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‘Endangered’ tax credits a key part of financing affordable housing projects

Courtesy of the Minnesota Housing Finance Agency
New affordable housing developments, like Renaissance Box in Lowertown Saint Paul, seek to attract a mix of income levels among residents.

So far, the plan is still up in the air, but Dominium, a large multi-family housing developer, has tossed its hardhat in the ring to develop an affordable apartment project on a vacant lot owned by St. Paul in the historic Dayton’s Bluff neighborhood. The development would sit next door to Metropolitan State University, which lies east of downtown and north of I-94.

Dominium responded to a request for proposals by St. Paul with a pitch for 100 to 150 units of senior housing. Mississippi Market, the food cooperative, also proposed to put its third Twin Cities grocery store on the site. Presumably the two mesh. Groceries on the ground floor and customers only an elevator ride away would seem to be a winning combination.

Owen Metz, senior development associate for Dominium, says that as yet there’s been no formal market study; until St. Paul says it is officially interested, everything remains vague. Why senior affordable housing? He couldn’t name any particular reason. “There are amenities in the area and transportation,” he said.

A significant factor

In fact, the most significant factor in such a development can be the financing.

Instead of going to a bank for a humongous loan, a developer of affordable housing, senior or otherwise, can rely on federal Low Income Housing Tax Credits (LIHTC) to subsidize a good portion of the bills. But the credits, which have provided 2.5 million affordable rental units across the U.S. since the program began in 1986, could be under threat — a possible casualty in any “grand bargain” reached by the president and Congress to cut the deficit and close tax loopholes.

“There’s not as much of a constituency for affordable housing as for other tax benefits, like the home mortgage deduction,” says Chip Halbach, executive director of the Minnesota Housing Partnership, a nonprofit that promotes and advocates for affordable housing.

You’re probably wondering what makes housing “affordable.” Under federal guidelines, residents must earn less than 60 percent of the area’s median income, which in the Twin Cities area is currently about $83,900 for a family of four. Additionally, residents may pay no more than 30 percent of their income in rent. So, the maximum for a family of four in this area would be $1,259. That may seem like a pretty generous amount — average rent right now in the Twin Cities is $951 — but policy-makers hoped that by keeping the income limit somewhat forgiving, the program would create buildings with an income mix. 

Congress created the LIHTC to encourage private developers to construct and rehabilitate affordable rental housing. Without the incentive, developers would never bother building anything so unprofitable. The alternative would be to have the government build acres of public housing — which didn’t work out so well in the past. In city after city — Atlanta, Chicago, St. Louis, Baltimore, Minneapolis — such  projects, often poorly maintained and magnets for violence and gangs, have had to be demolished.

How the credits work

So how does the incentive work?

Each year, the Department of the Treasury issues tax credits to the states to build affordable housing. The amount is based on population, and this year, Minnesota received $11.7 million. Developers must apply to the state for the credits.

Mary Tingerthal
Mary Tingerthal

“Minnesota has a very public competition, complete with a scoring system, awarding points for items the state deems important,” says Mary Tingerthal, commissioner of the Minnesota Housing Finance Agency.

Let’s say the developer has a $10 million project. The program allows him tax credits worth 9 percent of the total or $900,000, which can be claimed over a 10-year period. Generally, the developer sells the credits to a syndicate of investors who pool their money in a number of projects.

Depending on the state of the market, they may pay a little or a lot less than the face value. In the depths of the financial crisis, says Tingerthal, when investors were losing money and didn’t need tax credits, they were willing to pay only about 70 cents on the dollar. Now that the market has revived, the price is up to 95 cents. The developer uses funds from investors to finance construction and reduce rents.

Oh, and the investors get an ownership stake in the project — plus other tax benefits like depreciation. (A project can include a mix of affordable and market-rate units, but only the affordable element qualifies for tax credits.)

Senior housing does not qualify for what’s called the 9 percent program. The reason: Back in the ’70s and early ’80s, the federal government induced a boomlet in senior housing construction, and Minnesota has quite a bit. Some 55 percent of the state’s affordable housing is devoted to seniors.

Developers like Dominium, however, can use the so-called 4 percent program. It allows a developer to finance part of its project with tax-exempt bonds (which now carry very low interest rates) and part with tax credits for 4 percent of his costs. And there’s no limit on the amount that can be used in any one year.

Good record of success

The tax credit program has been pretty successful. A study published this year found that 43 percent of the occupants of housing financed by the tax credit had  “extremely low” incomes, defined as less than 30 percent of the area median income. And, according to Enterprise, a Maryland nonprofit that provides technical expertise on the credits, the foreclosure rate for affordable projects has been less than 1 percent.

Still, I always worry a bit about tax credits. They can create a bit of a gold rush with the result that we end up with a lot of subsidized stuff — in this case, affordable housing — that we might not have needed.

Halbach doesn’t think that’s likely. He points out that many people are what I’d call house-poor — paying a huge portion of their incomes — sometimes as much as 50 percent — on rent. Data gathered by the Partnership show that in Hennepin County, a two-bedroom apartment might rent for $904. To pay for it, a worker would need to earn $17.38 an hour, 40 hours a week. The typical renter, however, earns only $15.82. Rents are about the same in Anoka County, but the typical wage for a renter there is only $10.82. Seniors, he adds, may be fine in market-rate apartments right now, but “their incomes won’t necessarily keep up with rent increases that occur year after year.”

