Developers across the country face fierce competition for 9 percent low-income housing tax credits (LIHTCs), with 19 states last year reporting that demand for the credits was more than twice the supply, data gathered by AFFORDABLE HOUSING FINANCE shows. In Michigan, demand exceeded supply by more than a 5-to-1 ratio.
That means affordable housing firms, especially in tight coastal markets, must in many instances have a “Plan B” for their projects in case they don’t win LIHTC reservations from their state agencies. The most logical alternate route to development: using 4 percent LIHTCs, coupled with taxexempt bonds.
But that’s not always an easy transition for projects engineered to score high on applications for 9 percent LIHTCs, which can offer enough equity to help cover high land and construction costs, as well as pay for items such as green design which can help boost a project’s score in the competition.
Although the income targeting usually doesn’t have to be as deep with 4 percent deals, “it doesn’t offset for the drastically [lower] amount of credits,” said Tom Erickson, a senior vice president with Simpson Housing Solutions, a developer and tax credit syndicator in Long Beach, Calif. “You have a lot fewer credits and a little more income, so it makes for more public financing.”
The value of proper planning
Developers and syndicators who have wrangled projects aiming for 9 percent credits into 4 percent deals have two words of advice for others who are thinking of following in their footsteps: Plan ahead.
Most projects that fail to win 9 percent LIHTCs will need extra subsidies to pencil out as 4 percent projects, developers said. And to persuade local governments to pony up the extra dough needed to make such deals work, it pays to build support ahead of time among local officials.
That’s what Meta Housing Corp. did with its Pico Gramercy Family Apartments project in Los Angeles. “We recruited all the allies we could so that when we didn’t win the 9 percents we were able to rely on some political goodwill we had created,” said John Huskey, president of Meta Housing Corp., a Los Angeles-based developer that has created more than 3,000 affordable housing units.
City council members agreed to give the developer a letter of support for the 71-unit family project if it included a play area where children could ride their tricycles, said Huskey. That was one of the promises Meta Housing made sure it kept, so that when the firm went back to local governments asking for more money, it had a better chance of success.
In all, the $18.8 million project tapped 14 sources of funding, including the city and county of Los Angeles, the Community Redevelopment Agency, and even the L.A. Department of Water and Power.
Lining up key allies
In Northern California, bringing in a nonprofit partner helped USA Properties garner the local support it needed to turn a 9 percent seniors housing project into a 4 percent deal, said Geoff Brown, president of USA Properties Fund, Inc.
The Roseville, Calif.-based developer tried for 9 percent LIHTCs in 2001, but when it didn’t win the allocation it needed, “We didn’t think we had enough time to hold the escrow,” said Brown. “So what we did is went and got HOME funds, and the locality put in more money. We got an additional $1.4 million in subsidy and that kind of helped bridge the gap.” The involvement of the nonprofit Napa Valley Community Housing helped the firm secure the HOME funds and the local subsidy for the 117-unit project, said Brown.
“Going into the transaction, it’s almost like the deal has to work as a 4 percent [deal] and you’re just going for the 9 percent to roll the dice and see if you can get it,” said Jeff Butcher, vice president of the Western region for tax credit syndicator WNC & Associates.
Keeping your options open
Another piece of advice Huskey of Meta Housing offers to developers concerned about their ability to win allocations of 9 percent LIHTCs: Be flexible. “We try not to buy sites that have only one single exit strategy,” he said. “That’s foolish to do if your single exit strategy is 9 percent tax credits.”
A developer can also gain more flexibility with a site if it’s buying the land from a “friendly seller” such as a municipality, local government agency, or nonprofit, suggested Butcher. “They may dictate that they’ll set the purchase price based on a 9 percent transaction, but if you can’t get the 9 [percent credits], they’ll lower the price if you have to go with a 4 percent round,” he said.
One change developers pursuing the 4 percent option also might want to consider is increasing their project size, developers said. Even with the lower interest costs available using tax-exempt bonds, such deals are typically more costly because of all the issuance costs, from bond counsel to underwriters to credit enhancement, so it’s more economical to spread those costs out over more units.
“To make a real bond deal work, I would think you need typically at least an 80-unit project,” said Brown, adding that in some cases, “you can get away with a smaller project in a higher median income county.”