By Ellen Bowyer, COSCDA

and

Ralph Nodine, Development Strategies, Inc.

Edited by Kevin Kissinger, COSCDA

December 1996

TABLE OF CONTENTS

Preface

Acknowledgments/Note

Chapter 1. Summary and Overview

• Use of HOME with the Low-Income Housing Tax Credit

• Report Overview

• State Models

Chapter 2. Structuring a Program

• Designing a Joint Program

• Designing a Project Finance

• Designing Project Underwriting

• Establishing Time Frames for Fund Use

• Staffing the Program

Chapter 3. Structuring An Application Process

• Program Documents

• Application Form

• Rating and Ranking Applications

• Awarding Funds

Chapter 4. Approaches to Monitoring

• Performance Monitoring During Construction

• Affordability Monitoring After Construction

• Conclusion

 PREFACE

The Council of State Community Development Agencies (COSCDA) is a membership organization for cabinet-level state agencies which administer federal and state resources for housing, homelessness, and community and economic development. These programs include the Community Development Block Grant (CDBG) and (in about half of the states) HOME Investment Partnerships (HOME)and the Emergency Shelter Grant. COSCDA members work extensively with local governments, nonprofit organizations and the private business community. COSCDA provides technical assistance, training, and advocacy for members in the areas of policy development and program practice.

This report is one of eleven reports COSCDA is preparing under a cooperative technical assistance grant funded by the U.S. Department of Housing and Urban Development. The grant is administered through the National Affordable Housing Training Institute (NAHTI), a nonprofit organization composed of eight public interest groups, including COSCDA. NAHTI provides technical assistance and training support to city, county and state governments in the areas of affordable housing and community development.

Under its cooperative agreement through NAHTI, COSCDA conducts various training and technical assistance activities to help state agencies administer HOME program in an effective, innovative, accountable manner. These activities include HOME workshops, a quarterly newsletter called HOMEnotes, on-site consultations, and demand/response technical assistance and referral. The three model programs produced under this grant profile selected state programs to offer models of best practices in the development, implementation and management of effective HOME programs and viable housing development. Other model program guides in this series are entitled Structuring a HOME Training and T.A. System: A Model from Washington State and Using HOME for Job Training: Michigan's's Job Demonstration Program.

HOME is a federally-funded housing program that allocates funds directly to states and local governments on a formula basis (40 percent to states; 60 percent to local governments) for the development of affordable housing. Created in 1990 through the National Affordable Housing Act, the HOME program has generated more than 200,000 units of affordable housing and provided over 28,000 low-income families with tenant-based assistance.

HOME is currently the most flexible form of housing assistance provided directly to states and local governments. The program was developed, in part, due to recognition of the increasing state role in affordable housing development and to prompt additional and continuing housing development by states and local governments. The program also strongly emphasizes the role of community-based nonprofit organizations (formally designated as community housing development organizations, or CHDOs) in the housing delivery system. HOME funds may be used to support a range of activities necessary to produce decent, affordable rental and homeowner housing. It can also be used for transitional or permanent housing for people who are homeless. Program activities may include new construction, rehabilitation and acquisition of affordable housing, as well as tenant-based rental assistance (for an initial period of 24 months, which may be renewed) and security deposits. Funds also may be used to support project pre-development or organizational operating support for CHDOs.

ACKNOWLEDGMENTS

Ellen Bowyer and Kevin Kissinger thank the staffs of the Alabama Housing Finance Authority and the Massachusetts Department of Housing and Community Development, particularly Laura Nicholson and Kate Racer. Their help during site visits and report review made this document possible. Information, suggestions, and observations made by these two state staffs were invaluable to the completion of this report. Their assistance is very much appreciated. Kevin Kissinger thanks Lisa Sims for help with formatting this report.


NOTES

Throughout this report, the terms "joint projects" or "jointly-funded projects" refer to projects receiving both HOME funds and the federal Low-Income Housing Tax Credit. The Alabama Housing Finance Authority may be referred to as "AHFA" or as "Alabama," while the Massachusetts Department of Housing and Community Development may be referred to as "DHCD" or "Massachusetts." The federal Low-Income Housing Tax Credit may be referred to as the "housing tax credit or "LIHTC."

Chapter One. Summary and Overview

The HOME Investment Partnerships (HOME) Program was authorized in 1990 and received an initial appropriation of $1.5 billion in federal fiscal year 1991. HUD allocates HOME funds directly to states and local governments on a 40/60 basis (respectively). States have a great deal of flexibility in structuring their programs. Besides deciding how to distribute funds, states can decide the types of projects to assist and the types of eligible organizations.

Given the incomes of the tenants and the need to leverage scarce public resources, financing affordable housing generally requires multiple sources of funding. Over the last several years, states have sought to link HOME funds with the Low-Income Housing Tax Credit (LIHTC) to develop multifamily rental housing. Rental housing development is more feasible using HOME for gap financing and equity generated by LIHTC. For multi-family projects where development is expensive or where the income of tenants is especially low, these two programs work especially well together.

In the early days of HOME, many apparent conflicts between HOME and LIHTC existed. HUD clarified these conflicts through changes to HOME regulations. In many states, the agencies administering the two programs are the same. In other states, two agencies work together to streamline the application and administration process used for the two programs. Such streamlining achieves cost savings for both administrators and users.


Current Use of HOME with the Low-Income Housing Tax Credit

COSCDA surveyed states in late 1995 on the use of HOME funds. In questions regarding the housing tax credit, twenty-five states said that they extensively coordinated HOME and the housing tax credit, while fifteen reported some coordination. One state reported no coordination. Further, twenty-one states said that they expected coordination between the two programs to increase, while fifteen expected no change. Although they finance a great deal of housing through the two programs, twenty-two states showed high levels of interest in training or technical assistance in linking the two programs. Another eight states expressed medium levels of interest. The levels of activity and interest suggest that these two resources, when used in combination, can be essential to the development of affordable housing. To understand this relationship better, this section first examines what HOME and the housing tax credit each bring to an affordable housing deal.


Different Roles

HOME and LIHTC both provide a source of permanent funding for multifamily housing projects, but in ways that have implications over the long-term life of the project. Typically, rental housing (and most real estate) is financed with three distinct sources of long-term financing: first or primary mortgage debt, equity investment, and gap financing. Housing tax credits supply equity, while HOME is generally used for gap financing.

Equity is a necessary ingredient to financing because most lenders prefer to see some equity investment as a condition of financing. Equity also benefits project economics by being "patient" in the sense that it is not a "must-pay" obligation of the operation of the project.
Investors contribute equity in real estate in return for three potential benefits: cash flow, tax shelter and appreciation. Equity investment in affordable housing is usually dependent on tax benefits. Affordable housing generates little cash flow; extended-use agreements often limit appreciation. Housing tax credits provide equity to projects indirectly: investors put money into a deal in return for the tax benefits. The project sponsor is responsible for identifying organizations willing to invest in the project based on the projected return on investment, thereby syndicating the housing tax credit.

HOME generally provides the financing to fill the "gap" between private mortgage money and equity. Private mortgage lenders make loan decisions based on two major criteria: project debt capacity (which is determined based on its ability to generate cash to repay debt service), and project collateral value (as determined based on an appraisal of the property). This report covers these two issues in more detail in the underwriting section. Two factors limit the amount that the lender is willing to lend: (1) the need for the cash generation potential of the project to exceed debt service by some specified amount (debt coverage ratio); and (2) the need for the loan to be less than the "value" of the property (loan to value ratio). Equity investors lend an amount based on the benefits produced by a project. The total of private mortgages and equity that a project can obtain is often less than what is necessary to complete it. A gap in the financing sources thus exists.

