California New Markets Transactions to Help Renters, Struggling Homeowners
By Caitlin Jones
6 min read
Tax Credit Advisor, December 2009: Two new initiatives in California illustrate the flexibility and evolutionary nature of the federal new markets tax credit (NMTC) program. One project is a new energy company that is installing solar power equipment at 11 affordable rental housing communities, while the second will implement a model to use the NMTC to help struggling low-income homeowners avoid foreclosure and stay in their homes.
Solar Energy Business
Sunwheel Energy Partners and US Bancorp Community Development Corporation, both based in St. Louis, recently announced the closing of a $16 million investment in solar photovoltaic panels that will be installed on multiple affordable housing sites in Northern and Southern California occupied by about 1,500 families.
Sunwheel Energy Partners is a new renewable energy firm formed by members of McCormack Baron Salazar, an urban development company that builds affordable housing communities and operates a Community Development Entity (CDE) that has received awards of NMTC allocation authority.
Sunwheel Energy Partners President Jonathan Goldstein said a McCormack Baron CDE new markets allocation is being used for the current transaction. “We’re now underway installing about 1.6 megawatts of solar panel capacity on 11 different affordable housing sites around California,” he said. The systems, once operational in the first quarter of 2010, will generate more than 2.3 million kilowatt hours of renewable electricity annually.
The 11 low-income housing tax credit projects were developed by McCormack Baron Salazar.
“Sunwheel will own the solar panels and sell the electricity at a discount rate to these affordable housing sites,” Goldstein noted. He said at five of the 11 sites, the residents will be provided with electricity for free, because of the properties’ participation in California’s Multifamily Affordable Solar Housing (MASH) program and the use of “virtual net metering tariffs.” Under the latter, solar power generated at a property can be allocated by the owner – through the electric utility – between the common area load and the tenants’ meters. If more power is credited to the tenants, this is reflected in a reduction in the monthly electric bill that the tenants receive from the electric utility.
The three major utilities participating in the MASH program are PG&E, Southern California Edison, and San Diego Gas & Electric. PG&E and Edison serve the affordable housing properties in Sunwheel’s transaction.
Goldstein said at five of the housing sites 60% of the electricity produced will be provided to the tenants for free. The energy company will sell the power used for the “common load” for these and the other six properties at a discounted rate, under the terms of a power purchase agreement (PPA) entered into with each of the properties.
US Bank is the equity investor in the transaction. In return, the bank through an investment fund set up for the transaction, will receive the new markets tax credits, along with federal cash grants received from the U.S. Treasury in lieu of claiming the 30% investment tax credit on the solar equipment under the new Section 1603 grant program. The investment fund will be among the first in the country to combine the new markets credit with Section 1603 grants authorized by the American Recovery and Reinvestment Act.
Goldstein said US Bank is also providing a leveraged loan to bridge for the state rebate dollars that will be received. Under the MASH program, participating utilities also relay a state rebate for the portion of a cost of the solar energy system.
Goldstein noted that Sunwheel decided to do the initial NMTC transaction and solar installations on McCormack Baron properties as a learning experience. He said he’s in discussions with affordable housing owners about possible similar installations at their sites.
Goldstein said the new markets credit was vital to the current transaction. “Without question, we couldn’t target the renewable energy as deeply into these low-income communities and provide benefits for the low-income families, in the way that we’re doing, without new markets tax credits.”
Saving Struggling Homeowners
Clearinghouse CDFI, based in Lake Forest, Calif., has developed a model transaction structure using new markets tax credit to help low-income families at risk of foreclosure to stay in their homes.
Clearinghouse CDFI is both a community development financial institution and operates a CDE that has received new markets tax credit allocations.
According to Douglas Bystry, President & CEO of Clearinghouse CDFI, under the model, which might first be put into practice in Oakland if pending wrinkles are worked out with the city, new markets equity proceeds and other funds would be channeled to a newly created business – a Qualified Active Low Income Community Business (QALICB) that would be a “housing aggregator.” This business would acquire the homes of eligible low-income homeowners living in NMTC-eligible census tracts who are at risk of losing their homes, due to factors such as a predatory or subprime loan about to reset to a much higher interest rate. The company would then turn around and sell the home back to the same owner, with the purchase financed by a new first and second mortgage. The first, for about 80% of the purchase price, would come from Clearinghouse CDFI (the community development financial institution) or from another lender. The second, for the remaining 20% of the purchase price, would be fixed-rate, have a 7-year term, and have payments based on a 30-year amortization schedule. The end result would be affordable, long-term fixed-rate mortgage financing for the homeowner to get them out from under an unaffordable mortgage.
Bystry is waiting to see if the city of Oakland goes along with a subordinated position for its dollars, necessary for an NMTC leveraged structure transaction. If not, Bystry indicated that other California communities are a possibility.
Bystry noted the home purchase and resale structure is necessary because the NMTC cannot be used for straight refinancing of home mortgages.
CDFI Clearinghouse can also use NMTC proceeds combined with other funding sources to assist first-time home buyers, an approach also being considered in Oakland and elsewhere. Under this, the aggregator would buy homes and resell them to first-time home buyers, who would get a first and second mortgage
