Layers of Regulation Mounting Pressure on Tax Credit Developers

The Growing Regulatory Costs to Provide Affordable Housing

By Elaine Acker for the Texas Affiliation of Affordable Housing Providers

Navigating the labyrinth of modern government regulations can be daunting, and the regulations impact many aspects of our daily lives, often in ways that were never intended.

Consider healthcare: Over the past five years, visiting a healthcare professional has become an exercise in paperwork and red tape. Patients now sign electronic acknowledgments for documents they rarely read, all in the name of protection. Yet, these regulations often create more hurdles for doctors and their patients, complicating the path to wellness.

Consider technology: The devices we rely on daily—our smartphones, smart TVs, and computers—are laden with features and applications so numerous that it's nearly impossible to fully utilize them. The complexity intended to enhance our lives frequently overwhelms us instead.

Affordable housing is no different. The Texas Qualified Allocation Plan (QAP) looks very different today than it did in the 1980s. It has ballooned from 120 to over 200 pages, layered with requirements from federal, state, and local authorities. These regulations, while initially designed to protect residents and ensure that public funds are appropriately applied, have created a tangled web that even seasoned developers struggle to navigate. Often, these mandates address problems that no longer exist, yet the barriers they create persist, hindering the development of much-needed housing.

These examples underscore a broader issue: government regulations, though crafted with the best intentions, often lead to unintended consequences. Instead of simplifying and safeguarding, they frequently complicate and obstruct, creating challenges that impact industry professionals and the public alike.

The Cost of Doing Business

Meeting the growing need for housing is becoming ever more challenging for both private, market rate developers, and affordable housing, tax-credit developers thanks to factors like soaring insurance expenses, high interest rates, the cost of materials, and the increased costs associated with fee structures in local municipalities. According to the National Association of Home Builders (NAHB), the costs of regulations now exceed 40 percent of multifamily development costs. Read that again: 40 percent.

That means that as Texas’s affordable housing developers and builders face additional layers of requirements for every new community developed, the cost of doing business will ultimately become unsustainable. Every Texas business owner is in business to earn money. It’s fair to expect a return on their investment. But with every new regulation, the equation becomes less cost effective, which ultimately hurts Texas residents with fewer properties being developed or with properties having fewer available housing units.

The Dallas Morning News reported in March of this year that some permit fees would double, or in some cases, even triple. The new fee schedule took effect on May 1, 2024 and permit fees jumped from $225 to $552 per unit for multifamily developments. While the City of Dallas development department argued that the rate hikes were long overdue, the substantial, immediate increases are likely to hit affordable housing developers especially hard, adding tens of thousands of dollars to every development that cannot be passed along to tenants.

Also in March, the San Antonio Business Journal reported that the San Antonio Water System voted to increase impact fees on new builds. Fees are used to pay for capital improvements to service new developments. Under the new fee structure, developers’ costs increased by an average of 23 percent. When the city council expressed concerns about how the fees would affect residents moving into affordable housing builds, the city’s chief financial officer noted that affordable housing developers can apply for partial or full impact fee waivers – something that is helpful, but not readily available in all local jurisdictions.

Exploring the Double Standard

If you’ve wondered exactly what requirements factor into the equation, consider the chart below. You’ll see a quick comparison between the requirements for private developers versus tax credit developers.

Market rate developers clearly have fewer hurdles and access to more creative ways to move a deal forward.

Market rate developers have fewer hurdles and access to more creative ways to move a deal forward. With all documentation in place, they can close a deal in as little as 60 days. On the other side, affordable housing developers have multiple ways their plans can be derailed, and because rigorous protocols are required by the Texas QAP and statutory requirements, these deals take longer to place into service. It’s not unheard of for tax credit developments to take a year or more to close.

“There are different levers market rate developers have versus tax credit developers,” says Karsten Lowe, affordable housing development manager at JPI. “Underlying market conditions can allow market rate developments to charge higher rents which can help absorb the growing costs. Affordable developments are required to charge rents based on the county AMI, which has a defined ceiling. This can directly impact something as simple as how much you can pay for the dirt you are trying to develop. In counties with lower AMI’s it is becoming increasingly challenging to make the numbers work.”

Reminder: No Two Markets Are Alike

How did we get here? Federal and state regulations were initially intended to address health and safety. This meant universal requirements about certain building materials such as insulation. But over time, well-intended, one-size-fits-all regulations have morphed into expensive mandates that aren’t applicable for every municipality.

Texas features a wide range of geographical regions and significant economic diversity. There’s high tech in Austin and agriculture in the Valley. There are piney woods in the northeast and deserts in the west. It only makes sense that no two housing markets are the same, yet broad regulations remain in place, whether you are building in Plano or Laredo.