HOME fills the gap by providing either a loan or a grant. The decision to make a loan or a grant is based on many criteria, some of which are discussed later in this report. The HOME administrator does two types of underwriting in fulfilling its role as gap lender. First, it must determine the amount of the gap and the type of assistance needed to make the project feasible. Second, the HOME administrator must determine that a reasonable chance exists that the project will be successful if HOME fills the gap (and if applicable, that the sponsor can repay the loan). The HOME administrator looks at many of the same issues that a private mortgage lender looks at when deciding. Chapter two examines this process in more detail.


Benefits of Combining the Two Resources

HOME and the housing tax credit thus play complementary roles in financing affordable housing. Viable tax credit projects are difficult to structure without gap financing, especially in rural and inner-city areas and for persons with low incomes or special needs. Generally, the higher the public purpose of a project, the more likely a project will need gap financing. Usually, the only projects that are economically viable without gap financing are large suburban projects (more than 150 units) with rents that comply with housing tax credit rent limitations but are within a few dollars of area market rents. Significant regional variations, however, do affect viability in relation to project size.

Alabama notes that the equity generated by the housing tax credit is often essential, especially for small nonprofits, to ensure that a developer can obtain construction financing. While the housing tax credit provides important equity to a deal, HOME provides essential gap financing at an affordable rate, which makes many projects feasible. HOME permits development of affordable housing in poor, rural parts of Alabama that would not be feasible using only the housing tax credit. Similarly, Massachusetts notes that many housing tax credit deals are not financially feasible. HOME is an ideal fund to fill the gap, especially for higher-cost projects serving people with very low incomes or with special needs.

In addition, joint use of the two programs helps project development by simplifying a developer's access to housing financing. Massachusetts notes that combining resources under a single application process also provides more consistent project review.


Report Overview

This report provides recommendations for models which states can take in developing or amending a program that uses HOME funds with the low-income housing tax credit. This report is intended for two audiences: states that already use the two programs together and states that operate them separately. It develops a "model program" by examining several elements of joint HOME and housing tax credit use. It identifies what program elements are required for joint use and suggests optimal ways to meet requirements. To develop this report, the authors examined programs in Massachusetts and Alabama (states with different, yet successful approaches) to base recommendations on real state experiences.

Chapter Two describes several basic program issues states should consider when combining HOME and LIHTC, including: how to structure rents, income levels, and terms of affordability; considerations for financing joint projects; establishing time frames; and implications for staffing needs. Chapter Three describes the application process, application form, application content, and application rating process. Chapter Four concludes the report by briefly discussing the approach of Massachusetts and Alabama to long-term compliance monitoring and describing some projects funded in the two states.


State Models

This report uses information drawn from housing programs in Massachusetts and Alabama. COSCDA staff made site visits to these states to examine their programs in detail and draw out lessons for other states. Each state takes a different approach to the joint use of HOME and LIHTC; each joint program further operates within a different context.


HOME in Massachusetts

In Massachusetts, seven staff members administer HOME and the 9 percent housing tax credit in the Office of Private Housing in the Department of Housing and Community Development (DHCD). They specifically devote three of the seven staff members to LIHTC. Massachusetts received $11,972,000 in HOME funds for FY 1996 and about $7.5 million in its annual tax credit allocation.

The eighteen local participating jurisdictions (PJs) in Massachusetts received $22,150,000 in HOME funds during federal fiscal year 1996. They used resources with about $8 million in tax exempt bonds (annual commitments) and about $90 million in eight other state-financed programs (annual appropriations). DHCD meets HOME match through the state's tenant-based rental assistance program. Massachusetts meets both the HOME match requirements of both state and local PJs through the state-funded program.

Massachusetts directs about 60 percent of its HOME funds to rental housing, with the balance used for the full range of HOME-eligible activities. In 1995, the state received twenty-six applications requesting both HOME and the housing tax credit, with an average request of $425,482 in HOME and $298,656 housing tax credits. The average total development cost for the projects in the applications was $4,712,321. An additional twenty applications did not request housing tax credits. DHCD eventually funded a little more than half the total applications. About 50 percent of HOME/housing tax credit sponsors are neighborhood-based urban community development corporations; the other half are for-profit developers. Many successful applicants apply repeatedly.

About one-third of all the applications requesting housing tax credits also requested HOME funds. Of the sixty-three rental projects funded since HOME's inception, thirty-three projects also received tax credits. Housing tax credit and joint projects are often financed using six to eight sources of funding. These projects contain fifty to eighty units. Overall, housing tax credit equity ranges between thirty-three and 50 percent of total project financing. HOME-only projects are usually smaller from LIHTC-only projects or joint projects: HOME-only projects are often only four to eight units. Such projects usually have lower total development costs, and are often financed with three or four sources of funds.

The state's long involvement in affordable housing characterizes its use of HOME and the housing tax credit. First, the state approaches housing development as a full partner, not just a lender. In this role, the state directs scarce resources to development that they have identified (through needs assessments and public input) as critical to addressing affordable housing needs throughout Massachusetts.

Second, a grounded "infrastructure" exists, composed of state funding, strong nonprofit developers and high levels of development expertise. In the past, Massachusetts committed extensive resources to affordable housing; it has continued that commitment, at lower levels, to the present. The state's housing delivery system is composed of knowledgeable nonprofit and for-profit housing developers with a long history of community activism. This delivery system is thus able to support complex, innovative housing development that is financially feasible. Such housing often plays a pivotal role in more widespread community revitalization.


Alabama's Program

The Alabama Housing Finance Authority (AHFA) administers the HOME and LIHTC programs through its multifamily housing division. Created in 1980, AHFA first hired staff in 1987. The Authority currently employs 31 staff members (with nine in the multifamily division). The state received $12,931,000 in HOME funds for the 1996 federal fiscal year and about $5.2 million for its 1996 housing tax credit allocation. The state's six local HOME participating jurisdictions received $6,608,000 for the 1996 federal fiscal year. Alabama sets aside 100 percent of its annual HOME allocation for rental housing; this entire set-aside is used with the housing tax credit.

In its 1996 funding round (closed April 12, 1996), AHFA received eighty-six applications and expected to fund a little more than one-third. Sixty-four projects requested both HOME and the housing tax credit; another twenty-two requested housing tax credits only. The typical deal financed under the program is a forty-eight to 56-unit multifamily rental housing development. Alabama received eighty-six applications in 1996. The average development cost was about $3 million.

Three characteristics define Alabama's program. AHFA targets all HOME funds to rental housing. The state recognizes the needs of homeowners and first-time buyers by tax-exempt bonds. The state sees HOME as a scarce resource used most effectively as gap financing for rental housing. A second characteristic is the state's concern with rural areas, where much of the state's housing need is concentrated. The third characteristic is a strong interest in linking into private financing, thereby leveraging public funds with private resources to the greatest extent possible.

While these descriptions show some similarities between the programs in the way that Alabama and Massachusetts target their HOME funds to rental housing development, extensive differences exist. Massachusetts links HOME and the housing tax credit to other state-financed affordable housing programs. Conversely, Alabama does not have any state housing funds. While most of the applicants in Alabama are for-profit developers or local governments, most of the applicants in Massachusetts are nonprofit community development corporations, often with extensive experience in affordable housing development.

These differences between state programs help ensure that the information and recommendations in this report will help a variety of state programs. While this report is based on direct state experience, the recommendations in this report do not necessarily reflect the opinions of the states profiled. Instead, the best practices of each state serve as models for other states who are structuring or revising their own joint use of the two programs.

Chapter Two. Structuring a Program

An assessment of the joint programs in the two states suggests LIHTC drives the program workload during the application process. Due to the strict time frames associated with allocation of LIHTC, staff must rigorously assess projects for financial feasibility. The development team must ensure that the project can move forward within the proposed schedule. Once a project is funded, however, HOME takes the driver's seat, since HOME projects must meet many federal compliance requirements during construction.

The following section describes some of the program and project characteristics associated with joint use of HOME and the housing tax credit. It then examines project financing and underwriting, identifying the critical implications in several key areas. Within each section of the chapter, the different approaches taken by Alabama and Massachusetts are described followed by a short summary of the considerations.


