Filling the Funding Gap on Rural, Small Housing Tax Credit Deals
By Caitlin Jones
5 min read
Tax Credit Advisor, October 2009: Putting together successful rural and small low-income housing tax credit projects is particularly difficult today. These deals typically have large funding gaps and aren’t attractive to most tax credit syndicators and investors.
Nonetheless, these deals can get done. At the National Housing & Rehabilitation Association’s recent 2009 Summer Institute conference in Woodstock, Vt., several speakers described how.
“Filling the gap is really hard to do on a rural deal,” said Joseph Erdelyi, of the Vermont Housing Finance Agency, which allocates housing credits. He said there’s “no single template” for a successful rural credit project. “There are as many solutions as there are developments.”
Approaches in Kentucky
Developer Holly Weideman, of Lexington, Ky.-based AU Associates, Inc., cited four approaches that her firm has used to find equity for small rural deals in Kentucky. Many of the projects have used federal historic rehabilitation tax credits in addition to federal housing credits. All seven tax credit projects that the firm just placed in service, has under construction, or recently closed are getting equity from non-traditional investors new to housing credits.
One approach by Weideman has been to persuade some Kentucky banks to be the sole equity investor in a project. “We’ve found that the smallest bank that can do it alone has about $700 million in assets,” she noted. “For most areas [of Kentucky], that is reaching the upper echelon. We’ve educated some of the banks [with] that level of assets and have dragged them up the learning curve on what low-income housing tax credits mean, what historic credits mean, what those returns can be. And they’ve responded accordingly.”
Banks serving rural areas often are too small, however, to do housing credit deals alone, and lack the expertise. As a result, a second approach has been to work with a federation that has pulled together multiple very small banks à institutions that still have a Community Reinvestment Act “footprint” à to provide the equity for a single project. “If you pull enough of these together we can do a project,” Weideman said.
A third approach has been teaming with the president of a bank that AU Associates works with who also serves on the board of the Federal Reserve Bank of Cincinnati. “We’re working with him to take the lead in capitalizing a pool,” said Weideman. The bank president has relationships with other banks in certain smaller areas of Kentucky that AU Associates doesn’t have, while Weideman’s firm brings to the table relationships with other banks that this individual doesn’t know. This bank president can also earn fees for making construction loans to some of the projects funded by equity from these other banks.
Weideman said banks in rural areas “really want to participate” in their community. “And these towns are so small that it’s a huge public perception; lots of accolades.”
The fourth approach by AU Associates has been to approach prospective new investors “indigenous to our particular area,” says Weideman, particularly bourbon distillers. These firms are generally profitable at all times and often located in small towns, like Maker’s Mark in Loretto, Ky. (pop. 654). Weideman said Kentucky’s distillers have a vested interest in their communities and can receive favorable publicity for investing in a project, in addition to a healthy return.
“We try to think, what groups there are in our state that are large profit centers, that haven’t gotten into the arena of tax credits yet,” Weideman told the audience.
New Hampshire Deal
Charles Lief, a partner of The Hartland Group Community Developers and Consultants LLC, Burlington, Vt., described a $28 million mixed-income housing project his firm is co-developing with nonprofit Twin Pines Housing Trust in Hanover, N.H.
Gile Hill, mostly complete, will ultimately contain 12 buildings with 120 new housing units and green space on 21 acres. Sixty-unit units will be rentals, of which 75% will be low-income housing tax credit units and 25% market-rate apartments. The remaining 59 housing units will be for-sale condominiums à 25% permanently affordable in price and 75% market rate.
Lief said the rental units, which drew 1,000 applications, are all built and occupied. One-third of the condos have been built with more breaking ground. Sales are picking up after a market slowdown in 2008.
Lief said there’s demand for both the rental and for-sale units, market-rate and affordable. Hanover, even though located in a low-income county, is an affluent community. It boasts of Dartmouth College, a medical center, and a growing number of high-tech companies. The town also has “very few” affordable housing units, said Lief, and many local workers have long commutes.
The community’s desire to address this affordable housing need led to Gile Hill. The site was originally donated by a local family to the town, which later donated it to Twin Pines Housing Trust, based in White River Junction, Vt., for use for affordable housing and open space.
Among the project’s funding sources are equity generated by federal housing credits awarded by the New Hampshire Housing Finance Authority, and a $3.5 million subordinate loan from the New Hampshire Community Loan Fund, a community development financial institution. Leif noted subsidization of the affordable housing units by the market-rate units was also key to the project’s viability.
Speaking generally, Lief said a willingness to take sites with “some front-end complexity” is necessary to being able to develop affordable housing projects in rural areas.
In addition, he suggested that developers might be wise to invest time trying to persuade municipalities to ease their zoning and subdivision ordinances so that it’s no longer necessary to have to seek waivers or exceptions, because of their greater density, for affordable and workforce housing projects.
