Spring 2013 issue of Horizons

REAL ESTATE

How It Works As a federal program run by individual state housing agencies, the U.S. Treasury allocates about $8 billion annually to the state agencies. These agencies select projects and award tax credits on the acquisition, rehabilitation or new construction of rental housing specifically targeted to lower- income households. The process is very competitive given the overall demand for affordable housing. For instance, the Missouri Housing Development Commission is typically oversubscribed 4-to-1. A developer must apply for these credits and, if selected for an allocation of credits, must raise equity to fund development costs. Developers receive tax credits for the portions of the housing projects that are set aside for low and moderate income level households. For example, if a developer’s project is awarded $100,000 annually in credits, it will receive these credits over the 10-year allocation period for a total of $1,000,000 in tax credits. The developer will monetize these credits by raising equity for a discounted price per credit, say $0.80 for every dollar of credit allocated. This equity subsidy allows for reduced rents to be charged to tenants. There are many strict guidelines to ensure the tax credits go for their intended use. If the project falls out of compliance, the tax credits must be repaid in the form of tax credit recapture. The investors, developers and state housing finance agencies all provide asset management and oversight to ensure the properties are working as intended. In addition, each development is required to have an annual audit performed by an independent CPA.

So how does such an amazing development get built in the North Side, an area of St. Louis that has been desolate and in need of revitalization? A combination of incentives paved the way, starting with a $7.8 million HOPE VI Grant to the North Sarah project and $12.3 million in federal and state LIHTCs. U.S. Bancorp Community Development Corporation, the community investment subsidiary of U.S. Bank, invested for both the Federal and state LIHTCs. Yet, with the collaboration garnered by this project, and ultimately all LIHTC developments, the program and what it creates could be in jeopardy. Unfortunately, people are not well-informed on how the credit works or what it does. corporations get dollar-for-dollar federal income tax credits obtained at a steep discount while the developers reap hefty profits at the sacrifice of taxpayers. But if the public takes a closer look, it will find an effective and efficient financing tool that truly works to revitalize a community and its residents. Background On The Program Created by the tax reform act of 1986, the LIHTC program has arguably been the most successful pairing between the government and private sectors. Ultimately, the private sector, rather than the government, bears the risk and pays most of the costs along with the tenants who rent the affordable housing units. This program has been more successful at creating stable housing for moderate to low income individuals than any other subsidized government program. Since inception, it has produced approximately 2.6 million rental units and creates about 100,000 jobs annually. It’s often misunderstood to be a corporate windfall where financial institutions and large

But taking a step back from the program’s logistics and where the dollars fall, it is

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