BALTIMORE, MD - As the nationwide recession reduces the tax liability of large institutional investors, developers of affordable housing properties in Baltimore are feeling the trickle-down effects of the credit crunch, and turning to other sources of financing to get their projects built. On Wednesday, the Board of Estimates, the city's spending panel, approved a $100,000 a year payment in lieu of taxes (PILOT) agreement with Greater Baltimore AHC Inc., the nonprofit developer of the Greenhill Apartments, a 301-unit affordable housing complex in Park Heights.
This bailout was needed, according to city housing officials, because the credit crunch has reduced the value of federal Low Income Housing Tax Credits, a market shift that is good for the investors that buy the credits, but bad for developers who sell them, through investment partnerships called syndicators, as a way of financing their projects.
The federal LIHTC program, which began in 1986, allows large corporations to shield their profits from federal taxes by investing in affordable housing projects in neighborhoods that have typically been abandoned by large lenders. "There are two issues: one is the general and consistent inadequacies of federal funding for affordable housing that's sort of ongoing," said Paul Graziano, commissioner of Baltimore Housing, the city's housing department. "It's exacerbated by the fact that low income housing tax credits are worth less money because of the whole crisis in the mortgage industry."
The PILOT granted by the city to AHC is a form of public assistance meant to help cover operating costs and debt service on the building so that AHC will become a more attractive borrower, and more eligible for state bonds to help finance its $30 million renovation of the two-building complex. Greenhill has about 50 vacant units and needs new windows, elevators and heating, ventilation and air conditioning systems, among other improvements.
"If you walk down one of the hallways right now, imagine walking down the dreariest high school hallway you can remember, that's what it looks like," said Andrew M. Vincent, director of Greater Baltimore AHC. "We're going to do a lot of work to improve the aesthetics and give these tenants the quality environment they deserve."
In March 2007, the developer applied for $4.7 million in HOME funds, federal capital subsidies that are administered on a case-by-case basis by the city. That request was denied in December, and since then AHC has been scrambling to make the financing for Greenhill work. Kimmel Cameron, vice president for acquisitions at Hudson Capital, the Florida-based syndicator behind the Greenhill project, said all this started about six months ago when Fannie Mae and Freddie Mac, two of the nation's biggest purchasers of LIHTC, all but stopped buying the credits, and CitiGroup, another large LIHTC investor, cut back as well.
Experts say the three institutions stopped buying the credits because their tax liability dipped low enough that it was no longer worth their investment. "The market has dramatically changed and it's because three of the biggest players in the market — two are completely out, and one is teetering," Cameron said. "That took an enormous amount of money out of the marketplace." As recently as two years ago, investors were paying close to a dollar for each dollar of tax credit value. Now, experts estimate that average LIHTC prices are as low as 80 cents on the dollar. This means that the returns for investors buying the credits are high, but there are fewer potential buyers.
"Six months ago, the returns were ridiculously low, and it made no sense to buy them," Cameron said. "Now, just like in the rest of the financial markets, liquidity is not where it was, and there's not as mu
Source: Daily Record