Every year, the state allocating agency for tax credits, typically a state housing finance agency, is required to prepare a Qualified Application Plan (QAP). The QAP outlines housing priorities of the state and creates the rules by which LIHTC applications are scored and credits awarded. There are two components that guide the allocation of the credits: preferences and set-asides. Preferences are outlined in the QAP and are used to score applicants’ projects, and set-asides are funds that are reserved every year from the allocation pool for specific types of projects. Projects that address preferences listed in the QAP receive points that make them more competitive in the tax credit allocation process.
There are several regulations and priorities in determining which housing developments receive tax credits. The federal requirements for the LIHTC program are as follows:
- The project must be a residential rental property (either new construction or rehab).
- The property owner must commit to one of two possible low-income occupancy rules—the 20-50 rule, which stipulates that at least 20 percent of the units must be occupied by households with incomes at or below 50 percent of the area median income, or the 40-60 rule, which requires at least 40 percent of the units must be occupied by households at or below 60 percent of the area median income.
- The affordable units have maximum rent levels (including utilities) set at 30 percent of gross household income for households at the maximum income limit. For example, if a unit is restricted to households earning 60 percent of AMI, a household with a gross income of 50 percent of AMI would have to spend more than 30 percent of their income on rent. Some households fill that gap with other housing assistance, such as housing vouchers.
- Tax credits are allocated only for the construction costs of the affordable units—so-called “qualified construction costs”—though the project could have a mix of affordable and market-rate units, and could include commercial and/or community space.
- Property owners must operate under the income and rent restrictions for at least 30 years.
In addition to these federal rules with which every development receiving tax credits must comply, there are also rules established by each state’s QAP that determine which projects receive preference for the tax credits. The federal law requires that the priorities for tax credits specified in each state’s QAP give preference to projects that (1) serve the lowest income families (e.g. even below the federal requirement) and (2) are structured to remain affordable for the longest period of time. In addition, federal law also requires that at least 10 percent of the credits allocated by states are set aside for properties owned by nonprofit organizations. In addition, the federal government has specified that states can offer enhanced tax credits, equal to 130 percent of qualified construction costs, rather than 100 percent of qualified construction costs, to projects in difficult development areas (DDAs) or in qualified Census tracts (QCTs).
Preferences are outlined in a state’s QAP and are used to add points to each applicant’s score as they apply for tax credits. These extra points help prioritize projects that best meet the housing needs identified by the state HFAs as the most critical affordable housing needs. In addition to preferences, states are allowed to automatically allocate tax credits to projects that have particular characteristics (referred to as “set-asides”). Examples of preferences and set-asides include:
- geographic preferences
- local housing market needs or conditions
- type of project financing and use of matching funds
- proposed resident characteristics
- building characteristics (generally unit size)
- type of project—new construction versus rehabilitation
Broader Considerations for QAPs
An effective QAP can address all of these criteria and incentivize the production and preservation of rental housing that best meets the many competing needs of the state. While the primary goal is the creation or preservation of affordable housing, an effective QAP takes a more holistic approach. Housing is only one part of a community. As such, the QAP should reflect an understanding of how housing intersects with the community and other land uses, including retail, commercial and office uses, and with transportation systems, including roads and transit.
There are serious environmental concerns as well, related not just to housing construction and energy efficiency, but also to the housing location, proximity to other uses and its access. The QAP is an important tool for building healthy communities, and the implications for the larger community should be kept in mind when crafting it.
Because of the substantial housing needs and limited resources to serve very low-income households, the homeless, the physically and mentally challenged, people with HIV/ AIDS, and other severely challenged households, some QAPs try to maximize housing opportunities for the groups with the deepest need. However, it is important to include other considerations beyond just the number of affordable units that a development may provide for populations with the greatest housing needs.
For example, would residents have better access to schools, services, and opportunities in a mixed-income housing development that includes market-rate housing? Are working families struggling to afford housing located near transit and job centers? Similar questions could be asked of housing for older adults. Are there benefits to mixed-age communities rather than exclusive housing for older adults? Does your QAP encourage further segregation of rich and poor, old and young? Are there synergies that could be created by encouraging a variety of housing types with built-in diversity?
Listed below are several issues states consider when crafting a QAP.
- Urban versus rural housing needs. Rural housing needs are often overlooked and underserved for a variety of reasons, including the low-density nature of housing development and limited formal political organization in some areas. Some states have prioritized rural housing by granting points for development proposals that have additional funding through rural grants, offering points not directly tied to location, but as a condition of financing for developments located in rural areas.
- Location within an area with a community revitalization plan. New affordable housing development can often act as a catalyst for the revitalization of neighborhoods. The QAP can encourage this by granting points to development proposals in areas with a community revitalization plan, thereby leveraging the tax credit allocation to spur new investment in the community. This can also help create or preserve affordable housing in rapidly gentrifying areas.
- High-opportunity, low-poverty locations. While preference is usually given to development proposals in qualified Census tracts and difficult-to-develop areas, the QAP can also incentivize affordable or mixed-income housing in neighborhoods with low poverty rates and high opportunities for residents. Such communities often provide access to good schools and community infrastructure that may provide opportunities for lower-income families to succeed and produce positive outcomes, including better job opportunities, better access to health care, etc.
