Withering tax credits put crimp on housing

Affordable projects see key funding dry up

The turmoil in the financial markets is undermining the major source of public funding for the construction of low-rent apartments, increasing the cost of some Boston-area affordable housing projects and leaving others on the drawing board.

The problem is a collapse in the value of the tax-forgiveness credits, which the federal government lets developers sell to raise money.

In Dorchester, plans for 152 apartments for low-income families at the former Franklin Hill housing project were salvaged by $6.5 million in additional city and state funding, increasing the total cost by 12 percent, after proceeds from a tax-credit sale fell short of expectations.

In Jamaica Plain, the planned redevelopment of the former Blessed Sacrament Church complex is simply on hold because the project's tax credits can't be sold.

The federal government funds affordable housing construction primarily by granting developers a credit that reduces taxable income by a certain amount, which can be sold to companies such as banks. As recently as last year, developers generally could sell a $1 reduction for about $1. Now, it's hard to find buyers willing to pay more than 90 cents.

On a $10 million deal, that means a shortfall of at least $1 million in expected funding.

"The bottom line is less affordable housing," said Jon Rudzinski of Winn Development, a Boston company that regu larly sells tax credits to fund its projects. "If the pricing of tax credits goes down by 10 percent, I would venture to say that the number of (new) affordable units also goes down by 10 percent."

Prices have plunged largely because demand has diminished. The credits are purchased mostly by financial companies: Fannie Mae, Freddie Mac, Bank of America Corp., and others. Many of those companies are losing money right now. No profits, no need for tax credits.

When the money stopped flowing, the infrastructure started to crumble. Most tax credits are purchased from developers by middlemen, called syndicators, who then sell the credits to investors. Some syndicators were left holding credits they couldn't sell. Their businesses collapsed. And the developers that worked with them suddenly were searching, sometimes fruitlessly, for new buyers.

The Jamaica Plain Neighborhood Development Corporation is struggling to find investors for three projects, including the planned development of 27 units for the otherwise-homeless on the campus of the former Blessed Sacrament Church.

The state allocated $4 million in tax credits. Bids from investors were due in January. No bids were received. "Not at any price," said Richard Thal, the group's executive director.

The tax-credit program was created in 1986. Each year, the federal government allocates credits to the states based on population. This year, Massachusetts can allocate about $13 million in tax credits. The recipients can reduce their taxable income by the amount of the credit each year for 10 years.

Developers who sell the credits are required to rent the resulting units at prices affordable to a family making 60 percent or less of the median income for a metropolitan area. The units must remain affordable at least 15 years, or the investors must pay back the forgiven taxes.

During the glory years, investors sometimes paid even more than the face value of a tax credit - for example, $1.05 for each dollar of tax forgiveness. There was some method to the madness. The credits had other tax benefits, such as allowing investors to take deductions as the property declined in value. But the profit margins still were very narrow.

"The old pricing structure was unrealistic, and at some point, we knew that the bubble was going to burst," said Raoul Moore of Enterprise Community Investment, which buys tax credits from developers and resells them to investors. "When you have alternative investments that have the same risk factors and higher yields, you can't sustain that kind of pricing."

The lower prices mean a larger benefit for the buyer, which should eventually restore investor interest.

At Franklin Hill, a first phase of 114 apartments was funded last year while the market was still exuberant. The government allocated $25.7 million in tax credits. The developers sold those credits in March 2007 for $26 million, or about $1.01 for each dollar of credit.

The developer, Trinity Financial, went back into the market this year to sell a second allocation of $49.15 million in tax credits to fund the second phase of the development. This time, Trinity couldn't even find a buyer among the companies it has worked with in the past. It turned to a new company, Enterprise Community Investment, which agreed to pay $45 million - or about 90 cents for each dollar of credit.

That left Trinity short of the money it needed to build the second phase of Franklin Hill. The project was saved by another $4 million in funding from Boston and the Boston Housing Authority, and another $2.5 million in funding from Massachusetts, according to Kenan Bigby, Trinity's project manager.

"Getting to the finish line on this was very tough," Bigby said. "It was a lot of brain cells killed to get everything to fit back together."

Binyamin Appelbaum can be reached at bappelbaum@globe.com.