In the Cape Fear area, there aren’t many ways to get affordable units out in the field. But there is a federal program, the Low Income Housing Tax Credit (LIHTC), that did.
What is LIHTC and how does it work?
The Reagan era initiative, operated by the Internal Revenue Service, has been in existence since 1987. Since then, Wilmington developers have used tax credits for about 43 rental projects, putting into service over 1,900 affordable units.
Scott Farmer is the executive director of the North Carolina Housing Finance Agency, which administers the program in the state:
“Developers who wish to build apartments for households typically serving 60-80% of the area’s median income (MAI), or less, can apply for this resource.
Department of Housing and Urban Development estimates in 2020 for a family of four in Wilmington, that would be an income level of less than $ 62,800.
But Farmer says the program is a limited resource: “We get about 150 to 170 requests per year; we are able to fund around 40 projects per year through this program.
When developers apply for the program, they must choose to choose a 9% credit (usually for new construction), which goes up to a 70% grant, or a 4% credit (usually for rehabilitation projects). ), which can go up to a subsidy of 30%. The US Department of the Treasury has a formula to calculate credit rates based on length of credit period, subsidy level and interest rate.
If the developer’s request is approved, the units must remain affordable for at least 15 years. And in most cases, they sign an agreement that extends accessibility to 15 more.
Farmer says the program works primarily with investors such as banks and corporations buying the credits to reduce their tax liability:
“The credits are allocated to real estate developers who, in turn, sell them to investors who seek to offset their [tax] obligations. So it’s a way to get private investment in low-rental housing that people otherwise might not be interested in being a part of.
So, in essence, when the developer sells the loan (s) to the bank or investor, they turn around and pay the developer.
For example, Farmer says, “They [the investors] will pay them 90 cents on the dollar for the tax credit. And that’s money they can use to build the project. And that’s money they don’t have to borrow. So by selling the credits, they [the developers] able to keep rents low because they have less debt than they otherwise would.
Problems with LIHTC
But Pamela Atwood, director of housing policy for the North Carolina Housing Coalition, expresses concern that this program has become the main source of production of affordable units:
“And so, to provide housing, we have to rely on subsidies. And instead of a government giving the subsidy directly, we rely on that private market. And so my concerns with the local housing tax credit program lie in this privatization. ”
And, she says, the program essentially paved the way for the federal government to pull out of the money invested in building housing for low-income people.
Another key part of the system, Atwood says, is the amount of money developers can raise through these credits, which is market dependent.
“And that determines how much money is available that year. So if it’s not a particularly attractive year, we are building fewer units, so I have concerns about that. I think we’re starting to wonder if we should leave it to the market to try to solve this problem. ”
In other words, if developers can’t sell their tax credits – or can’t sell them at a sufficiently profitable rate – then the basic idea collapses. If developers can’t convert credits to cash, then they’re stuck at square one, having to take larger loans to finance construction, and charge higher rents to pay off larger debt.
Local control of the program broke when the owners of the Driftwood Apartment Complex, a recipient of these tax credits, attempted to sell the property.
The US Department of Housing and Urban Development has since halted, but not permanently blocked, the sale. If approved, Driftwood’s new owners would still be required to maintain affordable housing for another 15 years – but displacement of residents is a real concern.
And while 15 years may seem like a long time, the affordability regulations for all tax credit projects eventually expire, meaning private developers could convert low-income housing to housing at market rates.
But some developers claim that this doesn’t happen often because those who use those credits usually reapply, which restarts the compliance period for another 30 years. Another reason is that these units can be much smaller than the typical apartment at market rate, which can mean a more difficult sale.
Local developers who use LIHTC
Katrina redmon is the CEO of the Wilmington Housing Authority. They were behind 6 of these tax credit projects in Wilmington:
“We plan to keep all of our properties. And our waiting lists are very high. The need for affordable housing for the income people have in relation to jobs and retirement in our region is extremely important.
Another local developer who used the credits is Stephanie Norris from Norco Management Holding, incorporated and Terroir Development, LLC. She and her family have been building affordable multi-family homes since the 1970s.
And this year, she applied for her project, Estrella Landing, – and she says another local developer, Marshall Rich of BRAD Residence in Canopy Pointe, LLC, also applied:
“I often describe the tax credit program as being the best value for money in your community, or in our community in this case, because for example Estrella Landing has 84 units, the residence at Canopy Pointe is 72. other. I mean you’re talking about bringing 150 units potentially into the community at a time.
Norris’ proposed Estrella Landing project off Gordon Road will also feature a revenue mix. She plans to have about a quarter of the units at 30% MAI – that would be a family of four earning less than $ 26,000 a year, considered “ very low income ” – but a majority will serve earning residents. 60% of AMI. And about ten percent will be for those doing 80% of MAI. The units will be between one and three bedrooms.
She says the demand for credit is vast and once selected there is a lot of work to be done to maintain affordability requirements and manage the property.
“I mean it’s a challenge; sometimes it makes you cry and swear and fuss but when you finish a property but when you see a single mom who is in a tough situation that needs to be alone and you can offer her a sure and affordable place to live. It is totally worth it.
Go beyond LIHTC in Wilmington
Despite some successes, Katrina Redmond says the Low Income Housing Tax Credit program may not be the only way to get affordable housing in Wilmington:
“We’re going to have to take an honest look at the tools in the toolbox and realize that these tools are tired, that these tools have limits. What can we do to break down the barriers at the edge of these, and I wish I had those answers. It will take a village to find the answers to these questions.
Developer Stephanie Norris is even considering the county establishing some sort of fund for developers of affordable housing:
“I could apply for it and other tax credit promoters could apply for, say, a loan of $ 500,000 that the county ends up paying off over time. [And] it has favorable terms and low interest rates. We’re not looking for freebies, we’re just looking for fair debt service on properties like this, which we can operate, that can really impact those properties to keep rents even lower.
For the Government Center, the approved development agreement states that Cape Fear Stonewater will have at least 5% of multi-family units planned for workforce housing. The development team says it plans to “serve households that earn between 65% and 80% of the region’s median income, adjusted for household size.” For reference, this works out to about $ 33,000 to $ 41,000 for a one-person household or $ 38,000 to $ 47,000 for a two-person household in New Hanover County. “
And according to the initial Memorandum of Understanding (MOU) with Zimmer Development Company, The Grace project will also have at least 5% of the multi-family units planned for workforce housing for at least ten years.. The county defines these homes as those earning between 60% and 120% of the MAI.
Although these two projects generate a few dozen affordable units, there are some 30,000 households struggling with costs in New Hanover County having trouble paying rents or mortgages.