Melbourne Apartments is a new 84-unit building in Des Moines, where a three-bedroom apartment rents for $775 a month but comes with restrictions – a family of five, for example, can earn no more than $47,460 a year. What is remarkable about this otherwise modest project is that the equity came from the search engine giant Google, whose Mountain View, Calif., headquarters are more than 1,500 miles away.
The investment by Google and other large corporations in Melbourne Apartments and similar projects is one reason a cloud of gloom has lifted for developers of income-restricted housing. These developments depend heavily on low-income-housing tax credits, which provide the equity that makes the difference between whether a project gets built or not.
But when the economy collapsed in 2008 the market for these tax credits dwindled, and many projects never got off the ground. Just $4.5 billion in tax credit equity was raised in 2009, compared with $9 billion in 2006, said Frederick H. Copeman, who heads the tax credit practice at the Reznick Group, a national accounting and consulting company. “People were ready to walk off gangplanks,” he said. Copeman estimated that $7 billion was raised last year.
Created more than two decades ago to instill market discipline into the development of subsidized housing, low-income-housing tax credits are allocated by the federal government and awarded by the states to projects that meet strict requirements. Developers sell the credits to investors–generally financial institutions – that are seeking to reduce their federal income tax over a 10-year period. The banks have another incentive, because investing in tax credits helps them fulfill their obligations under the Community Reinvestment Act to invest in poorer neighborhoods where they have customers.
But after the collapse of Lehman Brothers, “the banks were focused on their long-term liquidity,” rather than on offsetting profits, said another income-restricted housing expert, Michael Novogradac, the managing partner in the San Francisco office of Novogradac & Co. Fannie Mae and Freddie Mac, which had been major investors in tax credits, stopped buying them in 2007. Weakened demand for tax credits led to lower prices, which made them less valuable to developers.
But if you can buy $1 worth of tax credit for 59 cents, you are getting a better return on your investment . That made the credits attractive to a new class of investors looking for double-digit yields. In addition to Google, new investors include Verizon and the insurance companies Liberty Mutual and Allstate, said James L. Logue III, chief operating officer of Great Lakes Capital Fund, in Lansing, Mich., which invests in incomerestricted housing in the Midwest and upstate New York.
Now that the pool of investors has grown and many financial institutions are once again healthy, prices for tax credits are rising and many long-delayed projects are getting under way.
John Hayes, the chief executive of Ginosko Development Co. in Milford, Mich., said he waited almost two years to begin a $7.7 million rehabilitation of Devon Square, a 1970s garden apartment complex in Ferndale, Mich., a suburb of Detroit. “We closed five deals in 2008, and then we had nothing from September 2008 on,” Hayes said. “Our next closing was in April 2010.” Great Lakes provided more than $3 million credit equity.
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