The low-income housing tax credit (LIHTC) has not only been the most powerful tool to create and preserve affordable housing, it’s been one of the most flexible.
Housing finance agencies (HFAs) are deploying the housing credit in innovative ways to meet housing needs, maximize resources, and elevate design.
“Innovation been a hallmark of this program from the beginning,” says Barbara Thompson, executive director of the National Council of State Housing Agencies (NCSHA). “The way Congress designed the program was to give the states flexibility. From flexibility stems creativity.”
The Illinois Housing Development Authority (IHDA) has recently deployed some of its housing credits to neighborhoods still struggling with the effects of the foreclosure crisis.
The Wisconsin Housing and Economic Development Authority (WHEDA) has created a special allocation round to fund high-impact projects. In another example, the Pennsylvania Housing Finance Agency (PHFA) has encouraged Passive House design through its LIHTC program.
They’re not alone in finding creative and critical ways to use housing credits. During a time of limited resources, wonderful ideas bloom, says Thompson. “From a national perspective, we’re seeing this kind of innovation all around the country,” she says.
Illinois: Rescuing troubled scattered sites
Illinois has been hard hit by the foreclosure crisis. A total of 99,666 properties in the state had at least one foreclosure filing in 2013. The number was much improved from the year before but still enough to give Illinois the nation’s third-highest foreclosure rate, according to RealtyTrac.
“We recognized there were many abandoned and foreclosed single-family homes in the communities where we were working to put tax credit projects,” says Christine Moran, managing director, multifamily finance, at IHDA. “We were trying to figure out if there was a way to stabilize areas that had foreclosures and long-term vacancies. We didn’t want the properties to go into further decay.”
IHDA came up with a solution to help address the issue. In 2013, it amended its qualified allocation plan (QAP) to allow developers to use the LIHTC program to acquire and rehabilitate scattered-site foreclosed homes. For developers who were going to work with these properties, IHDA would be a little more flexible in some of its requirements. For example, the usual site-control requirements were replaced with more flexible conditions. Instead of needing to have specific properties under their control when applying for credits, developers could identify a neighborhood or target area where they’d deploy the credits to purchase and rehab homes.
Since 2013, IHDA has funded four projects with 150 units under the initiative. The effort earned IHDA an award for best preservation and rehabilitation program from the NCSHA last year.
Brinshore Development is one of the developers involved in the scattered-site initiative. It received an $841,000 LIHTC award to acquire and rehab 40 foreclosed homes in Aurora. Partnering with the Aurora Housing Authority on the effort, Brinshore will rent the homes to Housing Authority clients.
“The flexibility provided by IHDA was vital to doing a project that requires assembling multiple sites,” says David Brint, co-founder and principal of Brinshore.
At the end of March, the roughly $12 million project was about 65% completed. Families have moved into the finished homes, and more houses will be rehabbed as the project wraps up this year.
“We’ve tried to have a few homes on the same block to try to stabilize individual blocks,” says Brint, who is leading a similar effort in Bloomington. “We also looked for strategic homes. If a corner property is vacant and abandoned, that’s not good for the block.”
The financing partners for the Aurora Impact Initiative include LIHTC syndicator Red Stone Equity Partners, permanent lender IFF, and construction lender JPMorgan Chase.
Massachusetts: Converting 9% proposals into 4% deals
In most states, if not all, the demand for 9% LIHTCs significantly exceeds the supply each year, which means many solid developments fail to receive credits.
Housing officials in Massachusetts have been working together so more developments can be funded and ultimately built. The Department of Housing and Community Development (DHCD) and MassHousing have sought to convert 9% LIHTC proposals into 4% LIHTC transactions.
This helps unfunded deals, and it’s also a good use of resources. While 9% credits are scarce, many states have available volume caps to generate 4% credits.
Under the Massachusetts effort, the DHCD informs MassHousing of proposals that didn’t receive 9% credits in a funding round. MassHousing staff then review the deals to determine whether a proposal has sufficient cash flow to potentially be viable with a reduced subsidy as a 4% transaction. Staff members also look for additional financial resources that can make up the gap created by going from 9% to 4% credits.
“In the two deals that were completed, this involved using MassHousing soft debt, increased permanent debt, additional soft debt from the state, state LIHTCs, deferred developer fees, and an increase in historic tax credits,” says Tim Sullivan, MassHousing’s executive director.
