LIHTC Allocating Agencies Respond to Equity Market Disruption

Published by Mark Shelburne on Monday, January 23, 2017 

Last fall’s election outcome greatly increased the likelihood of changes in the Internal Revenue Code, including a reduction in corporate tax rates. Because of this possibility, corporations are analyzing potential consequences for their investments in low-income housing tax credit (LIHTC) properties. As a result the LIHTC equity market is experiencing significant disruption. However, it’s important to note there is no shortage of demand for LIHTCs. Rather, the current questions involve pricing, with many closings delayed, and those deals that are going forward being closed with notably less equity.

Allocators’ Role
Normally LIHTC allocating agencies’ involvement in the developer-investor relationship is limited. However, when challenges arise agencies can play a crucial part. Novogradac & Company is surveying allocators about how they are addressing the disruption; the initial responses are below. Although some may have not yet decided on a course of action, all are aware of the issues and evaluating their options.

The responses fall into several categories:

  • gathering feedback from program participants;
  • monitoring past awards’ progress towards closing;
  • providing LIHTCs and appropriated sources to fill gaps;
  • lowering equity price assumptions for 2017 applications; and
  • making other changes in the award cycle, including delayed deadlines.

In a few cases the resulting policies involve amending qualified allocation plans (QAPs).

There is extensive variation between states, which makes sense. Agencies take different approaches to many, if not most, aspects of administering LIHTCs. While sometimes a source of frustration for those who work across the country, the ability to respond in ways specifically tailored to local circumstances has been and will be a continuing source of strength for the LIHTC.

State Responses
These summary descriptions are not necessarily complete, and may leave out state-specific nuances. For the sake of simplicity each LIHTC allocator is referred to as the agency, even though some have different names (e.g., authority). The descriptions only cover the 9 percent LIHTC, not tax-exempt bonds.

The agency has asked 2016 award recipients for all of their investors’ underwriting parameters, including the assumed tax rate, resulting pricing, and any adjusters. Developers need to update letters of interest for the carryover allocation. The agency decided to not extend its March 1 application deadline after talking to stakeholders.

The state’s rules contain penalties when past years’ awards do not meet certain benchmarks relating to closing equity. Because of the unpredictable nature of recent delays, the agency is “extending the readiness deadlines for first and second round projects by three and two months, respectively.” Not meeting these extended deadlines will result in losing an allocation, but not being penalized with negative points on future applications.

The agency is analyzing the 2016 awards to see what it can do about gaps caused by lower pricing (there is a possibility of using state tax credit for bond deals). The next 9 percent application deadline is June 1.

Earlier this month developers with a 2016 award had to submit an updated firm equity commitment letter with pricing valid through June 30, 2017. Failure to do so “may negatively impact a project’s ability to obtain subordinate financing resources.” The agency anticipates approving additional funding in February. Previously the agency has held two application rounds in a calendar year, but for 2017 cancelled the first. The remaining application opportunity is in June.

Applications for 2017 LIHTCs in were due in November, with awards planned for February. In December the agency held a call with the state developer group to discuss how to proceed. The development community did not want to resubmit their applications with lower pricing or postpone reservations. The agency’s focus will be utilizing the state housing trust fund to fill gaps on deals that haven’t closed and holding back LIHTCs for 2017 awards. The reservations will allow the 120 percent boost to equal the 130 percent amount.

Staff is considering LIHTCs and the National Housing Trust Fund as possible gap fillers. The application cycle will move forward as normal.

The agency continues to monitor projects in its pipeline and has taken action, including addressing declines in pricing and helping avoid such declines by working to meet stepped-up closing deadlines. Developers submitted 2017 applications on January 13. Staff has discussed the market uncertainty with several investors/syndicators. The requirements for equity commitment letters allow downward adjuster language.

The agency is engaged in discussions with its partners (developers, lenders, equity investors, etc.) and is monitoring the situation. At this point it has made no policy changes or determinations.

The agency is carefully monitoring LIHTC developments with prior awards that now are in the closing process; several developers have experienced pricing issues. At this point the agency is not planning to set-aside LIHTCs to resolve shortfalls, but rather will work through the developments as investments reach a critical point. Appropriated sources, increased deferred fee and local funds may be part of the solution. In advance of the preliminary application the agency reached out to many members of the development community about a possible delay and decided to maintain the current schedule.

The application deadline has been postponed from January to the end of February.

The application review process was underway when the market changed. The agency re-underwrote using $0.85 pricing, which created feasibility challenges. The awards made January 23 will have a “Pricing Adjustment” contingent award of up to 10 percent of the LIHTCs and depend on new underwriting and supporting documentation.

