility allowances in new and existing developments, and facilitate use of the energy consumption model utility allowance