In 2014, the first year of this collaboration, seven proposals were reviewed. Three were found to have the potential to work as 4% transactions with other funding. Two eventually moved forward—Voke Lofts in Worcester by WinnDevelopment and Sitkowski School Apartments in Webster by Neighborhood of Affordable Housing (NOAH). Both involved the adaptive reuse of historic buildings.
NOAH had tried many times to earn 9% credits in the DHCD’s competitive program before being steered toward the 4% program.
Completed and leased up at the end of 2015, Sitkowski School Apartments provides 66 affordable apartments for seniors. The development also plays a key role in the larger community, serving as the centerpiece of Webster’s downtown, says Toby Kramer, director of real estate development at NOAH.
The school’s former gym has been transformed into the new Webster Senior Center.
Financing for the approximately $20.5 million development included about $8.1 million in tax-exempt bond proceeds from MassHousing, which also provided a $1.6 million deferred-payment loan; $1 million from the Affordable Housing Trust; and a $1.75 million permanent loan. The DHCD awarded federal 4% LIHTCs and state LIHTCs as well as $1 million from its Housing Stabilization Fund and $715,000 in HOME funds. The Massachusetts Housing Investment Corp. provided more than $6 million in federal LIHTC equity and $3.3 million in state LIHTC equity. The development also used about $2 million in state historic tax credit equity from Selective Insurance and MAPFRE/Commerce Insurance.
In addition to the state housing agencies, the town of Webster was a strong partner, says Philip Giffee, NOAH executive director.
There were differing opinions about what should happen to the school building, including tearing it down, but many in town recognized that senior housing would be a good use, he says. An added incentive to convert the gym to a senior center made NOAH’s proposal a winner with the town.
For state housing officials, a new challenge has emerged: The tax-exempt bond volume cap is once again scarce and not as plentiful as it was in 2014. That means resources for 4% LIHTC and bond deals are tight for housing deals.
Pennsylvania: Encouraging energy efficiency
For the PHFA, making its properties more energy efficient through such measures as home energy ratings and geothermal systems has been a priority over the years. But when its efforts plateaued, the group turned to new approaches.
“We looked at what our next push would be as an HFA to have these units be more efficient to push those costs down for residents, and we saw that there had been inroads utilizing Passive House,” says Brian Hudson, PHFA executive director and CEO.
Developed by the Passive House Institute in Germany, Passive House is a rigorous standard to attain a high level of energy efficiency. It is made up of a set of design principles that include an airtight building envelope, high-performance windows and doors, and the managing of solar gain to use the sun’s energy for heating and minimize it for cooling.
For its highly competitive LIHTC program, the PHFA added points to its 2015 QAP to encourage Passive House design. Developers may be awarded up to 10 points for developments built either to the German standard from Passive House Academy or to the PHIUS+ standard from Passive House Institute US.
“The residents will be the beneficiaries, but it also translates into cost savings for operating the property,” says Hudson.
Seven developments that were allocated LIHTCs in the 2015 round have committed to Passive House. Two of the developments, The Whitehall by Mission First Housing Development Corp. in Chester County and Sacred Heart Residences by Pennrose Properties in Allentown, recently started construction.
The PHFA will monitor the Passive House projects to determine how much the savings are and what the trade-offs are for the additional costs.
“There’s a cost that goes along with this. As it becomes more familiar, it will go down,” Hudson says. “The further we can improve on costs and drive them down will be a big win.”
According to the Passive House Institute US, passive building costs approximately 5% to 10% more than conventional building.
The PHFA itself is also considering Passive House, analyzing the costs for a 35,000-square-foot addition to its headquarters.
“It’s a hot issue for not just Pennsylvania, but for other HFAs across the country,” Hudson says. “Utility costs and operating costs are the things that can improve quality of life as well as reduce costs for the operator of the project.”
Indiana: Promoting innovative projects
In 2014, the Indiana Housing and Community Development Authority (IHCDA) created an “innovation round” as part of its LIHTC program.
Working with developers, the agency piloted a way to reward cutting-edge housing projects outside of the usual competitive allocation round. IHCDA set aside $1.5 million—about 10% of its annual LIHTC authority—for the program and invited developers to submit letters detailing their innovative housing proposals, including the development’s uniqueness, ability to serve an unmet need, how it contributes to IHCDA’s mission, and how it is at a competitive disadvantage in the normal LIHTC round. From there, five proposals were selected to continue on in the process and submit full applications.