North Carolina
The agency has proposed a QAP amendment that, if approved, would make the following changes:

  • Owners may return their 2016 allocation for more 2017 LIHTCs.
  • Reconsideration will not take into account increased uses.
  • Allocations above the 2016 amount will count towards the developer’s 2017 award limit.
  • The deferred developer fee must remain and be a minimum of 25 percent.
  • Requests submitted “without a firm equity commitment will assume an equity price of $0.90.”
  • The maximum additional allocation will be $100,000 in annual LIHTCs.

The agency has proposed extensive amendments to its QAP. If approved:

  • The agency award additional 2017 credits to projects that received awards in 2016;
    • approximately 17 percent of the state ceiling will be available,
    • the estimated amounts will be between $400,000 and $1 million.
  • Developers “may not increase the project costs, reduce deferred developer fees, make design or services changes, or alter the income targeting ratio.”
  • There is a minimum deferred fee percentage which is correlated to the amount of increased LIHTCs.
  • “Owners must negotiate an agreement with the equity provider to return a portion of the additional” LIHTC or repay an agency loan if investor returns exceed initial projections.
  • The agency will list applications that would have received an award if not for this change; these proposals “may receive a competitive advantage in the 2018 QAP.”

In December the agency announced LIHTC developments that have not closed on all funding sources by January 31, 2017, must submit:

  • fully executed equity letter of intent (dated after July 14, 2016)
  • all executed financing commitment letters
  • updated budget (including sources and uses)
  • proposed timeline to achieve a construction closing, and
  • documentation that demonstrates the development is moving forward.

Not being able to demonstrate a viable financing plan may result in losing the allocation. In a memo to recipients of LIHTCs in 2016, the agency said, “Additionally, the Agency may not accept future applications from developers who are unable to move forward… and do not return the tax credits in a timely manner.”

South Dakota
The agency is not making any major changes at this time, but will be flexible as developments try and close between April and June.

The agency does not plan on modifying its basis boost policies to close funding gaps. There may be an effort to pursue additional state credits. The 2017 application and award schedule is moving forward as planned.

The agency proceeded with its scheduled January 18 application deadline and asked applicants to review and adjust assumptions to the current market conditions. Staff will work closely with each applicant and public funders to address gaps on a case by case basis.

The 9 percent application deadline was moved from February 3 to March 3; the expected LIHTC pricing range will be $0.88 to $0.94. A minimum of 85 percent of projected funding sources must be “committed” at the time of application. If the application’s uncommitted funding sources exceed 15 percent, the agency will increase the credit amount (as needed) to reduce uncommitted sources to 15 percent, which may result in a point reduction.

Conclusion and Next Steps
Just as all agencies are considering the best approach for their states, they also are interested in the status of both past awards and upcoming equity pricing. Please reach out to them with information as it develops. Doing so can only help your development/application and the LIHTC overall.

Contact Mark Shelburne with any comments or questions.

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novo alert

New LIHTC Expansion and Improvement Bill Introduced

WASHINGTON—July 14, 2016—Sen. Maria Cantwell, D-Wash., Sen. Orrin Hatch, R-Utah., and Sen. Ron Wyden, D-Ore., today introduced the Affordable Housing Credit Improvement Act of 2016, a separate, more comprehensive version of S.2962 , legislation that shares its name and was introduced in May. Both bills include a 50 percent expansion of the low-income housing tax credit (LIHTC), an income-averaging election and a permanent minimum 4 percent rate. The new legislation includes 17 additional improvements that provide more resources to affordable housing development, increase financial feasibility of developments or to streamline and simplify the LIHTC. It includes a provision to change the name of the LIHTC to the Affordable Housing Tax Credit.

For more details, see the Notes from Novogradac blog and tune in to the July 19 Tax Credit Tuesday podcast. Novogradac & Company has also posted a redline version of how Section 42 would be amended under the bill.


notes from novogradac


LIHTC: 30 Years of Making Impact

The federal low-income housing tax credit (LIHTC) became part of the federal tax code 30 years ago this fall, when President Ronald Reagan signed the Tax Reform Act of 1986. In the three decades since, millions of people have lived in homes provided by a program that also creates thousands of jobs and billions of dollars in income every year.

