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Presentation, discussion, and possible action on an order adopting the repeal of 10 TAC Chapter 13, Multifamily Direct Loan Rule, and an order adopting the new 10 TAC Chapter 13, Multifamily Direct Loan Rule, and directing its publication in the Texas Register for adoption
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RECOMMENDED ACTION
recommendation
WHEREAS, the Texas Department of Housing and Community Affairs (the Department) is authorized to make awards of loans or grants to developers for the State of Texas;
WHEREAS, the Department plans to administer the varying fund sources used in making these awards of loans and grants in a specific manner that necessitates this Multifamily Direct Loan Rule;
WHEREAS, pursuant to Tex. Gov’t Code §2306.053, the Department is authorized to adopt rules governing the administration of the Department and its programs; and
WHEREAS, public comment was accepted on this rule and such rulemaking is being adopted without substantive changes for publication in the Texas Register;
NOW, therefore, it is hereby
RESOLVED, that the final order adopting the repeal of 10 TAC Chapter 13, Multifamily Direct Loan Rule, and adopting new 10 TAC Chapter 13, Multifamily Direct Loan Rule, together with the preamble presented to this meeting, is hereby ordered and approved for publication in the Texas Register and its adoption; and
FURTHER RESOLVED, that the Executive Director and his designees be and each of them are hereby authorized, empowered, and directed, for and on behalf of the Department, to cause the 10 TAC Chapter 13, Multifamily Direct Loan Rule, together with the preamble in the form presented to this meeting, to be published in the Texas Register and, in connection therewith, make such non-substantive technical corrections as they may deem necessary to effectuate the foregoing, including requested revisions to the preambles.
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BACKGROUND
Attached to this Board Action Request is the final 10 TAC Chapter 13, Multifamily Direct Loan Rule. Changes to the Multifamily Direct Loan Rule are generally clarifications that staff identified as necessary to provide clear information to Applicants.
The Board approved the proposed repeal and replacement of 10 TAC Chapter 13, Multifamily Direct Loan Rule, at the Board meeting on October 26, 2024, as published in the Texas Register for public comment on November 10, 2023. Public comment, in accordance with the Citizen Participation Plan requirements in 24 CFR §91.105, was accepted between 8:00 a.m. Austin local time on November 1, 2023, and 5:00 p.m. Austin local time on December 1, 2023. Staff has reviewed all comments received and provided a reasoned response to these comments in the attached preamble.
Preamble, including required analysis, for adoption of the repeal of 10 TAC Chapter 13, the Multifamily Direct Loan Rule
The Texas Department of Housing and Community Affairs (the Department) adopts the repeal of 10 TAC Chapter 13, Multifamily Direct Loan Rule, §§ 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.7, 13.8, 13.9, 13.10, 13.11, 13.12, and 13.13. The purpose of the repeal is to provide for clarification of the existing rule through new rulemaking action.
The Department has analyzed this rulemaking and the analysis is described below for each category of analysis performed.
a. GOVERNMENT GROWTH IMPACT STATEMENT REQUIRED BY TEX. GOV’T CODE §2001.0221.
1. Mr. Bobby Wilkinson, Executive Director, has determined that, for the first five years the repeal would be in effect, the repeal does not create or eliminate a government program, but relates to the repeal, and simultaneous readoption making changes to an existing activity, administration of the Multifamily Direct Loan Program.
2. The repeal does not require a change in work that would require the creation of new employee positions, nor is the repeal significant enough to reduce work load to a degree that any existing employee positions are eliminated.
3. The repeal does not require additional future legislative appropriations.
4. The repeal does not result in an increase in fees paid to the Department nor in a decrease in fees paid to the Department.
5. The repeal is not creating a new regulation, except that it is being replaced by a new rule simultaneously to provide for revisions.
6. The action will repeal an existing regulation, but is associated with a simultaneous readoption making changes to an existing activity, administration of the Multifamily Direct Loan Program.
7. The repeal will not increase or decrease the number of individuals subject to the rule’s applicability.
8. The repeal will not negatively or positively affect this state’s economy.
b. ADVERSE ECONOMIC IMPACT ON SMALL OR MICRO-BUSINESSES OR RURAL COMMUNITIES AND REGULATORY FLEXIBILITY REQUIRED BY TEX. GOV’T CODE §2006.002.
