GRAND RAPIDS — If you look past the gleaming facades and sparkling new windows of just about every major housing project launched in downtown Grand Rapids over the past five years, you will find Low Income Housing Tax Credits (LIHTC) at their foundations.
But observers say Grand Rapids probably can’t — and shouldn’t — rely exclusively on the federal program for continued growth of housing alternatives in its core city.
While the LIHTC program has been used heavily here, developers in other communities now are becoming more aggressive in their proposals to include the tax credits as part of their financing packages. Michigan State Housing Development Authority administrators say the program is currently 3-to-1 oversubscribed with applicants. Plus, some questions remain over whether Grand Rapids needs to balance out its housing stock with more market-rate properties.
At first blush, the LIHTC program appears to be a form of corporate largesse where banks, C-corps and insurance companies can reap dollar-for-dollar federal income tax credits at an often-generous discount.
But nonprofit agencies and other proponents say the use of Low-Income Housing Tax Credits have been more successful at creating stable housing in Grand Rapids for low-income individuals than any other government subsidized projects here or elsewhere in the country.
Certainly the core city’s streetscape would look incredibly different without the credits.
Midland-based Brookstone Capital LLC intends to tap the federal program that trades income tax credits for investment in low-income housing when it breaks ground this month on three Grand Rapids apartment complexes, the largest of which is valued at $36 million. Other projects driven by the LIHTC program include Baker Lofts near the Downtown Market the Herkimer Hotel, Grand Central Lofts and several other housing projects in the core city.
For 2013, Wolverine Building Group has 14 housing projects slated to go up around the city, nine of which rely on LIHTC. The total cost of those projects is roughly $40 million.
State officials estimate that syndicates and investor groups leveraged $17.3 million of Low-Income Housing Tax Credits into nearly $148 million in equity for housing projects in Grand Rapids over the past five years, making the city one of the most successful low-income housing submarkets in the country, according to MSHDA. Grand Rapids has a strong track record with the program and is the second-largest user in the state behind Detroit.
“We’re cooking up one (development) right now that’s a $12 million project, using $9 million in tax credit equity,” said Jonathan Bradford, executive director of the Inner City Christian Federation, a nonprofit development organization. “The program allows us to come out with just around $2 million-plus in debt.”
HOW IT WORKS
Created by the Tax Reform Act of 1986, the LIHTC program gives state and local LIHTC-allocating agencies the equivalent of nearly $8 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.
If there is a go-to fund manager for LITCH projects in the state, the Great Lakes Capital Fund is it. In a handful of calls MiBiz made to banks that work in West Michigan, bankers repeatedly cited GLCF as the syndicate or middleman involved in many of the LIHTC programs across the region.
“LIHTC is our bread and butter,” said Jacob Horner, assistant vice president of tax credit investing and new markets tax credit manager for the Great Lakes Capital Fund (GLCF), which is headquartered in Lansing. “It’s about 70 percent of our total business.”
GLCF has more than 500 low-income housing developments in its portfolio and has raised $2.5 billion in capital since its inception in the early 1990s. The group is involved in community and economic development initiatives.
In LIHTC projects, developers are rewarded for designating that a portion of their housing projects will be for low- and moderate-income level individuals and families. This allows developers to apply for federal and state tax credits that they can then sell, typically at a discount, to raise equity toward development costs and reduced rents.
The program, which is administered by MSHDA on behalf of the federal government, allows the distribution of tax credits worth 9 percent of the total project cost. Projects have to meet one of two possible thresholds to be eligible for the full 9-percent credit: the 20/50 rule, which requires that 20 percent of the units be rent-restricted for families at or below 50 percent of the area median income (AMI) as determined by the U.S. Department of Housing and Urban Development (HUD), or the 40/60 rule, which specifies that 40 percent of the units must be rent-restricted for families at or below 60 percent of the AMI.
For a $20 million project that meets the criteria for the maximum available credits, a developer can potentially sell $1.8 million in tax credits that expire after 10 years. Projects are required to remain at affordable rates for 30 years.
