Does Tennessee's 2011 low-income housing tax credit allocation plan satisfy federal requirements to favor projects in poor census tracts?

Subject

Opinion No. 11-65, Preference in THDA's Qualified Allocation Plan for Developments in Qualified Census Tracts, September 13, 2011

Plain-English summary

Lieutenant Governor Ronald Ramsey asked whether Part VII-B-1-b of the Tennessee Housing Development Agency's 2011 Qualified Allocation Plan for the federal Low-Income Housing Tax Credit (LIHTC) program conflicted with the federal preference for projects in "qualified census tracts" (QCTs) under 26 U.S.C. § 42(m)(1)(B)(ii)(III). The political backdrop: developers who wanted to build in QCTs (high-poverty census tracts, with a 25% poverty rate or where 50% of households earn under 60% of area median income) believed they were entitled to a meaningful tax-credit preference under federal law. THDA's 2011 plan gave them only one point on a 181-point scale, and gave five points to projects in non-QCT census tracts inside community revitalization plans, which they read as a slight inverted from what Congress required.

The AG concluded there was no conflict. Two threads:

The federal statute is broadly worded. 26 U.S.C. § 42(m)(1)(B) requires the qualified allocation plan to "give preference" to QCT projects with a concerted community revitalization plan. It does not specify the degree of preference or compare QCT projects to non-QCT-in-revitalization-area projects. THDA's plan does give one point to QCT projects, which is more than the zero points awarded to projects outside both categories. That is a preference. Federal law does not require more.

Local-conditions flexibility is built into the federal statute. Before listing the preferences, § 42(m)(1)(B)(i) defines a qualified allocation plan as one "which sets forth selection criteria to be used to determine housing priorities of the housing credit agency which are appropriate to local conditions." § 42(m)(1)(C) further requires consideration of project location and housing-needs characteristics. The state agency administering LIHTC has substantial latitude to decide what local conditions require. THDA decided that Tennessee's needs would be best served by encouraging development in revitalization areas outside QCTs, and by capping QCT-located tax credits at 50 percent of total allocation. The AG accepted that policy judgment as within agency discretion.

Fair-housing risk pulls in the other direction. The AG flagged that excessive preference for QCT projects can raise fair-housing concerns. In Inclusive Communities Project, Inc. v. Texas Dept. of Housing and Community Affairs, 749 F. Supp. 2d 486 (N.D. Tex. 2010), plaintiffs alleged that Texas's allocation pattern (disproportionately approving non-elderly developments in minority QCT neighborhoods and disproportionately denying them in predominantly Caucasian non-QCT neighborhoods) violated the Fair Housing Act and 42 U.S.C. §§ 1982 and 1983. That case made it to the Supreme Court in 2015 on disparate-impact theory and ultimately validated such claims. So a state housing agency that gave too much weight to QCT location could be accused of perpetuating residential segregation. THDA's plan, with its modest QCT preference and 50 percent cap, threaded the needle.

Currency note

This opinion was issued in 2011. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Significant changes since 2011: The U.S. Supreme Court decided Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519 (2015), holding that disparate-impact claims are cognizable under the Fair Housing Act. That decision substantially tightened the constraints on QCT-favoring allocation plans. THDA's Qualified Allocation Plan has been revised annually; the structures and scoring discussed here are not current.

Background and statutory framework

The LIHTC program. 26 U.S.C. § 42 creates the Low-Income Housing Tax Credit, a federal tax credit for owners and developers of qualified low-income rental housing. Spring Hill, L.P. v. Tennessee State Bd. of Equalization, 2003 WL 23099679 (Tenn. Ct. App. Dec. 31, 2003), describes the program. State housing finance agencies allocate the credits annually using a qualified allocation plan.

Federal plan content requirements. Under 26 U.S.C. § 42(m)(1)(B):
- (i) the plan "sets forth selection criteria … which are appropriate to local conditions";
- (ii) gives preference in allocating to (I) projects serving the lowest income tenants, (II) projects obligated to serve qualified tenants for the longest periods, and (III) projects located in qualified census tracts whose development contributes to a concerted community revitalization plan.

Subsection (C) requires certain criteria to be in the plan, including project location and housing-needs characteristics.

QCT definition. 26 U.S.C. § 42(d)(5)(B)(ii)(I): a census tract in which 50 percent or more of households have income less than 60 percent of area median gross income, or which has a poverty rate of at least 25 percent.