The Department has evaluated this repeal and determined that the repeal will not create an economic effect on small or micro-businesses or rural communities.
c. TAKINGS IMPACT ASSESSMENT REQUIRED BY TEX. GOV’T CODE §2007.043. The repeal does not contemplate or authorize a taking by the Department, therefore no Takings Impact Assessment is required.
d. LOCAL EMPLOYMENT IMPACT STATEMENTS REQUIRED BY TEX. GOV’T CODE §2001.024(a)(6).
The Department has evaluated the repeal as to its possible effects on local economies and has determined that for the first five years the repeal would be in effect there would be no economic effect on local employment; therefore no local employment impact statement is required to be prepared for the rule.
e. PUBLIC BENEFIT/COST NOTE REQUIRED BY TEX. GOV’T CODE §2001.024(a)(5). Mr. Wilkinson has determined that, for each year of the first five years the repeal is in effect, the public benefit anticipated as a result of the repealed section would be increased clarity and improved access to the Multifamily Direct Loan funds. There will not be economic costs to individuals required to comply with the repealed section.
f. FISCAL NOTE REQUIRED BY TEX. GOV’T CODE §2001.024(a)(4). Mr. Wilkinson also has determined that for each year of the first five years the repeal is in effect, enforcing or administering the repeal does not have any foreseeable implications related to costs or revenues of the state or local governments.
SUMMARY OF PUBLIC COMMENT. The public comment period was held from November 1 to December 1, 2023, to receive input on the proposed repealed section. No comments on the repeal were received.
STATUTORY AUTHORITY. The repeal is adopted pursuant to Tex. Gov’t Code §2306.053, which authorizes the Department to adopt rules. Except as described herein the repealed sections affect no other code, article, or statute.
10 TAC Chapter 13, Multifamily Direct Loan Rule
§13.1. Purpose.
§13.2. Definitions.
§13.3. General Loan Requirements.
§13.4. Set-Asides, Regional Allocation, and NOFA Priorities.
§13.5. Application and Award Process.
§13.6. Scoring Criteria.
§13.7. Maximum Funding Requests and Minimum Number of MFDL Units.
§13.8. Loan Structure and Underwriting Requirements.
§13.9. Construction Standards.
§13.10. Development and Unit Requirements.
§13.11. Post-Award Requirements.
§13.12. Pre-Closing Amendments to Direct Loan Terms.
§13.13. Post-Closing Amendments to Direct Loan Terms.
Preamble, including required analysis, for adoption of new 10 TAC Chapter 13, Multifamily Direct Loan Rule
The Texas Department of Housing and Community Affairs (the Department) adopts with changes new 10 TAC Chapter 13, Multifamily Direct Loan Rule, §§ 13.1, 13.2, 13.3, 13.4, 13.5, 13.6, 13.7, 13.8, 13.9, 13.10, 13.11, 13.12, and 13.13. The purpose of the new sections is to provide compliance with Tex. Gov’t Code §2306.111 and to update the rule to: clarify program requirements in multiple sections, codify in rule practices of the division, and change citations to align with changes to other multifamily rules. In general, most changes are corrective in nature, intended to gain consistency with state or federal rules, delete duplicative language or provisions, correct or update rule references, and clarify language or processes to more adequately communicate the language or process. Additional changes were undertaken in order to simplify the rule, and to allow greater flexibility in implement the programs which it covers.
Tex. Gov’t Code §2001.0045(b) does not apply to the rule because it was determined that no costs are associated with this action, and therefore no costs warrant being offset.
The Department has analyzed this rulemaking and the analysis is described below for each category of analysis performed.
a. GOVERNMENT GROWTH IMPACT STATEMENT REQUIRED BY TEX. GOV’T CODE §2001.0221.
Mr. Bobby Wilkinson, Executive Director, has determined that, for the first five years the new rule would be in effect:
1. The rule does not create or eliminate a government program, but relates to the readoption of this rule which makes changes to an existing activity, administration of the Multifamily Direct Loan Program.
2. The new rule does not require a change in work that would require the creation of new employee positions nor are the rule changes significant enough to reduce work load to a degree that eliminates any existing employee positions.
3. The rule changes do not require additional future legislative appropriations.
4. The rule changes will not result in an increase in fees paid to the Department, nor in a decrease in fees paid to the Department.
