Housing Tax Credits FAQs

The federal housing tax credit program is a means of directing private capital toward the creation of affordable rental housing. Owners and investors in qualified affordable multifamily residential developments can use the housing tax credits as a dollar-for-dollar reduction of federal income tax liability. The value associated with the housing tax credits allows residences to be leased to qualified families at below market rate rents. The Texas Department of Housing and Community Affairs (TDHCA) is the only entity in the state of Texas with the authority to allocate housing tax credits under this program. To qualify for housing tax credits, the proposed development must involve new construction or undergo substantial rehabilitation of residential units. The credit amount a development may receive depends on the total amount of depreciable capital improvements and the funding sources available to finance the total development cost.

Developers apply for housing tax credits through an application process administered by TDHCA. This process is fully described in the Qualified Allocation Plan and Rules (QAP) which governs the program's operation. The QAP is revised annually in a process that involves public input, Board approval and ultimately approval by the Governor. Under the competitive HTC program, to be considered for an award of housing tax credits, an application must be submitted to TDHCA during the annual application acceptance period as published in the QAP. All applications must provide the required fee, application and supporting documentation as required by the QAP.

The competition for housing tax credits is very high. Therefore, in addition to submitting an application that meets the minimum threshold, applicants must achieve a high enough score to be competitive to receive an award.

Tax Exempt Bond applications applying for 4% housing tax credits are submitted to the Department once the Reservation of Allocation is issued by the Texas Bond Review Board. It is required under Section 1372 of the Texas Government Code, for Priority 1 and 2 applications to apply for housing tax credits. Priority 3 applications are not required to have housing tax credits; however, most developments are not financially feasible without them.

Under the competitive HTC program, housing tax credits are allocated in accordance with Section 2306.111 of the Texas Government Code, which requires that the credits be allocated on a regional basis. There are thirteen state service regions; each of the thirteen state service regions is further divided into Rural and Urban/Exurban areas each of which is targeted to receive a pre-determined amount of the housing tax credits for each year. The amount per area is based on a regional allocation formula which is generated, with public input, by the Housing Resource Center of TDHCA. Upon finalization of the formula, the targeted allocations will be released. Additionally, the HTC Program has several allocations and/or set-asides which it strives to meet: at least 10% of all credits must be awarded to Qualified Nonprofits, at least 15% of each region's credit allocation is targeted to At-Risk Developments and at least 5% of each region's credit allocation is targeted to developments funded by the U.S. Department of Agriculture.

It is the goal of TDHCA to encourage diversity through broad geographic allocation of housing tax credits within the state, and to promote maximum utilization of the available housing tax credit amount. The criteria utilized to realize this goal includes a point based scoring system (competitive HTC only) and an evaluation of the development's:

• cost and financial feasibility;
• geographic location within the state as compared to other developments applying for housing tax credits;
• impact on the concentration of existing housing tax credit developments and other affordable housing developments within specific markets and sub-markets;
• site conditions;
• development team experience; and
• consistency with the goal of awarding credits to as many different applicants as possible.

Those applications which are deemed to have a high priority based on the review criteria (competitive HTC only) are subject to an underwriting review which evaluates the development's projected construction costs and financial feasibility. Applications which pass the underwriting process and are determined to have the highest priority will be presented to TDHCA's Board of Directors for consideration.

For Tax Exempt Bond developments, the applications are recommended for approval to the Department's Governing Board of Directors based on the underwriting review which evaluates the development's projected construction costs and financial feasibility and the ability of the application to meet the threshold and compliance requirements of the Department.

The QAP defines a series of point based "Selection Criteria" items. To generate a "Selection Criteria" score, applicants request points for those criteria items for which their development is qualified. These scoring criteria change annually and can be reviewed in the QAP.

While it is a significant factor, an application's score is not the sole determining factor as to whether or not it will be recommended for an award of credits. However, the score serves as one of the primary criteria (as described in the previous section) used to assess how well an application fulfills the program's goals.

For the competitive HTC program, prior to the award of the credits, TDHCA will hold at least three public hearings in metropolitan and rural areas across the state. The public is encouraged to attend one of these scheduled hearings or to submit written comments to the HTC Program. When submitting comments, the application under discussion should be clearly identified by name, address, and city. Including the TDHCA application identification number in the correspondence is also helpful. Based on the provided comment, an indication of the level of support or opposition for an application will be included in the recommendation documentation presented to TDHCA's Board of Directors.

For Tax Exempt Bond applications which utilize TDHCA as the issuer, the Department will conduct development-specific public hearings in the community in which the development is to be located. The public is encouraged to attend these public hearings or submit written comments to the Department. For tax exempt bond applications which utilize a local issuer, interested individuals are encouraged to contact the Issuer for the public hearing information.

Public hearings are also held for the development of the QAP, which governs the administration of the HTC Program. The public is encouraged to attend or provide written comment. Written comment, on either a specific application or on the QAP, can be sent to: Multifamily Finance Production, P.O. Box 13941, Austin, TX 78711-3941 or (512) 475-3340 or by email to Joshua.Goldberger@tdhca.texas.gov.