Designing a Joint Program

One of the key issues for structuring a joint-funded program is the way in which the projects links the two funds. In Alabama, applicants requesting HOME funds are automatically considered for an allocation of housing tax credits. AHFA has found that housing tax credits provide essential equity, which is critical to obtaining construction financing (without which HOME-only projects will not move forward). About one-third of all applicants request housing tax credits only.

In Massachusetts, applicants may request HOME or housing tax credits among many other resources; receipt of one or the other does not automatically qualify an applicant for other resources. As noted earlier, of the seventy-five applications received in the 1995 funding rounds, about fifty-five requested HOME and the housing tax credit, while twenty requested HOME but not the housing tax credit.


Income Targeting

Income targeting is a restriction on the incomes of tenants eligible to live in a project. If a unit is reserved for households at or below 50 percent of median income, the manager must review the income of potential tenants and only accept those who meet this criteria, based on the actual size of the household. While income restrictions typically are combined with rent restrictions, the two may be entirely separate. Under the HOME program, at least 90 percent of all HOME-assisted rental units within a state's program must benefit people with incomes at or below 60 percent of area median income (AMI); the remaining 10 percent of the units may benefit people with incomes between sixty and 80 percent of AMI.

Under the housing tax credit, the owner must designate either: (1) 40 percent of the units at 60 percent of AMI; or (2) 20 percent of the units at 50 percent of AMI. As with HOME, these figures include both income targeting and rent restrictions; AMI is adjusted for family size. The housing tax credit allocation is based solely on the percentage of low-income units. An owner choosing to meet the minimum targeting of 20 percent of the units at 50 percent would receive tax credits for only 20 percent of the project. Due to this provision, most housing tax credit projects nationwide are close to 100 percent low-income. The IRS recently made a decision that if people with incomes (at or below 50 percent of AMI) occupy at least 40 percent of a project's units, HOME funds do not make the project "federally subsidized." Such projects are thus eligible for the 9 percent credit, although projects under this provision are not eligible for an increase in eligible basis otherwise available to projects in a qualified census tract or difficult development area.

Since each state allocates housing tax credits, developers view them as a scarce commodity. Developers therefore try to be competitive under each allocating agency's scoring system. Most of these scoring systems put some premium on targeting to lower incomes than required by the law. Consequently, many housing tax credit projects now have much lower income targeting that the minimums set forth above.

Alabama requires all projects to have at least 40 percent of HOME-assisted units targeted to people at or below 50 percent of median income, and 60 percent of the HOME-assisted rental units affordable to people at or below 60 percent of the AMI. While this requirement is directly linked to the housing tax credit, Alabama uses it for HOME targeting as well, since the requirement is consistent with HOME regulations. Usually, AHFA notes that developers are targeting all units to people at or below 50 percent of area median income. DHCD has not established a single-income targeting standard for joint-funded projects. Instead, income targeting requirements for projects vary depending on the program resources used. For example, some DHCD program resources require deeper targeting; other program resources do not.

Without strong incentives for mixed-income projects, economic considerations move the developer toward projects that are entirely low income: such projects are generally more profitable and more feasible. When the tax credit is involved, credits only accrue to the low-income units. Most allocation plans reward projects that contain more low-income units. Since credit syndication proceeds often provide thirty to 50 percent of project costs, forgoing them for some units means forgoing a significant source of financing. In most markets, the higher rents that can be obtained for the market rate units do not make up for the loss of tax credit equity.

Some administrative and management problems involved in the management and compliance documentation for mixed-income projects also tend to discourage developers. Both Alabama and Massachusetts note the difficulty of developing mixed-income projects using HOME and LIHTC. Alabama notes that low AMIs in their communities make it difficult to set market rents that are accessible to families seeking non-luxury apartments. Additionally, developers seek housing tax credits on every unit, since the equity generated by LIHTC is considered more valuable than the additional rental income that the market units would generate. In Massachusetts, mixed-income projects are difficult due to the type of project. Since most of the projects are rehabilitation of existing housing, the developer's ability to market the units to moderate or upper-income people is limited. Successful mixed-income housing requires a very good location, and may have higher construction costs, both of which are more difficult to support within an affordable housing project.


Setting Rents

For both HOME and the housing tax credit, maximum rents are based on the area median income (AMI) adjusted for family size (assuming 1.5 persons per bedroom, minus the appropriate utility allowance). Within each rental housing project under HOME, at least 20 percent of the HOME-assisted units must be leased to households with incomes at or below 50 percent of AMI. Rents on these units may not exceed the "low" HOME rents as defined below. All other HOME-assisted units within a project must be leased to households with incomes at or below 80 percent of AMI (at rents that do not exceed the "high" HOME rents as defined below). However, on a program-wide basis, at least 90 percent of HOME-assisted units must be leased to households at or below 60 percent of AMI. To meet both program and project requirements, states frequently require that 100 percent of all tenants have incomes at or below 60 percent of AMI at initial occupancy. Under that scenario, tenants whose incomes rise above 60 percent of AMI at recertification generally will not create compliance problems.

The U.S. Department of Housing and Urban Development (HUD) publishes HOME income and rent restrictions periodically and updates about once per year. For the units serving households at or below 50 percent of AMI, the gross rent may not exceed the "low" HOME rent, which is either 30 percent of the household's actual monthly adjusted income, or 30 percent of the gross income of a household at 50 percent of AMI, adjusted for family size (not to exceed Section 8 fair market rent [FMR]). Gross rents on all other HOME-assisted units may not exceed the "high" HOME rent, which is the lesser of an amount equal to 30 percent of the income of a household whose gross income is 65 percent of AMI, adjusted for bedroom size, or the FMR. In all of the above cases, gross rents must be adjusted by the appropriate utility allowance. When HOME funds are combined with federal or state project-based rental assistance, the rents for all units may be set at the maximum allowable Section 8 contract rents for that project, even if those rents exceed the HOME rents. In such cases, however, tenants earning 50% or less of area median income must no pay more than 30% of their income for rent.


Income and rent restrictions for LIHTC are generated in a similar manner as HOME (using 1.5 person per bedroom and the HUD income limits). Targeting requirements, however, are distinctly different. Either at least 20 percent of all units within each building on the LIHTC project must serve households at or below 50 percent AMI or at least 40 percent of all units in each building must serve households at or below 60 percent AMI. In either case, rents of the restricted units are regulated. Most tax credit developments choose to restrict 100 percent of units to some combination of 50 percent and 60 percent units, thereby enhancing scoring on competitive applications maximizing tax benefits to the project.

The IRS does not regularly publish maximum rent limits for the tax credit program (as HUD does for the HOME program). Many states administering the program calculate and publish the rents applicable in each locality within their state based on the HUD income limits. The IRS assumes for calculating rents that family size is one person in a studio apartment and 1.5 persons per bedroom in all other unit sizes. For instance, the IRS assumes that a three-bedroom unit will be occupied by 4.5 people (three bedrooms x 1.5 persons per bedroom).

In the above example, the maximum qualifying incomes of four person and five person households would have to be averaged to provide a 4.5 person household's income. The 50 percent AMI income for that household size is then divided by twelve to convert the annual income limit to a monthly figure and multiplied by .30 to determine maximum gross rent for a 50 percent tax credit unit (before adjusting for utility allowance). Sixty percent gross rents are calculated by multiplying the 50 percent gross rents by a factor of 1.2.

Two fine distinctions between the targeting requirements of the two programs must be highlighted. First, the IRS requires that minimum targeting requirements be met for each building within a tax credit project, while the HOME program does not require that assisted units be distributed evenly by building. Second, the percentages of low income units required by the tax credit program are based on the number of total units within the project, whereas the percentages related to the HOME program are based on the number of HOME-assisted units, which may be a subset of the total units in the project. For both HOME and the tax credit program, rents are calculated based on assumed household size while qualifying incomes are based on actual household size. For example, a three-bedroom apartment may be leased to a three-person household. That household's maximum qualifying income will be that of a three-person household, although the maximum rent for that unit will be based on a 4.5 person household.

