Melbourne Apartments is a new 84-unit building in Des Moines, Iowa, 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, California, headquarters are more than 2,414 kilometres 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.
Created more than two decades ago to instil 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 fulfil their obligations under the Community Reinvestment Act to invest in poorer neighbourhoods 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 income-restricted housing expert, Michael Novogradac, the managing partner in the San Francisco office of Novogradac & Co. 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, Michigan, 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 Co. in Milford, Michigan, said he waited almost two years to begin a $7.7 million rehabilitation of Devon Square, a 1970s garden apartment complex in Ferndale, Michigan, a suburb of Detroit. “We closed five deals in 2008, and then we had nothing from September 2008 on,” 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, 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, Connecticut, which brought together Capital One Bank and the Sugar Hill developer, Broadway Housing Communities.
Joe Hagan, the president and chief executive of the National Equity Fund, a nonprofit based in Chicago that raised $800 million in tax credit equity last year, said he favoured a regional approach so that a financial institution with branches only in New York could fulfil 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 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 273,588 kilometres 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.