QAP is DNA

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5 min read

A hen is only an egg’s device for making another egg.
– Samuel Butler, author of Erewhon

Competition is the lifeblood of existence, for only through competition does natural selection harness the self-interest of autonomous beings into evolutionary advance. Though the same principle is the fuel that powers the success of entrepreneurial capitalism, it was a long time coming to affordable housing, arriving serendipitously in the Low-Income Housing Tax Credit (LIHTC) program, which mandates a trifecta of ring-fenced individual-state autonomous allocations, annual award cycles, and Qualification Allocation Plans (QAPs) as modifiable DNA.

Over the program’s 27 years, this trio of imperatives has proven its worth; together they replicate the forces of evolution. Essential to evolution are three ecosystemic conditions: scarcity, selection, and rules. Without scarcity, there is no selection, and without rules, selection is random and does not progress. While nature solves these problems with the biological rules of Voltaire’s God (propagate or die), LIHTC’s evolution advances through intelligent design: its rulemakers are manifest and conscious.

Hypersensitive to QAP Changes

Twenty-seven generations of LIHTC evolution have made today’s markets hypersensitive to QAP changes. This is a great thing, because allocators can get what they want (even unto the tenth degree) just by writing it down in the QAP. The market’s ultra-responsiveness gives both power and responsibility: power, to shape the future inventory; and responsibility, for what is brought forward. If a state’s powers-that-be find that the properties awarded LIHTC fall short of the state’s policy goals, the fault lies not with the developers but with the QAP and those who made it.

Caught in the hurly-burly of award cycles, allocators may see themselves solely as referees beset by clamoring applicants. But if they take a moment to step back from the minutiae of scoring applications, they should see the QAP less as a rulebook and more as malleable economic DNA. They should ask: What inventory does the state want? What does it value?

No matter what a state says, the QAP is a truth measured in numbers. What is scored gets proffered, and what is not scored is valued at zero and hence ignored.

Given this, what do QAPs tell us about what states really care about? QAPs have steadily expanded, constantly adding features – desirable things not intrinsic to the 1949 National Housing Act’s mission of “decent, safe, and sanitary” housing. Accessibility, walkability, green, design, amenities – they’re all good things, and they all get points.

What doesn’t the QAP value? The answer: cost-effectiveness. But being cheaper does not score.

These days many hands are being wrung that project costs are high (or perceived as high). Some states wrestling with this challenge have adopted a regulatory response: create detailed design standards and conduct extensive internal reviews. Though natural for a regulator, this approach expands the workload for both the agency and the developer, leads to protracted abstruse debates, and may not actually deliver lower costs because a committee of architects and engineers will often agree only that more architecture and engineering are needed.

An Approach for Cost Containment

Instead of a regulatory approach, the swift and effective remedy to curb high costs is frighteningly easy: change the QAP, and wait two years.

For example, give (say) 15% of the QAP points to applications in the bottom quintile proposing projects with the lowest per-unit development cost, either divided into a few broad categories (e.g., elderly, family, new construction, acquisition-rehab) or via a weighting formula (derived from historical averages or otherwise). Keys are (1) rank on a curve and (2) do not publish the submissions until the awards are announced. This would put maximum pressure on developers with minimum state prescription.

Using competitive rather than regulatory forces is uncomfortable for most allocating agencies. It takes an act of conscious Zen renunciation (intelligence overriding anxiety) to specify only a few outcomes, step back from prescribing, and wait. But it works; it accelerates natural selection.

Evolution works because it forces species to compete. Capitalism works because it applies evolutionary forces to economic matters. QAPs work if their scoring system forces evolutionary competitiveness.

I’m reminded of the story of the quirky rich man with two sons, each of whom owned a horse. The father told his sons he would bequeath his entire fortune to the son whose horse came in last in a race between the two. When the race began, both riders dawdled, and two hours after the start, neither had traveled more than ten feet. A guru came along, and both sons appealed to him – what could be done to make it a genuine race?

The guru smiled, and said two words:

“Swap horses.”

David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay, State of the Market, available by emailing dsmith@recapadvisors.com.