In the past, slight discrepancies existed between the methods used by HUD and the Internal Revenue Service to calculate incomes and rents resulting from differences in rounding incomes. HUD has historically rounded annual incomes to the nearest $50, while the IRS rounds to the nearest $10. This problem was reconciled in § 92.252 of the Final HOME Rule (effective October 16, 1996). The rule now permits greater flexibility in determining the income eligibility of tenants in rental projects during the term of affordability. Source documents must be used to initially verify that tenant income meets HOME requirements. For income recertification, a tenant statement of income or a statement from a similar means-tested program (like LIHTC) will suffice.

A rent restriction places a limit on the maximum rent that can be charged for the unit. For both HOME and the housing tax credit, rents are based on median income adjusted for family size assuming 1.5 persons per bedroom and must be adjusted for the appropriate utility allowance. Structuring rents for joint projects is more complicated. Under the HOME program, within each rental housing project, at least 20 percent of the HOME-assisted units must benefit people with incomes at or below 50 percent of AMI (these units generally carry "low" HOME rents); the remaining HOME units must benefit households with incomes at or below 80 percent AMI (these units generally carry "high" HOME rents). To meet both program and project requirements, states frequently establish targeting requirements that 100 percent of all units benefit households at or below 60 percent AMI. Due to a statutory change in Section 208 of the Housing and Community Development Act of 1992, HOME regulations have been amended for consistency with the housing tax credit in cases where rents increase due to increased income of tenants occupying units. AHFA's requirements reflect that change: they provide that the income of tenants in joint-funded projects can increase up to 140 percent of the poverty level without triggering any rent increases. The next available unit in the project must, however, be rented to a qualifying household. AHFA notes that this works well in a 100 percent low-income project, but is more difficult to apply in a mixed-income project. DHCD notes that, to date, rent increases due to increased tenant income have not been a significant issue; when the situation occurs, DHCD adheres to the tax credit requirements.


Project Size Limits

No specific requirements under HOME or LIHTC exist regarding project size limits. A few considerations do exist that can help structure an overall program. AHFA defines "multifamily" as two or more attached units per building and does not permit scattered-site developments to qualify as multifamily. The maximum number of units in a HOME-funded project is fifty-six; the minimum project size is twelve units. Since Alabama views on-site management as strengthening a project, it uses fifty-six units; such a number makes it more feasible to retain an on-site manager. Applicants may apply for funding for projects that contain more than fifty-six units, but HOME funds will not finance more than fifty-six units. Most projects receiving HOME funds contain between forty-eight and fifty-six units.

Massachusetts does not establish any specific size limits for joint-funded projects, although it promotes a general limit of fifty units or fewer per project. For example, within the set-aside for new construction projects in the housing tax credit allocation plan, they give priority to projects that (among other things) contain fifty or fewer units. Under the HOME program, both states encourage applications for small or medium-scale projects (i.e., projects containing fewer than fifty-six units for Alabama and fewer than fifty units for Massachusetts).


Terms of Affordability

Federal regulations establish terms of affordability for HOME and the housing tax credit. Under HOME, the terms vary according to the per unit amount of funds invested in a project: five years for less than $15,000; ten years for funds between $15,000 and $39,999; and fifteen years for funds at or more than $40,000. In addition, newly constructed units or units acquired from new housing stock must remain affordable for at least twenty years despite funding levels. Use of the housing tax credit triggers a minimum 15-year term of affordability, with an optional extended low-income use agreement for thirty years. Most states provide additional points in their scoring systems for terms beyond the initial 15-year period.

In Massachusetts, the minimum term of affordability generally is thirty years. All housing tax credit projects must commit to at least a 30-year period (which applies when HOME funds are brought into the project). Projects may receive additional bonus points for longer terms: twenty points for terms in perpetuity; fifteen points for terms of fifty years; and ten bonus points for terms of forty years. In addition, as noted above, at the end of any initial affordability term, owners have the option of repaying their HOME loan (or other subsidized loans) in full, plus any deferred interest, or to extend the term of affordability. DHCD secures the term associated with housing tax credit units via a regulatory agreement with the developer; for the HOME units, the term is secured via a recorded note or within the mortgage. DHCD notes that different instruments must be used given the difference in the resources: failure to maintain affordability in the units assisted with the housing tax credit triggers tax consequences (potential repayment to the IRS of tax benefits received by the investor); with HOME, failure means possible assumption of the project by the state and repayment of HOME funds.

Alabama has established a minimum term of affordability of twenty years for joint-funded projects, with any HOME mortgage funds due in full at the end of that term. In addition, projects may receive five points for extending the term for five years. While the state tried to develop a single covenant for the deed that would ensure the affordability for both the purposes of the housing tax credit and HOME, they have decided to use two separate restrictive covenants within a single deed.


Eligible Applicants

In both Massachusetts and Alabama, eligible applicants for joint-funded projects include nonprofit organizations, for-profit developers, and CHDOs. In addition, Alabama permits local governments and individuals to apply for funds, while Massachusetts requires local governments to apply in partnership with for-profit or nonprofit developers. Many applicants for the Massachusetts program are sophisticated, urban-based community development corporations.

AHFA notes that while the number of nonprofit applicants has been growing in recent years, most applicants are for-profit entities, including developers who have done projects under the USDA Rural Development Administration (formerly the Farmers Home Administration). Other than community action agencies, most of the nonprofits that apply are smaller, often church-based organizations, with little experience in housing development. Consequently, AHFA encourages partnerships between for-profit developers and nonprofit owners, noting that the nonprofits benefit from the for-profits' expertise, while the for-profits benefit from the services that the nonprofits often can access and the additional (three) points awarded in the scoring process. Alabama and Massachusetts both maintain a pipeline of project applications that scored well, but for which sufficient resources do not exist. AHFA deliberately over-allocates so that returned credits will not disqualify Alabama from participating in the national pool.

 Designing Project Finance

Affordable housing generally requires several sources of financing to be successful. For example, projects in Massachusetts are often submitted with six to eight sources of financing, including: state and local HOME funds; Community Development Block Grant (CDBG); other state financing; and Affordable Housing Program funds (from the federal Home Loan banks). The following section does not attempt to identify different funding sources that can be linked in with HOME and the housing tax credit. Instead, it focuses on specific issues related to linking those resources, including structuring HOME awards to work most effectively with the housing tax credit, matching requirements, and limits on allocation amounts.


Structuring the Use of HOME Funds with LIHTC

The decision to provide HOME funds as grants or loans has both program and tax implications For states, the choice involves balancing two benefits: recycling funds to provide program income for future housing or providing the maximum subsidy to current projects (combined with administrative simplicity). Providing HOME funds as a loan creates the opportunity to generate program income that can be used to make future loans. Public funds for housing are scarce resources that may not be replaced in future years. States that use them to make loans can generate substantial annuities that can create self sustaining housing loan funds.

Many ways exist to structure HOME loans. Interest-only loans can keep debt service to a minimum and maximize the repayment stream to the State or local government. Since interest is a tax-deductible expense while the repayment of principal is not, interest-only loans may increase tax benefits and increase the equity that goes into a project. Loans may carry an interest rate that is higher than the amount the project can pay. Unpaid interest must accrue and be added to the principal. Interest-only loans will have a balloon payment that is due in the future.

Loans may be forgiven at some point in the future if certain conditions are met, but the terms of the forgiveness must be approved by the tax attorney. The structure of the HOME loan may affect the flow of tax benefits. Whenever the structure begins to vary from the straight level payment amortization, flexibility is required to deal with unexpected tax issues as they arise. Generally, the project's tax attorney will raise these issues since tax opinion is critical to the equity placement. For example, some tax attorneys believe that a loan that can be forgiven is at risk of being considered a grant by the IRS. Since grants are subtracted from eligible basis, resulting in reduced syndication proceeds, project sponsors may prefer that the loan not be forgiven. HOME lenders should understand the need to be flexible to structure a loan that allows the project to receive a clean tax opinion.