“IHCDA talked about using the tax credit program for innovation,” says Jacob Sipe, IHCDA executive director. “Not only should we challenge the developers, but we as a state agency also have to challenge ourselves to be innovative.”
As a result, IHCDA got creative. The agency made sure the proposals met underwriting and program compliance requirements, but it threw out the scoring categories. It also formed an external advisory committee made up of non-IHCDA members to make funding recommendations to the agency’s board. The committee members included a director of a statewide disability advocacy network, an executive from an Indiana community development financial institution, and a representative from another state HFA.
The committee and IHCDA staff then conducted site visits, giving each finalist two hours to present their proposal. In the first year, three developments were awarded housing credits. The following year, in 2015, two more projects received LIHTCs.
One of the funded developments is Main Street Cottages in Princeton by Milestone Ventures, which wanted to explore cost-containment issues and proposed building a 20-unit project with modular construction. The advisory committee met the developer at the modular home factory for a presentation.
Another is South Bend Mutual Homes by South Bend Heritage and Neighborhood Development Associates. The developers proposed the first co-operative model in a LIHTC property in Indiana. Here, the residents help make decisions about property operations and have a lease–purchase option for their homes. The development team also committed to work with a local university to study the ongoing impact of the development on the residents and neighborhood.
IHCDA recently decided to recast the innovation round and created the Moving Forward program, which recognizes that affordability for families goes beyond housing. A partner in the program is Energy Systems Network (ESN), which assembled a team of industry experts. The industry experts are working with developers to create innovative housing concepts that focus on transportation and sustainability.
The idea is to find solutions that keep residents’ monthly housing and transportation expenses to no more than 45% of their income, says Sipe.
The agency selected two development teams, BWI and Pedcor Investments, out of 11 applicants to participate in the program. Their concepts will be developed during a series of workshops and meetings with IHCDA, ESN, and the assembled experts. Upon completion of the workshops and creation of development concepts, the two development teams will each be able to submit housing tax credit applications of up to $750,000 each this year.
Creating a new LIHTC program such as the innovation round requires the support of the developer community, stresses Sipe. “I’ve told this to developers,” he says. “This is their set-aside.”
By tossing out the scoring criteria for the initiative, IHCDA would be making decisions that are subjective but is committed to doing so in a highly ethical manner, according to Sipe. “If [the developers] have the confidence in our agency to do that, we will do it for them,” he says.
Wisconsin: Looking for high impact
Low-income veterans have found a home at Major General Jacob Brown Veterans Manor in Green Bay, Wis.
Developed by Cardinal Capital Management and the Center for Veterans Issues, the 50-unit permanent supportive-housing project opened last June and serves veterans ranging from age 30 to the upper 60s from all branches of the military. Veterans Manor is located near the new Milo C. Huempfner VA Outpatient Clinic. The $7.5 million development was financed primarily with LIHTCs allocated by WHEDA and syndicated by RBC Capital Markets.
Veterans Manor received $595,500 in housing credits through WHEDA’s High-Impact Project Reserve (HIPR) program. Created in 2013, HIPR involves a special LIHTC round to fund particularly effective projects, including developments that are linked to job growth or job training; are part of a larger redevelopment plan; are located in an area with few affordable housing options or will have an immediate high impact on potential residents; and will improve the housing stock or address foreclosures, says Sean O’Brien, director of commercial lending at WHEDA.
In another example of a HIPR project, WHEDA awarded $850,000 in LIHTCs to Gorman & Co. to stabilize and revitalize the housing stock in Milwaukee’s Northside. The affordable housing developer is leading a multiphase recovery of the neighborhood by rehabbing vacant buildings and putting them back to use. Residents of the renovated single-family homes and duplexes have an option to buy after the initial 15-year LIHTC compliance period. Alliant Capital was the syndicator on the high-impact award, but Gorman has worked with other syndicators on other phases.
The effort is also unique because Gorman is working with Northcott Neighborhood House, a local nonprofit, to train area residents in construction and demolition work. They have also put in place a workforce training program that targets re-entry workers to get union apprenticeships in construction.
Overall, seven awards have been made through the high-impact program. “When you look at the projects that we’ve chosen, I feel like they’ve all been a great fit with our mission,” says O’Brien.
Looking ahead, this may be the final year for HIPR as WHEDA officials weigh the possibility of incorporating many of the program’s features into its regular LIHTC program.