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Presentation, discussion, and possible action regarding an appeal of the underwriting report for Culebra Apartments
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RECOMMENDED ACTION
recommendation
WHEREAS, Culebra Apartments is a 2024 9% housing tax credit Application that requests $2,000,000 in tax credits for the New Construction of 88 affordable units in San Antonio;
WHEREAS, on November 5, 2024, the Real Estate Analysis Division issued an underwriting report that did not recommend the Application for funding because it did not meet financial feasibility requirements;
WHEREAS, the Applicant timely filed an appeal of that request, which was denied by the Executive Director; and
WHEREAS, the Applicant has requested that the appeal be heard by the Board, and staff does not recommend that the Board grant the appeal;
NOW, therefore, it is hereby
RESOLVED, that the appeal of the underwriting report for Culebra Apartments in hereby denied.
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BACKGROUND
Culebra Apartments is a 2024 9% housing tax credit Application that was selected for review from the Waiting List as a result of another Application being withdrawn. The Application requests $2,000,000 in housing tax credits for the construction of 88 affordable units in San Antonio.
The Qualified Allocation Plan (QAP) establishes specific programmatic, financial, and underwriting requirements that must be met in order for an Application to be eligible for an award. The Department’s review process involves two distinct processes. First, the Application is reviewed by the Multifamily Finance Division. During this first review, staff evaluates the Application for both threshold and scoring purposes. This part of the process also includes a basic review of key financial requirements, such as ensuring that the correct rent limits are being used, and that certain key financial components such as the assumed vacancy rate are within allowable thresholds. Once this process is successfully completed, the Application is transferred to the Real Estate Analysis Division for underwriting, during which, staff evaluates the project’s initial and long-term financial feasibility.
Staff may issue Administrative Deficiencies to request additional information or Application corrections at any point during the review process. Applicants are otherwise prohibited by state statute from amending or modifying the Application during this process. In accordance with Tex. Gov’t Code §2306.6708:
Sec. 2306.6708. APPLICATION CHANGES OR SUPPLEMENTS.
(a) Except as provided by Subsection (b), an applicant may not change or supplement an application in any manner after the filing deadline.
(b) This section does not prohibit an applicant from:
(1) at the request of the department, clarifying information in the application or correcting administrative deficiencies in the application; or
(2) amending an application after allocation of housing tax credits in the manner provided by Section 2306.6712.
Several deficiencies were identified as part of the initial program review, and on September 25, 2024, a deficiency notice was sent out that requested, among other items:
• “Vacancy rate does not meet the rule of 7.5%. Please submit a new Tab 24 with only the vacancy rate corrected.”
• “Please provide Utility Allowance Documentation from the correct PHA [Public Housing Authority] and an updated Tab 25.”
• “Can you please highlight or provide an acknowledgment of the Income Averaging election on the IBC Term Sheet. An email from the lender will be accepted in lieu of providing re-issued Term Sheets.”
The full Deficiency list is attached to this item. The Applicant timely responded to the deficiency notice and provided all requested documents by the relevant deadline. In addition to the items that were requested, the Applicant provided other documentation and Application changes that had not been requested by staff. These changes included a change to the interest rate on the permanent loan, a change to the permanent loan amount, an updated Sources and Uses, and other financial exhibits.
Because these extra changes and new exhibits were not requested by staff and were not necessary in order to respond to the issued Deficiencies, they cannot be taken into consideration when underwriting the Application. Using the financial information originally provided in the Application, adjusted as required using the additional information requested by staff, the Application does not meet the Department’s underwriting standards. An underwriting report was issued on November 15, 2024, which did not recommend the Application for an award of tax credits. An appeal of that recommendation was timely submitted.
The appeal requests that the revised financial information be accepted and used to underwrite the Application, which the Department cannot accommodate for reasons already explained in this item. As an alternative, the appeal suggests that a new Deficiency could be issued that would allow the Application to be revised as an “all bills paid” structure for tenant utilities, which may result in the Application meeting financial feasibility requirements.
The QAP specifies strict timelines by which any deficiency that is issued must be resolved. In accordance with 10 TAC §11.201(6)(B):
Deficiencies for Competitive HTC Applications. Unless an extension has been timely requested and granted prior to the deadline, if a deficiency is not fully resolved to the satisfaction of the Department by 5:00 p.m. on the fifth business day following the date of the deficiency notice, then five (5) points shall be deducted from the selection criteria score for each additional day the deficiency remains unresolved. Points deducted for failure to timely respond to a deficiency will not impact the Pre-Application score. If deficiencies are not resolved by 5:00 p.m. on the seventh business day following the date of the deficiency notice, then the Application shall be terminated, subject to the Applicant's right to appeal. An Applicant may not change or supplement any part of an Application in any manner after the filing deadline or while the Application is under consideration for an award, and may not add any set-asides, increase the requested credit amount, revise the Unit mix (both income levels and Bedroom mixes), or adjust their self-score except in response to a direct request from the Department to do so as a result of an Administrative Deficiency. (§2306.6708(b); §2306.6708) Applicants may not use the Deficiency Process to increase a scoring item's points or to change any aspect of the proposed Development, financing structure, or other element of the Application. To the extent that the review of deficiency documentation or the imposing of point reductions for late responses alters the score assigned to the Application, such score will be reflected in the updated application log published on the Department's website or a Scoring Notice may be issued.
The previously mentioned list of deficiencies that was issued on September 25, 2024, requested that the Applicant revise the Utility Allowance to comply with Department rules. That deficiency was timely responded to and cleared in the initial deficiency response. Because the Application now complies with Utility Allowance requirements, there is no clear mechanism within the rules to allow a new deficiency to be issued.
Staff believes that its actions on this matter are consistent with state statute and the Qualified Allocation Plan, and accordingly recommends that this appeal be denied.