Guest column: Competition is 'fierce' for Housing Tax Credits ...

Posted: 6:30 am Fri, November 23, 2012
By John M.?Ries Finance and Commerce 6:30 am Fri, November 23, 2012

Aeon?s Renaissance Box, at 509 Sibley St. in St. Paul, and the iconic Riverside Plaza in Minneapolis (pictured) are examples of projects using the Housing Tax Credit along with federal and state Historic Tax Credits. (File photos: Bill Klotz)

Editor?s note: Guest columnist John M. Ries, managing partner of certified public accounting firm Mahoney, Ulbrich, Christiansen Russ P.A., specializes in the taxation and structuring of real estate transactions, using low-income housing tax credits, historic rehabilitation tax credits and new markets tax credits.?

The Housing Tax Credit (Section 42 of the Internal Revenue Code) is the largest and most successful federal program for financing affordable rental housing in the nation.?Since the credit was created by the Tax Reform Act of 1986, it has helped to finance more than 2.4 million apartments.

Under the program, state agencies award Housing Tax Credits to developers, who sell the credits to private investors in exchange for funding for the construction and rehabilitation of affordable rental housing.

These funds allow developers to borrow less money and pass the savings on to tenants in the form of lower rents. Investors, in turn, receive a 10-year stream of tax credits based on the cost of constructing or rehabilitating the apartments, which, in general, cannot be rented to anyone whose income exceeds 60 percent of the area median income.

In Minnesota, developers submitted applications this summer for reservations out of the state?s 2013 Tax Credit Pool.?Each state is allocated credits based on population and a per capita volume amount of $2.20 in 2012 and $2.25 in 2013.

Minnesota has more than $11 million of Housing Tax Credits to award this year and competition is fierce. The 2013 First Round Awards were released Oct. 25, and more than 50 developments applied for tax credits.?But only 20 received an allocation.

Minnesota has a very strong group of affordable housing developers.?Here are examples of some of the projects currently under way in Minnesota:

• The Dakota County Community Development Agency is working on another family housing project.? Its Family Townhome Program is designed for moderate-income families with children under age 18.? A typical tenant will be a family with a single mother, two children and an income of approximately $30,000.
• Project for Pride in Living (PPL) is building a family housing project in St. Paul, known as Fort Road Flats, which will also provide housing and supportive services to homeless individuals.
• Alliance Housing?s Gateway Lofts project is providing work force housing in North Minneapolis.
• RS Eden is in the middle of construction of its 100-unit Emanuel Housing project for people who have been homeless, may be struggling with drug or alcohol addictions or have other challenges.
• CommonBond Communities and Sand Companies have been granted the opportunity to create nearly 100 units of housing for homeless vets at Fort Snelling and in St Cloud.
• Twin Cities Housing Development Corp. just completed the substantial rehabilitation of Northgate Woods, a 75-unit property for seniors and families in Blaine.

Many factors are currently working in favor of producing the affordable apartments. Demand is high for the affordable apartments. Interest rates are at historically low rates, enabling developers to obtain favorable mortgage terms.

But demand for the credits remains high. Many banks, like U.S. Bank and Wells Fargo, are buying Housing Tax Credits for economic returns as well as Community Reinvestment Act (CRA) requirements, which push banks to reinvest in the neighborhoods in which they do business.

Other investors include well-known companies such as Verizon & Google. Google recently invested in George Sherman?s recapitalization of the 1,000-unit Riverside Plaza in Minneapolis.

In rural Minnesota, developers are anxiously awaiting funding of the Minnesota Equity Fund, which was formed by the Greater Minnesota Housing Fund to invest in rural Minnesota projects.

Some Housing Tax Credit deals are paired with Historic Tax Credits. Certain older, historic structures qualify for the Historic Tax Credit if a qualified rehabilitation of the structure is undertaken.

The Minnesota Historic Tax Credit enacted in 2010 piggy-backs on the federal Historic Tax Credit, providing another source of financing for qualified projects. Aeon?s Renaissance Box project in St. Paul, along with Riverside Plaza in Minneapolis, are projects using the Housing Tax Credit along with federal and state Historic Tax Credits.

Still, using Historic Tax Credits may complicate a deal. Recent tax decisions have thrown a monkey wrench in the structuring of these deals. The Historic Boardwalk Hall case, which involved the restoration of the Atlantic City, N.J., convention center, recently shut down closings of federal Historic Tax Credit transactions. And, a Commonwealth of Virginia case has caused uncertainty in state Historic Tax Credit deals.

As a result, industry experts are being very careful in structuring new historic credit deals.

The success of the Housing Tax Credit program has been well-documented, however. In 1989 and in 1997, the U.S. Government Accountability Office (GAO) reviewed the program and concluded it was serving its intended purpose ? to provide affordable housing to needy individuals.

A 2007 Harvard study found ?the Housing Credit has sound underpinnings and a track record of success in delivering rental housing assistance.?

The study cited ?its many appealing features? including ?its allocation primarily by state, and some local, agencies (making it responsive to local market conditions); the leveraging of private capital with strong interests in managing properties (so tax credits are not recaptured); and the placement of liability on owners rather than the federal government in the event of failure.?

This year?s election was very important to our nation.?Many important issues will need to be addressed.? Among them are our country?s unsustainable level of debt, budget deficits, tax reform, the housing market and the economy.?The Housing Tax Credit may find itself squarely in the middle of these tough issues.

I hope the Housing Tax Credit survives to continue the good work it has been doing for the last 25 years.

John M. Ries has more than 30 years of experience in public accounting and has been the managing partner at St.Paul-based Mahoney, Ulbrich, Christiansen Russ P.A.?He can be reached at 651-281-1840 or jries@mucr.com.

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Source: http://finance-commerce.com/2012/11/guest-column-competition-is-fierce-for-housing-tax-credits/

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