The timing wasn’t the greatest as neighborhood planners prepared to close on the financing for a $10 million renovation of the 88-unit Oak Terrace Apartments in Chinatown.
It was December, and Donald Trump was fresh off his presidential win after a campaign that included pledges to cut the corporate tax rate. The promise of tax reform has some investors scaling back how much money they are willing to put into low-income housing tax credits — a federal program used to fund the majority of affordable housing projects.
The reason? The credits are a popular way for investors to reduce their tax bills; when tax rates drop, so does the demand for tax-saving investments.
Oak Terrace was “all settled to go to closing and start construction in December” but got caught in the postelection downdraft, said Angie Liou, executive director of the Asian Community Development Corp., which is leading the upgrades to the 22-year-old building.
“On this particular project, the investor felt they had to be more conservative and run a scenario in case the tax rate goes down from 35 percent to 25 percent,” she said. “And that did cause a snag and delay in our project.”
With fewer dollars raised from selling the tax credits, Oak Terrace faced a $1.2 million funding gap that it covered by taking a larger loan and reducing project costs.
Affordable housing advocates worry that the falling value of low-income housing tax credits will leave developers scrambling to fill unexpected funding gaps, or delaying or even putting the brakes on some projects.
“Projects that are six to 12 months from construction are the ones most at risk,” said Joe Kriesberg, president and chief executive of the Massachusetts Association of Community Development Corporations. “These projects will eventually happen, they’re not going to die, but . . . projects that might have come to completion in 2018 might be completed in 2019.”
Before Election Day, low-income housing tax credits fetched an average high of $1.04 per $1; now they go for as little as 89 cents, market experts say. On average, the credits have dropped 10 to 15 percent in value depending on the project, said Michael Novogradac, managing partner at Novogradac & Co., a San Francisco-based certified public accounting and consulting firm.
“If you had a transaction that was priced at the higher value and now it has to be at the lower value, you have severe economic loss,” Novogradac said.
The decline in value could hinder both the city of Boston and the state in their efforts to promote more housing for low-income residents.
Mayor Martin J. Walsh has made affordable housing a priority for his administration and has set a goal of creating 6,500 new affordable units by 2030. He has made more than $70 million in funding available for affordable housing since becoming mayor. Last year, the state’s Department of Housing and Community Development awarded more than $31 million in state and federal low-income housing tax credits.
The three-decade-old Low-Income Housing Tax Credit, or LIHTC, program issues federal income tax credits to state housing agencies, which then distribute them to affordable housing developers. Developers, such as the Asian CDC, sell the credits to investors, including banks and other corporations, which get dollar-for-dollar reductions in their federal tax liability in exchange for financing of low-income housing projects.
With less funding than expected, affordable housing developers will turn to state or municipal programs to cover the gaps, but public funding is competitive and stretched thin. This makes people like Richard Thal, executive director of the Jamaica Plain Neighborhood Development Corp., nervous.
For the General Heath Square Apartments affordable housing project, the JPNDC is seeking a tax credit allocation from the state, and they expect to generate $8.5 million in equity — about half the project cost, Thal said.
“We’re still hopeful we’ll get funding for that project,” he said. “But the more diminution there is in the value of those tax credits, there will be fewer funds to spread around. It’s not going to help the pipeline, let’s put it that way.”
Thal said the organization recently had 3,000 households apply for 39 affordable apartments in Jackson Square.
Falling LIHTC values are only one of several potential threats to the affordable housing industry under the Trump administration, including proposals to cut more than $6 billion from the Department of Housing and Urban Development, the elimination of the Community Development Block Grant Program, as well as the Federal Historic Tax Credit program, said Gilbert J. Winn, chief executive of Boston-based developer WinnCompanies.
“The threat to affordable housing on its own is the bigger problem, and we just have to stand by and figure out what that will be,” said Winn, whose firm owns and manages hundreds of properties nationwide, including low-income and public housing units. “If you look at historically over the last decade, people will be very happy with a 90 cent tax credit pricing; it’s only recently that you see $1, $1.05.”
But because the costs to build and operate affordable housing have risen, “We need more subsidy to build the same housing than we did 10 years ago,” Winn said.
Even at 90 cents on the dollar, the credits are still a good value for projects, said Tim Sullivan, executive director at MassHousing, the state’s affordable housing bank, which last year closed on $355 million in financing on 16 projects with low-income tax credits.
“I’ve been here when there were substantially less favorable markets for affordable credits; this is still a, relatively speaking, good market. Not quite as good as it was six months ago,” Sullivan said, adding that he has high hopes for a bipartisan bill filed last week in Congress that would expand affordable housing credits by 50 percent over a five year period.
If the bill passes, it could make up for the drop in the value of LIHTCs by making more credits available to states, Sullivan said.
Bob Van Meter, executive director of the Boston chapter of Local Initiatives Support Corp., which provides lending for affordable housing projects, said he hopes Congress steps up to cover the devaluation of low-income credits.
“We have clearly documented needs for more affordable housing,” he said. The hit on low-income housing tax credits “will make it harder to meet those needs, there’s no question about it.”Katheleen Conti can be reached at firstname.lastname@example.org. Follow her on Twitter @GlobeKConti.