Mastering the California Tax Credit Game: A Deep Dive into QCTs, DDAs, and the TCAC/HCD Opportunity Map
The world of tax credits can be complex and overwhelming, especially when it comes to understanding the intricacies of California tax credits. One must navigate and master various components as applications to receive tax credits in California are scored on a 120-point scale.
California tax credits play a vital role in incentivizing affordable housing development and providing financial benefits to individuals and organizations. By mastering the California tax credit game, individuals and organizations can unlock numerous benefits. These include financial incentives for affordable housing development, access to additional resources, and increased competitiveness in securing tax credits. Understanding QCTs and DDAs is crucial since they serve as a key factor in determining eligibility for tax credit allocation. The TCAC/HCD Opportunity Map serves as a valuable resource for identifying tax credit opportunities.
Scoring
Tax Credit applications for affordable housing development are scored on a 120-point scale. 120s (projects scoring 120 points out of 120) receive top priority for funding and will be funded first, while 119s (projects scoring 119 points out of 120) and below will receive tertiary priority and will be funded after all possible 120s are funded. Therefore; affordable housing developers are trying to maximize points by achieving 120 points on each project that they submit for tax credit funding.
The number of different categories for points are numerous. For instance, each project application will take into consideration the following topics:
- Extent to Which the Project Serves Households at the Lowest Income Levels
- How the Project Affects State Policy Priorities
- Sponsor Qualifications
- Property Management Experience
- Project Readiness
- Sustainable Building Methods
- Cost Containment
Each topic is awarded points based on key criteria specified in the policies and each topic carries a different weight.
Locations
Locations present an area of the application that are out of the hands of Developers. Some locations naturally score better than other locations, so developers need to be picky about which projects they will pursue and which ones they won’t.
Qualified Census Tracts (QCTs), Difficult Development Areas (DDAs), and the TCAC/HCD Opportunity Map are all key criteria that present location based and cannot be changed by the developer. This means that if a developer wants to score 120 points, the project they are pursuing needs to be in High or Highest Resource AND reside in either a QCT or a DDA, otherwise they will be relegated to a lower point score if they maximize all other point categories.
QCTs, DDAs, and the TCAC/HCD Opportunity Map in Applications
As far as tax credit applications go, whether a project resides in a QCT or DDA carries the same weight in scoring (ie. a project can reside in either a QCT or a DDA and receive the maximum points in this category).
QCTs are designated areas that meet certain criteria related to income levels, poverty rates, or other factors. Projects located in QCTs receive priority in tax credit allocation, making them highly desirable for developers.
DDAs, on the other hand, are areas with higher costs or barriers to development. Projects located in DDAs receive additional points during the tax credit application process, increasing their chances of securing allocations.
Understanding QCTs & DDAs
The main benefit of finding projects in either a Qualified Census Tract (QCT), or a Difficult Development Area (DDA), relates to eligible basis. The eligible basis is the amount of money that the project costs that is depreciable. You can’t depreciate land, so only improvement costs qualify as eligible basis. But projects that reside in QCTs or DDAs get a 30% bump in eligible basis. So from a high level, if you buy a $10MM piece of land, and do $100MM worth of work to build the building. The eligible basis might be around $100MM. But in a QCT or DDA, it’s $130MM. If the deal is awarded 9% credits, then normally it would receive about $50MM in awards, but in QCTs and DDAs, it could receive $65MM in awards.
QCTs are specific geographic areas that have been designated by the state government as having a high concentration of low-income households. These areas are typically characterized by lower median incomes, higher poverty rates, and a larger percentage of residents receiving public assistance.
DDAs exhibit typically several traits. These include high land costs, low rental vacancy rates, high poverty rates, high unemployment rates, and other indicators of economic distress. The specific requirements may vary between states but generally aim to identify economically disadvantaged communities where affordable housing development is particularly challenging.
Another significance of QCTs & DDAs lies in the priority they receive in tax credit allocation. Projects located within QCTs/DDAs are given preferential treatment when it comes to securing tax credits.
One common criterion is the Area Median Income (AMI) threshold. The AMI is calculated based on the median income in a given region, and qualifying areas typically have an AMI that falls below a predetermined percentage, such as 60% or 80% of the regional AMI. This ensures that projects in these tracts target economically disadvantaged communities. QCTs/DDAs often have a higher percentage of residents living below the poverty line compared to surrounding regions.
HUD puts out a map of all DDAs and QCTs, which you can find here.
The TCAC/HCD Opportunity Map
The TCAC/HCD Opportunity Map is a valuable tool for developers and investors looking to maximize their tax credit benefits in California. Developed by the California Tax Credit Allocation Committee (TCAC) and the California Department of Housing and Community Development (HCD).
This tool is particularly beneficial as it saves time and simplifies the process of identifying eligible areas for tax credit allocation. It empowers developers to make informed decisions about where to invest their resources and focus their efforts. By strategically targeting properties in High and Highest resource locations identified on the Opportunity Map, developers can unlock the most needed areas where potential tax credit incentives will have a significant impact to economically disadvantaged communities.
The map uses color-coded regions to indicate the classification of each area, making it simple to identify eligible areas for tax credit allocation. By inputting an address or navigating through the map, users can determine if a specific location falls into which category. By focusing on Highest and High Resource locations, developers ensure that their project will score the highest possible points in this category of the application. Projects located in other resource locations will automatically score lower in this category.
This tool is located here.
Complexity
There are so many other factors that go into affordable housing development, and this article only discusses the 2 location factors in scoring a 120 in LIHTC deals, which are scored on a 120 point basis. For a complete list of 2024 guidance, look here.
Conclusion
Mastering the California tax credit game by understanding QCTs, DDAs, and the TCAC/HCD Opportunity Map is crucial for developers and investors looking to take advantage of tax credit incentives. By leveraging these designations, projects have not only achieved financial success but also made significant contributions to community development and revitalization efforts.
While these designations are helpful to developers, it also severely limits the number of properties that are feasible for tax credits. Most 100% affordable housing development projects cannot be feasibly built without tax credits, so 99% of projects will reside in QCTs/DDAs and in High or Highest resource areas, it’s unfortunately just that simple.
It is my opinion, as a broker working in the 100% affordable housing industry for over 10 years that this has both caused the housing crisis and contributed to alleviating the housing crisis in California. Hopefully more affordable housing will be built improving the quality of life for low-income individuals and families.
The information provided in this article are not considered fact, they are solely the views and opinions of the author. All of this information should be thoroughly researched independently, and this information shall not be relied on for the basis of any actions by the reader. Reader bares all responsibility for the use of the information provided above.
