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COVID-19 relief bill set a floor rate for affordable housing tax credit program — What’s next?

Banyan Development Group is behind a planned 13-story mixed-use affordable housing development in downtown Orlando that will restrict some of its apartments for people who are 55 years of age or older and have limited income.
Banyan Development Group is behind a planned 13-story mixed-use affordable housing development in downtown Orlando that will restrict some of its apartments for people who are 55 years of age or older and have limited income. (Fugleberg Koch)

Affordable housing developers had something to champion on the last Sunday of 2020.

The $900 billion COVID-19 Economic Relief Bill signed into law included a critical change to an affordable housing program, which accounting firm Novogradac estimates could add 130,000 affordable homes over the next 10 years nationwide, and 5,639 in Florida alone.

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“This was something the industry has been advocating for a number of years,” Dirk Wallace, a partner at Novogradac, said. “It was close to being passed in December 2019, however this last year I believe it was passed because we do have a great need for affordable housing and with the pandemic it will only increase.”

The federal coronavirus pandemic relief package established a permanent minimum 4% Low-Income House Tax Credit (LIHTC) rate that previously hinged on interest rates set by the Treasury Department.

Novogradac’s national and state estimates on the effect of the 4% floor.
Novogradac’s national and state estimates on the effect of the 4% floor. (Novogradac)

In December, the rate was around 3.09%. Over the last three to four years, it’s been fluctuating from 3.08% to 3.2%, Wallace said.

LIHTCs can be sold to investors to raise equity on affordable housing projects. The higher the tax credit rate, the more attractive it becomes to corporate investors that receive a reduction on federal income taxes for 10 years based on the rate after purchasing.

Properties should be able to realize over 25% in additional tax credit equity funding, which will result in getting more deals funded, Tony Del Pozzo, vice president of finance for The Related Group, said. Del Pozzo oversees financing operations for all of Related’s affordable and workforce housing projects across Florida.

The company recently opened senior affordable housing complex in Pine Hills called Preserve at Emerald Villas. The 55+ apartment community is restricted for active adults and seniors making less than $39,000.

The developer told GrowthSpotter the firm has additional development rights in the area that could provide enough leeway to construct another 90 to 100 affordable senior housing units.

Monthly rents range from $482 (for households earning 40% Average Median Income) to $755 (60% AMI) for one-bedroom units and $579 (40% AMI) to $906 (60% AMI) for two-bedroom apartments.

“There is a tremendous need for affordable housing,” he said. “While the tax credit floor will enable additional new units to be developed, I believe the demand will remain extremely strong.”

As the economy in the United States recovers from the pandemic, local government agencies may tighten or slowly roll out their own funding for affordable housing, subsequently.

Over the summer Orange, Seminole, Lake and Osceola counties lost out on more than $27 million in funds from the State Housing Initiatives Partnership (SHIP) when Gov. Ron DeSantis vetoed its entire $225 million. The initiative promised to help shoulder the cost of building and rehabbing affordable housing.

Orange County was expecting $11.7 million in SHIP funds this year, compared with the past two years when it only received about $1.4 million.

Typically affordable housing projects get done using some sort of gap filler, like money from the Sadowski Trust Fund or other types of government bonds and soft financing sources, because equity generated from the credits isn’t enough.

Ryan von Weller, managing director of development at Wendover Housing Partners, believes establishing a floor rate of noncompetitive 4% LIHTC tax credits can free up more local subsidies.

Some of the apartments in Monroe Landings will be set aside for families earning less than 60% of the area's median income.

“This floor on the 4% tax credit will allow municipal bonds and the SAIL [State Apartment Incentive Loan program] transactions to be more feasible throughout Florida as well as nationally,” he said. “More equity from these tax credits will lead to a reduction in necessary contributions from local governments in order to make an affordable housing transaction pencil out.”

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Alfonso Costa Jr., an executive vice president at Falcone Group and former Deputy Chief of Staff of the U.S. Department of Housing and Urban Development (HUD), agrees.

He pointed to programs like the HOME Investment Partnerships Program (HOME) and the Community Development Block Grant (CDBG) as other sources of funding that can utilize its money to help strengthen communities.

“It should consequently free up more sources of funding for local bodies of government to use beyond solely affordable housing gap financing,” he said. “The greater flexibility attributed to those dollars, the better from a holistic approach perspective.”

Additional tenant services, green features, and community amenities may now be cost effective, Devon Quist, a senior development associate at Dominium, said. “Bringing the additional resources to bear not only benefits the volume of affordable housing broadly, but also the quality of the new housing stock.”

Alexander Kiss, managing partner at Banyan Development Group, is taking an economic perspective while looking into the future of the new established floor rate. He believes the market will level off without any additional equity for potential developments and no increased rate of affordable housing development.

Most of the 139 apartments will be restricted to people who are 55 years of age or older and have limited income. The remaining 30 units will have no rent restrictions.

“With the supply of LIHTC increasing on each development, and with more equity investment options due to more potentially feasible developments, we do not know how pricing will be affected,” he said. “Economics would tell us that with a fixed demand for LIHTC from equity investors, the increased supply will simply cause the LIHTC pricing to fall.”

The developer is behind several affordable housing developments in Central Florida. In downtown Orlando, it’s behind a planned 13-story mixed-use tower that will offer both income restricted and non-income restricted apartments.

Kiss said additional sources of funding, like the one banks provide under the Community Reinvestment Act (CRA), should help to stabilize pricing.

“Banks will want to invest a minimum amount in certain areas. The likelihood is pricing will become even more location specific, related to CRA need,” he said.

Also looking to the future, Quist said he believes it’s too early to tell how the 4% floor will impact the affordable housing industry in Florida.

“At the end of the day, affordable housing is just a math equation,” he said. “The amount of subsidy that this new policy could bring to the table might make previously infeasible projects worth another look.”

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Have a tip about Central Florida development? Contact me at arabines@GrowthSpotter.com or (407) 420-5427, or tweet me at @amanda_rabines. Follow GrowthSpotter on Facebook, Twitter and LinkedIn.

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