A program in crisis: if adjustments are not made to the current tax credit system, residents risk owners and developers no longer participating in the affordable housing program.

The low-income housing tax credit is the most vital resource for creating affordable housing in the United States, yet today, more than ever, the system is perilously at risk. It is a process desperately in need of change, but because the issues that need addressing span the authority of two federal bureaucracies--the U.S. Department of Housing and Urban Development (HUD), which determines capped rent rates, and the Internal Revenue Service (IRS), which administers tax credits--necessary modifications are moving at a snail's pace.

HUD determines rent caps annually using formulas based on the median income that it has established for a given area of the country, such as the Houston Metropolitan Statistical Area (MSA). Rent caps are established for apartments ranging in size from efficiency units to five-bedroom units.

Allowable income caps are determined based on the number of people living in the apartment. If there are four occupants, the income cap is based on the median of the four incomes for that particular apartment. Houston has a large number of tax credit properties, similar to MSAs throughout Texas, Colorado and New Mexico.

BARRIERS TO PROFITABILITY

The problem with the program today is that in the past three years, the median income rate has remained flat, which means rent generated based on those incomes is also unchanged while expenses have skyrocketed. Across the nation, the cost of insurance, property tax and utilities, especially, have seen dramatic increases. In simpler terms, it is comparable to employees having their salary stay the same for three years while the costs of gas, groceries and heating oil see double-digit increases.

The portion of IRS Section 42 that governs utility allowances permits local public housing authorities to determine the rate at which rents are reduced to help families to pay their water, electric or natural gas costs. That is an across-the-board practice without an across-the-board standard, meaning that each public housing authority (PHA) can have a different formula ranging from the scientific to the bizarre for determining utility allowances. One PHA determines its rate based on the director's home electric bill.

While over time, developers of apartment communities have incorporated construction techniques that make buildings more energy efficient, many PHAs use formulas that are years old--based on energy consumption rates for buildings constructed in the 1960s and 1970s--and have given little, if any, thought to revising their standards. Revisions, when they do come about, are not frequently reviewed. A recent study showed that in Texas, water usage was actually 120 percent to 130 percent higher than the calculated allowance.

When PHAs revise their formulas, the result is that many rates drastically rise. Some allowances have gone from $58 to $250 overnight, derailing rent caps and causing lawsuits. Unfortunately, more often than not, litigation causes properties to go bankrupt, which effectively reduces the amount of affordable housing provided to the people who need it.

Sometimes it doesn't even take litigation for that to happen. In Houston, because of hurricanes Katrina and Rita, insurance rates have risen from $200 per unit to $1,500 per unit in some cases. Developers with properties built within the past three years find it difficult to get the needed financing to convert their properties to permanent status, which in some cases forces equity partners to take over the properties. In extreme cases, the lack of conversion may cause a foreclosure, which may remove a property from the affordable housing program and place it as a conventional rental, again making fewer units available to people who need housing assistance.

SOLUTIONS ON THE TABLE

From 1986 to present, the housing tax credit program has been, and remains, one of the best programs offered by the federal government to develop affordable housing. But now the program is in crisis.

Solutions require bringing all parties to the table. As it stands, with the tax credit program administered through the U.S. Department of Treasury's IRS and the housing system administered through HUD, neither organization has a real incentive to make the required changes.

One proposed improvement is to have HUD change its rules about calculating rent caps, an alteration that would use a formula that takes into account cost increases when median incomes remain flat. Of course the market where the property is located would have to be able to support the higher rents. This could provide a valuable incentive for developers to stay in a market.

Another solution, specifically regarding utility costs, is to employ third-party specialists to examine energy costs and determine property-specific utility allowances. Taking the lead in advocating this change is a coalition of agencies--including National Apartment Association, National Multi Housing Council, the Council for Affordable and Rural Housing, National Association of Home Builders, National Leased Housing Association and National Affordable Housing Management Association--that has evaluated various options that would provide more accurate adjustments of gross rent for resident-paid utilities. The coalition has evaluated research, looked at efforts by HUD, sought input from the Department of Energy and has considered a variety of analytical techniques and procedures.

The goal of the coalition is to maintain the current regulatory options in use today and to expand options available to better identify utility costs. The coalition actively has sought input from allocation agencies and others to determine the feasibility of implementing the recommended changes. Each agency in the coalition has backed the proposed new plan and has expressed individually that implementing the recommendations would benefit the program and the administrative agencies charged with its oversight.

Of all the suggested improvements, those backed by the coalition appear to have the most momentum. The plan's hallmark appears to be both appeasing and working around the sleeping bureaucratic giant by keeping current regulations in place, but adding the ability for owners to assess for utility efficiency. One provision gives owners the flexibility to hire a certified engineer to say that energy usage for a certain building costs a specific amount. The other provision in the plan suggests that as HUD adjusts its rent caps each year, the IRS would be required to make energy cost adjustments at the same time.

Government action has been responsive, but slow. The coalition submitted its proposal in February 2004 and the IRS has it scheduled for discussion in late summer or early fall 2006. And, in August, the U.S. Treasury Department announced that one of its priorities for 2006-2007 is changing the way rents are adjusted when residents pay for their own utilities. In the meantime, energy costs continue to rise. Exacerbating the problem is lower occupancy rates at tax-credit properties because of market conditions.

OBSTACLES AND OBLIGATIONS

The ability to generate an income stream sufficient to cover costs and make some profit is of considerable concern to property owners. Currently this program is the only one offering incentives for builders and developers to construct rental units under the auspices of "affordable housing." If some adjustments are not made quickly, not only do residents risk that developers will no longer participate in the affordable housing program, but there is also a likelihood of losing existing building stock as it converts to conventional, and more profitable, rental status.

Real estate professionals and business people have obligations to employees to be good stewards of their investments and to help everyone to gain access to high-quality, affordable housing that provides warmth and shelter. Where those duties overlap is the fairest place for all of us in the process to be.

RELATED ARTICLE: NAAEI offers Specialist in Housing Credit Management[TM] (SHCM[TM]) designation.

In a partnership with the National Affordable Housing Management Association (NAHMA) and the American Association of Homes and Services for the Aging (AAHSA), the NAA Education Institute will offer a designation course in the Specialist in Housing Credit Management[TM] (SHCM[TM]) certification.

The SHCM has been developed by NAHMA especially for management professionals involved with properties developed and operated under the Low Income Housing Tax Credit (LIHTC) program. The SHCM is designed by management professionals for management professionals to ensure they have attained the knowledge, experience and competence required to excel in the housing credit properly management industry.

The LIHTC program is the primary production tool for creating new affordable housing properties across every state in the country, and it is also the most important tool for rehabilitating and preserving the nation's existing stock of aging affordable housing. To maximize their careers, management professionals in the affordable housing industry must be able to demonstrate their experience and expertise in mastering the complex requirements of the UHTC program. Earning your SHCM enables management professionals to do just that.

For details, please contact NAAEI Director of Program Development Laurie Roberts at 703/518-6191 Ext. 122 or e-mail [e-mail].

Gene Blevins, Housing Credit Certified Professional (HCCP), is a Partner in Orion Real Estate Services, Houston. He served as the 1997 President of the Houston Apartment Association and continues to serve as a board member of the Texas Apartment Association.

Kirk Tate, CPM, CEO of Orion Real Estate Services, has been involved with property development and management in the Housing Tax Credit Program since its inception in 1986. He is a Past President of The Texas Apartment Association.

BY GENE BLEVINS and KIRK TATE