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Sunday, 08 November 2015 21:45

Demand for affordable housing builds interest in income-restricted tax credit

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GRAND RAPIDS — As demand for housing in downtown Grand Rapids and its near neighborhoods continues to grow, developers need to strike a critical balance between market-rate and “affordable” housing.

That’s according to Mark McDaniel, president and CEO of Lansing-based Cinnaire Corp. Formerly known as Great Lakes Capital Fund, the nonprofit real estate financial institution Cinnaire operates multiple investment funds aimed at bridging financing gaps for a variety of projects. Much of the group’s work, however, is geared toward managing investment funds for an in-demand development tool known as Low-Income Housing Tax Credits (LIHTC).

“Right now, it’s a crazy market,” McDaniel told MiBiz. “It’s the craziest I’ve ever seen it, and I’ve been involved in it since the day the program came to be in 1986.”

The recently rebranded Cinnaire remains in the process of fundraising to assist with the demand for more affordable housing.

Last month, the organization launched a new $175 million fund for investors, which are typically banks and insurance companies, McDaniel said. The fund will be focused on developing affordable housing options in four Great Lakes states: Indiana, Michigan, Illinois and Wisconsin.

With that fund, the organization can invest in between 50 and 60 development projects at an average size of 80 units, McDaniel said. About 60 percent of the deals from the new fund, Cinnaire’s 30th funding round, will close by the end of the year and the remainder will close in the early part of 2016, he said. McDaniel expects Cinnaire to launch another fund of the same amount sometime next year.

Investors in the organization’s funds are currently receiving returns of between 4 percent and 5 percent, McDaniel said.

According to Cinnaire data, the organization has more than $180 million in equity in Grand Rapids affordable housing, either for income-restricted units pegged to the area median income (AMI) or for residents who receive government assistance.


DRIVING DEMAND

Despite the recent growth of market-rate housing in many urban areas, demand for Low-Income Housing Tax Credits remains high all over Michigan, according to data from the Michigan State Housing Development Authority (MSHDA), the agency that administers the federal funds.

According to MSHDA’s standards, a developer receives the credits based on a percentage of units being offered as rent-restricted and income-restricted for a period of at least 18 years. The agency’s most widely-used incentive is a roughly 9 percent credit based on construction or rehabilitation costs, according to MSHDA officials.

MSHDA received requests for more than $193 million in LIHTC funds since August 2012 and awarded about $75.5 million over the same period.

The demand for housing tax credits also comes at a time when commercial real estate sources say bank debt is widely available for multifamily housing developments and when interest rates remain at record lows.

“For the 9 percent credit, our demand is consistently three-to-one to four-to-one over-subscribed each round we do,” said Chris LaGrand, chief housing investment officer at MSHDA. “We usually get three or four applications for every one we can fund.

“We think the market is hot right now.”

Andy Martin, a LIHTC analyst at MSHDA, said rents in Grand Rapids continue to increase, leading certain developers to believe there’s an opportunity to offer lower-cost units.

In many cases, rents have been outgrowing wage increases, leading to increased demand for more affordable housing options, Martin said.

“We’re definitely seeing a real need for that,” he said.

In its 2014 Low-Income Housing Tax Credit allocations, the most recent data available, MSHDA doled out $6.6 million for 10 projects in West Michigan. The allocations for projects in Kent, Berrien, Ottawa, Muskegon and St. Joseph counties will assist in the construction of 731 housing units, according to the agency.

The 20 East Fulton project, a mixed-use high-rise development in downtown Grand Rapids proposed by Midland-based Brookstone Capital LLC, received two allocations for a little more than $2 million in LIHTC funds. Forty-five of the 108 units in the proposed project will be income-restricted.

The addition of more income-restricted housing comes on the heels of a new report outlining the current inventory in the downtown Grand Rapids market. An April study by Downtown Grand Rapids Inc. found the downtown housing stock includes 1,344 income-restricted units, or 40.7 percent of the total available units.

“We’re at a moment where we’ve got a strong data set to understand what we have (in terms of housing),” said Kris Larson, the president and CEO of DGRI. “We were relying on anecdotes. (Being) equipped with that information enables us to have enlightened conversations on where we are.”

The major finding of the study, Larson said, was the “missing” middle-market housing for those who don’t qualify for income-restricted rent but can’t afford market-rate units. To build that type of housing will require the city to look at a variety of zoning processes and create incentives for developers to deliver those products, he said.


BRIDGING THE GAP

While the Low-Income Housing Tax Credit may appear to be another public subsidy, developers say using them actually draws out the development process and adds considerable time to a project.

The complexity of navigating the red tape associated with obtaining the credits means that typically only a handful of developers possess the expertise needed to get the projects completed, according to attorney Jared Belka.

“LIHTC is a whole other animal,” said Belka, senior counsel at Grand Rapids-based Warner Norcross & Judd LLP and co-chair of the firm’s economic incentives group, which works with developers on LIHTC. “If developers can do projects without incentives, they certainly will. When you add layers of financing, you add cost and time. Time kills deals.”

While not all developers have the inclination to take on the time and cost associated with the tax credits, they are important financing bridges to bring more affordability to the the market, Belka said.

Cinnaire’s McDaniel agreed, noting that affordability means different things to different people. Moreover, he said he believes it’s important for an area such as Grand Rapids to have a variety of price points, not just all market-rate or all affordable housing.

“That’s not good policy,” McDaniel said. “It’s short-sighted and there has to be a realization that what you’re seeing on South Division, up in some of the neighborhoods and now what’s happening west of the river, was all started with housing credits. Market-rate deals don’t happen unless there’s no risk. The credits take away the risk. You have to have both.”

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