Qualified Allocation Plans
The federal Low-Income Housing Tax Credit ("LIHTC") program was enacted by Congress in 1986 to create a tax credit incentive to encourage the development and construction or rehabilitation of rental housing for low-income households. The program provides each state with a set number of these tax credits to allocate annually based generally upon population.
LIHTCs are allocated by state housing agencies in accordance with the terms of each state's qualified allocation plan ("QAP"). The QAP generally establishes a state's selection criteria for how its credits will be awarded, giving preference to projects serving the lowest income tenants and providing a procedure for the state agency to monitor noncompliance. The QAPs are drafted annually by state housing agencies and must meet certain requirements. A majority of QAPs are also developed to meet specific state objectives and as a result, QAPs vary considerably from state to state. In order to receive a LIHTC allocation, developers of low-income rental housing must submit an application describing their project to the state housing agency in the state in which the project is located. Based upon the selection criteria in that state's QAP, an application will generally be awarded a certain number of points or other preference, and if the project achieves a certain score, it will be awarded an allocation of tax credits.
What are the Required Criteria for QAP's
Currently, the federal code requires every state housing agency to use the following eight "selection criteria" in their QAPs:
Project location (e.g., designated target areas)
Housing needs characteristics (e.g., income mix of tenants within the project)
Project characteristics including whether the project includes the use of existing housing as part of a community revitalization plan (e.g., percentage of low income units, number of units)
Sponsor characteristics (e.g., nonprofit sponsorship, minority participation in development and management, experience in development)
Tenant population with special housing needs (e.g., elderly, disabled, homeless)
Public housing waiting lists
Tenant populations of individuals with children
Projects intended for eventual tenant ownership
Changes to the Law That Impact Historic Preservation
Following the passage of the Housing and Economic Recovery Act of 2008 ("HERA"), two additional selection criteria were added as requirements:
The energy efficiency of the project
The historic character of the project
An explanation prepared by the Joint Tax Committee clarifies that "historic character" relates to "encouraging rehabilitation [of] certified historic structures" (Code section 47(c)(3)). These changes required by the HERA are effective for LIHTC allocations made after December 31, 2008 and must be addressed in each state's 2009 (and thereafter) QAP. This means that each state must now address how historic preservation is treated within the QAP. Previously, less than half of the states listed historic preservation as a consideration in determining QAP preferences.
A second new provision of the HERA permits state housing agencies the discretion to increase by up to 30% the LIHTCs available to a project. State housing agencies are expected to set standards in their QAP for determining which projects will receive a 30% boost. However, it is unclear whether state housing agencies are required to implement additional 30% basis boost guidelines. This affords states the opportunity to amend their QAPs to specifically permit historic rehabilitation projects to benefit from this discretionary 30% boost.
Preservationists Role in Amending Allocation Plans
The federal code sets forth certain basic requirements that must be met by every state with respect to adopting their annual QAP, including that QAPs be approved annually by a governmental entity after a public hearing and following reasonable public notice.
In addition to these federal requirements, a handful of states impose an additional level of governmental approval before a QAP may be adopted or amended. For example, several states including, but not limited to, California, Florida, Illinois, Pennsylvania and Kentucky, require that changes to their QAPs to be approved by both the state housing agency as well as by the Governor of that state. While every state requires some form of public notice and comment period prior to the adoption of their annual QAP, some states, including Pennsylvania, Virginia and Oregon, forego a formal public approval process with respect to any technical or other amendments. In general, however, most states require some form of public approval before a QAP may be amended.
With the recent amendments required by the HERA, state housing agencies who's QAPs are not currently in compliance must revise their 2009 QAPs to include both the energy efficiency and the historic character of a project as additional selection criteria. States with QAPs that are technically in compliance with the HERA requirements may nevertheless wish to amend their QAPs to incorporate the best-practice model language described herein, including establishing criteria for increasing by up to 30% the LIHTCs available to energy efficient and historic projects. Such changes will generally be subject to the public hearing and notice requirements discussed above.