5. The rule is not creating a new regulation, except that it is replacing a rule being repealed simultaneously to provide for revisions.
6. The rule will not expand, limit, or repeal an existing regulation.
7. The rule will not increase or decrease the number of individuals subject to the rule’s applicability; and
8. The rule will not negatively or positively affect the state’s economy.
b. ADVERSE ECONOMIC IMPACT ON SMALL OR MICRO-BUSINESSES OR RURAL COMMUNITIES AND REGULATORY FLEXIBILITY REQUIRED BY TEX. GOV’T CODE §2006.002. The Department, in drafting this rule, has attempted to reduce any adverse economic effect on small or micro-business or rural communities while remaining consistent with the statutory requirements of Tex. Gov’t Code §2306.111.
1. The Department has evaluated this rule and determined that none of the adverse effect strategies outlined in Tex. Gov’t Code §2006.002(b) are applicable.
2. This rule relates to the procedures for multifamily direct loan applications and award through various Department fund sources. Other than in the case of a small or micro-business that is an applicant for such a loan product, no small or micro-businesses are subject to the rule. It is estimated that approximately 200 small or micro-businesses are such applicants; for those entities the new rule provides for a more clear, transparent process for applying for funds and does not result in a negative impact for those small or micro-businesses. There are not likely to be any rural communities subject to the rule because this rule is applicable only to direct loan applicants for development of properties, which are not generally municipalities. The fee for applying for a Multifamily Direct Loan product is $1,000, unless the Applicant is a nonprofit that provides supportive services or the Applicant is applying for Housing Tax Credits in conjunction with Multifamily Direct Loan funds, in which case the application fee may be waived. These fee costs are not inclusive of external costs required by the basic business necessities underlying any real estate transaction, from placing earnest money on land, conducting an Environmental Site Assessment, conducting a market study, potentially retaining counsel, hiring an architect and an engineer to construct basic site designs and elevations, and paying any other related, third-party fees for securing the necessary financing to construct multifamily housing.
There are 1,296 rural communities potentially subject to the rule for which the economic impact of the rule is projected to be $0. 10 TAC Chapter 13 places no financial burdens on rural communities, as the costs associated with submitting an Application are born entirely by private parties. In an average year the volume of applications for MFDL resources that are located in rural areas is approximately fifteen. In those cases, a rural community securing a loan will experience an economic benefit, including, potentially, increased property tax revenue from a multifamily Development.
3. The Department has determined that because there are rural MFDL awardees, this program helps promote construction activities and long term tax base in rural areas of Texas. Aside from the fees and costs associated with submitting an Application, there is a probable positive economic effect on small or micro-businesses or rural communities that receive MFDL awards and successfully use those awards to construct multifamily housing, although the specific impact is not able to be quantified in advance.
c. TAKINGS IMPACT ASSESSMENT REQUIRED BY TEX. GOV’T CODE §2007.043. The rule does not contemplate or authorize a taking by the Department, therefore no Takings Impact Assessment is required.
d. LOCAL EMPLOYMENT IMPACT STATEMENTS REQUIRED BY TEX. GOV’T CODE §2001.024(a)(6).
The Department has evaluated the rule as to its possible effects on local economies and has determined that for the first five years the rule will be in effect the rule may provide a possible positive economic effect on local employment in association with this rule since MFDL Developments, layered with housing tax credits, often involve a typical minimum investment of $10 million in capital, and more commonly an investment from $20 million to $30 million. Such a capital investment has direct, indirect, and induced effects on the local and regional economies and local employment. However, because the exact location of where program funds or developments are directed is not determined in rule, and is driven by real estate demand, there is no way to predict during rulemaking where these positive effects may occur. Furthermore, while the Department believes that any and all impacts are positive, that impact is not able to be quantified for any given community until MFDL awards and LIHTCs are actually awarded to a proposed Development, given the unique characteristics of each proposed multifamily Development.
