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Presentation, discussion, and possible action regarding appeals related to the 2024 9% Housing Tax Credit Round
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RECOMMENDED ACTION
recommendation
WHEREAS, Reserve at Woodland Heights is a 2024 9% Housing Tax Credit Application that requests $1,558,860 in Housing Tax Credits for the New Construction of 60 affordable Units in Lufkin, Angelina County;
WHEREAS, the Application was submitted with rents that were above the allowable limit for 12 two-bedroom Units, and when those rents are adjusted to the allowable limit, the Development no longer meets financial feasibility requirements;
WHEREAS, the Department issued a Real Estate Analysis Report that did not recommend the Application for an award of funding;
WHEREAS, the Applicant timely appealed this Report, and submitted new financial exhibits, as well as an updated loan term sheet and increased credit pricing with that appeal in order to support that the Development could be financially feasible if the Application were amended; and
WHEREAS, the amended financial terms and credit pricing represent a material change to the Application that exceeds the scope of an Administrative Deficiency;
NOW, therefore, it is hereby
RESOLVED, that the appeal for Reserve at Woodland Heights is hereby denied.
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BACKGROUND
The Reserve at Woodland Heights is a 2024 9% Housing Tax Credit Application that proposes the New Construction of 60 affordable Units in Lufkin, Angelina County. The Application includes 12 one-bedroom, 36 two-bedroom, and 12 three-bedroom Units. The Rent Schedule submitted by the Applicant with the Application incorrectly included the rent allowable for a three-bedroom Unit for 12 of the two-bedroom Units. Because this rent exceeds the allowable limit for two-bedroom Units, the Department issued an Administrative Deficiency for the Application on June 24, 2024, asking the Applicant to revise the Rent Schedule to be consistent with the allowable rents for each Unit size. The Applicant timely responded to this deficiency, submitting a new Rent Schedule that included the appropriate rent levels for each bedroom size.
When underwritten with the appropriate two-bedroom rents, the Effective Gross Income (EGI) decreases by $18,826, generating a 1.11 Debt Coverage Ratio (DCR) and negative 15-year cash flow of $214,547. In order to meet the minimum 1.15 DCR, and in accordance with 10 TAC §11.302(d)(4)(D)(i)(IV), the underwriter assumed a $95,432 decrease to debt, which required increasing the deferred developer fee by the same amount. This amount of deferred fee cannot be repaid within 15 years.
The Application was determined to be financially infeasible in accordance with 10 TAC §11.302(i)(2), which states that a Development will be determined to be infeasible if:
(2) Deferred Developer Fee. Applicants requesting an allocation of tax credits where the estimated Deferred Developer Fee, based on the underwritten capitalization structure, is not repayable from Cash Flow within the first 15 years of the long term pro forma as described in subsection (d)(5) of this section.
The Applicant timely appealed this determination on July 16, 2024. The appeal suggests that that the revision of the Rent Schedule created other inconsistencies within that Application, and that these inconsistencies should be curable through the Administrative Deficiency process. With the appeal, the Applicant submitted unsolicited updated operating expenses and a revised 15-year operating pro forma. The appeal also sought to add a revised loan term sheet that proposes a new loan amount, and a revised tax credit equity proposal that increases the credit price from $0.87 to $0.89. The appeal asked the Department to consider the revised permanent loan amount and the revised tax credit equity proposal in order to meet financial feasibility. These items were not included in the attached Board materials, as Tex. Gov’t Code §2306.6715(e) prohibits the Board’s review on appeal of any information not contained in or filed with the original application.
Through the Department’s initial underwriting process, the management fee was adjusted to reflect 4% of the reduced EGI, and the senior loan amount was reduced in order to meet the minimum 1.15 DCR. These adjustments addressed the financial inconsistencies created within the Application by the revised Rent Schedule. Because of this, the updated operating expenses, 15-year pro forma, and term sheets are not required to address an inconsistency within the Application.
The Department did not find an inconsistency within the Application that necessitated correction through the Administrative Deficiency process. Because of this, the appeal was denied by the Executive Director on July 22, 2024. Staff also recommends that the Board deny the appeal.