The 2011 THDA plan provisions in question. Part VII-B-1-b awards one point to projects located entirely within a QCT whose development contributes to an approved concerted community revitalization plan, and five points to projects located entirely within a non-QCT census tract that is entirely within an area covered by an approved community revitalization plan. The plan also caps QCT-located tax credits at 50 percent of total allocation (Parts IV-D-1 and VII-1-b-ii). Total available points are 181; the minimum to remain eligible is 80.

Fair-housing backdrop. Inclusive Communities Project, Inc. v. Texas Dept. of Housing and Community Affairs, 749 F. Supp. 2d 486 (N.D. Tex. 2010), at the time of this opinion, had found the plaintiff had standing and established a prima facie case that Texas's LIHTC allocation pattern violated the Fair Housing Act and 42 U.S.C. §§ 1982 and 1983 by disproportionately concentrating tax credits in minority QCT neighborhoods.

Common questions

Why give more points to non-QCT projects in revitalization areas than to QCT projects?

THDA's policy judgment: encourage low-income housing in revitalization areas that aren't already QCT-dense, while still preferring QCT projects to projects not in any revitalization area. The AG accepted that this struck a reasonable balance between the federal preference and fair-housing concerns about concentration.

Does this opinion give THDA carte blanche?

No. The AG concluded that the 2011 plan, as drafted, does not conflict with the federal statute. The AG was not asked whether a different plan with no QCT preference at all would conflict; that would likely be a different result.

What did Inclusive Communities Project end up holding?

At the district court in 2010 (which the AG cited), the case was at the prima facie stage. It went up to the Supreme Court and in 2015 (Texas Dept. of Housing and Community Affairs v. Inclusive Communities Project, Inc., 576 U.S. 519) the Court held disparate-impact claims are available under the Fair Housing Act. The framework constrains state housing agency allocation decisions today more than this 2011 opinion contemplates.

Did developers in QCTs have a strong claim that THDA's plan violated federal law?

According to this opinion, no. The federal text says "give preference," which THDA did by awarding one point. The statute does not require more.

Could THDA reverse the point allocation in a future year?

Yes, subject to fair-housing and federal-statute constraints. The AG's analysis turned on what was in the 2011 plan, not on what THDA was required to do in any given year.

Citations

• 26 U.S.C. § 42 (LIHTC program)
• 26 U.S.C. § 42(d)(5)(B)(ii)(I), -42(d)(5)(C)
• 26 U.S.C. § 42(m), -42(m)(1)(B), -42(m)(1)(B)(i), -42(m)(1)(B)(ii)(III), -42(m)(1)(C), -42(m)(1)(C)(i)
• Fair Housing Act; 42 U.S.C. §§ 1982, 1983
• Spring Hill, L.P. v. Tennessee State Bd. of Equalization, 2003 WL 23099679 (Tenn. Ct. App. Dec. 31, 2003)
• Inclusive Communities Project, Inc. v. Texas Dept. of Housing and Community Affairs, 749 F. Supp. 2d 486 (N.D. Tex. 2010)

Source

• Landing page: https://www.tn.gov/attorneygeneral/opinions.html
• Original PDF: https://www.tn.gov/content/dam/tn/attorneygeneral/documents/ops/2011/op11-065.pdf

Original opinion text

September 13, 2011
Opinion No. 11-65
Preference in THDA's Qualified Allocation Plan for Developments in Qualified Census Tracts

QUESTION

Does Part VII-B-1-b of the Tennessee Housing Development Agency's 2011 Qualified Allocation Plan conflict with Section 42(m)(1)(B)(ii)(III) of the Internal Revenue Code, which requires "preference" be given to developments "located in qualified census tracts"?

OPINION

No. Pursuant to the federal statute, THDA may determine what the State's low-income housing needs are and create a plan that best suits those needs. Based on THDA's 2011 Plan, it appears that THDA has determined that those needs would best be addressed by ensuring that tax credits are not allocated solely to developments located in qualified census tracts.

ANALYSIS

Pursuant to Section 42 of the Internal Revenue Code of 1986, the Low-Income Housing Tax Credit ("LIHTC") program encourages the construction and rehabilitation of low-income rental housing by providing federal tax credits to the owners and developers of those properties. See Spring Hill, L.P. v. Tennessee State Bd. of Equalization, No. M2001-02683-COA-R3-CV, 2003 WL 23099679 (Tenn. Ct. App. Dec. 31, 2003). The federal statute requires the state agency administering the program to create a "qualified allocation plan" by which to allocate the tax credits each year. 26 U.S.C. § 42(m). The "qualified allocation plan" is a plan

(i) which sets forth selection criteria to be used to determine housing priorities of the housing credit agency which are appropriate to local conditions, [and]
(ii) which also gives preference in allocating housing credit dollar amounts among selected projects to--
(I) projects serving the lowest income tenants,
(II) projects obligated to serve qualified tenants for the longest periods, and
(III) projects which are located in qualified census tracts (as defined in subsection (d)(5)(C)) and the development of which contributes to a concerted community revitalization plan.

