HUD's policy of annually updating list of poor areas threatens bonding plans.

WASHINGTON -- Some projects financed with the low-income housing tax credit could be derailed because of a Housing and Urban Development policy of annually updating the number of cities and counties poor enough to be eligible for extra amounts of credit, lobbyists and developers said yesterday.

Those lobbyists and developers said they only recently became aware of that policy when HUD updated a list of those areas it had originally published in 1990. Dropped from the list were San Jose, the borough of Manhattan in New York City, and 10 counties.

The problem is that it generally takes at least 18 months to put the financing together for projects using the credit, because they are often combined with other subsidies, such as tax-exempt multifamily housing bonds. A developer could be well into the planning process for a project, only to find that a chunk of the housing credit he is counting on is not forthcoming.

Such is the case with at least one credit-backed project in San Jose. "The seeming arbitrariness of it and annualized nature of it run counter to the concept of planning for development," said Bill Witte, a principal with the Related Companies of California, which has been helping to put together the financing for that project.

The Tax Reform Act of 1986 created the low-income housing credit to offset the loss of various tax incentives designed to spur housing development. In general, the law allows rental housing developers a tax credit equal to a percentage of the present value of the low-income portion of housing projects.

State housing agencies allocate the credit, which is limited by a $1.25 per capita volume cap, though the need for a cap allocation is waived if the project is also financed with private-activity bonds.

Congress passed legislation in 1990 that permits developers to obtain 30% more credit than they would normally be allowed if their projects are build in areas HUD considered difficult to develop. A city or county can be designated as a "difficult development area" if it has unusually high housing costs and a large number of low-income people.

Last September, the department announced it was revising the list to reflect data gathered from the 1990 Census. HUD also said it would update the least every year.

The possibility that a city could be dropped from the list in any given year "makes it particularly difficult, because the development process takes longer than a year," said a housing lobbyist who asked not to be idenfified.

"It's just hard when you're planning in an 18-month development cycle, and then all of a sudden near the end of a planning process 30% of your credit equity may disappear," the lobbyist added.

Mr. Witte said for the San Jose project, the change means a loss of $1.2 million in equity that will have to be made up some other way. He said the project will still go forward, but losing that equity "makes an already difficult and complicated process more difficult and complicated."

New York Cith housing officials could not be reached for comment as to how the change in the list affects projects now being planned for Manhattan. Another New York borough, the Bronx, remains on the list.

While dropping several cities and counties from its list, HUD also added several cities that had not been on the list, including: Billings, Mont.; Fresno, Calif.; Lawrence, Mass.; Brockton, Mass.; Honolulu, Hawaii; Casper, Wyo.; and Yakima, Wash. For the next year, at least, projects financed with the credit in those cities will be eligible for the extra credit amount. Also added were 28 counties.

In its September announcement, HUD created a stir by not specifying an effective date for the new difficult development list. The omission of a specific date threw into doubt projects for which tax-exempt bonds had already been issued but the credit had not yet been allocated.

The department rectified that problem by publishing a clarification in Tuesday's edition of the Federal Register, which states that the list of difficult development areas is effective for allocations of credit made on or after Jan. 1, 1992. For projects with a bond component, "the list is effective if the bonds are issued and the building is placed in service after 1991," the department said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER