The Qualified Allocation Plan (“QAP”) is the fundamental document guiding the allocation of housing subsidy funds. Federal law, 26 U.S.C. 42(m), requires that the federal low income housing tax credit be allocated pursuant to a QAP prepared by the state’s lead housing agency. Massachusetts law, G.L. 23B, s. 3(v), requires that our state LIHTC also be awarded pursuant to the same plan. G.L. 23B, s. 3(v). The regulations of the Executive Office of Housing and Livable Communities (“HLC”) offer an overview of the QAP’s role:
From time to time, the Department shall amend or supplement its existing qualified allocation plan or its program guidelines, or both, to provide taxpayers guidance on how Massachusetts low-income housing tax credit will be allocated among competing projects. Such guidance shall adhere to the statutory requirements of providing the least amount of Massachusetts low-income housing tax credit necessary to ensure financial feasibility of selected projects while allocating the total available Massachusetts low-income housing tax credit among as many qualified Massachusetts projects as fiscally feasible.
Since the state and federal tax low income credits are essential elements in most subsidized housing finance stacks, the QAP effectively governs the allocation of all affordable housing subsidy funds. As the QAP states:
It is important to note that the priorities included in this plan to a large extent are priorities for the Department’s other affordable housing programs as well. This is true for two reasons. First, tax credit projects often require other DHCD resources in order to proceed. Thus, the priorities established for the tax credit program have a direct impact on DHCD’s other housing programs. For example, when DHCD, through the tax credit allocation plan, establishes recommended cost limits for tax credit projects, the cost limits clearly apply to other DHCD programs in support of the same project.
The second reason is that the tax credit program, through the annual allocation plan, undergoes greater and more frequent scrutiny than other state housing programs. Although other housing programs have guidelines and regulations that are modified from time to time, the annual tax credit allocation plan is the public document in which the Department most clearly and most frequently attempts to state its priorities for state-assisted affordable housing projects.
QAP 12. In this post, all references to the QAP will be in the form “QAP n”, where n is the page number in the QAP version posted on HLC’s QAP page as of September 2024, which is linked to as the 2023-4 plan, but is titled within itself as the 2022-3 plan.
The QAP includes discussion of the bigger picture of housing in the state, but this post summarizes only the more mechanical and quantitative elements of the QAP.
Priority categories for funding
The QAP defines five project types that will be funded.
QAP 7 (emphasis altered for readability).
- Housing for extremely low-income individuals (ELI), families, and seniors earning less than 30 percent of area median income with a particular focus on those who are homeless or at risk of homelessness. Projects in this category must be supported by tenant services and include at least 20 percent ELI units. . . .
- Investment in distressed and at-risk neighborhoods . . . Projects in this category include projects located in the Commonwealth’s 24 Gateway Cities and/or Qualified Census Tracts (QCTs, as defined by Section 42 of the Internal Revenue Code).
- Preservation of existing affordable housing that extends affordability in situations that are consistent with QAP policies and the preservation working group policies. . . .
- Family housing production . . . At least 65% of the units in a project must include two or more bedrooms, and at least 10% must be three-bedroom units, unless that percentage of two-bedroom or three-bedroom units . . .
- Family or senior housing production in communities in which the affordable housing stock, as defined by the state Subsidized Housing Inventory (SHI), is lower than 12%. . . .
Set asides
The QAP includes the following categorical allocations of tax credit resources, referred to as “set asides”:
- “[HLC] intends to allocate the competitive 9% credit to support the production or creation of new affordable rental units. However, developers also may structure production projects using the 4% credit.” QAP 20. See discussion of 9% vs. 4% credit in this previous post. Production of new units includes rehabilitation of units that have been vacant for at least two years and/or are uninhabitable.
- “[HLC] is requiring sponsors of preservation projects to structure their applications as tax-exempt bond transactions using 4% credits. Working with MassHousing or MassDevelopment, sponsors of preservation projects should be able to structure a tax-exempt bond/4% application in lieu of a 9% application. . . . [HLC] intends to award its most valuable resources, including the 4% credit, to [preserve affordable housing units] that are at greatest risk of loss” due to either expiration of affordability restrictions or to physical or financial distress. QAP 21-22. These preservation priorities are further specified in the “preservation matrix.” QAP 25-28.
- “Federal law requires that at least 10% of the credit available in 2022-2023 be allocated to projects involving ‘qualified non-profit organizations.'” QAP 23.
Whether the project is production or preservation, the minimum project size is 12 units.
Cost guidelines
The QAP includes per unit total development cost (“TDC”) limits. These limits are not firm; rather, they are “recommended.”
- Production TDC in metro Boston ranging from $329K for small units in suburban areas to $399K for large units in urban areas. “Large” unit projects must have an average of two bedrooms per unit and must include at least 10% three or more bedroom units. QAP 29.
- Preservation TDC in metro Boston ranging from $229K in suburban areas to $299K for “Large” unit projects in urban areas. QAP 30.
In addition to stating recommended overall TDC limits, the QAP states that HLC “typically” caps the amount of the allowed cost basis for tax credit computation at $250K for production projects and $175K for preservation projects. So, for example a new unit costing $399,000 (as part of a larger production project) could get a tax credit worth up to $225,000 (9% of $250,000 x 10 years). For a preservation project (which would likely also be seeking tax exempt financing), the per unit tax credit subsidy limit would be $70,000 (4% of $175,000 x 10 years).
Finally, the QAP states that HLC states “typically” caps tax awards of the 9% credit at $1 million.
It is not clear from the currently valid QAP or recent NOFA to what extent HLC will use its discretion to adjust the “recommended” or “typical” ceilings to reflect significantly increased costs. The recommended TDC limits are roughly half of the unit prices heard recently in informal conversations with developers. The QAP recognizes recent construction cost inflation and signals a coming update. QAP 29. However the most recent general Notice of Funding Availability (“NoFA”) continues to point back to the QAP as to cost guidelines.
Sponsors also should note that applications under this NOFA must meet HLC’s limits on development and operating costs per unit for affordable housing, which are included in the current tax credit Qualified Allocation Plan (QAP), as posted to HLC’s website. The limits included in the QAP apply to all HLC-assisted projects, not just to LIHTC projects.
NOFA – Winter 2024 – Affordable Housing Competition for Rental Projects. Note that NOFAs are listed on HLCs LIHTC page.
Project evaluation
There are three steps in competitive project evaluation under the QAP. First, the project must screen in to at least one of the five priority categories and either the production or preservation set aside criteria. Second, the project must meet all of 12 additional threshold requirements. Projects passing these tests will be scored using a point system. QAP 31.
Threshold criteria
Two of the threshold criteria impose higher affordability requirements than required by federal law:
- commitment to a 30 year term of affordability (45 if seeking state credits)
- reservation of 13% of units for persons or families earning less than 30% of area median income (10% if using the 4% credit, but 15% if using tax exempt financing and the 4% credit and the project has 50% or more of the units at market rates); project based vouchers may be used to help support these units.
Note that the QAP does not list the basic affordability requirements for federal and state tax credits as threshold criteria, but are discussed as background at QAP 13-14. See discussion of LIHTC affordability requirements here.
Five of the threshold criteria speak to basic viability of the proposal:
- creditworthiness — all debt obligations paid current, other audit criteria
- site control — title or fully executed option
- identification of all financing sources, with evidence of strong interest if not commitment
- up to date compliance on previous tax credit projects
- good standing in other state housing programs
Five of the threshold criteria are judgment calls about project quality:
- site quality
- evidence of local support or local processing
- an appropriate plan for provision of services to tenants, particularly for senior housing
- consistency with sustainable development principles
- fair housing narrative
Point system
Projects meeting the threshold criteria are scored using a two-tier scoring system. 100 points are awarded based on “fundamental project characteristics.” These fall in five categories and projects must receive at least 12 points in each of the five categories and may receive up to 20 points in each of the five categories.
- Financial feasibility — strength of financing commitments, etc.
- Design — compliance with design standards, including sustainability and accessibility; design standards, including dwelling unit size standards, are included as appendices to the QAP.
- Development team — experience and capacity, inclusion of minority/women business enterprise members
- Marketability — third party market evaluation for the proposed units; include section 8 renters only if there are project based vouchers approved already
- Readiness to proceed
If projects receive the minimum total of 5 x 12 points from the five fundamental characteristic categories, they can earn additional up to 82 points for special characteristics:
| Application special characteristic | Points Available |
|---|---|
| Chief elected official letter of support | 2 |
| Contribution to “concerted community revitalization planning effort” | 6 |
| Team members certified by State Office of Minority and Women Business Assistance | 6 |
| Non-profit sponsorship | 5 |
| Persons with disabilities and/or persons in need of supportive services (e.g. homeless) | 8 |
| Inclusion of market rate units in the project (max points if over 50% market rate) | 6 |
| Location in area of opportunity — low poverty communities with education, jobs, etc. | 14 |
| Conformance with code preferences — 50 year affordability, lower income, high poverty location | 3 |
| Green and accessible design elements | 26 |
| Proximity to transit | 6 |
| Total (note that some criteria conflict — low/high poverty area — so no project will receive all) | 82 |
Local support
Of political note, the QAP favors projects with local support, but recognizes that local support may not always be attainable. as a As a threshold criterion, the QAP requires that developers demonstrate efforts to achieve local support , but out of a maximum possible score of 182, only 2 points can be obtained for official local support. The QAP states:
In an ideal world, every affordable housing project would have the support of two key constituencies: its neighbors and the elected leaders of the community. Unfortunately, many projects lack local support, whether from the owners of abutting properties, local elected officials, or both. In some cases, support is withheld for good reasons; in other cases, support is unreasonably withheld.
In general, [HLC] encourages applications from tax credit projects that have full local support. In certain circumstances, sponsors may submit applications for [HLC’s] credit authority for projects that are not locally supported. If a sponsor/owner cannot demonstrate local support, he or she must instead demonstrate through a written narrative included in the OneStop+ application substantial efforts to respond to local concerns and obtain the chief elected official’s support. If [HLC] is not satisfied that the sponsor/owner has made every reasonable effort to obtain support, [HLC] will reject the tax credit application.
QAP 32-33
Up to six additional points are available if the project furthers a “Concerted Community Revitalization Planning Effort.” Of these, two points can be obtained if the project conforms to a neighborhood revitalization plan that is either approved the chief elected official or developed with demonstrated community input. Two more points can be obtained if the project conforms to a housing production plan or priority development areas approved by HLC. Finally, two points are awarded for projects undertaken by DCDs under a community investment plan. QAP 47-48.
Financial policies
The QAP identifies several additional critical policies that will shape subsidy awards financially.
- Awards must be limited to the amounts “necessary to make a project feasible.” QAP 59. To implement this policy, HLC requires developers to disclose costs and financing resources in great detail. However, the policy does not actually define what level of profitability constitutes “feasibility.” The policy requires complex discretionary judgments in its application. QAP 59.
- More crisply, the QAP defines permissible developer fees according to a schedule based on size. Developer fees are a cost element for the project and are defined broadly to include all consulting fees and reserves which might be taken out as cash flow within the first five years. Developer fees are costs as opposed to long term return on developer and investor equity, so the relatively crisp fee limitations do not add clarity to the basic “feasibility” judgment. QAP 60.
- Rehabilitation projects in high poverty census tracts and “difficult-to-develop” areas (where high construction costs make units unaffordable to residents) may seek a basis boost to 130% if necessary to achieve feasibility. QAP 62. This boost is only available to projects not receiving tax-exempt financing. QAP 15; 26 U.S.C. 42(d)(5)(B)(v). Sixty one communities, including Boston and Cambridge have been designated as difficult to develop. QAP 16.