Making HOME funds available as grants has two benefits: administrative simplicity and maximal benefit to the projects funded. HOME funds carry obligation to comply with many federal rules and regulations, which apply to program income generated on HOME-funded projects. Providing HOME funds as a grant eliminates the need to manage program income. Grants also provide the maximum benefit to projects (except those involving tax credits; see the following paragraph) and, if properly structured, can improve affordability. Loans are repaid from project income generated either from higher tenant rents or from debt service that could have been used to justify additional private financing. Grants generally have greater impact on more projects and reduce replacement of private financing with grants.

Structuring HOME funds as loans also carries benefits. To maximize the housing tax credits generated by a project, HOME funds must be: (1) loaned to the project at a rate that is more than the cost of comparable federal funds; or (2) be used to ensure at least 40 percent of the units are available to (and affordable for) households at no more than 50 percent of AMI. Grants reduce the tax credits by reducing the basis from which they are calculated. Grants can also be treated as taxable income to the investors in the project. For these reasons, granting HOME funds directly to LIHTC projects is not desirable. States that provide grants usually make the grants to nonprofit sponsors who use the proceeds to make a loan to the project (thereby eliminating problems associated with making grants to housing tax credit projects). Possible tax problems may arise with this approach, however, so states should act carefully.
Alabama awards HOME funds as loans, at a half-percent interest rate, for a 20-year term. At the end of the term, the full mortgage principal must be repaid to the state HOME fund. Any project financed with HOME funds must have an amortizing first mortgage. Once reasonable cost amounts and net operating income has been calculated, AHFA determines the amount of the first mortgage that the project can carry, based on a 20-year fully amortizing mortgage at the current market rate. Housing tax credits are then calculated as a basic source of equity. This equity and the first mortgage amount are deducted from the total development costs and the state uses HOME funds to fill the gap.

Although Massachusetts permits applicants to request any of the distribution forms allowed by federal regulation (e.g., low-interest or zero-interest and deferred loans), it does not encourage grants. At the end of the initial term of affordability, the owner either must repay the full loan amount, plus any deferred interest, or may recommit to an additional term of affordability. DHCD reviews all HOME applications to determine the minimum loan amount required to fill any financing gap while supporting adequate operating costs and debt service coverage.

Overall, most states use HOME funds as part of the permanent mortgage on a project; they do not provide funds to a project until closing occurs. Sometimes, states will allocate HOME funds as construction financing, which is rolled over into the permanent mortgage. Massachusetts uses HOME funds as permanent financing, occasionally permitting them to be used to support construction and then rolling that loan into the permanent financing.


Matching Funds

HUD regulations require that HOME funds be matched at 25 percent by other non-federal sources. While no match requirements exist for LIHTC, the amount and type of other funding brought into a project has implications for the financing package. Massachusetts meets both its own federal match requirements and those of local participating jurisdictions through state housing funds appropriated annually to provide rental assistance. It also calculates "match' from a different perspective. Local PJs in the state can only seek state HOME funds if they provide a dollar-for-dollar match with their own HOME funds. Massachusetts pursues this policy to spread its HOME funds beyond the largest, neediest urban areas. Alabama meets part of its HOME match requirements through state bond resources.


Limits on Allocations

The amount of HOME funds a state allocates to a project (calculated on a per unit basis) has implications for terms of affordability. Federal regulations require that each HOME-assisted unit receive at least $1,000 in HOME funds. Further, all states need to rigorously assess the amount of public resources going into a project in order to ensure maximum leveraging.

Other reasons exist to support floors and ceilings for allocation amounts. For example, to broaden the applicant pool, Alabama established limits (10 percent of the state's total annual allocation amount) on how much housing tax credits they awarded to individual projects. Additionally, AHFA limits the amount of credits that they can allocate to one or more projects held by a given owner to 15 percent. DHCD gives preference to applications seeking no more than $30,000 per unit in HOME funds. Applications seeking a commitment of more than $500,000 in HOME funds for one project may not be competitive. Although DHCD strictly scrutinizes projects to ensure that the LIHTC allocation is the least needed for project feasibility, it has not established overall limits on per-project or per-owner allocations of the credits.

Designing Project Underwriting

Underwriting is essentially a process of evaluating the risk inherent in making a given loan. Underwriting a housing deal involves assessing the financials of a project to ensure that the project generates a return on investment, while remaining financially and physically sound. Two key underwriting issues exist when using HOME funds and housing tax credits together. First, project costs must be reasonable; any changes to those costs must be assessed in an accountable manner. Second, the amount of HOME subsidy and housing tax credits allocated to the project should be the minimum amount necessary to make the project feasible, and public benefit should be consistent with the public cost.

Overall, Alabama and Massachusetts assume that debt is not amortized and does not underwrite the HOME loan as a lender. Since lower debt service in a project permits it to carry lower rents, projects serving some of the lowest-income tenants, or tenants needing supportive services, become more feasible. Alabama underwrites the conventional, private loan for debt service and calculate the amount of HOME funds necessary to fill the gap. The specifics of each state's approach in each of the four areas identified above are summarized below.


Setting Reasonable Costs

Both Massachusetts and Alabama ensure that project costs are reasonable, and assess specific cost amounts and the percentage of specific costs relative to the total development cost. Alabama uses commercial cost estimates (such as Marshall-Swift) and relies on a database of costs from third-party verification (i.e., construction consultants, architects and engineers) comparisons to comparable projects. Their experience in funding projects has given Alabama a strong basis for determining whether the actual expenses for project items and the percentage those expenses form of the development costs, are both feasible to ensure quality projects, and are consistent with usual costs.

Massachusetts also bases its reasonable costs on extensive cost data from the housing market. To collect and assess the data, the state held a series of meetings with other lenders. It then worked with a housing consultant to develop an outline of reasonable costs. Limitations apply to development and operating costs in the proforma.

Alabama looks at six sets of costs: construction; acquisition; soft; contingency reserves; builder profit and overhead; and developer fees. Some of the general percentages associated with these costs are disclosed to applicants. For example, contingency reserves cannot exceed 10 percent of total construction costs, builder profit and overhead cannot exceed 8 percent of total construction costs, and developer fees, generally set at 15 percent, can never exceed 20 percent of total project costs. Some specific limits associated with soft costs and acquisition costs are not disclosed as specific percentages.

Massachusetts identifies limits in LIHTC guidelines that apply also to joint-funded projects. Overall, soft costs should not exceed 20-25 percent of development costs, operating costs should be approximately $2,800 to $6,000 per unit (depending in part on household size), and the replacement reserve must equal $275 per unit per year. DHCD also identifies trending assumptions, by specific types of units, which the applicant should assume while developing the proforma. Limits on developer's fee and overhead (including development consultant fees) are established based on project cost: 15 percent for the first $3 million in development costs, plus 12.5 percent of total development costs for projects from $3 million to $5 million, plus 10 percent of total development costs of more than $5 million.

Alabama assesses costs by entering project information and related development costs into a database (using a program written by AHFA staff), which then calculates construction costs per square foot and per unit, operating costs per unit and net operating income. A variance between the two may result in a determination either that the project is financially infeasible (at which point, it is rejected for consideration) or may result in a recalculation of the HOME and housing tax credit using costs that AHFA considers reasonable. Massachusetts does not use a database or a computer program, but relies on the experience of staff who collectively have reviewed hundreds of proformas and funding applications.

As described in chapter three, most projects change, either during the application scoring process or following the award of funds. Some of these changes may include cost changes. Chapter three details how Massachusetts and Alabama assess changes; one general point that holds for both states is the importance of incorporating proposed changes into the underwriting process, and ensuring that those changes are assessed with regard to the overall financial feasibility of a deal.


