Tax Credit Crunch Hits Affordable Housing

LOWELL, OR - A federal program that gives investors a tax shelter if they buy into low-income housing projects may be the latest victim of the national housing debacle, and the effects are being felt locally. Low-wage workers in Lane County have benefited mightily from the "low-income housing tax credit" program over the past two decades as local social service agencies became multifamily housing developers, building about 35 apartment projects that house nearly 2,000 Lane County families paying lower-than-market-rate rents.

Two new projects hang in the balance today in Lane County: St. Vincent de Paul's proposed 35-unit Lamb Building on 11th Avenue and Sponsor Inc.'s planned 20-bed transitional housing for homeless ex-criminal offenders on Highway 99. This week, the Oregon Housing and Community Services Agency is scheduled to announce projects statewide, including potentially those two local projects, that won a twice-yearly competition for tax credits.

But here's the rub: The winning agencies must then find investors willing to buy tax credits associated with their real estate projects, and investors are increasingly scarce. Those who are still willing to buy in are demanding, and getting high yields, which means less money for the agencies building the housing. The poor shape of the tax credit market "does threaten our ability to do affordable housing," said Floyd Smith, spokesman for the state housing agency.

The market is likely to get worse before it gets better, said Katy Patricelli, vice president in community lending at Wells Fargo Bank, which has loaned money to several local tax credit projects. The low-income housing tax credit was created by President Ronald Reagan in 1986 and has resulted in the construction of hundreds of thousands of apartment projects nationally offering low rents.

Lane County social service agencies, led by St. Vincent de Paul, charged into the building program in the early 1990s. St. Vincent de Paul built 19 of 35 local tax credit projects, including the five-story, $8.7 million Aurora Building in downtown Eugene and the five-story, $7.4 million Royal Building in downtown Springfield. Another nonprofit agency, Metropolitan Affordable Housing Corp., opened the $20 million WestTown on 8th apartment complex in downtown Eugene in August.

The state of Oregon gives out the credits in a competitive process each year. The nonprofit developers sell the credits through syndicates that gather and pool business/investor dollars. Businesses that buy the tax credits for less than the face value can, each year for the succeeding 10 years, knock the full amount off of their taxes.

The marketplace determines how much less than the full amount the investors pay initially. For example, a corporation can buy what amounts to $1 million in tax credits for $750,000. The developer of the housing project gets the money up front. The corporation gets to take $100,000 off its taxes for each of the next 10 years. In the early years of the tax credit, all kinds of Fortune 500 companies sought out the low-income housing tax credit shelter, including Weyerhaeuser Co., Chevron Corp. and Campbell Soup Co. But in the real estate boom years after 2000, those companies were squeezed out by financial sector investors, topped by Fannie Mae and Freddie Mac. Citibank and Washington Mutual also bought in.

With competition for tax shelters hot and heavy, the price for tax credits soared to more than 94 cents on the dollar, until very recently. "With these banks that have taken huge losses, Washington Mutual, for example, when you are losing hundreds of millions of dollars, (tax credits are) not something you need at the moment," said Monika Elgert, regional vice president for the syndication firm Enterprise Community Investment Inc. In other words, businesses without profits are also without tax liabilities and so they have no need for tax credits.

In recent months, with investors withdrawing from the market, the tax credit price has fallen to 80 cents on the dollar and even lower. That means a lot less money for construction, Smith said. Each year, Smith said, the Internal Revenue Service gives Oregon $8.5 million in tax credits to allocate to projects. At 90 cents on the dollar, those credits will produce $76.5 million for the agencies building housing.

But at 80 cents on the dollar, they will bring in only $68 million to these agencies. The state housing agency is in the midst of choosing which of dozens of proposed projects should get credits this year. The agency has narrowed the field to 16 projects, but it may not make all the awards. The state may choose to give a fewer number of projects a larger number of tax credits, Smith said. And those are certain to be worth less than just a few months ago.

The rapidly declining credit price could mean a funding gap of $100,000 or more for each project, Smith estimated. Some of the organizations won't be able to come up with the additional money. Earlier, projects could get some bond money from the state, but that's not possible right now. "This agency hasn't been able to sell its bonds in some weeks," Smith said. In bigger cities, local governments may be able to pitch in to close the deals. But that's not likely in rural areas. "Those projects are going to have a heck of a time. Those projects won't work from a financing perspective," Elgert said.

Syndicators, meanwhile, are looking to businesses outside the financial sector to start buying tax credits. Terry McDonald, executive director of St. Vincent de Paul of Lane County, said lots of industries, even in a down economy, are making a profit and in need of a tax shelter. Petrochemicals comes to mind, he said. If St. Vincent de Paul gets an allotment of credits this week for the Lamb Building, Mc­Donald said he'd start looking for buyers. "Let me get my checkered suit on and my cigar and I'll say, 'Come on down and make a deal.' We're obviously motivated and everyone else is too," he said. If the syndicators can't find investors for the Lamb Building, McDonald said, he'd beat the bushes himself. He tried selling credits once before but without a lot of success.

"It was a difficult concept for small investors to get their head around. Is it possible to do that today? Actually, it's a backup strategy for St. Vincent de Paul to invite local pools," McDonald said. "First things first: We'll do it the regular way. And if we don't, we'll do it a different way. I always have a Plan B. That's my job." And if the tax credit price is too low to finance the Lamb Building? "We'll work very hard on making sure we have other sources come in. We'll do some significant value engineering. And then we'll do a lot of praying."