Generally, developers sell the credits to a syndicate or group of investors like the GLCF. It’s often the case that investors will put funds into a project pool that the syndicate manages.
Investors can use the credits they receive in annual allotments to reduce dollar-for-dollar their federal tax liability over a 10-year period in exchange for supporting subsidized housing.
A simple example of the sale of such tax credits: If a property is awarded $100,000 of credits annually, then the total allocation would be $1,000,000 over the 10-year allocation period. If there is only one limited partner, and if he pays $750,000 for his partner interest, then he is essentially paying “75 cents on the dollar” for those credits, according to Chicago-based The Appraisal Journal.
Banks account for a large portion of the LIHTC credits purchased each year, as it is one way they are able to meet federal Community Reinvestment Act standards. The act requires banks to make all their retail loan products available — without discrimination — across their entire market footprint.
“Banks have been found to make more loans to their board of directors than it makes in all of its inner city branches. That, as you can imagine, is a problem,” Bradford said. “You better not be found with different underwriting standards, and obviously low- and moderate-income people are harder underwrite.
“Still, banks need a balanced portfolio, and buying tax credits is a way to do that. They aren’t really investing in the residents. Instead, they’re buying quite safe, secured, protected positions with the developers who put the project together.”
Depending on market conditions, investors could pay slightly less or a lot less than face value for these credits.
With the Grand Rapids submarket one of the highest performing regions nationally for the LIHTC program, there is still pent-up demand and credits are selling at competitive rates. Deals happening in the city are seeing credits sold for around 80 cents on the dollar and above to private investors and roughly 90 cents or better to the banks.
The current prices reflect national averages, but the reason Grand Rapids is a hotbed for LIHTC projects rests with credit buyers’ perception of the city as a relatively low-risk, development-friendly urban area.
Each deal has a unique structure, Bradford said, and they can get very complex. LIHTC projects are loaded with compliances and regulations that must be tracked and accounted for each year by the developer/owner.
There is also a 4-percent program that allows developers to finance part of a project with tax-exempt bonds and part with tax credits for 4 percent of the development cost. This program requires that only 30 percent of prospective residents have incomes below the HUD-determined area median income.
The state’s annual LIHTC appropriation is roughly $22 million, which equates to some $220 million of federal investment over the 10-year credit allocation period, according to program coordinators and MSHDA.
With financing for market-rate residential projects difficult to assemble and developers’ abilities to go ahead with new buildings and rehabilitation projects constrained by high construction costs, developers can turn to the LIHTC program to help fill the money gap.
With the momentum of public and private investment in Grand Rapids pushing south along Division Avenue, the area is almost unanimously the next boon for commercial investment, real estate brokers told MiBiz. However, some brokers cautioned that much of the interest in the area relies on the success of the Downtown Market going forward.
MiBiz previously reported on the impact that projects like the Downtown Market and the development of the Grand Rapids Public Schools’ new University Preparatory Academy are having on attracting investment to that area of the city.
Regardless, some new construction projects and redevelopments of blighted buildings are moving forward at a healthy clip. Many projects are leasing up quickly, which is indicative of the demand for what is commonly referred to as “workforce housing.”
“Rental uptake is very fast,” said Chris LaGrand, LIHTC program coordinator for MSHDA. “These projects lease up very quickly. In some cases, we’ve seen projects on the market for 60 days max, and they’re full.”
THE RIGHT DEVELOPMENT FOR THE NEED?
There is no question that building LIHTC developments is almost always a win-win for in-need residents as well as developers, construction companies and even banks, GLCF’s Horner said. It’s profitable or has some benefit for all parties involved.
If the current trend stays, Grand Rapids could very well end up with a great deal of affordable housing. While people praise the LIHTC program for promoting diversity and maintaining culture in the city, some are questioning if there’s really a need for more low-income housing or whether those types of projects are being driven by the lucrative LIHTC benefits at a time when other developments are difficult to pull off.
