QAP Incentives

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Studying a Hot Topic

A recent study, Effect of QAP Incentives on the Location of LIHTC Properties, provides fact-based insights into tax credits that can stimulate emotions and grab headlines.

In accordance with congressional mandates, every state issues a Qualified Allocation Plan (QAP) explaining the criteria it will use in awarding Federal 9% Low Income Tax Credits (LIHTC). The topic is particularly hot because the U.S. Supreme Court is expected to issue its decision in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc., which involves Texas’ allocation of LIHTCs, and focuses on whether the Fair Housing Act of 1968 outlaws only intentional discrimination.

The QAP study, conducted by a multidisciplinary team of scholars at the Furman Center for Real Estate and Urban Policy of New York University, and released by U.S. Department of Housing and Urban Development, Office of Policy Development and Research, comes amid increasing competition for LIHTC in virtually every state.

Data show that “state qualified allocation plans matter,” and indicate “states can use their QAPs to shape siting outcomes,” says Ingrid Gould Ellen, one of the study’s coauthors. Ellen, Professor of Urban Policy and Planning and Director of the Urban Planning Program at NYU Wagner Graduate School of Public Service, explains that “states changing their QAPs to favor developments in higher opportunity areas saw: (1) increases in share of tax credits allocated in low-poverty neighborhoods; (2) decreases in share of tax credits allocated in high-poverty neighborhoods; and (3) decreases in average poverty rate of neighborhoods surrounding LIHTC developments.”

The study, says Ellen, emphasizes the complexity of QAPs: “We also show they provide little guidance about what constitutes a community revitalization plan—even though the federal government requires states to give preference to developments located in QCTs [qualified census tracts] and which contribute to a community revitalization plan. Indeed, some QAPs are silent on the issue, suggesting that they may be giving LIHTC developments located in QCTs a preference even if they are not part of a revitalization plan.”

Effect of QAP Incentives on the Location of LIHTC Properties, of course, is only a beginning. Among other things, it does not examine whether points, set-asides or other QAP scoring systems most affect sitings. Nor does it explore many of the differences in state outcomes, or the possible impact of QAPs on projects that developers propose. Data for the study come from only 21 states; omitted are some states with large LIHTC programs— information from these states was often not available; in other instances, changes in a state’s QAPs were ambiguous and could not fit into the study design.

Kathy O’Regan, Assistant Secretary for Policy Development and Research at the U.S. Department of Housing and Urban Development, which issued the report, notes in a web discussion hosted by the Furman Center, :http://furmancenter.org/research/iri/gordon that “exactly which features of the QAPs are most effective is harder to learn through this purely quantitative assessment,” and “as noted by the researchers, data limits prohibit distinguishing between new construction and rehabilitation.”

O’Regan explains: “Rehabilitation is frequently part of preserving affordable housing, itself a key LIHTC goal due to its cost effectiveness and benefits for existing tenants. Such housing, however, is more likely to be in higher poverty neighborhoods. In this report, prioritizing preservation is scored as lowering access to low poverty neighborhoods. Does that mean preservation should not be prioritized? No it does not.”

What else can developers who focus on affordable housing learn from these findings?

Professor Ellen’s answer is direct: “Developers should pay attention to changes to QAPs because the study suggests, but doesn’t prove, that states closely follow QAP guidelines when deciding which projects should get credits.” She adds, “Some of our findings could be explained by developers responding to QAPs too; we can’t disentangle.”

And what about the U.S. Supreme Court? “Given the attention this issue has gotten in light of the Texas case, it seems HFAs [housing finance agencies] are even more conscious of the neighborhood factors in their QAPs today than they were several years ago,” says Molly Bryson, who has several decades of experience with tax credits and affordable housing, and works at the Washington, DC office of the law firm Ballard Spahr, where she heads their Tax Credits Team.

The consensus among experts seems to be that better understanding the impact of QAPS will be necessary no matter what the U.S. Supreme Court rules in the Texas case. A decision that the Fair Housing Act encompasses liability based on evidence of disparate impact on minority groups when more neutral policies are available would make QAPs even more important as a tool; and a decision limiting the scope of the law to intentional actions will still leave states needing to better understand how QAPs affect the siting of LIHTC developments. The prime goal—to create sound affordable housing and thriving communities—will remain.

“Both the literal words in the QAP and the intent of the agency preparing the QAP are crucial,” says Jerome Breed, a Washington, D.C.-based tax partner at the law firm Bryan Cave. “To the extent the Supreme Court decision increases uncertainty in the allocation process by making allocation challenges more likely, it will discourage developers from participating in LIHTC development and will incentivize developers to avoid siting projects in neighborhoods that could be subject to challenge. The effect may make it more difficult to meet the housing goals of the allocating agency.”

Adds Bryson, “because LIHTCs are most likely not their only funding source, developers’ thinking is also influenced by requirements from other funding sources such as state or local governments. All these stakeholders will impact how developers move forward in the wake of the U.S. Supreme Court case.”