City of Lawrence
Neighborhood Resources Department
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TO: |
David L. Corliss, City Manager |
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FROM: |
Lesley Rigney, Neighborhood Programs Specialist |
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CC: |
Margene Swarts, Community Development Manager |
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Victor Torres, Neighborhood Resources Director |
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DATE: |
November 21, 2006 |
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RE: |
Deal Makers Expo – Financing Affordable Housing |
Three city staff including myself attended the Deal Makers Expo in Topeka on Tuesday, November 7. It was a half-day seminar hosted by the City of Topeka and US Bank for the purpose of educating developers and builders of potential funding options for affordable housing in Topeka. Two main options were discussed that would allow developers to offer housing units at affordable prices: Bond Financing and Tax Credit Financing.
Bond Financing
With bond financing, developers and builders can secure financing at much lower tax-exempt interest rates than with traditional construction loans. Whereas a conventional loan rate may be around 7%, a tax-exempt loan rate may be around 5.85% and in some cases as low as 4.7%. In Lawrence this would work if the City would issue tax exempt bonds for purchase by banks or investors. Some banks, such as US Bank, pass along 100% of the benefit to clients. Others may keep a percentage of the discounted rate. The lowest rates are available with bank qualified loans, which are for smaller projects (less than $3 million and 50 units) that do not receive any tax credits. Non bank qualified financing is more commonly used, has fewer restrictions and may be combined with tax credits.
Bond financing is a potentially promising option to encourage affordable housing development in Lawrence – it can be used for new construction or acquisition and rehabilitation. It is important to keep in mind that this option can be a lengthy process. It typically takes 9-12 months to complete a bond deal. Additionally, up front costs may be substantially higher to cover the administrative costs for closing.
Tax Credits
Three types of tax credits were discussed: Historic, New Market, and Low Income Housing Tax Credits.
Historic
A one year reduction in Federal income taxes is available for owners of qualified historic projects. In order to qualify, a building must be on the National Register or be a contributing building in a National Historic District. Additionally, there is a 5-year compliance period where ownership cannot change so this will not work for development of owner-occupied housing. If a qualifying project could be identified and moved forward, this could provide substantial financial benefits for a developer, and in turn, low-income renters.
New Market
Another highly competitive, but potentially beneficial, option to finance affordable housing, new market tax credits must be used for the main purpose of economic development. Projects have to happen within “a high distress area and must trigger significant, material economic and social benefits.” The process of applying for this type of credit is highly complicated and would require that the City establish or identify a Community Development Entity to administer the process.
Low-Income
A 10 year reduction in federal income tax liability is possible for owners of and investors in qualified rental housing projects. The Kansas Housing Resources Corporation administers the state’s allocation of these tax credits. The amount of the credits depends upon eligible project costs, and developers can apply for either 4% (for projects receiving other forms of subsidy) or 9% (for new construction and/or substantial rehab projects) credits. Kansas has a limited amount of tax credits available for allocation, and projects are awarded on a competitive basis twice annually.
Summary
Taking advantage of opportunities such as bond financing and various tax credit programs may be helpful in encouraging developers to offer more affordable housing in the city. The complexity and administrative intensity of securing these opportunities may deter developers from pursuing them, and this is likely the reason that Topeka hosted such a seminar. It may be very helpful to offer such a seminar, targeted at the development community, in Lawrence.