Subsidy Layering

Given that the funds involved in an affordable housing deal often come from one or more public sources, there is a particular concern to ensure that the public funding provided is sufficient, but not in excess, of the resources needed. Specific requirements exist associated with subsidy layering in HOME and with calculating the amount of housing tax credit for which a given project is eligible. This discussion focuses on how Alabama and Massachusetts apply those requirements.

The two states handle all aspects of underwriting joint HOME and housing tax credit projects. Once staff have decided reasonable costs and the total development cost, they assess the equity generated by LIHTC. This assessment uses a standard approach to calculating project basis and other funding available to support the project. HOME is used as gap financing and is calculated in relation to the amount of conventional debt the project's income stream permits it to carry. Further, all of the assessments of the project's capacity to carry debt are made. Under AHFA's approach, any excess cash flow ("excess cash flow" is the amount by which actual rents plus other income exceeds 1.4 times the total of actual operating expenses and debt service) from the project for a calendar year will be paid immediately following each calendar year to reduce the principal balance of the state HOME loan.

Establishing Time Frames for Fund Use

States are required to follow federal requirements under Section 42 of the IRS Code to evaluate LIHTC projects at three times: when the project is given a reservation (generally the time of application); when the project is awarded credits; and when the project is completed (when form 8609 is awarded). This evaluation is really a subsidy underwriting during which the allocating agency determines that the project is not receiving more credit than is absolutely necessary to make the project economically feasible.

Projects receiving housing tax credits must be "placed in service" (when a certificate of occupancy is issued for one or more units in the building) in the year in which they receive their final allocation of housing tax credits. For those projects not placed in service in the year of the initial LIHTC award, states may commit to a "carryover allocation" if at least 10 percent of the costs used to establish the project's basis have been incurred. The developer then has two additional years in which to place the building in service.


States must have committed their full annual allocation of HOME funds within 24 months; they must also expend all funds within five years of allocation. As these two different sets of requirements suggest, the requirements associated with LIHTC are more stringent than those of HOME, so LIHTC drives the overall schedule for joint-funded projects.

In its reservation letter for LIHTC, Alabama identifies several actions that must occur within a specific time from the date of the reservation letter:

--30 days: Legally binding commitment for any conventional financing; for HUD funding, evidence of an application for a conditional commitment.

--90 days: Zoning--certified organizational documents; a preliminary letter of intent from the syndicator; construction must commence if there is no construction loan.

--120 days: Construction must begin--full possession of the site as evidenced by the warranty deed.

For carryover allocations, applicants must complete the Carryover Allocation Agreement and return that to AHFA by November 29 of the year in which the reservation letter is issued. The Actual Cost Certification must be competed and returned to AHFA prior to its issuing the LIHTC allocation certification (IRS Form 8609), which in turn must be completed within 60 days after the project is placed in service. AHFA is under no obligation to issue an 8609 if the certification is received after November 29 of the year in which the reservation letter is issued. These time frames do not directly apply to the HOME funds, but, as noted earlier, if the developer loses the housing tax credit allocation due to the failure to meet these time frames, any HOME funds awarded to the deal are retracted as well.

Once the housing tax credit staff receives the quarterly report indicating the project is 90 percent complete, an actual cost certification package is sent to the owner. After receiving the notice of occupancy, AHFA publishes legal notices indicating the completion in area newspapers. During the public notice period for completion, closing documents are sent to the owner for review, and the project is reviewed to ensure that it has been built as planned, and that there have been no changes in the market. After closing, borrowers are responsible for recordation of all documents; once evidence of recordation is provided to AHFA, HOME funds are wired to the bank.

Staffing the Program

As noted earlier, Massachusetts usually has about seven staff working in the Private Housing division, with four generally assigned to HOME and three to the housing tax credit. One critical staff issue identified by Massachusetts is the need for dedicated counsel to assist with legal requirements and closings. While it doesn't matter so much whether the counsel are internal staff or external (Massachusetts works with outside counsel recruited through an RFP process), it is important for them to be able to dedicate time to the program given the tight time frames associated with fund allocation. For purposes of the housing tax credit, the need for counsel is greatest during the initial phases of funding an application; for HOME, the need is greatest during loan closing.

Alabama has nine staff members in its multifamily division, with one employee in charge of HOME and one in charge of housing tax credits. The tax credit coordinator and HOME coordinator work together to develop program materials and manage the application process. After projects have been underwritten and scored, recommendations are made for funding awards. Once a project has been funded, other staff members track compliance with federal requirements and ensure long-term affordability continues after rent-up. Staff note that they have been cross-trained in one another's program requirements, which furthers their ability to work together.

Chapter Three. Structuring the Application Process

The application process is a central part of using HOME and the housing tax credit together. This chapter examines the principal elements of the application process, including the documents developed to describe the programs, the design of the application form itself, the scoring criteria, and the process by which applications are rated, ranked and funded. Within each section of the chapter, the different approaches taken by Alabama and Massachusetts are described, followed by a short summary of the considerations for decisions as to taking one approach or another.


Program Documents

Section 42 of the tax code requires allocation plans for the housing tax credit, while the HOME program requires that the program be described within the State Consolidated Plan. Both Alabama and Massachusetts use separate documents describing funding allocations and requirements for HOME and the housing tax credit. Both also use essentially the following documents: separate allocation plans for the housing tax credit and HOME programs; program descriptions for HOME; separate program guides for the housing tax credit and HOME program; an application form; and application guidelines (Massachusetts's is structured as a notice of funding availability). Both Massachusetts and Alabama use the allocation plans to identify application requirements, scoring criteria, and the elements of the approval process. The program guides provide detail on the specific requirements associated with each of the programs.

Application Form

A single application form for both HOME and the housing tax credit is virtually essential to joint use of the two resources. Often the information required for both programs is the same, and submission and review of applications is simplified by a single form. There are a host of issues associated with the structure and format of the application, and whether other resources should be drawn into the application process. While both Alabama and Massachusetts use a single application for HOME and LIHTC, the use of the application plays out differently in each state.


Information Requested

Application forms for both HOME and the housing tax credit should reflect state issues and needs, as should the information required for the scoring process. There are, however, a few areas which become more complex under joint use of HOME and the housing tax credit and require special treatment in the application form.

One is the rent structure -- Massachusetts notes that developers often find it confusing to establish rents within the requirements associated with high and low HOME rents and tax credit rental requirements. Intensive technical assistance is required, especially for smaller, less experienced developers. DHCD also notes, however, that it expects developers to be able to propose accurate rents within their application, and strongly encourages applicants to retain consultants to assist with applications partly given this type of complexity.

Second, it is important to have developers identify the number of HOME units up-front in their application. Identifying HOME units up-front is important for two reasons. Davis-Bacon wage requirements apply to projects containing 12 or more units and it is important to know at the outset of project development whether those will be a factor. Second, any HOME units must carry the HOME rent restrictions, which may differ from those on the housing tax credit units (as noted earlier, at least 40 percent of all units must serve tenants at or below 50 percent of area median income to get the full 9 percent credit). Designating fewer HOME units means that fewer units must carry the lower 50 percent rents.

Third, while HOME and housing tax credits do not require letters of support, consolidated plan regulations require a letter from local entitlement jurisdictions when locally-controlled funds are used. The letter must indicate if a proposed project is consistent with the local consolidated plan. Alabama requires that all applicants receive support from the mayor or chief executive officer of the city in which the proposed project is to be located.

Another issue related to required information is the type of supporting documentation which must be submitted with applications. Massachusetts requires a full set of plans and specifications submitted with applications. Alabama requires a list of project specifications, a schematic site plan, and an architect's certification of the project square footage. Alabama requires the full plans when the project is approved.


Resources Covered by the Application

In Massachusetts, six to eight different sources of funding generally go into a single affordable housing deal. Responding to developer criticisms that they were filling out numerous original applications, (all requesting much of the same information), to propose a single housing development, the state coordinated discussions with other state funding sources and local governments to develop the One Stop Affordable Housing Application, with the first joint deals coming in under that application in 1990. This permits developers, via a single application, to access state HOME funds and the housing tax credit, as well as HOME funds from the city of Boston, the Massachusetts Housing Finance Agency (MHFA) and the Massachusetts Housing Partnership.

