The capital markets meltdown is affecting all sectors of the affordable housing industry, and nowhere is this more evident than the Midwest. For cities like Cleveland and Detroit, foreclosures have been a fact of life for years. But the foreclosure rate has only accelerated in the last year, forcing these areas to allocate more resources to stabilize their hardest-hit communities.
The depressed low-income housing tax credit (LIHTC) equity market is scuttling deals left and right, especially in rural areas that are unattractive to tax credit investors, who are cherry-picking only the most attractive urban deals. Plus, many rural deals are out of the geographic footprint of banks seeking to meet their Community Reinvestment Act requirements; without any investor interest, these deals are foldng.
With the LIHTC market growing more ugly by the day, developers need more secondary financing. But the housing trust funds in areas like Illinois and Ohio are expected to face severe shortfalls next year, as those states struggle with budget difficulties.
In Ohio, five scattered-site redevelopments of foreclosed and vacant properties received tax credit allocations this year. For the first time, the Ohio Housing Finance Agency (OHFA) included language in its 2008 qualified allocation plan specifically addressing foreclosed properties and relaxed certain requirements to make tax credits more accessible. In all, 199 foreclosed and vacant homes will be rehabbed, with two initiatives in Cleveland, two in Toledo, and one in Dayton.
The federal housing bill signed in July should help matters in the short term. State housing finance agencies (HFAs) received 10 percent additional credits in 2008 and for 2009. Many Midwest HFAs are providing equity supplements, allocating the additional credits to projects that received allocations earlier this year, to help make up for the equity shortfall.
Developers need all the help they can get. In Ohio, tax credits were pricing at about 85 cents in May, but OHFA was bracing for prices in the mid-70-cent range in its latest round of allocations. Despite the grim financing environment, good projects are still getting done. In Dayton, nonprofit developer Miami Valley Housing Opportunities opened the doors in September on Ohio Avenue Commons, a 27-unit supportive-housing facility. The $4 million development was financed with nearly $3 million in LIHTC and historic tax credit equity, syndicated by Enterprise Community Investment, Inc., and a host of secondary financing, including city and county funds.
Minneapolis-based Dominium closed the financing on a new 37-unit 9 percent tax credit development called Albertville Meadows Townhomes in late September. The developer once favored tax-exempt bond deals, but says 9 percent deals are much easier to get done now. “There is a strong aversion on the demand side against bond deals right now,” says Paul Sween, a principal at Dominium. “There are some types of deals, like a bond rehab in a rural area, that just won't get done now.”
Ohio is facing budget issues, causing many to question whether the state's housing trust fund will be available to developers next year. And Illinois' housing trust fund, seeded by a tax on real estate transfers, is expected to be less than robust next year since its transaction volume has fallen significantly.
The Madison County Housing Authority (MCHA) broke ground in September on Meachum Crossing, a 78- unit community on a redeveloped former public housing site in Venice, Ill. MCHA received about $500,000 in state housing trust fund money, as well as 9 percent equity pricing in the high $0.80 range. The $15 million development received about $11.7 million in LIHTC equity. “The secondary financing that goes along with these deals is very hard to get,” says Dorothy Hummel, MCHA's deputy director. “But at the same time, there's an endless demand for affordable housing.”