The $87 billion question

New Orleans — Bridget Vinson describes her company’s property managers as the stars who have helped her recover after Hurricane Katrina swamped this city in 2005. But her energy really begins to show when she peppers her favorite low-income housing tax credit (LIHTC) syndicator with questions about applying for tax credits for new projects and the nitty-gritty details of how to maximize the equity investment.

In New Orleans, tax credit investors are viewed as the great hope of the affordable housing industry as it looks to rebuild.

Vinson, a thin but energetic woman who serves as executive director of nonprofit developer Humanitas, Inc., has already submitted an application for a seniors housing development in the inaugural round of special LIHTCs authorized by Congress, called Gulf Opportunity Zone (GO Zone) credits. (For more on Go Zone credits, see sidebar.) She has heard estimates of tax credits fetching as much as $1.12 in equity per tax credit dollar, and she thinks that will be enough to develop the project using only the equity. She plans to take some extra funds she has available from other projects and put that into the new project to bolster reserves.

She’s already making plans for further GO Zone applications for additional projects. That eager approach is echoed over at HRI Development. HRI’s 12 properties in the New Orleans area – ranging from HOPE VI redevelopments to market-rate downtown lofts – sustained about $35 million in damage and its staff has worked around the clock since September 2005 to get its properties back online, but it submitted six GO Zone applications for new developments. Reservations are expected to be announced in June.

Affordable housing in the limelight

Developers, lenders and housing finance agency officials are in broad agreement that users of housing tax credits can do a lot to make or break the program’s reputation, depending on how they use the credits in the rebuilding of the Gulf Coast.

“We want to be able to allocate these credits as soon as possible,” Brenda Evans, program director at the Louisiana Housing Finance Agency (LHFA), told a recent Novogradac conference on Gulf Zone rebuilding. But she said there is national scrutiny of the rebuilding effort, so LHFA was moving cautiously “to make sure the credits are allocated appropriately.”

Therefore, developers are not likely to find too many bent rules or relaxed standards as they apply for LIHTCs here. But tax credit professionals in the state believe that solid deals should do very well in allocation rounds.

The city of New Orleans is promising that the developers will be welcomed with open arms. “Our market, as never before, is now ready for capital,” said Lisa Mazique, executive director of the New Orleans Redevelopment Authority. She said New Orleans was a difficult place to get approvals before the storm because of the limited amount of developable land in the landlocked city and because of fierce opposition from neighborhood groups to any loss of historic structures, but now the city is working with developers to identify neighborhoods for large-scale development. “We can probably shoot for the moon now in real estate development,” she said.

LHFA received 231 applications in 2006 for credits in the state’s GO Zone areas (the portions of the state hit by the 2005 hurricanes); it usually receives about 80. The deadline for the GO Zone areas was April 17; the deadline for the portions of the state outside of the GO Zone was May 17. There will likely be another round later in the year, but LHFA officials had not scheduled it at press time.

Huge need, huge opportunity

Enterprise Community Partners estimates that more than $87 billion could be required to replace or repair the roughly 1 million housing units – single-family and multifamily – throughout the Gulf Coast that were damaged by the 2005 hurricanes. The big question is how much of the needed equity will the investors be willing to put forward. The federal government has already ponied up more than $100 billion, but much of that was spent on emergency housing and other relief efforts in the months right after the storms.

Fortune 500 companies, large banks, and Fannie Mae and Freddie Mac are likely to make up 80% to 85% of the investment market for GO Zone tax credits, according to Greg Judge, senior vice president and chief investment officer at MMA Financial. Community Reinvestment Act requirements, Congressional pressure, and a desire to earn good-citizenship points are several reasons why those institutions will be very visible in Gulf Coast recovery efforts. But even some large investors are cautious about committing themselves.

One major tax credit investor, visiting New Orleans to see the situation for himself, recited a long list of challenges that was echoed by other investors and developers: slow payment of insurance claims, uncertainty about future cost or availability of insurance coverage, labor shortages, rising property taxes, the improvement of the levees, crime and rising security costs, and uncertainty about how many former residents will return to the city.

Investors have “not been totally scared off, but I think they have some questions,” said Chris Dischinger, co-owner of LDG Development of Louisville, Ky. LDG has applied for GO Zone credits to build projects in Hattiesburg, Miss.; Gonzales, La.; and Baton Rouge, La. “The overarching issue is what are you going to be able to do – what’s the availability of insurance and labor?” asked Dischinger. (For a report on Mississippi’s Gulf Coast rebuilding effort, see page 58.)

GE Commercial Finance is very interested in playing an investment role in the Gulf Coast’s recovery, according to one company representative, but the size and targeting of its investment is still uncertain. “What I would like to do … is find a way for GE to invest equity to help rebuild or rehabilitate affordable housing in the GO Zone areas,” said Larry Mandel, managing director of affordable housing in the company’s GE Real Estate division. But he said he’s trying to figure out how to assess the situation. “First of all, where’s the housing going to be built? How are you going to locate the housing, and where’s the infrastructure to support the housing?”

Room to build

Gary Downs, a partner in the San Francisco office of the law firm Pillsbury Winthrop, has been very busy working on New Orleans development projects. He is optimistic about the city’s potential to come back better than before. “It feels like things are finally moving forward,” he said.

Affordable housing developers have an advantage over market-rate developers because New Orleans was sadly under-provisioned with affordable housing before the storm, and its damage hit poor areas of the city disproportionately. Before the storm, the city had about 35,000 blighted properties, according to one local developer and investor, who preferred to remain unnamed. Now, even though people are uncertain at what level New Orleans’ population will stabilize, they all pretty much agree that there’s plenty of affordable housing that can be built before it even approaches an overbuilding situation.

Some of the worst-hit areas were the Ninth Ward and suburban New Orleans East, where properties sat in 3 to 10 feet of water for days on end. About 7,000 affordable units (both LIHTC and very inexpensive market-rate units) were destroyed in the Ninth Ward alone. Eighty-five percent of the city’s public housing units sustained major damage, according to Novogradac & Co., LLP.

The storm left a lot of properties in the situation of Wind Run Apartments, a suburban garden community of two-story buildings owned by Volunteers of America (VoA). The first floors are total losses because of the flooding, but a visit to a second-floor apartment presents a unit that appears completely normal – if you can stand the stench of the rotting food from the refrigerators downstairs.

The question for Wind Run’s community administrator, Sandy Feraci, is whether the property can be saved by redoing the first floors or if the buildings will have to be destroyed. Three hundred of the 400 units were reserved for low-income households and rented for $420 (for a one bedroom unit) to $490 (for two-bedrooms). It was 95% to 98% occupied before the storm. “New Orleans always had a need for affordable housing,” said Feraci.

VoA had about 1,200 units in New Orleans before the storms, and it plans to rebuild or replace those units as well as develop another 1,000 units a year of workforce housing for several years, according to Patrick Sheridan, VoA’s vice president for real estate development.