Over the 30 years, the beneficiaries of the America’s most successful affordable rental housing program have included low-income residents, business and the all levels of government, as seen below.



novo alert

HUD Releases Update on LIHTC Tenant Data

WASHINGTON–March 25, 2016–The U.S. Department of Housing and Urban Development (HUD) today updated its Data on Tenants in LIHTC Units report, revising the information through Dec. 31, 2013. The report is mandated by the Housing and Economic Recovery Act of 2008, which requires state housing agencies to submit certain demographic and economic information on low-income housing tax credit (LIHTC) tenants to HUD. In today’s report, a net additional 153,870 units were reported compared to the initial report through 2012, reflecting units placed in service in 2013 as well as new information on units not submitted in the previous year.

novo alert

Affordable Housing Group Pens Letter for LIHTC Expansion

WASHINGTON–March 7, 2016–The ACTION Campaign is calling on supporters of the low-income housing tax credit (LIHTC) to sign on to a letter to Congress calling for a LIHTC allocation authority cap increase of at least 50 percent. ACTION’s projections indicate such an expansion would support the preservation and construction of 350,000 to 400,000 additional affordable apartments over a 10-year period. The deadline to sign is Friday, March 11. While new signatories from all states are sought, officials from the ACTION Campaign said they are particularly interested in supporters from Idaho, Kansas, Maine, Montana, Nevada, New Mexico, North Dakota, South Carolina, South Dakota, Tennessee, West Virginia and Wyoming.

Novogradac LIHTC Year 15 Handbook, 2015 Edition

The number of LIHTC developments reaching Year 15 has averaged about 1,300 properties per year during the past decade and approximately 924,000 affordable rental homes are projected to reach the end of their 15-year compliance period between 2014 and 2020.

The 2015 Novogradac LIHTC Year 15 Handbook provides guidance, options and insight into trends for all parties in a LIHTC transaction at Year 15, whether they want to retain their property, exit ownership or are undecided.

Topics include everything from the partnership between the owner/developer and investor to various exit strategies and tips for approaching the end of the compliance period. Filled with guidance, updates and useful documents, the 2015 Novogradac LIHTC Year 15 Handbook is a valuable resource for owners, investors, developers, government agencies and anyone else who faces decisions that come with the end of the initial compliance period for LIHTC developments.

The 2015 Novogradac LIHTC Year 15 Handbook includes such discussions as:

  • considerations for market analysis;
  • when and how to reposition your property in the market;
  • exit strategy options;
  • potential tax consequences for options at Year 15;
  • concerns at Year 15 for general partners, limited partners, syndicators and housing finance agencies;
  • Year 15 compliance issues for LIHTC properties;
  • recapture issues;
  • handling debt at Year 15;
  • deferred developer fees and their implications;
  • valuation of partnership interests;
  • GAAP guidance for transactions at Year 15;
  • and more.

Click here to view the Table of Contents.

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March 3, 2016


novo alert

IRS, Treasury Amend LIHTC Utility Allowances Submetering Regulations

WASHINGTON–March 2, 2016–The Internal Revenue Service and the Treasury Department will publish in tomorrow’s Federal Register final and temporary regulations that amend the utility allowance regulations concerning the low-income housing tax credit (LIHTC). The final regulations provide that utility costs paid by a LIHTC property tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility. Thus, the utility costs do not count against the maximum rent that the LIHTC building owner can charge. The temporary regulations extend the principles of these submetering rules to LIHTC property owners that provide low-income tenants with energy directly acquired from a renewable source and that is not delivered by a local utility provider. The regulations will be effective on the date of publication in the Federal Register.



ncsha newsupdate

IRS Issues Housing Credit Compliance Monitoring Regulations

Posted: 2/24/2016
On February 23, the Internal Revenue Service (IRS) issued regulations amending the Low Income Housing Tax Credit (Housing Credit) compliance monitoring requirements to revise and clarify physical inspection and certification review rules. In conjunction with the new regulations, IRS published Revenue Procedure 2016-15, which further explains the implementation of the new regulations. The compliance monitoring regulations will be effective upon formal publication in the Federal Register on February 25.

The regulations provide greater flexibility regarding the minimum number of units for which an agency must conduct physical inspections and low-income certifications; do away with the “same unit” rule, which required agencies to conduct both physical inspections and low-income certification reviews on the same units; and permit the physical inspection protocol established under HUD’s Real Estate Assessment Center (REAC) to satisfy the Housing Credit physical inspection requirements.

IRS originally requested comments on its compliance monitoring requirements in Notice 2012-18, which it issued in March of 2012. NCSHA’s response to that request for comments encouraged IRS to reduce and refine the minimum 20 percent physical inspection requirement, decouple physical inspections from low-income certification reviews, and allow for more flexibility in inspection and file review requirements when properties are also subject to inspection by other local, state, or federal agencies. The new compliance monitoring regulations make many of the changes NCSHA sought.

The regulations set the minimum number of units that must undergo a physical inspection at the lesser of 20 percent of the low-income units in the project, rounded up to the nearest whole number, or the number of units set forth in the Low-Income Housing Credit Minimum Unit Sample Size Reference Chart, which is included in Revenue Procedure 2016-15. The Reference Chart allows agencies to undertake physical inspections on fewer than 20 percent of the units in larger properties. For example, agencies would be required to inspect only 22 units in properties with between 102 and 130 total Housing Credit qualified units. Prior to these regulations, IRS required Housing Credit agencies to inspect at least 20 percent of all units in the project.

