How Do Federal Tax Credits Fund Richmond's Affordable Housing?
We’re continuing our look this week into how municipalities in the Commonwealth encourage and pay for affordable housing. The federal Low-Income Housing Tax Credit (LIHTC) program is the largest source of new, affordable housing in the United States and in Virginia. WCVE’s Megan Pauly has more for our housing series Where We Live:
In a former Manchester stove factory, Richmond developer John Gregory points out what are now new apartments and artist studios. Out on the terrace, there’s a pool, dog park - and an empty plot of grass where Gregory wants to build a four-story affordable housing complex.
Gregory: The top two floors of this building will have views of the city skyline. We’re hoping to begin as soon as possible.
Gregory has already completed five phases of the New Manchester Flats development. They used historic tax credits to help pay for much of the work. Construction on the sixth phase - the $17 million affordable complex - was supposed to start this past July. But since this is a new construction project not a rehab one, Gregory says financing it is challenging.
Gregory: The reality of these projects is that the rents are very low and they are really barely enough to cover the operating costs of having staff members, property managers, landscaping, keeping the site nice, paying the electric bills, repairing the elevator if it breaks...
One of the best financing tools he’s found to help solve that problem: what’re called low-income housing tax credits. Since 1986 the program has helped fund about 103,000 affordable apartment units across Virginia. Over the past five years it’s funded close to 4,500 affordable units in greater Richmond and about 2,100 in Richmond’s city limits.
The federal government allocated a certain number of tax credits to states each year based on census data. The amount Virginia received this year: $22.8 million in credits. $6.6 million worth of credits are being used to fund 900 units under construction in the Richmond area right now.
At Virginia’s Housing and Development Authority, LIHTC Director JD Bondurant determines how these tax credits are allocated.
Bondurant: So it's federal, but the real beauty and I think one of the real strengths of the program is that each state gets to decide what's best for that state.
Developers follow what’s called a Qualified Allocation Plan when applying for the competitive credits.
Bondurant: And in our case it's about a 30-40 page document that outlines how you would compete.
Proposals are scored higher for prioritizing things like proximity to public transit or serving the lowest income households. The biggest problem, Bondurant says, is there aren’t enough tax credits to go around. That’s partially due to demand, but also the omnibus tax bill passed by Congress in December.
Gregory: When the the congressional act lowered the corporate tax rates, it meant these banks had less tax bill, less need to buy credits.
Banks buy the tax credits from the developer to help offset their tax bill. This gives the developer money to pay for construction.
Sometimes there’s a middle man facilitating that process. The technical term is a syndicator. One of them is Bob Newman with the Virginia Community Development Corporation.
Newman: We’re kind of a matchmaker.
But under the new tax code - banks owe less in taxes, which means they don’t need as many tax credits.
Newman: It really has created a lot of gaps.
Now, banks aren’t paying as much for the credits. In some cases, about 10% less. That may not sounds like a lot, but for Gregory’s development project - the difference is about $700,000.
Gregory: So in a project like a new Manchester Flats where $7,000,000 out of the funding is coming from the sale of low income housing tax credits, that means that suddenly a 10 percent drop, you have a $700,000 hole to fill. And it’s very difficult to make that work.
Until he can secure that $700,000 - Gregory’s in a holding pattern. Existing apartments funded with low-income housing tax credits have to remain affordable for at least 30 years. But they can apply to get out of the affordability requirement after 15 years. Bondurant says so far the state hasn’t granted this to developers.
Bondurant: I think we've been really proud of that. But I will also say we, I've seen a dramatic uptick in the number of folks seeking those.
There are state incentives if developers keep units affordable beyond the first 30 years - for up to 40 or 50 years. They also have the option of selling the complex to a non-profit to keep the units affordable indefinitely. But if a non-profit doesn’t buy it, the units could lose their affordability.
Next week, we’ll explore one of the only known solutions for maintaining affordability permanently.
Megan Pauly, WCVE News.