Low-Income Housing Tax Credits remain the mainstay of financing for affordable seniors housing projects, but funds are scarce for developers.
By Jane Adler
In light of the growing need for affordable seniors housing amid an improving U.S. economy, investors and developers alike are aggressively pursuing federal Low-Income Housing Tax Credits.
Developers continue to vie for a limited number of credit allocations — determined by the state — to provide the low-cost equity needed to finance projects that serve the elderly with low and moderate incomes. Competition is also fierce among investors that purchase tax credits, which are trading at historically high prices.
Developers grumble about the scarcity of tax credits and the time it takes to pull together a financing package, though new programs are helping to streamline the process.
Meanwhile, the industry continues to lobby the U.S. Congress to make more funds available. But sweeping tax reform could alter one of the only government programs available to finance affordable seniors housing projects.
“We want to make sure resources for affordable housing are preserved,” says Beth Mullen, national director of affordable housing at CohnReznick, a tax advisory firm headquartered in New York. “There is such a great need.”
By 2024, approximately 6.5 million households in the 65-and-over population are projected to have annual incomes under $15,000 — a 37 percent increase over a single decade, according to a recent study by the Joint Center for Housing Studies of Harvard University.
Growth in the number of older households with incomes between $15,000 and $29,999 is expected to add another 2.9 million to the ranks of low-income households. The Harvard report also shows that 3.9 million older renters are currently eligible for rental assistance, but only 1.4 million elders receive any help.
Since its creation in 1986, the Low-Income Housing Tax Credit (LIHTC) program has helped to finance more than 2.4 million affordable rental housing units for low-income households, according to a 2014 report by the Office of the Comptroller of the Currency. It’s estimated that about 25 percent of the projects target the senior population.
Tax credits work by encouraging private entities to invest in affordable developments. In short, federal housing tax credits are awarded to developers of qualified projects. Developers sell the credits to investors to raise equity for a project, which reduces the amount of debt needed to finance the project and results in lower repayment costs. In turn, that allows for lower rents.
Legislative uncertainty
There are two types of federal tax credits available. The so-called 9 percent credit provides a 70 percent subsidy, and the 4 percent credit, issued in conjunction with tax-exempt bonds, provides a 30 percent subsidy.
The 9 percent credits result in a greater amount of equity for the project, making them the most popular. About three applications are submitted for every 9 percent award granted, sources say.
Nine percent credits totaling approximately $7.3 billion were available in 2013. About $2 billion of 4 percent credits were available.
Though the value of credits was originally designed to vary based on current interest rates, in 2008 Congress fixed the rate of the 9 percent credit. But that provision expired in 2013 and deals in 2014 have been subject to a floating rate. In December, the U.S. House of Representatives passed a provision to fix the rate at 9 percent for a year, but the U.S. Senate has yet to pass the bill.
“The uncertainty makes some deals economically infeasible,” says Mullen, who operates out of CohnReznick’s office in Sacramento, Calif. She explains that transactions subject to the floating rate, which averages about 7.5 percent, sometimes don’t work because they don’t generate enough equity.
Michael Lavine, executive vice president of Wells Fargo Community Lending & Investment-Tax Credit Equity, agrees that the floating rate has caused the amount of capital in a deal to be reduced. That has been partially offset, however, by low interest rates and the availability of more equity because of high pricing for the credits. “That’s closed the gap a bit,” says Lavine, who is based in Charlotte, N.C.
Wells Fargo generated LIHTC loans totaling approximately $2 billion in 2014. For example, the bank recently provided financing for City Heights, a new 23-story high-rise apartment for seniors in Miami. The $30 million project includes 98 units and was built by Miami-based Landmark Development. LIHTC equity totaled about $27 million.
Other market forces are also affecting the program. Operators complain that building expenses are increasing but rents can’t be raised because they are tied to area median incomes, which have been stagnant. What’s more, affordable housing developers are competing for land with traditional developers as the economy recovers. That competition can raise costs and make affordable housing deals unworkable financially.
On the plus side, Lavine characterizes the LIHTC investor market as frothy. “The market has fully recovered from the recession and is every bit as hot as it was prior to the recession,” he says.
Investors include financial institutions, insurance companies and other corporate entities. Investors can expect returns of about 6 to 7 percent, though tax credits in large metro markets generate returns of 5 percent or less because of intense competition among investors, according to Mullen of CohnReznick.
Loan process streamlined
Timing continues to be a problem for developers. They complain about waiting as long as five years to be awarded the LIHTC funds. Substantial time lags mean that contractor bids are long outdated by the time construction begins.
In response, the U.S. Department of Housing and Development (HUD) launched a pilot program in 2011 to expedite the loan approval process based on the agency’s success with the Section 232 LEAN Program, which helped accelerate loan approvals for the refinancing and construction of nursing homes and assisted living projects. The LIHTC pilot program was revised in 2014 to increase its flexibility and make it available to more projects.
