WASHINGTON, DC - Developers of rental housing and state housing agencies are turning to Congress for help to rejuvenate another industry that has been staggered by the financial crisis. Most multi-family rental housing construction and rehabilitation in the United States is financed by federal tax credits. In recent years, mortgage giants Fannie Mae and Freddie Mac have put up as much as 40-percent of the tax credit equity for affordable housing projects nationwide.
Now nationalized, Fannie and Freddie won't have any need for tax credits for years to come. To make matters worse, huge losses at large banks like Citigroup and Wachovia have taken those players out of the market for the time being. The result is scarce investment capital for multi-family housing construction, at a time when more families are being pushed back into apartment living by the foreclosure crisis. "The laws of supply and demand have been turned on their heads. You have this growing need for multi-family rentals, while capital is parked on the sidelines," said Jim Miller, an attorney at the law firm of Winston and Strawn.
Miller is counsel to the Affordable Housing Tax Credit Coalition, a group of developers, syndicators, lenders and state agencies. In meetings with lawmakers and congressional staff this week, the group pressed for making tax credits more generous to give low-income housing a boost.
Congressional aides say it is likely that the economic stimulus package, which Congress is expected to consider in January, will include funds for affordable housing development. Unclear is whether the help will be provided through a restructuring of tax credits or through a direct appropriation to keep projects in the pipeline going.
The housing tax credit program, in place since 1986, has generally earned high marks for bringing in private-sector investors to help fund construction of affordable housing. The investors also help make sure projects serve the community in a way that preserves eligibility for the tax credit. But the current situation points up a problem with relying on tax-credit financing: in a downturn, available capital can dry up quickly.
Hardest hit are the areas in the most need. The Louisiana Housing Finance Agency in November had to reclaim about $18 million in tax credits from projects it determined were not viable, in some cases because they lacked financing. Most of that total was from additional housing tax credits Congress enacted to help rebuild after Hurricane Katrina. The agency reallocated the tax credits to projects it believes have a better chance of succeeding.
But other states too are seeing developers yield tax credits back to state agencies after not being able to line up financing. "We're not doing near the amount of deals we have done in the past," said Bob Diener, director of multi-family housing at the California Housing Finance Agency. Diener said investors now can afford to pick and choose and avoid renovation projects or developments in less-desirable locations. "Tax-credit investors want new construction, strong borrowers and a good location," he said.
Lawmakers are in the early stages of discussing how to respond to the flagging market. Industry lobbyists have proposed tax-credit changes to increase credit yields, with the aim of making the credits more attractive to non-financial sector investors, such as high-tech companies. "One result of having to come to grips with the current crisis is that we recognize the need to expand the group of investors. But to do so, you're going to have to increase the yield and reduce the complexity of the credit," said Miller.
That could be accomplished in a number of ways. Under the current structure, investors must spread the benefits of the credit over 10 years. One proposal would shorten that period to five years. Another would allow the use of the housing tax credit to offset alternative minimum tax liability.
But staff of congressional tax committees are skeptical of those approaches, according to aides and lobbyists. They worry that the scarcity of capital is so pervasive that simply loosening restrictions on the credit would not have a significant effect. "Their reaction was mixed at best," said Miller.
There is some discussion of making the credit refundable, but that is controversial. Solar and wind energy industry officials, facing a similar tax credit crunch, are pressing Congress to make renewable-energy tax credits refundable.
But Jeffrey Lesk, who leads the real estate syndication practice at the law firm of Nixon Peabody, said making the credit refundable would sacrifice the market discipline that has served the tax-credit program well. "The investors and syndicates do very stringent asset management, and they provide strict contractual penalties for getting it wrong," said Lesk. "If you replace the current system with a refundable credit, presumably a project owner can simply monetize the credit - essentially getting a grant from the federal government."
"If that's the case, you have no third-party oversight, underwriting or monitoring," he added. Another option is a direct appropriation of federal dollars to state housing agencies to finance projects while the tax-credit market recovers. The industry coalition has suggested a cash infusion of around $5 billion per year for the next several years.
Source: alibaba.com