Texas Gov’t Code §2001.022(a) states that this “impact statement must describe in detail the probable effect of the rule on employment in each geographic region affected by this rule…” Considering that significant construction activity is associated with any MFDL Development layered with LIHTC and each apartment community significantly increases the property value of the land being developed, there are no probable negative effects of the new rule on particular geographic regions. If anything, positive effects will ensue in those communities where developers receive MFDL awards.
e. PUBLIC BENEFIT/COST NOTE REQUIRED BY TEX GOV’T CODE §2001.024(a)(5). Mr. Wilkinson has determined that, for each year of the first five years the new sections are in effect, the public benefit anticipated as a result of the new sections will be improved clarity of program requirements in multiple sections, codification in rule practices of the division, and change citations to align with changes to other multifamily rules. There will not be any economic cost to any individuals required to comply with the new sections because this rule does not have any new requirements that would cause additional costs to applicants.
f. FISCAL NOTE REQUIRED BY TEX. GOV’T CODE §2001.024(a)(4). Mr. Wilkinson also has determined that for each year of the first five years the new sections are in effect, enforcing or administering the new sections does not have any foreseeable implications related to costs or revenues of the state or local governments because it does not have any new requirements that would cause additional costs to applicants.
SUMMARY OF PUBLIC COMMENT. The public comment period was held from November 1, to December 1, 2023, to receive input on the proposed new sections. Comment was received from: BETCO Housing Lab (Commenter 1) and Foundation Communities (Commenter 2). A summary of comments pertinent to the proposed rule and the Department’s response is provided.
STATUTORY AUTHORITY. The new sections are adopted pursuant to Tex. Gov’t Code §2306.053, which authorizes the Department to adopt rules. Except as described herein the new sections affect no other code, article, or statute. The rule has been reviewed by legal counsel and found to be a valid exercise of the agency’s legal authority.
13.3 General Loan Requirements
COMMENT SUMMARY: Commenter 1 requests that interest on construction loans be removed from §13.3(e), related to Ineligible Costs. The commenter notes that interest on construction loans is eligible federally, and therefore should also be eligible in this rule.
STAFF RESPONSE: Both NHTF and HOME federal regulations limit repayment of construction, bridge financing, or guaranteed loans, including the interest on those loans. For both programs, in order for the repayment of these loans to be eligible, the loan must have been used for eligible costs under the specific program in question, and the HOME or NHTF assistance is required to have been part of the original financing for the project. For NHTF, these costs could not have occurred before the Department enters into the Contract with the Owner. In addition, repayment of these loans or the interest on them would require that the Department review all costs paid out of those loans to ensure that all are eligible under the relevant program. Given the Department’s current workload related to these funds, staff is unable to assume the additional responsibility of these reviews. Accordingly, no change is recommended related to this comment.
13.4 Set-Asides, Regional Allocation, and NOFA Priorities
COMMENT SUMMARY: Commenter 1 requests that “NOFA Priorities” be removed from this section, and elsewhere in the rule, as those priorities are now established in each Notice of Funding Availability.
STAFF RESPONSE: NOFA Priorities are still addressed at §13.4(c), which establishes that the priorities will be established in each NOFA. Staff recognizes that this is significantly abbreviated from what has previously been covered in the rule concerning NOFA priorities, but believes that it is important to make this small section of the rule easy to locate for people who may be reading the rule for the first time. Staff recommends leaving the title as is.
COMMENT SUMMARY: Commenter 2 notes that a sentence in §13.4(a) is confusing, and could be read to prohibit layering MFDL funds with other Department sources. Commenter 2 also requests that §13.4(a)(A)(i) be modified to include a provision from 24 CFR 93.302 concerning layering of project-based subsidies onto NHTF units.
STAFF RESPONSE: Concerning the unclear sentence noted by the Commenter, staff agrees and has deleted this sentence from the rule. Any prohibited layering can be addressed in a NOFA, as has been done in the past. Regarding the federal provision that the Commenter would like referenced in the rule, the rule currently cites the exact section of 24 CFR, and therefore staff believes the rule currently accomplishes what is being asked.
13.5 Application and Award Process
COMMENT SUMMARY: Commenter 1 requests clarity as to whether the experience requirement of having previously placed 50 units in service is limited to affordable or market-rate units. The Commenter also requests additional guidance as to what would be considered sufficient evidence of this requirement.
STAFF RESPONSE: The rule is silent as to whether the units in question must be affordable or market-rate, therefore staff would have no basis for denying either type of unit to meet the qualification.