But how much affordable housing does the metro need now and in the future? In point of fact, nobody really knows.

Says Tingerthal, “We are now in the process of working with the Metropolitan Council and other agencies to figure out what demand will be over the next 10 years.”

Obviously, there’s the “silver tsunami” in the offing, 78 million baby boomers passing age 65. But where they want to live and what they will need is anybody’s guess.

“They’re not monolithic,” says Tingerthal. Presumably, some will move to apartments in cities to be close to mass transit. The vast majority, she suspects, will want to stay in the homes they occupy now.

Similarly, we don’t know how much need there will be for subsidized housing for the poor. Some of the gap may be taken up by private housing where rents are low because the buildings have aged or deteriorated.

Knowing what we’ve got and what we lack should help determine how big a tax credit program we need. But abolishing it altogether would be a calamity, says Tingerthal. “It’s true that the tax credits are an obscure program without a broad constituency. But we’ll fight very hard to keep it.”

Comments (6)

  1. Submitted by Ray Schoch on 11/21/2012 - 09:14 am.

    It’s the constituency

    I won’t be surprised to see just this sort of program on the chopping block as a “grand bargain” is pursued in Washington. If that comes to pass, it’ll be yet another example of balancing a budget on the backs of the most vulnerable – unless it’s coupled with a sizable reduction in the mortgage interest deduction. Mention of the latter usually brings howls of protest, despite the fact that it hasn’t been around forever, and that our neighbor to the north has never had such a deduction in its tax code, yet home ownership rates there are about the same as they are here.

    Indeed, the “Silver Tsunami” is on the near horizon, and it’s definitely not monolithic, so a lot of these housing policy questions will be works in progress for quite a while.

    Years ago, when I was renting in Colorado, my rent went up 22% over the course of 3 years. It was the primary motivation for my return to home ownership, since it was obvious that my income wasn’t increasing at anything near that rate. Only years later, as a planning commissioner talking to someone on the community’s housing board, did I discover that the reason my “market rate” rent went up so steeply was that the housing board was raising money – from its “market rate” tenants – to build more affordable housing elsewhere in the community. I didn’t know the apartment complex where I’d been renting was owned by the housing board, and the rental increases didn’t provide all the new funding, but in any case, seldom has a housing subsidy been so direct, or its providers so such a narrow group.

  2. Submitted by Tim Milner on 11/21/2012 - 09:18 am.

    I am all for affordable housing

    but for me this is another example of wasteful spending.

    We have tons of homes in foreclosure at very affordable prices. We have tons of apartment vacancies also at affordable prices – as the article points out. Why are we giving any tax incentives to build more? Should we not be helping these people absorb the housing already available? I betting you would spend far less providing down payments for people to buy foreclosed homes than you would subsidizing another building with tax credits.

    This is just the kind of project that needs far more scrutiny if we are every going to get control our spending.

  3. Submitted by Nick Magrino on 11/21/2012 - 09:27 am.

    I can’t help but feel like manipulation of the housing market, in either direction, by subsidizing construction isn’t a very good idea/hasn’t worked very well. Whether it’s providing a mortgage interest tax deduction on a vacation home or subsidizing “affordable” housing. There’s a natural progression in housing where things get cheaper over time–expensive units are what get built to begin with, and eventually it ages and becomes more middle-income as newer units become available elsewhere. Aside from greenfield single-family tract housing in the suburbs (which, surprise, are typically heavily subsidized when you take into account how much infrastructure is needed to prop up and “give value to” those developments) you don’t really build new middle-income housing. The market figures it out by itself…or at least it used to before we threw a ton of money at it.

  4. Submitted by David Greene on 11/21/2012 - 10:54 am.

    Met Council Housing Plan

    “But how much affordable housing does the metro need now and in the future? In point of fact, nobody really knows.”

    This is exactly why the Met Council’s work to revive a long-dead affordable housing plan is so important. Under Republican leadership this task of the Council was left to rot. Thus, no one really knows what the current situation is and what’s coming in the future.

    I am glad we finally have a responsible set of people on the Council.

  5. Submitted by jody rooney on 11/23/2012 - 09:51 am.

    Housing subsidies do distort the market

    Home owner tax credits also distort as well as rental subsidies and tax credits. This is all part of the bigger question of housing policy. What does any government want to accomplish with it.

    I am glad that Mr. Greene is optimistic about the met councils role but my observation is that is whatever they do will be greeted with both skepticism and resentment by local government. In the past they have argued for affordable housing in cities like Dellwood and Grant places with no public transportation and no convenient services or shopping. The Council has a lot of self inflicted wounds that started long before the Republicans. Breaking the council into operating units for the development of sewer, transportation (and really MNDOT could do a better job) and other public infrastructure would be a great way to save money.

  6. Submitted by Sanjita Kumari on 11/28/2012 - 01:07 am.

    In India most are prefer direct payment……………….for best affordable housing in Bhubaneswar….

    It will be true that There’s not as much of a constituency for affordable housing as for other tax benefits, like the home mortgage deduction.

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