“This pilot program is a great product,” says Brian Graney, an investment banking associate at Columbus, Ohio-based Lancaster Pollard. While developers often turn to Freddie Mac and Fannie Mae for permanent financing, Graney says the new HUD product provides a suitable alternative at a low interest rate.
For example, National Church Residences used HUD’s LIHTC pilot program to refinance and fund the rehabilitation of Arlington by the Lake, a 51-unit affordable seniors housing project in Toledo, Ohio. The building, like many apartment projects built decades ago under HUD’s Section 202 Supportive Housing for the Elderly program, was in need of substantial renovation.
Since the HUD 202 program no longer supports new construction, the LIHTC program is filling the void, says Graney.
Owned and operated by National Church Residences, Arlington by the Lake is for independent seniors. Services are not available, though an on-site service coordinator helps residents find help, such as Meals on Wheels.
The $2.7 million financing package included 4 percent LIHTC funds, an FHA-insured fixed-rate mortgage issued under HUD’s pilot program, short-term bonds, and funds from the Ohio Housing Finance Agency. HUD approved the mortgage loan within a few months, a process that previously took up to a year, says Graney.
Repairs included replacement of the roof, sidewalks, windows, plumbing fixtures, and lighting. The old façade of aluminum siding was stripped away and replaced with a new vinyl product that looks like cedar shingles. The common areas were also upgraded. The community room and lobby were redone with new furniture and flooring. A patio was built behind the building.
Arlington by the Lake recently celebrated a grand reopening and is fully occupied. “We’re optimistic that more deals like this will get done,” says Graney.
Projects get green light
Although many of the tax credits awarded are being used to rehabilitate older projects, new seniors projects also are under way. Over the last decade, The Community Builders has used the LIHTC program to refinance and redevelop six older HUD 202 buildings. But the Boston-based affordable housing developer, which mostly focuses on multifamily projects, adds new senior apartments to the mix when it makes sense.
“We rarely build anything without LIHTC funds,” says Beverly Bates, senior vice president of development operations at The Community Builders. “I don’t know where the affordable housing industry would be without it.”
For example, The Community Builders recently constructed a new 76-unit project in Chicago called Oakwood Shores Senior Apartments. The building is part of the redevelopment of the area formerly occupied by the Ida B. Wells public housing project on Chicago’s South Side, which upon completion will include more than 600 new mixed-income rental units.
The senior apartments are fully leased and had a total development cost of about $19 million. LIHTC funds and other sources provided the financing. Rents range from $798 to $998 per month.
The building includes a number of energy-saving features, such as upgraded insulation and windows, a solar reflective roof, solar thermal panel for hot water, low-flow plumbing fixtures and energy-efficient lighting and appliances throughout.
Vying for funds
Competition for 9 percent credits among developers continues to be intense. Christian Church Homes owns 59 senior apartment communities, mostly located in California. The state has a rigorous qualification process for LIHTC funding based on a system that awards points for affordability, the need in the area, and specific project features.
“If you don’t have 100 percent of the points, it’s not worth applying,” says Kathleen Mertz, director of housing development at Christian Church Homes based in Oakland, Calif.
Tiebreakers often determine LIHTC awards, according to Mertz. Key factors include whether other public funding sources have committed funds to the project, the proximity of the development to shopping and transit, and the use of sustainable or “green” building systems.
Since 9 percent credits are difficult to secure, Mertz sometimes combines 4 percent credits with state credits. “You don’t get as much equity as a straight 9 percent credit, but you get a little more bang for your buck,” she says.
Christian Church Homes is using LIHTC funds to renovate Garfield Park Village, a four-acre senior apartment complex in Santa Cruz, Calif. Built in 1964, the project was the first senior apartment project to be developed by Christian Church Homes under the HUD 202 program.
Garfield Park Village consists of 12 cottages with four units each, and a 46-unit apartment building. The property also includes a single-family home for the property manager, and another building with a community room and maintenance supply area.
“The original loan was expiring and we wanted to keep the units affordable,” says Mertz. The financing package consists of a 4 percent LIHTC equity investment of $10.1 million, plus capital from other sources including HUD HOME funds from the city of Santa Cruz. Union Bank provided a $17 million construction loan and an $8.6 million permanent loan.
The project also received rental assistance through a new HUD initiative, the Senior Preservation Rental Assistance Contracts (SPRAC) program.
The SPRAC program is meant to keep rents affordable for low-income seniors in buildings financed under the old Section 202 program and to facilitate improvements at the properties.
Garfield Park Village is being renovated in four phases. Changes include updated heating and ventilation systems, new double-pane windows and energy-efficient appliances and lighting. The property will also include a community garden, computer center and a community room with a common area, kitchen and library. The first phase was just completed. Monthly rents range from $700 to $1,200.
“A lot of seniors in the Bay Area can’t afford an apartment,” says Mertz. “Our mission is to serve those low-income seniors.”