Alabama uses a single application that covers HOME, LIHTC, and tax-exempt bonds which are the principal resources for multifamily housing in the state. Both states have a single point of intake for the application


Application Copies and Format; Fees

Alabama requires that one copy of the original application be submitted, and is moving toward putting the application form on disk so that it can be more easily completed. In Massachusetts, the requirements for the number of applications to be submitted varies depending on the funds which an applicant is requesting. For housing tax credits alone, for example, the applicant must submit a completed disk, three hard copies of the application, and a set of plans to DHCD, as well as four copies of the application and a set of plans to the Massachusetts Housing Finance Agency. If both HOME and the housing tax credit are being requested, the applicant must submit two additional hard copies of the application to DHCD. If only HOME funds are being requested, applicants must submit one disk, three hard copies and one set of plans to DHCD. The variations in the number of applications are due largely to the number of people involved in the review of the applications.

Alabama charges a single fee of $500 regardless of the resources being requested, which is seen as useful largely in terms of discouraging frivolous applications. The fee for applying under the Massachusetts One-Stop Affordable Housing Program varies depending on the funds being requested. For both the housing tax credit alone, and in conjunction with the HOME program, fees are $500 for projects sponsored by nonprofits or containing 20 or fewer units, and $3,000 for all other deals. For HOME funds alone, the fees are $250 for projects sponsored by nonprofits and $500 for-profits.

Accepting Applications

Once an application form has been developed, the state must establish a time frame for accepting applications, including decisions as to providing technical assistance and guidance during that time. Alabama holds one funding round annually, usually during a 30-day period in early spring. During the last week of that period, applications may be submitted. In the past, AHFA staff have met with applicants throughout that 30-day period, including the final week. Staff conduct training seminars during that period, with one day devoted to training for CHDOs and an additional two- to three-day general finance training. In future years, they may end consultation during the final week, since their time is otherwise preoccupied with accepting and initiating review of applications during that period.

Massachusetts holds two rounds, one in the spring and a second in the summer. There is a preapplication time during both funding rounds when state staff meet with potential applicants to help them develop their application. Massachusetts notes that many of the project sponsors and developers are repeat applicants to the program and are familiar with application requirements and the process. Organizations applying for the first time are strongly encouraged to engage a consultant. Given the level of knowledge about the program by groups throughout the state, Massachusetts does very little marketing of the program.

Rating and Ranking Applications

In both Alabama and Massachusetts, the scoring criteria for joint projects are structured largely around criteria that initially were established for the housing tax credit. Broadly speaking, there are three levels of scoring criteria used by both agencies: housing priorities (the types of projects eligible for assistance), threshold or basic qualifying criteria, and specific scoring criteria, the assessment of which results in actual points awarded to an application. Both Alabama and Massachusetts generally use the same set of criteria to assess HOME-housing tax credit projects and projects requesting only the housing tax credit; exceptions are noted. Projects requesting HOME only generally use the same criteria, but the application of the criteria may be slightly less intensive.


The Review Process

How applications are reviewed provides a context for understanding the interplay among priorities, threshold criteria and scoring criteria. In both Alabama and Massachusetts, an application is reviewed first for completeness, receiving no further consideration if it is incomplete. If complete, the application is assessed for financial feasibility, and if financially feasible, is considered further using the scoring criteria.

At this point, AHFA staff, or private consultants under contract to AHFA, conduct site visits to each of the proposed projects to directly assess site and information provided in the application. Also at this time, AHFA sends a letter to the local government in which the project will be located, informing them of the application and requesting comments indicating their support or opposition, or other issues such as zoning incompatibility, within 30 days. Lack of local support may result in the project not being funded. DHCD requires that applications for HOME funds be signed by the chief elected officer of the community in which the project is located, but does not require local approval for projects not requesting HOME funds.

Within the Multifamily Housing Division within AHFA, HOME and LIHTC staff assess the applications and one underwriter performs a financial feasibility assessment. In 1995, review was managed by having staff assigned to examine one or more components of each application to arrive at an overall score for an application. The scores were then verified by the underwriter. In Massachusetts, DHCD manages the overall application review process for all One-Stop applications requesting State HOME funds and the housing tax credit (together or separately), including overseeing MHFA's assessment of certain criteria in the areas of design, site characteristics, development team capacity, and marketability.

DHCD does the underwriting for projects, evaluating project basis, project costs, and the status of other sources of financing. Throughout the process, DHCD is the sole contact for developers with questions on their application. Further, DHCD mediates any differences in scoring on a given project that may result from MHFA's review. Both Alabama and Massachusetts use computer programs to assess financial feasibility (see also the discussion of underwriting in Chapter Two).

Under AHFA's 1996 funding round, application review was initiated on April 12 and continued for 90 days after that. During that 90-day period, the review of applications must be completed, and initial recommendations made to the multifamily committee on AHFA's board. On July 31, AHFA expects to issue reservation and commitment letters. Massachusetts typically holds two combined tax credit/HOME funding rounds each year: one in the Spring and a second in the Fall.


Housing Priorities

Both Alabama and Massachusetts establish priorities for joint projects, which are based in part on the needs identified within the state Consolidated Plan. These differ between Alabama and Massachusetts and obviously will vary among all states given different types of housing needs. Other differences include the level of detail at which states establish housing priorities.

In Massachusetts, there are two levels of priorities: one for project characteristics, and a second for project type. Massachusetts has priorities for deals which have the following characteristics: ones that have low per-unit costs, minimize the amount of DHCD subsidy, target resources directly to available inventory which is not utilized or is underutilized, preserve existing affordable housing, and encourage reinvestment in areas that have experienced substantial disinvestment.



The priorities for project type overlap somewhat and are structured as set-asides within the housing tax credit allocation:

--35 percent: Financially distressed properties;
--30 percent: Moderate or substantial rehabilitation projects;
--20 percent: Preservation projects;
--12 percent: New construction; and
--3 percent: Rural Housing and Community Development Service projects.

Alabama establishes one set of housing priorities, which deal both with project characteristics and type, without providing specific set-asides. Projects must:

--Add to (or significantly upgrade) the existing low-income housing stock;
--Be unable to set-aside units for low-income tenants without tax credits;
--Use additional assistance through federal, state or local subsidies;
--Designate a significant portion of the units for special needs tenants; and
--Provide for a balanced distribution of housing tax credits throughout the state in terms of geographic and rural/urban areas.


Threshold/Qualifying Criteria

Alabama and Massachusetts use similar threshold/qualifying criteria. Applications must be complete and must be proposing developments within the specified housing priorities. Applicants must have site control and project costs must be reasonable, and the project must indicate financial feasibility. Alabama requires evidence of a likelihood of sustained 15-year compliance with Section 42 (for HOME, likelihood of sustained 20-year compliance with the HOME regulations), which is determined through an initial assessment of the proforma. Massachusetts requires commitment to a full 30-year lock-in for affordability. Specifically for projects requesting the housing tax credit alone or in addition to HOME, Alabama requires evidence of legally binding commitments for funds other than AHFA funds/credits or conventional financing.


AHFA and DHCD assess evidence indicating the creditworthiness of the development team; the applicant's good standing with regard to compliance monitoring in existing projects; and the applicant's ability to incur more than 10 percent of the project's reasonably anticipated eligible basis by the deadline specified by DHCD (no later than November 29 of the application year for AHFA and December 31 of the application year for DHCD). Finally, the application must receive at least 50 percent of the total possible points in the total scoring and at least 50 percent of the points in each of the scoring categories of site, readiness to proceed, development team, design and marketability.


Scoring Criteria

Massachusetts awards a total of 300 potential points in the following way. A total of 170 possible points are available as follows: the site (from both a marketing and a design and technical perspective) (15 points); readiness to proceed (35 points); project design (35 points); development team (25 points). In addition, a total of 130 bonus points may be awarded for priority criteria, including for mixed-income projects, geographic location and nonprofit sponsorship.

