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Presentation, discussion, and possible action on an appeal of the cost certification underwriting analysis for Town Oaks (HTC #21164/22838/23963)
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RECOMMENDED ACTION
recommendation
WHEREAS, Town Oaks (Development) was approved for a 9% Housing Tax Credit (HTC) award in 2021, a reallocation of tax credits under Force Majeure in 2022, and Supplemental Credits in 2023 for the acquisition and rehabilitation of 48 units, all of which are designated as low-income units, in Kenedy, Karnes County;
WHEREAS, rehabilitation of the Development was completed in 2024, and the cost certification documentation for the Development has been submitted by the Owner and is under review the Department;
WHEREAS, staff’s underwriting analysis at cost certification reflects a year-one Debt Coverage Ratio (DCR) of 2.29 for the Development, which exceeds the maximum DCR threshold of 1.50 at cost certification as stated in 10 TAC §11.302(d)(4)(D), requiring an adjustment of the debt to bring the projected DCR to 1.50 for HTC sizing purposes, which resulted in a recommend annual HTC amount of $573,284, which is $53,466 lower than the allocated HTC amount after the Supplemental Credits;
WHEREAS, HVM 2021 Kenedy, LLC (Development Owner or Owner) requests that this recommended reduction to the HTC amount be reconsidered, as the Development is a Section 515 property financed and regulated by the United States Department of Agriculture Rural Development (USDA-RD), and because of that, excess project cash is not freely distributed to the Owner; and
WHEREAS, Section 42 of the Internal Revenue Code requires that the housing credit dollar amount allocated to a project shall not exceed the amount the housing credit agency determines is necessary for the financial feasibility of the project and its viability as a qualified low-income housing project throughout the credit period, and the maximum DCR threshold in the Qualified Allocation Plan is applied to determine that developments have a sufficient level of debt and are not over-subsidized with Housing Tax Credits;
NOW, therefore, it is hereby
RESOLVED, that the appeal of the underwriting at cost certification for Town Oaks is denied as presented to this meeting, and the Executive Director and his designees are each authorized, directed, and empowered to take all necessary action to effectuate the foregoing; and
FURTHER RESOLVED, in accordance with 10 TAC §11.901(15), the Owner will be required to pay a fee equal to the one year credit amount of the lost credits (10% of the total unused tax credit amount) prior to the issuance of IRS Forms 8609 because the unsupported tax credits were not returned within 180 days of the end of the first year of the credit period.
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BACKGROUND
Town Oaks was approved for a 9% Housing Tax Credit (HTC) award in the annual amount of $545,000 in 2021, a reallocation of tax credits under Force Majeure in 2022, and Supplemental Credits increasing the annual HTC amount to $626,750 in 2023 for the acquisition and rehabilitation of 48 units, all of which are designated as low-income units, in Kenedy, Karnes County. Rehabilitation of the Development was completed in 2024, and the cost certification documentation for the Development has been submitted by the Owner and is under review the Department.
The Development collects rents based on a Section 8 project-based Housing Assistance Payment (HAP) contract, and from the time of Application, in 2021, to cost certification, the HAP contract rents increased substantially, changes to operating expenses were not as substantial, and debt service decreased. As a result, staff’s underwriting analysis at cost certification reflects a year-one Debt Coverage Ratio (DCR) of 2.29 for the Development. This DCR exceeds the maximum DCR threshold of 1.50 at cost certification stated in 10 TAC §11.302(d)(4)(D), requiring an adjustment of the debt to decrease the projected DCR to 1.50 for HTC sizing purposes, which resulted in a recommend annual HTC amount of $573,284, which is $53,466 lower than the allocated HTC amount after the Supplemental Credits. The additional debt added to the analysis for HTC sizing purposes is based on a 6% interest rate and a 30-year amortization, but it should be noted that the first lien debt is a USDA loan subsidized to an interest rate of 1% with a 50-year amortization period. The financing structure also includes a loan from The BHHH Companies, Inc. at an interest rate of 5% and a 30-year amortization period.
In a letter as of August 10, 2026, Dennis Hoover, a representative of the Owner, requests that this recommended reduction to the HTC amount be reconsidered, as the Development is a Section 515 property financed and regulated by the United States Department of Agriculture Rural Development (USDA-RD), and because of that, excess project cash is not freely distributed to the Owner. The Owner’s letter further states that any distribution to the Owner is strictly limited to the Return to Owner (RTO) authorized by USDA-RD and that cash flow in excess of the authorized RTO must be retained within the project or applied in accordance with USDA-RD requirements.
Section 42 of the Internal Revenue Code requires that the housing credit dollar amount allocated to a project shall not exceed the amount the housing credit agency determines is necessary for the financial feasibility of the project and its viability as a qualified low-income housing project throughout the credit period, and the maximum DCR threshold in the Qualified Allocation Plan is applied to determine that developments have a sufficient level of debt and are not over-subsidized with Housing Tax Credits. Any remaining cash flow from operations distributed to the partners or applied to the Development is not part of the HTC amount calculation.
To mitigate part of the reduction to the HTC amount, the Owner has the option under the 2021 Qualified Allocation Plan to deposit up to $2,500 per unit into a Special Reserve Account to include as a development cost. The Owner may also propose additional building and site amenities (suitable for the Target Population being served) in an amount not to exceed 1.5% of the originally underwritten Hard Costs. If this option is selected by the Owner, the additional amenities must be included in the Land Use Restriction Agreement for the Development.
Staff recommends that the appeal of the underwriting at cost certification for Town Oaks be denied. Furthermore, 10 TAC §11.901(15) states that Development Owners who have more tax credits allocated to them than they can substantiate through Cost Certification will return those excess tax credits prior to issuance of IRS Form 8609. For Competitive Housing Tax Credit Developments, a penalty fee equal to the one year credit amount of the lost credits (10% of the total unused tax credit amount) will be required to be paid by the Owner prior to the issuance of IRS Form 8609 if the tax credits are not returned, and 8609's issued, within 180 days of the end of the first year of the credit period. Because 2023 is the first year of the credit period for this Development, the unsupported tax credits cannot be reallocated and will be lost. Therefore, the Owner will be required to pay the applicable fee for the lost tax credits prior to issuance of IRS Forms 8609. Staff further recommends that if there is any adjustment to the HTC amount for finalization of the cost certification process, as agreed by staff and the Owner, such adjustment does not require further Board approval. Additionally, all required pending documentation for the cost certification review must be provided for the issuance of 8609s.