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Presentation, discussion, and possible action regarding an appeal of the underwriting report for Azle Oaks Apartments
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RECOMMENDED ACTION
recommendation
WHEREAS, Azle Oaks Apartments is a 2025 competitive 9% Housing Tax Credit Application that requests $2,000,000 in Housing Tax Credits to Rehabilitate 116 Units in Azle;
WHEREAS, the Department’s Real Estate Analysis Division reviewed the Application and published an underwriting report that reduced the recommended a credit allocation to $1,999,705 for the reasons outlined below;
WHEREAS, the Applicant timely appealed this determination to the Executive Director, who denied the appeal; and
WHEREAS, the Applicant has requested to appeal directly to the Governing Board.
NOW, therefore, it is hereby
RESOLVED, that the appeal of the underwriting report for Azle Oaks Apartments is denied.
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BACKGROUND
Azle Oaks Apartments is a 2025 competitive 9% Housing Tax Credit Application that requests $2,000,000 in Housing Tax Credits to Rehabilitate 116 Units in Azle.
One federally allowable use of the Low Income Housing Tax Credit is the acquisition and rehabilitation of existing housing. In such a transaction, the credits for the acquisition of the buildings and the credits for the rehabilitation of those buildings are treated separately, although the Department underwrites and allocates the credits as a single transaction. To help illustrate this, please see the following excerpt from the underwriting report for this transaction (the full report is attached to this item):
The total Eligible Basis for the Acquisition of the buildings is separate from the Rehabilitation, as is federally required. After calculating the eligible credit amounts for both activities, the Department combines them into a single recommended credit amount which is presented to the Board for final approval. The Owner then claims these two credits separately with the Internal Revenue Service.
The Eligible Basis is the portion of a property's costs that can be used to calculate the amount of tax credits. It includes the costs of depreciable residential rental property used for qualified low-income housing purposes. Critically, Eligible Basis must exclude any non-depreciable assets, such as land. When calculating the eligible credits for acquisition, the Department is required to determine the amount of non-depreciable costs associated with the transaction and then calculate the credits based on the remaining eligible costs.
Applicants that intend to include building acquisition costs in Eligible Basis are required to submit a third-party appraisal to substantiate those costs. An appraisal was submitted with this Application that indicates an "as-is” value of $1,950,000, with the land valued at $750,000 (38.46%) and the buildings at $1,200,000 (61.54%).
The Development currently has a loan from USDA. In accordance with 10 TAC §11.304(c)(10)(E), the appraisal includes a valuation of this favorable financing associated with the property. Specifically, it identifies $575,000 in value attributable to the USDA loan transfer, as required:
(E) For any Development with favorable financing (generally below market debt) that will remain in place and transfer to the new owner, the appraisal must include a separate value for the existing favorable financing with supporting information.
While the QAP does not explicitly prescribe how favorable financing should be allocated between land and building acquisition costs, the Department’s Real Estate Analysis (REA) division applied its longstanding underwriting methodology. For over a decade, REA has consistently allocated favorable financing between land and building in proportion to the respective appraised values. This methodology is embedded in the TDHCA underwriting model and has been applied uniformly to USDA applications that include favorable financing to substantiate their acquisition price.
In this case, applying the appraisal-derived ratios (38.46% land/61.54% building) to the Applicant’s proposed acquisition cost of $2,447,238 results in an allocated land cost of $942,888 and building cost of $1,508,622; however, the Applicant allocated all favorable financing to the building and reported a land value of only $565,910 - $184,090 below the appraised land value of $750,000. After applying the proportional allocation of favorable financing, the Applicant's eligible building acquisition cost is overstated by $376,978. As a result, the Underwriting Report published on June 12, 2025, recommends a reduced annual 9% Housing Tax Credit allocation of $1,999,705, reflecting a $2,467 reduction in equity proceeds. With this small reduction in equity, the project remains financially feasible.
The Applicant timely appealed the Underwriting Report on June 17, 2025. The appeal argues that favorable financing should not be allocated according to the appraisal-derived ratios, because at cost certification, a CPA will not consider favorable financing because it is not a variable that adds value or has any aspect that impacts the land. The Applicant asserts this is because the favorable financing is not earned by the land, but is earned by the buildings. The Applicant further state that USDA 515 did not provide financing for affordable land, they financed affordable housing. The appeal does acknowledge that the appraised land value is $750,000, not the $565,190 submitted in the Application.
The appeal also references the 2023 Cleveland Square 9% Application (#23081), in which TDHCA accepted a land value equal to the appraised amount. In that case, however, the allocation of favorable financing had no effect on the credit allocation because the Applicant submitted a land value that exceeded the appraised value by $106,860.
The Application was underwritten using standard REA procedures that ensure consistency across all applications. Applying the appraised land/building value ratios to the value of transferred favorable financing reflects the benefit received by the current Applicant and prospective new owner. This approach is logical, consistently applicable, and transparent.
A third-party buyer would not have access to historical loan disbursements and could not reasonably be expected to determine how the original financing was applied to costs by the previous owner. What is relevant for underwriting purposes of the current tax credit Application is the benefit that the new ownership derives from the below-market financing it will assume. The methodology used by REA appropriately captures that benefit and ensures equitable treatment across all applicants.