Preservationists should be aware of opportunities to provide comment to state housing agencies regarding how best to incorporate historic preservation in their state's revised QAP. Contact information for state housing agencies can be found at: http://www.novoco.com/low_income_housing/lihtc/state_agencies.php
Current Treatment of "Historic Character" Under Qualified Allocation Plans
According to a review of QAPs conducted in 2005 by the National Trust for Historic Preservation, approximately twenty-one (21) QAPs award points based upon preservation or historic-related criteria. In a random sampling of the scoring methodology from fourteen 2008 and 2009 state QAPs which did include a point-based preference for historic buildings, the average weight ascribed to preservation or historic-related scoring criteria was approximately 5.1%. Some states, such as Arizona, Indiana and Ohio, award points to buildings that are either individually listed on the National Register of Historic Places or are a contributing structure in a registered historic district. It is noteworthy that in some states, points are awarded solely based upon whether the project involves a historic building with no explicit requirement that the project demonstrates that it will follow federal or state rehabilitation standards. On the other hand, Virginia, requires that the "rehabilitation will be completed in such a manner as to be eligible for historic rehabilitation tax credits" and this presumably applies even if the project does not actually apply for and utilize historic credits. States such as Arizona, Delaware, Georgia, Indiana and New Jersey award points (or additional points) for projects that qualify for and receive historic rehabilitation tax credits.
Best Practices and Model Language for Preservation-Related Preferences
To assist state housing agencies in achieving a consistent, best-practice with respect to implementing the new HERA requirement regarding the addition of "historic character" as a selection criteria, following is model language (based upon a review of current preservation and historic-related criteria in various state QAPs) that may be added to the selection criteria of your state's QAP:
Historic Character Pare Available for Projects of Historic Character
"Historic Character" means any project consisting of one or more structures (1) (a) individually listed in the National Register of Historic Places; (b) located in a registered historic district and certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district; (c) that have received local landmark designation through a local historic preservation commission through an ordinance; or (d) located within an area that has been zoned as a historic area; and (2) the rehabilitation of which will be completed in such a manner as to be eligible for (federal and/or state) historic rehabilitation tax credits.
Required Documentation: (1) (a) A letter from the Department of the Interior's National Park Service ("NPS") verifying that the structures(s) are listed in the National Register of Historic Places or verification of the listing through the NPS website at www.cr.nps.gov/nr; (b) an Evaluation of Significance in the form of a Historic Preservation Certification Application Part 1–Evaluation of Significance (Form 10-168) from the NPS; (c) a letter from the local historic preservation commission evidencing the local landmark designation; or (d) a copy of the municipal zoning ordinance and a letter from the local municipality verifying that the project is located in an area zoned as historic and that the project will meet the requirements outlined in the applicable zoning ordinance(s); and (2) a letter from the State Historic Preservation Office evidencing that the rehabilitation is a certified rehabilitation which will be completed in a manner consistent with the historic character of the structure or the district in which the structure is located and eligible for (federal and/or state) historic rehabilitation tax credits.
Further, following is recommended model language that may be added to your state's QAP to specifically permit historic rehabilitation projects to benefit from the discretionary 30% basis boost:
The practice of rehabilitating historic buildings for use as affordable housing has become a proven community development strategy. A white paper prepared for the National Trust for Historic Preservation found access, walkability and transit orientation afforded by historic neighborhoods (including proximity of historic buildings to work, shopping and transportation) to be key benefits of this approach. The National Park Service ("NPS") in its publication "Affordable Housing Through Historic Preservation" noted that owners may find that community resistance to the siting of affordable housing is overcome where the project entails the renovation of a local landmark. Building amenities unique to historic buildings, relief from zoning, the availability of property tax breaks and the intangibles associated with culture and heritage also can come into play.
Another significant driver of the reuse of historic buildings for affordable housing over the years has been the availability of tax credit equity. Particularly popular has been the twinning of the federal Historic Tax Credit (the "HTC") provided for in Section 47 of the Internal Revenue Code with the Section 42 Low-Income Housing Tax Credit. The benefits of this approach, however, are reduced by virtue of a provision of the tax code which provides that LIHTC eligible basis must be reduced by the amount of HTCs claimed.
In order to replace the incentive lost by basis reduction provision discussed above, the [HFA] finds that it is appropriate to utilize the authority provided for in the Housing and Economic Recovery Act of 2008, in order to designate projects involving the rehabilitations of structures of Historic Character as if they were in a difficult to develop areas ("DDA") and thus eligible to utilize 130% of eligible basis as a factor in determining the adjusted eligible basis.