Regarding adding guidance to the rule specifying acceptable documentation to demonstrate that this requirement has been met, the Qualified Allocation Plan previously contained similar language related to an experience requirement. A common complaint among Applicants was that the requirements were so specific that they prevented some Applicants from qualifying, even if they otherwise met the intention of the experience requirement. Recognizing that each Development and business are unique, staff recommends no change to the language to allow as much reasonableness and flexibility as possible when reviewing for this requirement.
COMMENT SUMMARY: Commenter 2 requests that NHTF applications be exempt from the requirement to include language concerning choice-limiting actions and environmental review in purchase contracts or site control agreements, stating that this language is not the result of any federal requirement for that particular program.
STAFF RESPONSE: Staff recommends exempting NHTF applications from having to meet this requirement unless the Development is layered with other funds subject to Part 50 and Part 58; however, potential Applicants should be aware that undertaking any choice-limiting action may render the Development ineligible for other types of funding should the need arise for an Application to be moved to another funding source.
13.7 Maximum Funding Requests and Minimum Number of MFDL Units
COMMENT SUMMARY: Commenter 2 requests that staff analysis follow HUD requirements for determining the minimum number of MFDL units and to not require any more 30% AMI units than what are required federally.
STAFF RESPONSE: Staff uses a unit-subsidy analysis and a cost-proportion analysis to determine the number of affordable units required on a project. This method is compliant with federal requirements. Staff recommends no change.
13.8 Loan Structure and Underwriting Requirements
COMMENT SUMMARY: Commenter 1 requests that TDHCA’s loan only be superior to that have soft repayment structures, non-amortizing notes, have deferred forgivable provisions, or in which the lender has an identity of interest with any member of the Development Team, only in the event that the TDHCA loan is in an amount greater than those sources.
STAFF RESPONSE: Staff recommends that an Applicant that needs a structure that does not comply with the rules should submit a waiver request as soon as possible, but no later than with the Application for the Board’s consideration. No change is recommended to the rule.
COMMENT SUMARRY: Commenter 2 requests that loans with soft repayment structures have a 0% interest during permanent periods. The commenter also requests that the Department begin determining lien priority and payment priority separately (current practice is that lien priority determines payment priority), and that certain fees that are payable from surplus cash, such as deferred developer fees and investor required fees, to be paid before the Department’s loan.
STAFF RESPONSE: Permanent-period interest is established in each NOFA, and therefore recommends no change concerning that interest rate in the rule. Lien priority and payment priority have historically matched one another for Department programs. While staff appreciates the suggestion of treating them as separate concepts, this would represent a significant rule change, and therefore recommends exploring this concept for the 2025 rule. Regarding loan priorities, staff recommends that an Applicant that needs a structure that does not comply with the rules should submit a waiver request with the Application for the Board’s consideration. No change is recommended to the rule.
13.10 Development and Unit Requirements
COMMENT SUMMARY: Commenter 1 requests that the Department publish a calculator to assist Applicants in determining the appropriate number of HOME Match units that must be provided at each development. Commenter 1 also requests that no program other than HOME be required to provide match units.
STAFF RESPONSE: Staff appreciates the suggestion of publishing a match unit calculator, and will work on this in 2024. Regarding other programs providing match units, the Department has an obligation to match the majority of its federal HOME allocation each year at $0.25 per $1.00 received. The funds must contribute towards housing that qualifies as affordable housing under the HOME program (24 CFR 92.218(a)). A development that provides match funds must also provide match units to meet the requirement, otherwise the match would not be contributing to qualifying housing. The Department does not have the option of removing the requirement for non-HOME MFDL programs to provide match, as these contributions are necessary to meet the federal requirement, therefore this provision will remain in the rule.
13.11 Post-Award Requirements
COMMENT SUMMARY: The new rule requires that a fully completed environmental review must be submitted to the Department within 90 days of the Application Acceptance Date. Commenter 1 requests that this be changed to within 90 days of the Board approval date.
STAFF RESPONSE: Staff will not enter into a contract for any awarded funds until the environmental clearance is completed. Shortening the time between Application receipt, underwriting, Board approval, contracting, and closing is a critical and immediate priority for the Department. Adding as many as 90 days between award and contract is contrary to this priority, and therefore staff recommends no change.
MISCELLANEOUS
Commenter 2 provided additional comment concerning priorities that should be established in the Department’s NOFAs. Staff appreciates these comments and will revisit them during future NOFA development processes; however, no specific response is being provided at this time, as these items are part of a NOFA, rather than the rule in question.