NEW ORLEANS, LA - After Hurricanes Katrina and Rita, the federal government tried to speed the restoration of affordable rental housing by channeling a vast number of tax credits to Louisiana. Many developers nonetheless struggled to secure private investors and begin construction of this critical type of housing. In a recent report, an independent real estate consultant blames the frequent delays partly on the way the state designed and implemented the Gulf Opportunity Zone Tax Credit program.
The consultant, Charles Williams of Baton Rouge, concedes that many of these projects were slow to take wing for reasons beyond the government's control. Almost all developers encountered dramatic runups in cost of both insurance and construction, and some faced reluctance from Wall Street investors wary of doing business in a heavily damaged region.
At the same time, Williams contends that the state erred in pushing developments that mixed affordable apartments with those that rent at market rates, usually in a 40-60 ratio. While some developers succeeded in closing mixed-income deals, such as the Falstaff apartments in New Orleans, Williams says others struggled to find enthusiastic lenders.
Kelly Longwell, a New Orleans real estate attorney and president of the Louisiana Association of Affordable Housing Providers, said lenders are accustomed to tax credit deals in which 100 percent of the apartments are affordable. When developers proffer the 40-60 mixed-income concept, many lenders refuse to assume that the higher rents from the market-rate units will in fact materialize. They underwrite the project as if all the units are affordable. "Investors have a hard time getting their arms around that fact that there's a disparity in the rent rates, Longwell said.
That means many developers cannot borrow as much money as they need to complete their deals. Faced with a financing gap, they sometimes approach the Louisiana Housing Finance Agency for additional tax credits or for Community Development Block Grants, according to Williams. "We're ending up paying out a lot of CDBG money basically to get market-rate units in Orleans Parish, where the private market is already responding adequately to the provision of such units," Williams said in an interview.
Milton Bailey, president of the Louisiana Housing Finance Agency, said investors began to pull away from mixed-income developments only at the end of last year, when the national credit markets collapsed and the value of the tax credits dropped. He said the mixed-income concept as a whole is sound. "The flight away from mixed-income was brought on by the equity crunch," Bailey said. "The proof of its having worked is all over major cities throughout the United States."
Williams also noted in his report that the national credit crisis had reduced the impact of the tax credit program, largely because the pool of tax credit investors is limited to a few large national institutions, such as Fannie Mae, Freddie Mac and Bank of America, who did not need to buy as many credits once the market declined.
"All of a sudden Congress flooded the market with all of these new tax credits. They assumed the banks would just buy more," Williams said in an interview. "For a while, that worked. Then it started to break down in 2007 because banks had gotten their fill. They try to achieve diversification and limit the business they do in any one geographic area."
Williams produced his report in May for the benefit of a private equity firm, but he shared it this month with The Times-Picayune to shed light on what he believed were "practical and political issues" in the tax credit program that slowed delivery of affordable housing after the 2005 storms.
Williams calculated that, as of the first quarter of the year, financing had
Source: Times-Picayune