“Typically, yields on projects have been about 6 percent to 7 percent on an annual basis,” Horner said. “Developers are getting about a 12 percent to 15 percent fee on the total project cost.”
The alternative to the program — government-built public housing — is a trap that saw failure in several major cities across the country. Because of this, LIHTC program supporters — including the National Multi Housing Council (NMHC) — are urging legislators to maintain the current 9 percent tax credit, which expires Dec. 31, 2013. The council also recommends legislators expand the program’s flexibility by allowing some percentage of residents in LIHTC-driven projects to earn between 60 percent to 80 percent of the area median income.
In the Grand Rapids-Wyoming area, the median income is around $35,000, according to 2011 census data from Bureau of Labor Statistics. The average rent for Grand Rapids is hovering near $750 per month, but monthly rents rise quickly for housing closer to the central business district.
“(LIHTC) isn’t Section 8 or HUD housing or what people typically think of when they hear ‘low-income housing,’” said Aaron Jonker, a project manager with Grand Rapids-based Wolverine Building Group. “These developments also serve a population that is generally younger, making somewhere between $24,000 and $35,000 per year. The fact is these are the people who are interested in the urban core.”
However, people above that income threshold, students and other young professionals would be hard-pressed to find available apartments with rents below the $1,000- to $1,500-per-month mark in the city, he said.
Properties like the Globe Apartments and The Lofts Apartments also have the ability to capture another important Grand Rapids demographic: college students. The expanding presence of Grand Valley State University, Western Michigan University and Michigan State University continues to add an influx of students and young professionals to the city.
All the higher education institutions account for some 40,000 individuals pursuing college studies in the Grand Rapids area.
Without a solid group of investors and other highly competitive grant programs like the Community Revitalization Program offered through the Michigan Economic Development Corp., financing a market-rate residential project is next to impossible, said MSHDA’s LaGrand and real estate professionals. Companies like 616 Development have worked to infill properties around the city with market-rate apartments, and larger firms such as Rockford Construction Co. Inc. continue to redevelop long-neglected buildings, including Morton House on Monroe Center.
Still, the number of available market-rate apartments at affordable prices remains small, which also can put a crimp into the region’s ability to attract more talent to live in the city. Others also question the ability of LIHTC-led developments to help support increased commercial and retail offerings.
Few people would argue that the LIHTC is a powerful tool that pushes macro-level social development, but some say it doesn’t always work in the interest of city building. For example, there is no current strategic plan that dictates what blighted buildings or vacant sites should be designated for LIHTC projects.
In development, it’s all about making the numbers work. If the city’s goal is to attract sustainable retail and commercial development and expand the downtown farther south, then the continued development of low-income housing might not be the best answer, said Kris Larson, executive director of the Grand Rapids Downtown Development Authority. Perhaps other uses for properties should be considered instead of affordable housing, he said.
It’s generally understood that higher-wealth individuals possess more consumer spending power, and retail follows those dollars. However, those at MSHDA maintain that low-income to moderate-income individuals play a large supporting role to businesses that are looking for an urban hub.
If Grand Rapids is in danger over-developing LIHTC projects, LaGrand and Jonker both agreed that the city won’t reach that tipping point anytime soon.
In working with a number of programs in peer states including North Carolina, Ohio, Iowa and Pennsylvania, LaGrand said the LIHTC program has a solid track record of economic impact.
“One of the key roles of economic development is to use tools, such as incentives, to make feasible progress toward achieving a community vision,” the DDA’s Larson said. “However, tools are most useful when you know what you want to build. For communities, a critical step is defining what the city wants to build, and then fashioning, selecting and utilizing tools in the most effective manner possible toward realizing its vision.”
Mike Wright, a development and incentives specialist with Grand Rapids-based commercial brokerage Colliers International, agreed that the community at large and developers need to understand the city’s housing needs as well as the city’s development goals.
“There has to be a collaborative community conversation creating these projects, and many depend on this tool, but there needs to be an action plan in place first,” Wright said. “Without the LIHTC credit, we wouldn’t be at the level of development we are at today.”