Melbourne Apartments is a new 84-unit building in Des Moines, where a three-bedroom apartment rents for $775 a month but comes with restrictions — a family of five, for example, can earn no more than $47,460 a year. What is remarkable about this otherwise modest project is that the equity came from the search-engine giant Google, whose Mountain View, Calif., headquarters are more than 1,500 miles away.
The investment by Google and other large corporations in Melbourne Apartments and similar projects is one reason a cloud of gloom has lifted for developers of income-restricted housing. These developments depend heavily on low-income-housing tax credits, which provide the equity that makes the difference between whether a project gets built or not.
But when the economy collapsed in 2008 the market for these tax credits dwindled, and many projects never got off the ground. Just $4.5 billion in tax credit equity was raised in 2009, compared with $9 billion in 2006, said Frederick H. Copeman, who heads the tax credit practice at the Reznick Group, a national accounting and consulting company. “People were ready to walk off gangplanks,” he said. Mr. Copeman estimated that $7 billion was raised last year.
Created more than two decades ago to instill market discipline into the development of subsidized housing, low-income-housing tax credits are allocated by the federal government and awarded by the states to projects that meet strict requirements. Developers sell the credits to investors — generally financial institutions — that are seeking to reduce their federal income tax over a 10-year period. The banks have another incentive, because investing in tax credits helps them fulfill their obligations under the Community Reinvestment Act to invest in poorer neighborhoods where they have customers.
But after the collapse of Lehman Brothers, “the banks were focused on their long-term liquidity,” rather than on offsetting profits, said another income-restricted housing expert, Michael Novogradac, the managing partner in the San Francisco office of Novogradac & Company. Fannie Mae and Freddie Mac, which had been major investors in tax credits, stopped buying them in 2007. Weakened demand for tax credits led to lower prices, which made them less valuable to developers.
But if you can buy $1 worth of tax credit for 59 cents, you are getting a better return on your investment. That made the credits attractive to a new class of investors looking for double-digit yields. In addition to Google, new investors include Verizon and the insurance companies Liberty Mutual and Allstate, said James L. Logue III, chief operating officer of Great Lakes Capital Fund, in Lansing, Mich., which invests in income-restricted housing in the Midwest and upstate New York.
Now that the pool of investors has grown and many financial institutions are once again healthy, prices for tax credits are rising and many long-delayed projects are getting under way.
John Hayes, the chief executive of Ginosko Development Company in Milford, Mich., said he waited almost two years to begin a $7.7 million rehabilitation of Devon Square, a 1970s garden apartment complex in Ferndale, Mich., a suburb of Detroit. “We closed five deals in 2008, and then we had nothing from September 2008 on,” Mr. Hayes said. “Our next closing was in April 2010.” Great Lakes provided more than $3 million credit equity.
Some tax credit specialists say that coastal states have an unfair advantage over other regions where the need for this type of housing is just as pressing. In the Midwest, for example, the going price for a dollar’s worth of tax credits is about 70 cents or so, with some metropolitan areas getting 80 cents, Mr. Logue said. In New York, by contrast, Capital One Bank is paying 97 cents on the dollar for about $29 million worth of tax credits for Sugar Hill, an ambitious project that will replace a former garage on 155th Street between Saint Nicholas Avenue and Saint Nicholas Place in Harlem. Just two years ago, though, a dollar’s worth of tax credits in New York was selling for about 20 cents less, said William Traylor, the president of Richman Housing Resources, a New York-based division of the Richman Group of Greenwich, Conn., which brought together Capital One Bank and the Sugar Hill developer, Broadway Housing Communities.
Mr. Copeman attributed the differential today in tax credit prices from one region to another to “the unintended, perverse consequences” of the Community Reinvestment Act, despite what he said was a need for five million more units in all 50 states. He said banks generally did not make these investments in places where they had no depositors.
Joe Hagan, the president and chief executive of the National Equity Fund, a nonprofit organization based in Chicago that raised $800 million in tax credit equity last year, said he favored a regional approach so that a financial institution with branches only in New York could fulfill its community reinvestment duty in Albany.
A second reason for the spread in tax credit prices is the perceived risk in communities where market-rate housing has declined in value. Tax credits are forfeited if a foreclosure occurs.
But demand is so high in New York that the 124 units at Sugar Hill will be allocated by lottery. A three-bedroom apartment at Sugar Hill will rent for about $1,200, less than half of market rent, Broadway Housing officials said. About 5,000 applications are expected, they said.
Perched on the promontory known as Coogan’s Bluff, near where the old New York Giants played baseball at the Polo Grounds, the $73 million Sugar Hill development will also include a children’s museum named for the Harlem artist Faith Ringgold, and education and other services for the low-income residents and the surrounding neighborhood. By augmenting housing with services, “we can serve more families than can be accommodated in a residential development,” said Ellen Baxter, the executive director of Broadway Housing, a nonprofit organization that has redeveloped six other buildings in Harlem.
Outside New York and a few other places, investors may worry about whether the units will fill up. Capital One will not invest in a project unless market-rate rents in the area are at least 10 percent higher than the subsidized rents, said Laura Bailey, a managing vice president.
Beth Stohr, the director of the low-income housing tax credit program for the U.S. Bancorp Community Development Corporation, a subsidiary of U.S. Bancorp, said the investors needed to be sure that a project would be viable over a long period of time. “The key to all of this is getting a good market review,” she said, “so you understand the dynamics of the market.”
But for certain types of cash-rich investors, the riskier markets have presented a lucrative opportunity because of the high returns. Robert J. Wasserman, the managing director for tax credit syndications at U.S. Bancorp, said he had logged 170,000 miles since a 2009 meeting with potential new investors like Google. The bank arranged an $86 million fund for Google to invest in 480 income-restricted apartments in the Midwest and California, including the Melbourne Apartments in Des Moines.
Brent Callinicos, a Google vice president, took note in a statement of the “void in affordable housing investment” and said the tax credit investments “allows us to further our goal of providing relief to people who otherwise may not have access to quality housing.” But will tax credits seem less attractive now that the annual rate of return has declined to about 8 percent from a high of 15 percent?
Mr. Wasserman acknowledged that the answer was unknown. “Will these new investors stay in the market?” he said. “So far, we think it will go on for another year. I don’t know what’s going to happen after that.”
Terry Pristin New York Times January 25, 2011