- Deconcentration of poverty in low-opportunity, high-poverty locations. Just as many high-opportunity locations have limited affordable housing, many low-opportunity neighborhoods may have a concentration of low-income housing that may have adverse impacts. The QAP can assist in bringing housing balance to these locations by supporting mixed-income housing that includes market-rate units, rather than 100-percent low- and very-low-income housing. Some plans address this by asking for the proximity of the development proposal to another tax credit project or the proximity to a concentration of multifamily rental units.
- Using vacancy rates to determine location need. Communities with low vacancy rates are by definition areas of high demand for rental properties. High demand usually drives up rental rates, making it difficult for working families to afford safe and adequate rental housing. The QAP can use low vacancy rates as a likely indicator of a tight and unaffordable rental market.
- Location outside of environmentally challenged areas. A sad reality is that many low-income communities have historically been located in environmentally challenged areas, in part because of low land costs. Many poor communities are located near landfills or incinerators or freeways, or near environmental hazards like flood plains, putting residents at risk of natural or human-made hazards. The QAP can attempt to avoid furthering this unfortunate pattern by offering points for distance from any environmentally challenged area.
- Access to public transportation and community amenities. Many working families cannot afford the costs of purchasing, maintaining, and insuring an automobile, and rely on public transportation for part or all of their transportation needs. Seniors often have limited ability or desire to drive as they age as well. As commutes have worsened and gas prices have risen, access to public transit, especially light rail and subways, has becoming increasingly desirable. This growing market demand for housing near transit has driven up housing costs around transit in many communities. An effective QAP can help preserve existing affordable housing in such areas for working families and older adults who rely on public transportation for their daily needs. It can also support the development of new housing in such areas. Proximity to community amenities like grocery stores, doctors’ offices, and drug stores, as well as job centers, are often considered in QAPs as well.
New construction, rehabilitation, renovation or preservation considerations:
- New construction versus rehabilitation. The QAP can provide incentives for either new construction or rehabilitation of existing rental housing depending upon the needs of the community. Often within a state there will be communities with a need for both new affordable housing and rehabilitation of existing affordable rental housing. The QAP should address the need for both and determine annually which is the priority and where.
- Preservation of historic architectural resources. The Housing and Economic Recovery Act of 2008 added the historic character of the project as a criterion to be used in state QAPs. Most states have an inventory of their historic resources, including buildings of historical or architectural significance that contribute to the heritage and quality of life of the area. Many of these structures are often threatened with demolition or neglect. An effective QAP can encourage the rehabilitation and reuse of such structures as affordable housing. Some buildings will also qualify for the use of historic tax credits.
Development type considerations:
- Support for mixed-use development. Combining housing and commercial uses including retail, restaurants, and offices can provide convenience and efficiencies for the residents, but can also provide additional income for the developer if the commercial uses are viable. This development type reduces necessary trips by automobile as well, thereby reducing local traffic and creating fewer harmful greenhouse gas emissions. The QAP can encourage mixed-use development by granting points for these proposals where appropriate.
- Support for mixed-income development. Most QAPs give priority to development proposals with 100 percent affordable housing in an effort to produce the maximum number of affordable housing units. While the reasoning is completely understandable, the outcomes might not be as advantageous to the residents as would a mixed-income development. In some situations mixed-income housing may be more appropriate and more effective in creating opportunities, housing balance, and positive outcomes both for new residents and the existing communities. Since the tax credits themselves cover only the costs of units serving families with incomes below 60 percent of AMI, a focus on mixed-income development does not reduce resources for low-income families.
- Support for compact development. Compact development is often viewed as being a more efficient and cost-effective use of public infrastructure. While getting density right is often context specific, higher-density development generally offers numerous advantages to the community, developer, and resident. The QAP could be carefully structured to reward the right level of density in the right location.
- Support for green development. Many affordable housing developers are incorporating energy-efficient green building techniques in their developments because utility expenses for tenants can often represent a significant and increasingly volatile monthly expense. State QAPs can reward such efforts by granting points for development proposals that support green development practices, such as alternative energy sources and energy efficiency. Where a project is located can be just as important to its environmental sustainability as the features of the home.
- Housing for larger families. The foreclosure crisis forced many former homeowners to become renters. Many of these households were large families requiring at least three-bedroom apartments. Finding apartments of this size is difficult in many markets. In the states hardest hit by the crisis, the QAP can reward development proposals with a high proportion of apartments with three or more bedrooms, if this is a priority for the state. Many of these families had declared bankruptcy, meaning they may be renters for seven or more years while they repair their credit.
- Housing for older adults. Many older adults are on fixed incomes, while their rents and property taxes often escalate at a rate greater than their income. Some are forced to leave their homes and their communities because they can no longer afford the property taxes. Many have medical issues and prescriptions that consume a good portion of their income as well. States with significant older populations often support senior housing through their QAPs. While older adults may impact the local health care system, they don’t create need for public school expenditures, which are usually the largest local public expense for communities. Along with addressing an important need, this is often an attractive reason many communities want more affordable senior housing in their communities.