Affordable Housing Finance

FINANCE

NEW MARKETS TAX CREDITS

For-Sale Housing from NMTCs

AFFORDABLE HOUSING FINANCE • September 2008

BY BENDIX ANDERSON

COLUMBUS, OHIO - Vacant houses in neighborhoods like American Addition and North of Broad here are getting a second chance, thanks to the New Markets Tax Credit (NMTC) program. Developers like Columbus Housing Partnership (CHP) have figured out a way to tap NMTCs for the development of forsale housing, bringing dilapidated foreclosed homes and vacant lots back to productive life.

The NMTC breakthrough has already been put into practice in Cleveland, where Vintage Development Group is using NMTC construction loans to redevelop a neighborhood of vacant lots just outside downtown. Another Cleveland developer, Zaremba, Inc., is using low-interest NMTC financing to build 550 condominiums at its high-rise Avenue District project.

The NMTC program is intended to encourage commercial investment activity in low-income neighborhoods. However, that can create challenges when the business invested in is a housing development. The program requires that at least 20 percent of the income from such projects come from commercial real estate.

Lenders can help developers avoid that obstacle by using the equity generated from the NMTCs to make a loan to a developer instead of providing equity to a mixed-use project. That’s allowed under a provision of the NMTC program that authorizes use of the credits to make loans to businesses located in low-income census tracts.

The upshot? Developers located in a qualifying census tract can borrow through the NMTC program just like any other company sited in the neighborhood. They can then use the loan proceeds to build housing without having to meet the 20-percent commercial-income requirement.

CHP plans to build or rehabilitate 700 affordable single-family houses over seven years in the Columbus area using NMTC financing. The total development cost of the houses could reach $80 million.

The financing closed in October when CHP received two sets of loans from Enterprise Community Investment, Inc., a community development entity with an allocation of NMTCs. The first is effectively a $6.5 million line of credit that will be used to acquire and redevelop lots and foreclosed houses. A second loan of $3 million provided working capital that allowed the developer to build up its capacity and construct a sales office in the low-income neighborhood where many of the houses are likely to be built. That move was key, because to qualify for NMTC investments, a business must be located in a low-income area.

The NMTC program also requires the money from the loans to remain invested in qualifying projects continuously for the full seven-year compliance period of the tax credits or risk recapture. That means that CHP needs to keep building and rehabbing homes. The developer has built strong relationships with banks and local officials to keep the vacant lots and empty houses coming.

Enterprise raised $3 million of the equity it lent CHP from the sale of NMTCs to Huntington Community Development Corp. and Nationwide Mutual Insurance Co. The other $6.5 million came from loans from lenders Huntington, Nationwide, CHP, and the Affordable Housing Trust for Columbus and Franklin County. The loans had a blended interest rate of 2.8 percent.

The mix of loans and no-cost NMTC equity helped lower the interest rate on the $9.5 million loan package to CHP by more than a full percentage point to just 1.9 percent.

At that low interest rate, CHP can develop new houses for $140,000 apiece. Gap money provided by local HOME funds lowered the sales price by $30,000 a unit, to an average $110,000 for residents earning up to 80 percent of the area median income. Rehabilitated properties sell for less, averaging $80,000.

The nonprofit plans to sell 30 houses this year, including a small subdivision of five to eight houses. That’s a steep drop from its original plan to sell 90. To keep its $6.5 million line of credit invested, CHP also plans to start infrastructure work this year on a subdivision of 120 new homes.

New neighborhoods in Cleveland

The Vintage Group, a Cleveland developer, is also using NMTC loans to develop Battery Park, which will eventually total 320 units of for-sale housing. Fifty units have sold so far.

KeyBank, which provided the NMTC construction financing to Battery Park, selected Vintage in part because the developer could already meet the NMTC standards for a “qualified low-income community business.”

Vintage doesn’t even have to worry about the seven-year compliance period of the NMTC program. If the company repays the NMTC loan before its seven years are up, KeyBank will simply reinvest Vintage’s package of NMTC equity and other investments into another NMTCqualified low-income community business.

“The compliance risk is really away from the developer,” said Roz Ciulla, senior vice president of community development for KeyBank.

A similar structure is financing highrise condominiums in the heart of Cleveland. Zaremba, Inc., plans to build 550 condominiums at its Avenue District project. This summer, the first tower, with 62 planned condos, was nearing completion.

“From our standpoint, it’s just like a commercial loan,” said Brian Blasinsky, financial manager for Zaremba.

KeyBank made a $12 million floating- rate construction loan subsidized with NMTCs to Zaremba to build its high-rise. At press time, the loan’s rate was 5.5 percent. Just to compare, the project received a second unsubsidized $12 million floating- rate construction loan from National City Bank. At press time, that loan’s rate was 7.25 percent.

The condos don’t have any restrictions on the incomes of the people who can buy them. But the low interest rate provided by NMTCs helped make it possible to offer condos at prices averaging about $300 a square foot. That’s about $100 per square foot lower than the prices of comparable projects in secondary markets like Pittsburgh and Nashville, said Blasinsky.

NMTC experts hope these projects will be a model that helps developers in low-income neighborhoods build more housing.