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It’s getting even harder to build affordable housing in housing-starved San Diego.
President Donald Trump hasn’t yet made good on his promise to slash corporate taxes – but his plan is already causing real problems for low-income housing projects across the state, including at least one in San Diego.
Virtually every affordable housing project in the state has been funded by the so-called low-income housing tax credit for the past few decades.
But now, with a potential cut in corporate taxes on the table, banks are hesitant to invest in the credits. If the cuts materialize at the rates floated by Trump and Republicans in Congress, buying the tax credits now would end up as a loss over the coming years for investors. That makes investing in affordable housing for tax purposes far less attractive.
In California, low-income housing projects apply for the tax credits and if they’re awarded them, they go look for investors to buy the credits. Investors, usually banks, then bid for those credits, thus investing in the affordable housing developments.
Investors get two main benefits from purchasing these credits.
The first is that the tax credits offer a dollar-for-dollar deduction in federal income tax.
The second benefit is that investors can claim losses based on the property investment. A development is something that depreciates – or diminishes in value over time. For example, if an investor bought $10 million in tax credits for an affordable housing development, over the following 10 years, they would be able to claim a $1 million loss when filing their taxes each year, which would reduce what they have to pay to the government.
“The thing that we’re experiencing at this point is we’re seeing a reduction in what investors are willing to pay for tax credits,” said Ken Sauder, CEO of Wakeland Housing and Development Corporation.
Developers in the region told me that before the election, the tax credits were worth more than a dollar each. Now they’re worth around 90-95 cents.
In general, low-income housing developers will have to start budgeting for projects assuming that they’re going to get less money for those tax credits.
But projects that were awarded credits right around the election are now facing sudden funding gaps. Those projects had asked for a certain number of credits, based on the credits’ price at the time. Now, they’re finding investors are only willing to pay them less than they had accounted for and are short millions of dollars.
One San Diego project has come up just under $2 million short because the tax credits they were counting on are now valued for less.
Vista del Puente, a 52-unit apartment complex for disabled veterans in the Southcrest neighborhood of southeastern San Diego has been in the works since 2014.
It had received funds from a Housing First initiative from the city’s Housing Commission to include 38 units for homeless individuals with wraparound services. The project also received state funds to help homeless veterans with a serious illness or disability.
“It was in the final stages of being completed,” said Jon Derryberry, executive director of Townspeople. “And as the new administration starts speaking of tax reform, the whole banking community, in a knee-jerk reaction says, ‘OK, we can’t do that.’ Our particular project was fully funded and now we’re just going just shy of $2 million because all the banks have taken a pause.”
After learning of the shortfall, the project went back to the Housing Commission to help fill that gap, said Derryberry and John Seymour, vice president of acquisitions for National CORE. The agreement hasn’t been finalized yet, so they said they couldn’t provide more details.
Seymour said regardless of the shortfall, the project will be built – but it might take longer.
He estimated that National CORE has roughly 350 units that could have started construction in 2017 in San Diego County that are caught in limbo and will be delayed. Seymour said he would guess more than 1,000 units may be delayed countywide that would have been ready to break ground in 2017.
Dave Gatzke, vice president of acquisitions at Community Housing Works, said they were expecting a chill in production this year as well.
“Uncertainty is clearly a drag until the market recalibrates and resets,” Gatzke said.
Once everyone knows what changes in the tax code are happening, developers and investors can realign their expectations of what tax credits are worth. It’s likely going to mean that low-income housing developers – who already piece together funding from a variety of sources, including the tax credits, funds from local jurisdictions and specialized state funds that focus on veterans or transit-oriented development – are going to face larger funding gaps.
“It basically means for us that we have to underwrite deals for tax credits this year for lesser amounts and sort of see where that leaves us,” Sauder said. “We might have to be going back to local jurisdictions for help.”
Since November’s election, when speculation over tax reform started impacting the low-income housing tax credits, the state has been trying to come up with creative solutions that won’t impact the budget.
The state has both 9 percent and 4 percent tax credits to allocate. The 9 percent credits, since they are worth more, are much more competitive and not every project that applies gets them. The 4 percent credits, on the other hand, are less utilized.
Since the state has a surplus of the 4 percent credits, it offered developers who have the 9 percent credits the option of also using the lesser credits in certain situations to help fill the funding gap right now.
Gatzke said that the market adjustment might not be the only threat to these tax credits. There is no guarantee that in efforts to simplify the tax code, the program won’t take a bigger hit.
“The industry is generally optimistic that the tax credit survives, but there’s this black box called tax reform and no one knows what it is yet,” he said.
The risk facing the tax credits underscores the funding struggles that low-income housing developers face.
“We’re in a stage three cancer with the [low-income housing tax credits],” said Seymour.
The first stage, he said, came back in 2008, when affordable housing developers started to see a significant decline in state and federal resources. Stage two was when the state’s redevelopment program ended, which had given money to jurisdictions to revitalize neighborhoods.
Low-income housing could be produced much faster if the industry wasn’t struggling for funds, Seymour said. According to a recent report from the state’s Department of Housing and Community Development, the state has regularly fallen roughly 100,000 housing units short of what’s needed for various income levels every year.
“This year definitely going to see slowdown in unit production,” Seymour said. “There is a backlog of projects, like Vista del Puente that are shovel-ready or will be by the end of the year. By not moving forward, we’re not creating housing, not addressing health care as a housing solution and we’re not creating jobs.”