26 U.S.C. § 42(m)(1)(B). The statute also requires certain criteria to be used in the plan, including "project location" and "housing needs characteristics." 26 U.S.C. § 42(m)(1)(C).

The Tennessee Housing Development Agency ("THDA") administers the LIHTC program in Tennessee. The 2011 THDA LIHTC Qualified Allocation Plan sets forth the eligibility requirements an applicant's development must satisfy and provides points to the applicant for development characteristics that meet its selection criteria. For example, an applicant receives 1 point for each "neighborhood amenity" located within a certain distance of the development. 2011 Plan, at Part VII-B-1-a-i. The applicant must obtain at least 80 out of 181 available points to remain eligible to receive a tax credit allocation. 2011 Plan, at Part VII-B.

This opinion concerns the preference, or lack thereof, given to developments located in a "qualified census tract" ("QCT") by the 2011 Plan. A QCT is a "census tract … in which 50 percent or more of the households have an income which is less than 60 percent of the area median gross income … or which has a poverty rate of at least 25 percent." 26 U.S.C. § 42(d)(5)(B)(ii)(I). As shown in the excerpt of the federal statute above, qualified allocation plans must give preference to developments located in QCTs. 26 U.S.C. § 42(m)(1)(B)(ii)(III). The 2011 Plan provides one point to "[d]evelopments located completely and entirely within a [QCT], the development of which contributes to an approved concerted community revitalization plan" and five points to "[d]evelopments located completely and entirely within a census tract (other than a [QCT]) that is, itself, completely and entirely within an area covered by an approved community revitalization plan." 2011 Plan, at Part VII-1-b. That the 2011 Plan provides more points to the latter development does not mean that it conflicts with Section 42(m)(1)(B)(ii)(III). The federal statute does not state how a plan should give preference to a QCT-located development or over what developments it should be given preference. At the least, by receiving one point, the 2011 Plan does give preference to a QCT-located development over a development that is not located within a QCT or a community revitalization plan, because such a development would receive no points.

More importantly, the federal statute should not be read as automatically requiring qualified allocation plans to give a great preference to QCT-located developments. In fact, the housing needs of the community should carry more weight than the QCT preference. Before expressing the QCT preference, the federal statute defines a qualified allocation plan as a plan "which sets forth selection criteria to be used to determine housing priorities … which are appropriate to local conditions." 26 U.S.C. § 42(m)(1)(B)(i) (emphasis added). A plan must also consider the location of the development. 26 U.S.C. § 42(m)(1)(C)(i). In other words, a housing credit agency such as THDA has the flexibility to ascertain the low-income housing needs of the State and create a plan that best suits those needs. In devising the 2011 Plan, THDA appears to have determined that the State's needs would be best served by not limiting developments to QCTs. Not only does the 2011 Plan encourage developments in areas outside of QCTs that have community revitalization plans, it also limits the amount of tax credits for QCT-located developments to 50 percent of the total amount of tax credits available for allocation. 2011 Plan, at Parts IV-D-1 and VII-1-b-ii.

It should also be noted that giving too great a preference to QCT-located developments may raise other concerns for a housing credit agency. If the QCTs in a State have a large minority population, locating too many developments within them could be seen as perpetuating racial segregation and discrimination in violation of federal law. See Inclusive Communities Project, Inc. v. Texas Dept. of Housing and Community Affairs, 749 F. Supp. 2d 486 (N.D. Tex 2010). In Inclusive Communities Project, the court found that the plaintiff had standing to bring a discrimination claim and had established a prima facie case that the Texas Department of Housing and Community Affairs had violated the Fair Housing Act and 42 U.S.C. §§ 1982 and 1983 by, among other things, disproportionately approving tax credits for non-elderly developments in minority QCT neighborhoods and disproportionately denying tax credits for non-elderly developments in predominately Caucasian non-QCT neighborhoods. Id., at 496-500.

ROBERT E. COOPER, JR.
Attorney General and Reporter

WILLIAM E. YOUNG
Solicitor General

NICHOLAS G. BARCA
Assistant Attorney General

Requested by:
The Honorable Ronald L. Ramsey
Lieutenant Governor and Speaker of the Senate
One Legislative Plaza
Nashville, Tennessee 37243