How to provide enough financing to serve the renters with the greatest need is a problem on the minds of housing advocates this year.
Gap financing is one of the deepest pains for affordable developers, Robert Rozen says.
Rozen, principal at Washington Council Ernst & Young, and several other housing experts weighed in during a panel discussion at the Bipartisan Policy Center’s 2014 Housing Summit.
The experts discussed how to solve the problem of making deals work as cuts are handed down from the policymakers.
As Congress debates appropriations each year, more and more supportive financing for the low-income housing tax credit (LIHTC) program is cut, particularly the Community Development Block Grant program and HOME funds, Rozen says.
“They’ve already been cut drastically in the last few years. They’ll continue to be cut,” Rozen says. “That’s a great source of gap financing, and that’s on top of state and local cuts. So, without gap financing the ability to do quality deals, well we’ll still do quality deals, but the ability to do the best deals that politicians are most interested in and most impressed by with deeper targeting, supportive housing is just going to get really hard.”
Michael Novogradac, managing partner of Novogradac & Co., says one of the biggest challenges for the LIHTC is that while it brings down the need for hard debt in a deal, it doesn’t cover operating expenses.
“You at least have to have enough rent to cover operating expenses on an ongoing basis,” he says. “And when you’re trying to serve the extremely low income levels, that won’t be enough to cover operating expenses and then you need some sort of operating expense subsidy.”
Ali Solis, senior vice president of public policy and external affairs at Enterprise Community Partners, is concerned about the overwhelming demand that isn’t being met.
Currently there are about 11.5 million families with incomes below 30 percent of the area median income who are vying for placement in about 3 million available and affordable apartment homes, Solis says.
“For those families with such low incomes, even housing credit properties may be out of reach without additional resources,” she says.
Income blending at LIHTC properties has been proposed as a solution to supporting the lowest-income renters.
Solis is encouraging housing advocates on the Hill to get creative.
“One approach to how we might address this is income averaging, and the reason for that is it may really bring in rental income from some of the higher-income tenants within these developments and then allow you to support some of those lower-income families through innovative financing,” she says.
Mike Jacobs says income mixing can work, but it needs to be more flexible. Jacobs, senior vice president and head of the originations group overseeing the acquisition of LIHTC deals for the National Equity Fund, saw an 80-unit deal break in Troy, N.Y., because the highest incomes couldn’t support the lower incomes with the way the LIHTC program works currently.
“We just had a project that had some very low-income targeting, but they didn’t have rental subsidies,” he says. “The extremely low income didn’t come with a rental subsidy. They needed to have 80 percent units to help offset that. But because 80 percent units can’t be counted as basis, now all of a sudden they weren’t generating all of the credits, and the deal was so tight that the deal just didn’t work and the deal died.”
Meanwhile, in addition to making a specific deal work, income averaging can help foster growth in a community, Jacobs says. He took a trip to Detroit and studied what was happening in one area of the city. Many tax credits had been pumped into the area, creating space for the 30 through 60 percent AMI residents, but the community continues to struggle in the absence of those residents earning between 60 and 80 percent of the AMI.
“What I don’t have is 60 to 80 percent, and that’s what’s going to tip this community over,” he says. “That’s what is going to push us over and get this community solid and allow us to move on someplace else.”
Lindsay Machak is an Associate Editor for Affordable Housing Finance. Connect with her on Twitter @LMachak.