Because of their significant long-term financial investment in the development and community, developers in most cases want to work with area citizens and be a good neighbor. Therefore it is not uncommon for developers to make reasonable alterations to the planned development in response to the concerns of area neighbors.

In addition to attending and commenting at public hearings on a particular development such as this, individuals and neighborhood organizations are encouraged to work directly with the developer to gain a better understanding of a particular development. Open community meetings offer an opportunity to ask questions, express concerns, and have a productive dialogue between the developer and community.

Below are some common questions that will help you gain a better understanding of the developer’s goals and intentions regarding a proposed property:

• What other developments has the developer built and where are they are located?
• What are the developer’s long-term goals for the property?
• How will the development fit in with the existing neighbor-hood?
• Who is the management company and what is its track record?
• What types of supportive services will be provided to residents?
• Who are the proposed tenants and how will they be screened?

Each development must include a minimum percentage of units to be set aside for eligible low income tenants. The rent charged for these units is restricted according to federal guidelines which correspond to the household's income level. While rental rates are restricted, they are not subsidized (i.e., Section 8 housing) by the HTC Program. A low income housing development will be eligible to apply for housing tax credits if it meets either of the following criteria:

a) Twenty percent (20%) or more of the residential units in the project are both rent restricted and occupied by individuals whose income is fifty percent (50%) or less of Area Median Family Income (AMFI);

b) Forty percent (40%) or more of the residential units in the project are both rent restricted and occupied by individuals whose income is sixty percent (60%) or less of AMFI.

Housing tax credits may only be claimed for the affordable units that have been set aside for participation under the program. Although a developer only needs to set aside a minimum of twenty percent (20%) of a project's units for qualified tenants, applicants will typically set aside between 60% and 100% of the units for scoring purposes and to claim a higher amount of housing tax credits.

In addition to these set aside requirements, under the Bond program there are additional set-asides the development must meet based on the Priority that is assigned by the Texas Bond Review Board.

The rent limits for housing tax credit units are based on the household income level and the number of bedrooms in the unit. These rent and income limits are generated by the U.S. Department of Housing and Urban Development each year. HTC rent limits include an allowance for the cost of utilities (heat, lights, air conditioning, water, sewer, oil or gas). In projects where the owner pays all utilities, no adjustment in the HTC rent limits are needed to determine the maximum rent that can be charged for a housing tax credit unit. In projects where tenants pay all or a portion of their own utilities, the rent established for a housing tax credit unit must not exceed the applicable HTC rent limit for that unit.

The Department can provide interested parties with specific rent limits for their area, or a complete set of income and rent limits can be found on the Department's Web site. Households will be required by the property owner to periodically document their income level so that the owner may continue to claim the housing tax credits for their unit.

Under the federal income tax code, a credit is a dollar-for-dollar reduction in the income tax liability for the investor. It is important to note that only the owners of a housing tax credit property may utilize the benefits of the housing tax credits over time. A credit is subtracted after the amount of tax is calculated. In this form, a credit differs from a deduction or adjustment to income, which is then subtracted from income before the tax rate is applied and the amount of tax is calculated.

Many private developers and builders concentrate their efforts in larger metropolitan areas and target higher income individuals and families. However, demographic studies show that lower and moderate income individuals and families are the fastest growing segment of our population. As the population grows, so will the need for affordable housing.

Properties that receive housing tax credits must compete with nearby market developments for tenants. The properties are safe, secure, and well maintained. They have amenities similar to other apartment complexes, and may offer swimming pools, community centers and reception areas. Newer developments may include daytime childcare, evening GED classes, on-site medical care and credit counseling. These supportive services are provided without charge to the tenants.

Unlike most publicly-subsidized housing which is designed to assist the elderly, disabled, minimum wage workers or the unemployed, the housing tax credit program does not provide tenants with governmental rent subsidies. It provides equity to build the development which allows the developer to charge lower rents to the tenants. The program's rent and income levels vary from county to county. In Houston, for example, the maximum allowable rent (which includes a utility allowance) for a three bedroom housing tax credit apartment would be $953. To be eligible to reside in the housing tax credit unit, a family of four's annual income could not exceed $36,660 at the time they signed the lease. In Lubbock, the maximum allowable rent for a three-bedroom apartment would be $783 a month. A family of four's annual income could not exceed $30,120. Tenants must pay their rents in full. Thus, the tenants are most likely working Texans or retirees seeking an affordable place to live.

Typically, tenants may include: school teachers; police officers; firefighters; mechanics; single parents who are balancing career and family while attending night school; city employees; sales clerks; and retirees. Affordable housing and low income units are quite different from public housing projects.

Many of the apartments built during the boom years of the 1980's which were abandoned and boarded-up during the state's real estate bust, are today fully renovated and leased. Hundreds of sprawling apartment complexes that had for years been both eyesores and occasional drug refuges, now provide thousands of working Texans with quality, affordable housing, including the elderly and persons with disabilities.

Housing tax credit benefits are lost if a development fails to meet state and federal standards every year for each of the 15 years of the compliance period. Properties are then monitored for an additional 15 years to maintain affordability.