Following up its earlier summary judgment, the U.S. District Court of the Northern District of Texas ruled late last month that the Texas Department of Housing and Community Affairs (“TDHCA”) adopted policies for allocating LIHTCs that violated the Fair Housing Act (the “FHAct”). Inclusive Cmtys. Project, Inc. v. Tex. Dep’t of Hous. & Cmty. Affairs, 2012 U.S. Dist. LEXIS 37450, No. 3:08-CV-0546-D (N.D. Tex. March 20, 2012) (“ICI III”). The decision is a clear warning to state tax credit allocating agencies that obedience to state and federal tax credit allocation rules does not necessarily insulate the agencies from fair housing claims, especially where years of practice concentrates LIHTC units in lower income/higher minority population areas. Although the case does not specifically address private developers, it should also alert them that over-concentration of LIHTC proposals in such neighborhoods may bring discrimination charges against them too.
Previously, Judge Sidney Fitzwater had ruled that the plaintiffs, sponsors of Section 8 housing, had been injured by the TDHCA’s allocation policies, which, the court found, had led to concentration of LIHTC units in lower income/higher minority neighborhoods, making it difficult for the plaintiffs to obtain LIHTCs for developments in higher income/non-minority neighborhoods. The case was a disparate impact claim, meaning that the plaintiffs alleged that the TDHCA’s LIHTC allocation practices, although neutral in form, had a harsher impact on minorities protected by the FHAct than on non-minority groups.
To the surprise of most observers, the court in ICI II had previously held that TDHCA’s efforts to comply with Federal tax credit allocation policies did not protect it from the possible discriminatory impact of those policies. In this opinion, the court was no more disposed to the arguments raised by the TDHCA that various state-level allocation rules—including rules that were adopted specifically to reduce discrimination—were justified. In the end, the court directed the TDHCA to produce “a remedial plan that sets out how it will bring its allocation decisions into compliance” with the FHAct. Id. at *60-61. The new opinion does not itself require TDHCA to revise it past allocation decisions.
Analysis: State tax credit allocating agencies should review ICI II and ICI III closely. The court there held that the TDHCA’s attempts to justify its allocation policies under both federal and state law were insufficient to satisfy the required standard. Given the state of federal law, it is difficult to see how the agency there could have done more to reduce potential discriminatory impacts without violating the LIHTC rules. In other words, while there may have been alternatives to the approaches that the TDHCA uses, it is not clear that those alternatives would, in the words of the court, “enable [the TDHCA’s] interest to be served with less discriminatory impact.” ICI III at *28. The ICI cases thus seem to create an unfortunate conflict between complying with fair housing law and with legitimate LIHTC allocation rules established by the Congress, the IRS, and state legislatures. The ICI cases also leave unclear where the “tipping point” is at which neutral allocation policies become discriminatory. Finally, as noted above, although the ICI decisions did not address the policies of private firms that apply for tax credits, the same logic—that federal and state tax credit allocation rules dictated their decisions to apply for tax credits in lower income/higher minority neighborhoods—would seem to be equally subject to fair housing attacks.
Both state tax credit allocating agencies and private developers should expect additional fair housing challenges to their tax credit allocation practices, and should examine how allocations have been made in the past to see whether steps can be taken to reduce any potential over-concentrations of tax credits in the future.