Affordable housing tax credits up for grabs

Pete Ramsel, executive director of MHDC in Kansas City, said that upon approval, his agency will issue a Notice of Funding Available so that real estate developers can start the application process for the 9 percent tax credits. But for first-time developers, there’s a lot to think about when contemplating the use of state and federal financing for affordable home construction.

“It’s a long process,” said John Harpole, owner of New Beginnings Development Inc. in Springfield. “It’s not for the person who wants to do it once.”

Harpole said he uses state and federal financing almost exclusively. Harpole got his start using tax credits in 1994 in Branson. “There was a need for housing, but not a way to do it conventionally because of the bank interest rates and property prices,” he said. “With the tax credits, it allowed me to get our equity down to a reasonable rate.”

Besides the 9 percent tax credits, MHDC also offers Home and Housing Trust Fund allocations and 4 percent tax credits for developers who have received tax-exempt bonds from other sources. Harpole has used all of these avenues as well as private financing for projects throughout southwest Missouri, including in Taney County. Construction was finished this spring on the 76-unit Lost Tree Apartments South and construction is under way on Ridgecrest Apartments. Both complexes are located north of Branson, and both are financed with tax-exempt bonds through the Industrial Development Authority of Taney County and MHDC’s 4 percent tax credits.

Marie and Joe Carmichael, owners of Affordable Homes Development Inc. in Springfield, also use state and federal financing for housing projects. They are building 33 homes at Keeter Heights on Hillbilly Lane in Hollister. The Carmichaels financed the project through IDA tax-exempt bonds and MHDC’s 4 percent tax credits, as well as a $200,000 Community Development Block Grant awarded through the Missouri Department of Economic Development.

“You can’t dabble in it,” Joe Carmichael said. “People are attracted to it for the tax credits, (but) these projects are with you for 15 years. It is a long-term commitment.”

Carmichael advised that developers applying for the first time “probably ought to hire someone to help with the application. There is not a construction manual. You have to figure it out from reading the (Notice of Funding Available).”

Competing for funds

There is a competitive application process to obtain the credits.

“We probably have 30 developers who do this as a living, statewide,” Ramsel said.

He said there are another 15 to 20 not-for-profits and about 50 developers outside the state who apply for tax credits for Missouri projects. Last year, the state received 114 applications. This year, Ramsel expects to receive closer to 150 applications. Ramsel said his office can advise potential applicants who have questions up until the time the NOFA comes out in late August. The agency also will meet with those applicants who are turned down for financing.

Passing the state’s rigorous application process is just one challenge for developers. Another is maintaining compliance once the housing project is built. “Our lease is 20 pages long,” Harpole said. “We have to certify tenants every year.”

He said his projects are audited by four agencies annually and tenants must continually meet qualified income requirements while living there.

Criticism

For more than a year, the MHDC has come under fire from individuals and the media. The Columbia Tribune investigated the agency’s tax credit system, among other practices, One criticism has been that figures show that only about 40 cents of every tax credit dollar that’s issue goes into housing construction.

“Affordable housing is like anything else,” Ramsel said. “It comes with a cost.”

Ramsel said the MHDC staff looked at its 2006 projects that used tax credits and other state funding and discovered that without the equity from the credits, the monthly rents on those projects would have been an additional $100 to $200. He also said the state’s tax incentives come with strict building codes for the housing units. “The benefits are quality of construction and more affordable units,” Ramsel said.

The MHDC also commissioned a $65,000 study by BKD LLP of Springfield and Missouri State University, in part, to answer its critics. The report was presented to MHDC commissioners during a June 15 in Branson. Referring to findings from the study, Ramsel said critics should look at the wider scope of the development projects. The report stated that each dollar of state tax credit awarded generates $9.60 in economic activity and an increase in gross state product of $5.45. “That’s pretty significant,” Ramsel said.

Ramsel said the investment risk taken on by the developers also should be taken into account. “The state is financing affordable housing,” he said. “They are demanding the developer’s money up front.” He said developers must wait until the project is constructed and rented to receive the tax credit, which usually takes about two years. Then, the tax credit benefit is applied over the next 10 years.

Carmichael noted that developers can lose those tax credits during the 10-year span. “If you violate any of the tax credit rules, then you lose your tax credits,” he said. “These rules are set by the Internal Revenue Service. It’s a risk the investor takes.”