...it is important to consider the cost-benefit equation in a way that recognizes the impact on property owners, and ultimately, the effect on Texas’s most vulnerable renters.

Mandates and Policies in the News

The most recent example of this one-size-fits-all approach is the requirement that new multifamily developments financed by HUD or USDA be built to meet the International Energy Conservation Code (IECC). In an April 2024 article, the NAHB said that the mandate does little to curb overall energy use but will make the housing affordability crisis worse, deterring developers at a time when more affordable housing options are needed. Further, the article notes that property owners will not see a payback for more than 90 years and they "will make older, less efficient homes more attractive." All multifamily properties will have to comply with the new building codes by May 2025.

While there’s no question that measures are needed to address climate change, it is important to consider the cost-benefit equation in a way that recognizes the impact on property owners, and ultimately, the effect on Texas’s most vulnerable renters. If the payback on the added cost is 90 years away, the property owner will not see a benefit in their lifetime, yet they would be required to shoulder those costs on top of everything else.

In other news, the City of Austin’s latest eviction policies have created a backlash for residents.

Megan Lasch, owner and president of Austin’s O-SDA Industries, explained the ripple effect of a well-intended policy: a 30-day notice period prior to providing notices of eviction. When the City of Austin extended the time for eviction notices it inadvertently made it difficult for those being evicted to find alternate housing. Why? Some tenants accrue thousands of dollars of past-due debt because of the extended process. Residents end up with 90-120 days of past due balances instead of 30-60 days, or even a zero past due balance if they were able to work out a payment plan sooner rather than later. “When tenants stop paying, over time, it creates an economic problem with the property,” says Lasch, “and the property has to spend money reletting the unit. The goal is always to keep people housed but for the system to work, there has to be accountability on all sides of the equation.”

Meanwhile, the developer is still responsible for meeting their own debt obligations to lenders and paying for social services. The bottom line: affordable housing has to be sustainable for developers, too, because you’re counting on them, along with their investors, to build housing for a diverse workforce.

“If we really want to create and maintain long term affordable housing, it is incredibly vital that lawmakers listen to all sides of the process as they consider new policies,” says Lasch. “Taking time to understand how policy changes affect the day-to-day operations of the community will, in the long run, create more sustainable affordable housing. Because these communities operate under very tight margins, even one bad policy can have a huge impact to the overall health of the property.”

If we really want to create and maintain long-term affordable housing, it is incredibly vital that lawmakers listen to all sides of the process as they consider new policies.

Quality of Life

When you reduce the regulatory costs associated with development, housing becomes instantly more affordable for those who need it most and immediately improves their quality of life."

One of the objectives of safe, high quality, affordable housing is that you can put a market rate development right next to it and not be able to tell them apart. Tenants needing affordable housing don't deserve any less of a standard of living, says TAAHP Executive Director Roger Arriaga.

The differences in costs are happening behind the scenes. The chart below highlights some of the design features and on-site benefits that can affect the business model for affordable housing developers.

“We know we have a housing crisis here in Texas,” says Lowe. “And people struggle to quantify what that means. But I can tell you, as it relates to the low-income housing tax credit program, that affordable housing has been one of the most successful public-private partnerships in all of U.S. history.”

“The goal should be to address affordability,” Lowe continues. “But to address that need of affordability, the finances have to make sense.”

Multifamily Development Design Features, Amenities, and Requirements

A Sustainable Future for Affordable Housing

For that partnership to remain robust well into the future, consider this:

1. What if every regulation started with an affordability impact analysis?

2. What if policymakers streamlined the tax credit regulations to remove duplications?

3. What if the state removed requirements for state representative approvals and allowed community leaders to decide what is best for their home community?

4. What if the broad federal and state regulations were set aside in favor of requirements tailored to Texas’ diverse regions?

5. What if local jurisdictions helped facilitate the approval processes for developers and builders, removing burdens and barriers, and focusing on the mission of affordable housing.

6. What if everyone believed that neighborhoods are made of a strong community fabric which includes diverse housing options for those who seek it?

7. What if municipalities leveled the playing field, applying affordable housing’s rigorous standards to market-rate developers?

8. What if municipalities waived fees and expedited applications, zoning, and inspections for housing developments that meet their criteria for quality built, safe, and affordable housing?

Meaningful change and sustainable affordable housing programs can start with a single conversation.

The goal should be to address affordability, but to address that need of affordability, the finances have to make sense.

Karsten Lowe, JPI

ARE YOU INTERESTED IN AFFORDABLE HOUSING POLICY ISSUES?

TAAHP offers several ways to stay informed and get involved. TAAHP sends e-mail newsletters monthly to members. Members who want to take a more hands-on approach can get involved in TAAHP committees. For more information, visit www.taahp.org