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I’m not familiar enough with Stone Arch apartments to answer Vicky Heller’s specific questions or even discuss the merits of this particular project, but I’ll take one more stab at answering some of Vicky’s general questions and then hopefully we can move this discussion past developer-bashing and onto something more constructive – like how else should Minneapolis provide affordable housing.
First, Low Income Housing Tax Credits and bond financing are ways to subsidize affordable housing using FEDERAL income tax credits. Yes, it is a federal subsidy – in exchange for an agreement from a developer to keep units at below-market rents. If you want a good primer on tax credits, go to http://lihtc.info/.
[VH] 1. If Mr. Minn's group has $23 million in CASH to guarantee payment of the bonds, why use public financing at all? Interest rates are at historic lows. It cost a lot of money to do the bond offering. Why waste it? That bond allocation could have been used for many other projects - don't we have enough subsidized riverfront rental housing?
[JR] Steve Minn never said he had $23M in CASH to guarantee payment of bonds. In simple terms, it's like a home mortgage; the bonds are secured by the down payment and the value of the real estate (and maybe other personal guarantees). If you don't make your payments you lose the property.
[JR] Why use bond financing at all? Because without tax credits and a lower interest rate, the project would lose money and the "affordable" units would never get built.
[VH] 3. "The tax credits came with the bonds. They were sold in the private marketplace at a discount. We got partners in exchange for the cash, who share in our financial performance." Who are the limited partners who bought the $3 million worth of tax credits? What happened to that money?
[JR] The money from the sale of tax credits becomes equity in the project, thereby reducing the amount of money that needs to be borrowed and making it possible to offer lower rents. The credits are sold to investors at a discount something like this: The project receives $3M in federal tax credits, paid out in $300,000 installments for 10 years. The investors buy this 10-year stream of tax credits for the present value of the money discounted at the prevailing market rate. If the investors seek a 6% return on investment, they would contribute about $2.2M in cash equity into the project in exchange for $3M in tax credits.
[JR] Bottom line: You can love or hate tax credits and bond financing, but they are federal programs to provide affordable housing and I don’t think they are being abused any more in Minneapolis than anywhere else in the country. (The QAP could be better, but that’s another discussion.) So, here are my questions:
1. Why does the city have to provide TIF on top of these other programs to make projects cash flow? (Someone, please send me a current pro forma.)
2. Since part of the affordable housing problem is an “income shortage” and not a “housing shortage,” why doesn’t the city invest some of its scarce housing dollars in a streamlined local voucher program and give families in need an opportunity to rent existing apartments?
John Rocker Calhoun |
