Affordable housing developers “fighting like crazy” to pencil out projects following drop in tax credit value
Affordable housing developers in Colorado are facing a new challenge that could stretch their limited funding resources even further and potentially impact the number of income-restricted units that can be built every year.
A sudden decrease in the value of federal low-income housing tax credits after the November election is forcing developers to re-examine their project budgets and, in some cases, scramble to fill unexpected funding gaps that can easily run into the millions.
“Right now, there’s a group of projects that are fighting like crazy to make it float,” said Bob Munroe, a partner with Denver-based Solvera Affordable Housing Advisors.
The tax credits — the largest funding mechanism for income-restricted rental housing nationwide — are designed to subsidize about 70 percent of the cost of building low-income apartments.
Since the election, however, the amount investors are willing to pay for the credits has dropped sometimes by 15 to 25 cents on the dollar, driven down by the possibility of corporate tax cuts under the Trump administration.
“With a drop of 5 to 10 cents in a transaction, that can create a $1 million gap. It’s that gap that has to be filled,” said Cris A. White, CEO of the Colorado Housing and Finance Authority, which administers the federal tax credit program in the state.
“This is a real thing,” White said. “Even though investors are anticipating what might happen, the impact is real. The impact is quantifiable and it’s genuine.”
The credits work by incentivizing banks, insurance companies and other private-sector investors to help finance affordable rentals in exchange for a dollar-for-dollar reduction in their federal tax liability over 10 years.
In other words, for every dollar investors put into the construction of low-income apartments, they get to subtract a dollar from their tax bill.
Before the election, those investors were often willing to pay $1.10, maybe $1.15 for $1 in tax credits, White said. Since the election, the going rate has fallen to 85 to 90 cents.
President Donald Trump’s tax plan, unveiled last month, includes cutting the corporate tax rate to 15 percent from 35 percent.
“For (tax-credit buyers) it’s an investment. They calculate a yield on that investment,” White said. “With corporate tax rates potentially going down, the attractiveness and yield of those investments go down with it.”
The situation is particularly challenging for projects that received tax credit allocations right before the election, Munroe said. Solvera is currently consulting on two such projects, in Aurora and Colorado Springs.
In September, 13 projects received allocations of the highly competitive — and most valuable — federal tax credits from CHFA, a funding round that was expected to be worth more than $130 million over 10 years.
“When those projects applied, they applied based on an older model of investment by the tax credit investor. That’s all changed,” Munroe said. “The market has changed. And now we’re caught in this in-between time.”
Both of Solvera’s projects are facing a funding gap, and Munroe said they are in the process of going back to all of their investors to ask each of them to throw in a little bit more to make things pencil out again.
“We’ve gotten a warm reception,” Munroe said. “Everyone has been very supportive and sensitive to the circumstances.”
Greenway Flats in Colorado Springs received $1.1 million in tax credits to build 65 apartments for people who are homeless or at risk of homelessness in conjunction with the Springs Rescue Mission.
Aurora’s Paris Family Housing, which will be owned and managed by Brothers Redevelopment, got $553,000 in credits to develop 39 two- and three-bedroom apartments primarily for veterans and their families.
“Just as an example, if you have $1 million in annual tax credits and you get $1 a year for 10 years and you sell it for $1.10, which was one of the quotes we had gotten, then that’s $11 million,” Munroe said. “Now, the market is 95 cents. Now it’s only $9.5 million. Suddenly we have a $1.5 million gap that’s totally been created by forces outside of our control.”
The tumult in the tax credit market is definitely concerning, Brothers president Jeff Martinez said.
“We’re working through it,” Martinez said. “It’s certainly a setback for the industry as a whole, but we’re not going to be deterred. Affordable housing is just too important. ”
CHFA is considering a supplemental allocation of tax credits to help get some struggling projects over the finish line, White said. (The housing authority typically holds back a certain portion of its total credit allocation for this reason.)
“We still want to see these deals through to the end,” White said “The demand for affordable housing is growing. We want to do everything we can to make these deals work.”
The Denver Office of Economic Development also expects to see more projects come to the city for financial support, housing program manager Doug Selbee said. This year marks the first year of the city’s new 10-year $150 million affordable housing plan.
“Quite frankly, what we’ve enjoyed in the last couple years with super-high tax credit pricing along with very low interest rates from the lending community, there’s been projects that have gone in and been awarded tax credit deals, that did not come to the city or the state for additional gap financing,” he said. “I don’t think we’ll see that going forward.”
The city is already planning to go back and analyze its term sheets before the 2018 round of credit allocations to make sure they reflect what it actually takes to build projects, Selbee said.
Long term, the decrease in the value of low-income housing tax credits could have an impact on the number of affordable apartments being built, developers warned.
“Projects will be more costly and there will be fewer units put in the market,” Martinez said. “That comes at a time when we’re at a crisis point for affordable housing not just in the metro area but across the nation. It couldn’t have come at a worse time.”
The Denver Housing Authority has already started factoring in lower credit prices for its future projects, executive director Ismael Guerrero said. In the months since the election, DHA has received offers as low as 85 cents.
“At this point we’re all trying to be optimistic to see where this will all shake out,” Guerrero said. “It’s unfortunate we’re not working from good information or real information, really. It’s a lot of speculation about what might happen.”
One of its current projects, Vida at St. Anthony’s, was also in CHFA’s September round of credit allocations, receiving $1.25 million in competitive federal credits and $1.07 million in noncompetitive credits.
DHA was fortunate, though, because Vida’s credit investor agreed to hold to its pre-election price — $1.18 — with some possible contract language that would kick in should significant cuts to the corporate tax rate materialize, he said.
The 175-unit apartment complex, planned as part of the St. Anthony redevelopment off West Colfax Avenue, will target seniors and people with disabilities and feature a community health clinic on the ground floor.
The credit issue could be compounded, though, if the Trump administration gains traction on another budget proposal to eliminate HUD’s Community Development Block Grant and HOME Investment Partnerships programs, Guerrero said.
“The programs we used to turn for gap financing could be affected, too,” he said. “It’s almost a perfect storm of potential policy and funding decisions federally that’s going to put a lot of pressure on the local scene here.”