Builders Shelving Affordable Housing Projects

MoneyNews
Monday, March 31, 2008

Affordable housing projects in various stages of development across the country are being scrapped or put on indefinite hold across the country, among the most recent victims of the credit crisis.

Financial firms have reduced their involvement in the federal government's tax credit program, created to stimulate the construction of rental apartments for lease at below market prices.

Among the reluctant lenders or loan guarantors are Bank of America, Fannie Mae, and Freddie Mac.

This means further loss of jobs, reduced sales of construction materials and commodities such as lumber, and anticipated tax revenues.

Among the major projects short-stopped is phase one of a $100 million, Carlisle Development Group plan to build 355 low-cost residences in conjunction with a Miami, Fla.-YMCA.

A planned construction of 25 rental residences for senior citizens in Pueblo, Colo., scheduled to begin in April, was tabled for an indefinite period by the housing authority there.

Slowdowns and stoppages have also impacted New Orleans, still rebuilding after the devastation of Hurricane Katrina.

Similar affordable housing projects nationwide have suffered the same fate as the need for tax credits by major lenders has declined in the wake of their massive write-downs.

The result: Financial firms have stepped away from government programs that once attracted their participation in more profitable times for them, and developers of low-cost housing can't borrow the cash they need to operate their businesses.

In good financial times, the government tax credit program, established in 1986, worked well, and everyone benefited. More housing units were built that low-income renters could afford.

Tax credits, which profitable firms wanted to use to reduce their tax liability and which investors bought and sold like other derivatives, were much in demand. Some investors reportedly paid as much as 95 cents on the dollar for a dollar's worth of tax credit.

Recent tax credit prices have sunk to 79 cents on the dollar, according to a report in The Wall Street Journal. Tax credit prices may fall further as the economy further unravels and low income renters will suffer.

Under the once-successful program which funded the building of more than one million low rent units, potential renters who earned less than 60 percent of a locality's median income were eligible for residency in the low-cost apartments.

Developers, both for-profit and non-profit, were required to keep the rents affordable for the ensuing 15 to 40 years. Participating developers received as much as 65 percent of a project's cost in tax credits.

Although previously developments under the tax credit program had a low default rate, tax credits are no longer necessary as a tax shelter, and the weakening economy that has raised the specter of default – whether justified or not – has kept lenders and investors away.

For developers who now can't secure credit to begin or complete projects, gap financing may be their only hope.

Gap financing would include state or municipal government grants, cash from private philanthropic institutions or federal subsidies. Current conditions, however, make the prospect of such funding problematic

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