Alabama awards a total of 100 points as follows: project location (25 points); project characteristics (20 points); special needs housing (20 points); applicant characteristics (this includes level of experience, and identity as a minority or women-owned business) (15 points); rent affordability (15 points); and equity contributions by the owner (5 points). Up to 35 points may be deducted from the overall score based on a detrimental site characteristics or lack of access to services (maximum 10 points); creditworthiness (based on credit checks made of development team members) (maximum of 10 points); and unsatisfactory compliance on existing projects (up to 15 points). In addition, for applications for the housing tax credit only or in conjunction with HOME, 5 points will be deducted from the overall score if a 1995 project received a reservation for housing tax credits, but did not meet the minimum 10 percent carryover requirement that resulted in returned credits, and 10 points will be deducted if a previous project was not placed in service within 24 months of receiving the reservation.

Awarding Funds

The end result of the application process for successful applicants is funding award. The structure for award of funds must be carefully and clearly detailed, since retracting an award may be extremely difficult.


Notification of Award

Both DHCD and AHFA use roughly the same process for initial fund award: each issues a commitment letter for HOME funds, and a reservation letter for housing tax credits. The reservation letter identifies actions the State agency requires the applicant to take within specific time frames following the date of the reservation letter. Alabama permits applicants who are awarded housing tax credit allocation, but who believe the amount to be insufficient, to appeal the decision in writing within 10 days of the date of the reservation letter.


Changes to the Project After Fund Award

Both Alabama and Massachusetts note that projects usually change to some extent following initial award of funds, and both have in place processes to assess whether the changes are due to the deal's maturing, or whether it is due to poor structuring from the outset. In Alabama, the state has identified specific "negative actions" which may occur after reservation through to placed-in-service date, that may cause the reservation to be terminated. These include changes in site, ownership, syndication structure, unit design and general contractor, and instances of curable non-compliance will occur beyond the specified cure period on the applicant's existing properties. In addition, allocations may be decreased or denied due to AHFA's finding that there was fraudulent information in the application or that conditions in the reservation letter were not met, among other issues. These requirements track with Section 42.

Massachusetts requires the submission of a report prior to issuing a carryover allocation and the submission of semi-annual reports between issuance of the carryover allocation and the final allocation. AHFA requires a quarterly status report. These reports allow DHCD and AHFA to identify any changes in the project which would result in a change in the project's eligibility for housing or in the project's overall scoring. DHCD and AHFA review these changes to determine whether any material changes result from factors outside of the developer's control, and do not represent any deliberate "abuse" of the scoring system. Abusive changes would be those that would result in a change in scoring, which are not subsequently cured, which DHCD does not consider outside of the developer's ability to cure. DHCD offers the developer a chance to respond to its finding, but may at its discretion reduce or cancel the housing tax credit allocation.

Chapter Four. Approaches to Monitoring

This chapter briefly summarizes monitoring approaches for both construction and long-term compliance. The chapter is relatively brief because with the time frames associated with award of funds, completion of construction and rent-up, monitoring jointly-funded projects has not yet been extensively done in either state.


Performance Monitoring During Construction

During the construction phase, compliance requirements associated with HOME-funded projects represent the bulk of construction monitoring requirements for joint-funded projects. Staffing is the principal concern for ensuring compliance with federal requirement during construction. Alabama has retained private consultants to handle monitoring during project construction. Throughout the construction period, the consultants make four to five on-site inspections, providing reports to the staff. While AHFA considers it cost-effective to use consultants as opposed to full-time staff, finding sufficient qualified consultants may be difficult in addition delays in site visits or reports may occur and there may be some tension between the consultants and the contractors working on the site.


Affordability Monitoring After Construction

States must monitor HOME-funded projects throughout their term of affordability for compliance with (among other things) rent and income restrictions. Annually, state administrators are to review the project activity to ensure compliance, including an on-site visit to projects containing more than 25 units (states must visit sites containing fewer than 25 units every two years). Within these broad parameters, states have a great deal of flexibility in terms of the specific kinds of information they examine, processes for record keeping and submittal, and the location of records. Section 92.504, Record keeping, in the HOME regulations, provides extensive detail around record keeping requirements.

Section 42 of the IRS regulations offers states a few different options for monitoring for tax credit compliance. Briefly, owners of at least 50 percent of all projects must submit information to the state for compliance review, the agency must inspect at least 20 percent of the low-income projects each year, or the owners of all projects must submit information to the state and 20 percent of all owners must submit information for compliance review. Important, differences exist between monitoring requirements for HOME and the housing tax credit. While HOME requires annual on-site visits to projects containing 25 or more units; the housing tax credit does not. On the other hand, the specific monitoring requirements associated with the housing tax credit are much more detailed than those for HOME. In the area of affordability, in cases where HOME and the housing tax credit are used together, states' monitoring procedures will need to track principally with the housing tax credit since its requirements can accommodate those under HOME but not vice versa. In addition, annual site visits will be required for joint-funded projects containing 25 or more units; biennial site visits are required for projects containing fewer than 25 units.

Currently both Massachusetts and Alabama are monitoring primarily for the housing tax credit, with their procedures and requirements based on regulations under Section 42. In Massachusetts, there currently are 192 projects, containing 13,200 units, subject to compliance monitoring. A records review is conducted on 20 percent of the files, while 20 percent of the units receive an annual on-site inspection. Massachusetts charges a monitoring fee of $25 per project to pay a private firm to handle marketing of housing tax credit projects. Monitoring projects funded with both HOME and the housing tax credit has not yet become a serious issue, and the state has not made any decisions as to how it will approach this.

In Alabama, there currently are 309 projects, containing 11,456 units, subject to compliance monitoring for the HOME and housing tax credit programs. AHFA has established almost identical compliance monitoring requirements for its HOME and housing tax credit programs, with the HOME requirements noting additional provisions and restrictions in cases where an allocation of housing tax credits has been made to the project. The specific provisions for HOME-funded projects include references to annual on-site inspections for all projects; for the housing tax credit, there is reference to AHFA's charging a fee to cover administrative expenses. Currently, AHFA is able to use agency staff to handle monitoring. As noted earlier, AHFA does not permit scattered-site projects to qualify as multifamily housing. This requirement is seen as reducing the staff burden of long-term monitoring.


Conclusion

Use of HOME and the housing tax credit together facilitates the development of affordable multifamily rental housing that can meet the needs of low-income tenants. Alabama and Massachusetts take very different approaches to the joint use of HOME and the housing tax credit, both with very successful results. While this report has clarified the elements of a "model program" by highlighting some key issues that states will need to address as they seek to combine resources for housing development, it has not tried to suggest final, set recommendations on options around the use of funds and structure of programs.

From the outset of program design, states will need to work within the context of their consolidated plan, and other efforts to assess needs and collect public input, in order to ensure that the programs developed can support projects which are relevant to community's needs. Once a sense of program direction has been identified, states will need to examine their underwriting processes, and their overall approach to housing finance, in order to ensure that their procedures and requirements in those areas support needed projects. While these are assessments which are internal to the state -- the whole array of government and other agencies, and community residents which cannot be detailed or prescribed in a report, their absence will affect the productivity and success of any resulting program.

ABOUT COSCDA

Vision

COSCDA is the premier national association advocating and enhancing the leadership role of states in holistic community development through innovative policy development and implementation, customer-driven technical assistance, education and collaborative efforts.

Mission

• Advocate for the common development goals of the states.
• Develop policies and recommendations on community development issues.
• Keep members informed about federal and state administrative and legislative developments that affect members.
• Enhance the capacity of states to deal effectively and comprehensively with community development issues.
• Ensure the availability of community development expertise to members.
• Encourage and assist states in the development and implementation of effective community development programs.
• Facilitate the exchange of information about programs and achievements among states and act as a clearinghouse for community development organizations.

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