Investors pay premium for affordable housing tax credits

Community Reinvestment Act driving demand in select urban areas

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Oct. 12, 2012

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In San Francisco, investors pay more than $1 a credit, whereas investors elsewhere might be paying 90 cents or less. This still works because of project economics: Costs to develop outside of Los Angeles or New York are lower.

"If you are only getting 90 cents on the dollar, you can make a development pencil out in Topeka," said Mullen.

Back in the heart of the recession, around 2008 and 2009, prices for tax credits had fallen to as low as the 60-cent range due to the lack of investment interest. Developers were ready to go -- they just couldn't find investors.

None of this meant there weren't clients, as the need for affordable housing remains consistent. Again, according to CAP, there are 5.1 million more low-income renters than there are affordable rental units, and the total number of "severely cost-burdened households (paying more than half their income on housing) nearly doubled over the past decade."

The challenge ahead, Mullen said, "is if the federal government decides to cut back on things such as the Section 8 housing voucher, which is one way low-income people pay for rent. If rental assistance is pared back, this could have a negative impact on low-income housing development because many tenants rely on rental assistance."

For developers, there are other kinds of credits that can make a new development pencil out, including energy credits for developers installing solar equipment, which is an upfront credit that can equal 30 percent of the cost of equipment. There is also an energy-efficiency tax credit that has expired but might be extended by Congress.

Also available are historic building tax credits and incentives for master-planned communities to include commercial buildings, which could be used for affordable housing.

In regard to the HUD survey, which reports when the LIHTC 15-year-period requirement of an "affordability period" expires and when those units could become affordable housing, it's a major concern for individual developers because there are often other issues involved, including outstanding debt, amount of soft financing involved (from city or county), and tax advantages or disadvantages, Mullen said.

"We spend a lot of time consulting with developers who have held onto their buildings for 15 years and are now trying to decide what to do with the structures," Mullen said. "In many cases, developers need their debt right-sized or the buildings are not in peak conditions. Many times, developers are considering another tax credit transaction."

In short, a lot of those older structures will remain low-income housing, which is a good thing.

Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "Growing Up Levittown: In a Time of Conformity, Controversy and Cultural Crisis," is now available for sale on

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