The regulations apply the same number of units standard (the lesser of 20 percent of the units in the building or the number allowed under the Reference Chart) to unit low-income certification reviews. However, the regulations decouple those certification rules from the physical inspection requirement, allowing states the option of conducting certification reviews on units in a property that did not also undergo physical inspection. This will allow states to conduct their physical inspections at a separate time from their certification reviews, giving them greater flexibility to coordinate the timing of Housing Credit physical inspections with physical inspections required under other housing programs. It also allows agencies to conduct certification reviews in the winter time and physical inspections in the summer time when it may be more feasible to visit properties due to weather conditions.

Agencies are allowed to conduct physical inspections and low-income certification reviews on more than the minimum required number of units should the agency believe it appropriate. Because the regulations decouple physical inspections from low-income certifications, agencies may conduct more inspections than certifications, or vice versa, so long as they conduct at least the minimum number of each.

The regulations also permit the REAC protocol to satisfy the Housing Credit inspection requirements so long as the inspection satisfies the following requirements as outlined in Revenue Procedure 2016-15:

  • Both vacant and occupied low-income units in the project are included in the population of units from which units are selected for inspection;
  • The inspection complies with REAC’s procedural and substantive requirements, including the use of REAC Uniform Physical Condition Standards inspection software;
  • The inspection is performed by HUD REAC inspectors; and
  • The inspection results are sent to HUD and reviewed and scored within HUD’s secure system without the involvement of the inspector, and HUD makes the inspection report available.


The regulations continue to require agencies to comply with the “all buildings” rule, which states that the agency must conduct on-site inspections in units in all buildings in a project rather than simply applying the minimum number of unit rule on a project-wide basis should a project encompass multiple buildings. The regulations provide an exception to the all buildings rule for agencies that use the REAC protocol to satisfy the physical inspection requirement, though in certain cases REAC may require inspections in all buildings of a project.

The regulations note that the IRS remains open to further comments from interested parties on various issues covered in the regulations, including provisions in Revenue Procedure 2016-15 that define “performed under the REAC protocol” and whether IRS should shorten the reasonable notice time frame that agencies may give owners before undertaking either physical inspections or certification reviews, which currently stands at generally no more than 30 days.

The regulations also provide the opportunity for parties to provide greater detail and justification for proposals made in comments on Notice 2012-18 that IRS decided not to adopt in these regulations, including proposals to allow a risk-based assessment model in place of inspection requirements based on the number of units in a project.

Ostensibly, IRS must be open to further modifications of the compliance regulations in light of its request for additional comments. However, the regulations do not give a deadline by which the agency must receive comments on these issues or provide a specific person to whom the comments should be addressed. NCSHA has reached out to IRS for further clarification.

For more information, contact NCSHA’s Jennifer Schwartz.

Low-Income Housing Tax Credit Handbook, 2015 Edition

The 2015 edition of the Low-Income Housing Tax Credit Handbook is the authoritative guide for affordable rental housing owners, developers, managers, investors and the professionals who counsel them.

A perfect complement, the 2015 Novogradac LIHTC Year 15 Handbook provides guidance, options and insight into trends for all parties in a LIHTC transaction at Year 15, whether they want to retain their property, exit ownership or are undecided.

For a limited time, save 10 percent when ordering these two tools together with coupon code Together16. Offer expires Feb. 29, 2016.


tax credit handbook
The 2015 edition of the Low-Income Housing Tax Credit Handbook is the authoritative guide for affordable rental housing owners, developers, managers and investors, and the professionals who counsel them.

Updates to this edition include new sections about: real estate appraisal partnership valuations, managing resyndicated LIHTC properties, the Tax Increase Prevention Act of 2014, child-support verification for tenant income, measuring nonmonetary gift income for tenants, and various 120-day rules. There is also updated information about: qualified low-income housing development right of first refusal, the transfer of partnership interest, the minimum set-aside test general rule, small-area difficult development areas, vacancy rate estimations in valuation, valuing tax credits for income approach, relocation payments, habitability review, and much more. The content reflects all changes to existing legislation affecting the LIHTC program and its 2015 regulations.

This handbook provides a clear explanation of Section 42 of the Internal Revenue Code and organizes and summarizes the Internal Revenue Code, private letter rulings and revenue rulings, with detailed code reviews, analyses of business impacts, and examples of model transactions to illustrate complex concepts.

The 2015 edition of the Low-Income Housing Tax Credit Handbook is an essential resource for every active participant in the low-income housing tax credit market.



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