By Carl Wagner

Shovel-ready affordable housing projects received a jump-start in 2009 with support from two American Recovery and Reinvestment Act (ARRA) programs. The programs are designed to ensure funding is available for multifamily affordable housing projects that have been in the pipeline since 2007.

The Tax Credit Exchange Program (Exchange) and the Tax Credit Assistance Program (TCAP), both associated with the Low-Income Housing Tax Credit (LIHTC) program, were enacted in February 2009 with the passage of ARRA.

When the economy slowed in 2008 and 2009, so did investor demand for LIHTCs. In the program’s heyday, investors got dollar-for-dollar write-offs on their federal tax bills, but when Fannie Mae and Freddie Mac withdrew from the market in late 2008, tax credits evaporated by 40 percent or more in small cities and rural areas.

The Exchange and TCAP programs are designed to step in where LIHTC cannot because of market conditions. While they were slow in starting because federal implementation procedures took time to develop and because state-level procedures required various approvals (and often varied by state, frustrating multi-state developers), both have picked up momentum since mid- to late 2009.

LIHTCs are allocated by state housing agencies in accordance with the terms of each state’s qualified allocation plan (QAP). Similarly, affordable housing developers must submit tax credit applications to the housing agency in the state where the project is located to receive credits through Exchange and/or TCAP.

The Exchange Program in Rural America
The Exchange program authorizes the U.S. Treasury to issue grants to state housing agencies to help affordable housing developers complete projects. Here’s how it works: the state housing agencies exchange eligible LIHTCs with the Treasury for 85 cents per dollar. The exchange credits are awarded through HUD to affordable housing developers for new construction or the acquisition and rehabilitation of rental housing for low-income families and individuals.

The Treasury provided in excess of $4 billion in Exchange funds in 2009 to states for projects such as Santa Fe Apartments in Atchison, Kan., and Calvert Heights in Chestertown, Md., both Lancaster Pollard clients. Neither would have been possible without Exchange funds.

Santa Fe Apartments is a 46-unit affordable housing complex for seniors in a rural community of 10,000 residents. It was acquired by Property & Capital Funding, LLC, which planned to renovate the units and make general improvements. The total development cost was $3.8 million. The developer received $1.8 million in tax credits through the Exchange program and a $1.7 million loan with 90 percent guaranteed through USDA’s Section 538 loan guarantee program.

In Maryland, Delaware Valley Development Corporation (DVDC) was seeking both permanent and construction financing for Calvert Heights, a new construction project replacing an affordable housing property. Calvert Heights’ total development cost was $9.3 million. DVDC received $5.3 million in tax credits through the Exchange program, a $1.8 million loan with 90 percent guaranteed through USDA’s Section 538 loan guarantee program, and $2 million in HOME funds.The project was the first in Maryland to take advantage of Section 538 for construction and a permanent loan guarantee.

The Tax Credit Assistance Program (TCAP)
TCAP, a HUD program operated in conjunction with state housing finance agencies, is designed to support LIHTC projects that lost or cannot find a tax credit investor. Under TCAP, the government essentially purchases tax credits from developers. HUD has made available $2.25 billion to state housing finance agencies until Sept. 30, 2011. These funds are designated for either 9 percent LIHTCs or tax-exempt bond deals as additional financing. Projects that received tax credits under Section 42(h) during fiscal years 2007, 2008 or 2009 are eligible for this additional financing.

New Uses for Old Money: A Case Study
Recently, states have been willing to consider new uses for USDA financing options.

In 2009, the USDA in Virginia approved its first-ever loan through the Section 538 Guaranteed Rural Rental Housing Program to High Meadows Associates, which in 2006 began construction on High Meadows Townhomes, a 60-unit community of one, two and three-bedroom townhomes.

Developer Mark Kinser of Unlimited Construction has 23 years of experience building multi-family developments in Virginia. His vast experience was a plus for the USDA, which, like HUD, prefers borrowers with proven track records.

In this case, High Meadows had completed construction and was seeking permanent financing because its original commitment had fallen through in the market tumult. Lancaster Pollard recommended Section 538, a funding option intended to fund new construction, acquisition with substantial renovation, or rehabilitation of existing Section 515 rural multifamily affordable housing. The USDA was receptive to the application due to the need for more quality, affordable rental housing in Virginia.

The total development cost for High Meadows was $9 million. The developer received a $2.2 million loan with 90 percent guaranteed through USDA’s Section 538 loan guarantee program. Tax credits from the Virginia Housing Development Authority comprised the remainder of the funding.

Also in 2009, the USDA agreed to a unique construction/permanent loan guarantee financing structure for an affordable housing project in Kent County, Md., by DVDC, the Calvert Heights developer. DVDC purchased an existing affordable housing complex that was originally a combination of two affordable housing rental communities. It plans to rehabilitate and combine the properties as Baywood Village and Baywood Village/Rock Hall Manor to provide a total of 104 affordable housing units.

The financing structure was unique by industry standards. DVDC received a USDA Section 538 guarantee for a permanent and construction loan from Lancaster Pollard; three USDA Section 515 loans; an ARRA-supported HUD HOME formula loan and Exchange credits.

Financing Structures in 2010
Both TCAP and the Exchange program are limited to affordable housing projects that were awarded LIHTCs in 2007, 2008 or 2009. While there are signs that the economy is improving, industry projections show it will be two to three years before the economy settles into a comfortable new normal. Lending for new construction will continue to be tight, and LIHTC demand will continue to be low.

As a result, we expect to see the continued use of government agency programs that combine construction and permanent financing, such as FHA/HUD Section 221(d)(4) and the USDA Section 538 programs for new construction and substantial renovation, combined with the Exchange program and other loan programs, as necessary, to meet the growing need for affordable multi-family housing, particularly in rural areas.

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