Shovel-Ready, Investor-Deprived

Shovel-Ready, Investor-Deprived ROCHESTER, NY - For more than three years, Roger Brandt, a Rochester developer of housing for people with low incomes, has been planning the second phase of his Union Meadows project in suburban Chili (rhymes with mai tai). He hopes to build 42 apartments in a town home style, with brick veneer facades and vinyl siding, and rent them to people earning as little as $25,000 a year. The first phase, with 48 units, was completed in 1998 and has a waiting list of 234 families.

In January, New York State awarded Union Meadows low-income housing tax credits, giving Mr. Brandt access to the equity he needed to make the $8.4 million project feasible. (To generate equity, developers sell the tax credits to corporations seeking to offset profits.)

But then last month, KeyCorp, the Cleveland financial institution that had agreed to buy the tax credits, backed out of Mr. Brandt's project. The bank also disclosed that it had lost nearly $488 million in the first three months of the year.

KeyCorp's withdrawal left Mr. Brandt, president of Rochester's Cornerstone Group, scrambling for a replacement. "We've been dialing for dollars," said Mr. Brandt, who has built 877 units of rent-restricted housing over the last two decades. In most of his projects, the monthly rent for a two-bedroom apartment is about $575 a month, compared with about $850 for a market-rate apartment, he said.

Mr. Brandt's experience is being mirrored throughout the nation, demonstrating the shortcomings of a financing vehicle that was conceived more than two decades ago to inject market discipline into the development of income-restricted housing. The theory was that investors would support only those projects likely to be successful.

Many developers are finding themselves either unable to sell tax credits that they have been awarded or short millions of dollars because the price that investors are willing to pay for a tax credit has tumbled from $1 or more to less than 75 cents today.

Today, the total amount of tax credit equity available for low-income housing has shrunk to $4 billion to $4.5 billion, down from about $9 billion in 2007, Frederick H. Copeman, the national director of tax credit investment advisory services at Ernst & Young, said in an interview in his Boston office.

In New York State, some 16 affordable housing projects that were awarded tax credits by the Division of Housing and Community Renewal have yet to find buyers, the agency said. In Michigan, state officials say that of 59 proposed developments that were awarded this type of tax credits last year, they know of only two deals that have been completed, though the actual number may be slightly higher.

"Every deal is struggling," said Deborah VanAmerongen, the New York State housing commissioner. Last year, developers of five projects turned in their tax credits after they could not find investors, she said. And yet, applications for the tax credits have increased 20 percent statewide (and have doubled in New York City), she said.

Two temporary remedies were included in the stimulus package passed by Congress. The United States Department of Housing and Urban Development will give the states $2.25 billion to distribute to developers to fill the gap left by falling tax credit prices. A second program will allow the states to exchange unused tax credits for cash from the federal government.

Allocated by the federal government since 1987, tax credits are awarded by the states to projects that meet strict requirements and are used by investors to reduce their federal income tax over a 10-year period.

Initially, the program drew a variety of investors, including companies like Chevron and Berkshire Hathaway. More recently, the program has mainly attracted financial institutions, which often use the credits to fulfill their obligations under the Community Reinvestment Act to invest in poorer neighborhoods where they have customers.

Until last year, Fannie Mae and Freddie Mac acquired 30 percent or more of the tax credits. But as their losses piled up, these agencies stopped buying credits, as did many other troubled financial institutions, including Citigroup, another big player.

Some of the remaining investors are reluctant to back projects outside major urban areas, fearing that these developments will face increased competition now that market-rate rents have slipped. The tax credits are forfeited if a foreclosure occurs, and cost overruns cannot be passed on to tenants.

"Basic market forces are at work here," said William Traylor, the president of Richman Housing Resources, a syndication company affiliated with the Richman Group, that operates in New York City. "Investors are looking for strong real estate transactions in strong real estate markets."

Developments the size of Union Meadows in Rochester have also suffered because investors find it more economical to participate in a few large projects rather than a lot of smaller ones, industry specialists said.

But despite the overbuilding that occurred during the housing boom, there remains a critical shortage of rental housing for low-income families and elderly people. Nationwide, about five million additional units are needed, Mr. Copeman said.

"This program at its peak efficiency creates 90,000 units a year, and more than that go out of service each year," said Mr. Copeman, 58. "We're not going to overbuild affordable housing in my lifetime."

But he said that not long ago, the rent differential between market-rate and affordable housing in certain markets like Austin and Atlanta was as little as $25 a month, showing that sometimes projects are built when they are not needed. "People took their eye off the ball when capital was easy to come by," he said. Still, he said, affordable housing remains one of the safest of all real estate investments, with a default rate of only 0.08 percent.

Though the risk is minimal, tax credit investors now insist on financial guarantees from developers if the project runs into trouble, developers said. "The requirements are much more onerous," said Robert Hoskins, president of the NuRock Companies, a developer in Alpharetta, Ga.

In Framingham, Mass., outside Boston, a nonprofit organization, Jewish Community Housing for the Elderly, has been stymied in its efforts to break ground on a 150-unit mixed-income development on land it has owned since 2003. "We have one investor we have received offers from," said Allan Isbitz, the vice president for real estate, who had hoped to begin construction last year. "The offer has changed twice in the month that we have been negotiating with them. They want a lot of different risk reducers in the partnership agreement."

He said his project was particularly challenging because it fell under the type of program that included bond financing. These days, investors are shying away from putting more debt on their books, he said.

New York City developers are also affected. Lemle & Wolff, a developer, won the right to build a mixed-income project on city land in the East Bronx. But with the decline in price of tax credits, the project is $3 million short of what it needs. "Making the numbers work is very, very difficult," said Frank Anelante, the chief executive.

Last month, New York became the first state in the nation to allocate some of the $253 million in stimulus money intended to close the tax-credit financing gap, choosing nine projects deemed "shovel ready."

The state is also working with a syndicator in Lansing, Mich., Great Lakes Capital Fund, that has created a fund to attract a new group of investors to projects upstate.

"We think there is an opportunity for new investors, who haven't been in the market recently," said James L. Logue, Great Lakes' chief operating officer. "We're cautiously optimistic."

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