The seven-member Missouri Housing Development Commission voted Nov. 17 to withhold Missouri’s 2018 low-income housing tax credits, which typically help fund new construction and rehabilitation of affordable housing to the tune of $100 million a year.
The move to completely block the contested budget item took local developers by surprise.
“We were getting ready to put a couple applications in,” said Denise Heintz, partner at O’Reilly Development Co. LLC.
O’Reilly Development has built affordable housing communities in St. Joseph, Joplin, Boonville and St. Louis – typically using both historic preservation and low income tax credits.
“We have over 100 people on a waiting list, waiting for that type of housing,” she said, adding that her office has been working on the plans, in undisclosed cities, for up to 10 months and land has already been secured.
But the tax credits, which are awarded to developers and sold at a discount to investors, are considered inefficient by some. The program has been under scrutiny by lawmakers seeking opportunities for budget cuts citing a 2014 report that said less than half of the funds actually go to construction costs.
“Politicians spend millions of your money on projects that sound nice, but don’t get results,” commission member Gov. Eric Greitens said of the stalled program in a news release.
Investing in housing
The tax credits have been employed in the development of thousands of housing units in Missouri since 1990, in conjunction with federal tax credits.
Locally, Vecino Group has used low-income tax credits to build the $9.7 million, 68-unit Frisco apartment building downtown that caters to people with disabilities, as well as single-family neighborhood Fulbright Springs and Nixa’s Highland Ridge duplex community. Zimmerman Properties LLC has built more than 50 affordable housing developments, including Villas at Quail Creek in Springfield.
Those units are rented below market value to those with income levels less than 60 percent of the area median income.
Tax credits are awarded, Heintz said, through a competitive application process in which developers prove the need in an area, forecast the cost of operation and the rent, disclose their development fee and then offer favorable concessions, such as extending the number of years that low rents will be offered beyond the 15-year minimum before it may be sold or converted to traditional housing.
If approved, the developer then raises equity for construction by selling the credits at a discount to investors who use them over the course of 10 years to lower their income taxes.
Without the credits, she said, debt on each project increases, which drives up rents.
After the development fee is collected from the project, she said, owners may only charge occupants the cost of running the property, plus a small percent above the debt burden.
The governor ran for office on a fiscally conservative platform and his new administration in January began a concerted effort to examine the efficacy of tax credits. According to the June findings by the Governor’s Committee on Simple, Fair and Low Taxes, Missouri taxpayers redeemed more than $575 million in tax credits in fiscal 2016, with the state’s low-income incentive program being the largest portion at $101.9 million.
But the program has been in the crosshairs for years.
A 2014 report by former Missouri Auditor Thomas Schweich found the low-income credit helped build housing for those in need, but did so inefficiently. Only about 42 cents of every tax credit dollar issued went toward the construction of low-income housing, the report found, with the remainder going mostly to investors.
Missouri’s spending on the program also was described by the report as out of step with other states. At the time, 10 states had a low-income credit, and the Show-Me State spent the most per capita – $28.60. No other state had more than $20 per capita and six spent less than $5.14. Today, 16 states have a low-income credit program, plus the District of Columbia.
“If the (low-income housing tax credit) was substantively working in a way that the market couldn’t otherwise provide, it may be worthwhile,” said Patrick Ishmael, director of government accountability at the Show-Me Institute, a free-market think tank in favor of decreasing taxes. “But if you look across the country, most states don’t have (tax credits) – and yet they still have affordable housing.”
If there is demand for affordable housing, Ishmael said the market will find a way to make it happen.
“It isn’t the role of government to guarantee a higher-than-market-provided rate of return for a given project,” he said.
The governor has called the program a fine idea that became a benefit for special interest groups. In its June recommendation, the Governor’s Committee on Simple, Fair and Low Taxes recommended converting the low-income credit program into a low-interest construction loan program.
Heintz said since the state is in charge of assigning both the state and federal tax credits, and has always assigned them as a package deal, the commission’s move put a moratorium on both avenues of funding.
During its vote, the commission approved a plan to dole out the federal dollars, said Debbie Shantz Hart, co-owner of tax-credit consultant firm Housing Plus. But commissioners have not yet approved a second required document for the application process, known as a “notice of funding availability.”
“No one knows when applications are going to be due,” Hart said, noting several Housing Plus proposals statewide are stymied.
The firm partnered in the past with Vecino Group to build Fulbright Springs and Highland Ridge, and with The Kitchen to build Beacon Village and the $5.3 million McClernon Villas.
MHDC.com states the commission allocates the funding each year, so the fate of 2019 tax credits will be decided this time next year.
“Without the state equity, you can’t do projects in more-rural communities,” Hart said, pointing to the lower income levels, which drive the rent limits lower – even though the construction costs are similar.
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