Whither LIHTC, Part 3

Lots of activity during the holiday break, but we’ll start with House Financial Service Committee Chairman Barney Frank

According to a well-written article in the Boston Globe, Congressman Barney Frank wants to include $10 billion for affordable housing in the stimulus bill to be announced later this month.

The $10 billion would take the form of $5b in Treasury purchases of tax credits and $5b in assistance to states for funding existing projects currently stalled by market conditions. “Frank said the Treasury could buy the credits and hold them until the market improves and then resell them to recoup its money. He said the government also could send money to states to help developers with funds they need to get projects moving.”

The Globe article does not discuss the length of time Treasury would hold the tax credits, whether the credit period would begin once the credits are sold to a third party, or whether the compliance period would be extended. If Treasury holds the credits, then deals will probably get done, but if the credit period begins at point of purchase, the credits will decline in value (because they burn off at +/- 10% per year) and Treasury will never realize any gain from the sale. If the credit period begins at point of sale to the eventual investors (TBD) then the investors will pick up a project either at completion (if conditions are good) or well into its first couple of years of service (if conditions aren’t). This means that equity investments will be due immediately rather than spaced over construction, replacement reserve costs will be higher, and that the property will be much more likely to require a major capital upgrade during the compliance period.

The direct assistance to states is much harder to evaluate, but there are many, many projects that cannot be built because neither equity nor debt is available for funding. In the spirit of “shovel ready” that predominates discussion of the stimulus bill, the National Housing Partnership Network claims “There are 230 projects ‘shovel ready,’ with a combined 2,100 units that could go into construction if the federal government provides additional help.” Of course, 10 units/project seems a little low, so I’ll assume that the Globe missed a decimal place.

One of the things to remember is that even if a project can be built, that does not mean that construction expenses will not exceed budgets, that the project will deliver on time, or that operations will not require additional funding. This is particularly important because many developers are over extended or feeling pressure on existing deals and cannot be counted on to provide additional operating loans. I deal with developers across the country on a daily basis and I can’t find one that doesn’t feel heat.

Overall the article provides a good summary of complex issues and presents the policy challenges faced by the industry.

“Whither LIHTC”, a multi-part, semi-informed discussion of the current challenges to the Low Income Housing Tax Credit program is discussed in Part 1 and Part 2.

(Via Open House.)