One Account Of Why The Low-Income Housing Tax Credit Is Broken

People could wonder, reasonably, about why I am so negative about housing policy. It’s true, I have become a one man Statler and Waldorf on occasion, criticizing housing policies across the country. I have been especially hard on what I have called the non-profit housing industrial complex, the array of organizations that use Low Income Housing Tax Credits (LIHTC), state, and local funds to trickle out very expensive housing units very slowly. The LIHTC program has become a subsidy for bad local land use policy that restricts supply creating higher prices and thus the imperative for more and more non-profit housing. One developer from Texas has written an extensive first-hand account of what it is like to build housing subsidized with tax credits. The post is an indictment of the LIHTC process and program, both of which should be at least reformed if not completely rebuilt.

Luu Mac is an architect and the primary project developer and co-living rental manager for LND Development, a group of four partners who buy and develop co-living and short-term rental properties in Dallas and Fort Worth, especially in the Bishop Arts District. What’s compelling about Mac’s account is that it is written from the perspective of a private for-profit developer trying to use tax credits; Mac’s observations therefore are from someone outside the system and thus a window into inefficiencies from a person who isn’t beholden to the system. Everything Mac describes is familiar to me from my brief stint in the world of LIHTC.

Mac starts off his story with a question, “how hard could it be to partner with the government to build some housing? We obviously need it; they’ll be supportive. I’ll just fill out a few forms, swing a few hammers, and smile at the ribbon cutting.”

But this decidedly is not the case. Mac starts with land acquisition, something that is challenging for any builder of housing. Land that has a sign in front of it is generally not desirable, the best land is a parcel that hasn’t hit the market yet and provides an opportunity to negotiate without competition. But this is made more difficult with the uncertainties of trying to get funding and financing through local Housing Finance Agencies (HFAs). Buyer and seller must be patient, and often to keep a parcel off the market a developer has to pay, and, as the old saying goes time is money.

Next Mac describes the application process and something called a Qualified Application Plan or QAP. Every state’s HFA has various targets, goals, and emphases for how they want to use tax credits. It’s true from my experience too. Sometimes projects aiming to house homeless people gets priority, other times it’s housing with services, or other times some other social agenda drive the prioritization of resources. But that isn’t the way housing demand works, whether subsidized or not.

“You read through the QAP to see how your piece of land and the project you have in mind ‘score.’ Low-Income Housing Tax Credits are competitive, so each project is “scored” on various attributes. Your score will tell you how likely your project is to get 9% vs. 4% LIHTC.” The project I did was a 4% project as is the one in Mac’s narrative. While the 4% allocation injects less equity into a project, it is easier to get because 9% projects tend to be ones that are fulfilling the HFA’s housing agenda. And, in theory, the 4% projects are supposed to be easier to do.

But it isn’t really. Mac evocatively describes the process.

“The full tax credit application (often called the ‘core app’) is, and I can’t stress this enough, absolutely horrible. It’s like having the DMV, the IRS, and your dumb cousin as development partners. So many studies, reports, and consultants need to be engaged to finalize your LIHTC application. The workbook itself is a never-ending Excel spreadsheet; I encourage you all to download it and look around. It’s rare you get to see the physical representation of bureaucracy in real-time, but there it is. I have often referred to it as the matryoshka doll. Every tab contains a link to yet another Excel workbook that must be completed. ‘Will your project have toilets, or will people pee in the hallways like animals? If toilets, please fill out the ‘Toilet Necessity Demonstration Workbook.’ I’m only half kidding here.”

If you want to see what Mac is talking about, you can take a trip to the Texas Department of Housing and Community Affairs to download one of the messy excel spread sheets mentioned.

Even then, a developer isn’t done. More money is needed, it’s what’s called in the business a “capital stack.” And a stack it is. My project was relatively simple with LIHTC, state funding, a construction loan, and a small amount of private donations. But each source of funding comes with multiple requirements, some of them onerous. I remember spending hours on the phone, and in one case going back and forth for weeks over a development agreement that split our property and conditioned our housing development with a medical clinic on the adjacent lot. What if the clinic didn’t happen? Would we be denied Certificate of Occupancy for our completed housing project? It took weeks of back and forth and the city swearing on a stack of bibles that, yes, no matter what we’d be allowed to rent units even if the clinic wasn’t done.

And projects, even after financing, have to be approved by the HFA and in some cases by other political bodies adding capital to the project. This means abundant opportunities for angry neighbors to oppose or put additional conditions on the project as well as labor unions and other interest groups angling to add ornaments to satisfy narrow constituencies.

Aren’t all housing projects this hard? No, they aren’t. If you’ve read my series on how development happens, you’ll know it is difficult even without all the requirements Mac covers along with the requirement of each part of the “capital stack.” And no, it isn’t lucrative to build 4% LIHTC housing for private developers. It’s a headache and expensive and thus the margins are thin. So why would anyone build it? The answer is they aren’t as much as they could. So, it’s easy to see why non-profits always have the same message: We need more money! The bloated and efficient system Mac describes can only be survived with a business model that depends on endless flows of capital from government.

You can see why I’m at best a curmudgeon about this issue at least and something of a Jeremiah at worst. Mac asks the perfect question:

“So, here is my question. Did reading all this piss you off a little? I mean, this was the Cliff Notes version, and it’s still brutal. Are you frustrated that this is the system? Perhaps irritated with me that I put you through this? If so, good. That was the goal.”

Now if we could only get elected officials to feel that same frustration rather than passing more rules, regulations, fees, fines, and taxes and fixing the resulting inflation with more LIHTC and million-dollar units.