Rethke Terrace

Heartland Housing Initiatives used millions in city and Dane County investments and federal affordable housing tax credit for Rethke Terrace, a 60-unit housing project for homeless single adults and veterans opened in May. The prospect of federal corporate tax cuts is creating turmoil in the tax credit market and threatening a key funding source for affordable housing.

The prospect of major corporate tax cuts in a Trump administration is creating instability in federal tax credit markets and jeopardizing city, state and national efforts to create housing for the homeless and those with low incomes, city officials say.

Lower corporate tax rates make federal affordable housing tax credits less attractive to banks and other big investors that use them to offset federal tax liability. If prices for the credits drop, they won’t generate as much money for developers, resulting in financing gaps for affordable housing projects, officials say.

The city’s Affordable Housing Initiative, begun in the 2015 budget, relies heavily on the tax credits to help developers finance 60 to 70 percent or more of such projects.

Through the initiative, developers already have used credits at four projects to create 60 units for the homeless and 205 low-cost units for those making less than 60 percent of the Area Median Income, or $45,360 for a family of three.

Five more projects awarded credits are expected to break ground next year, bringing 53 more units for the homeless and 214 affordable units. And another five projects have secured city support and are preparing to seek credits to bring 68 units for the homeless and 216 affordable units in 2018.

But new instability and uncertainly in the tax credit market could create financing gaps of $500,000 to $1 million and delay or even stop some of the projects, city officials said.

Mayor Paul Soglin was out of town and could not be reached. But city community development director Jim O’Keefe said: “It’s real. It’s too early for us to know how significant of a disruption it’s going to be. It has the potential to be very disruptive.”

Chicago-based Heartland Housing, which used tax credits to build housing for the homeless on Madison’s East Side, secured credits in 2016 to build more units for the homeless on the Far West Side next year, and is preparing to seek credits early next year for additional units for the homeless on the South Side in 2018.

The devaluing of tax credits creates challenges, said Nadia Underhill, Heartland’s director of real estate development.

“It’s really changing the landscape of what we can do in the foreseeable future,” she said. “It will just slow down production. It’s a national problem.”

WHEDA mulls action

The state uses the tax credits, distributed by the Wisconsin Housing and Economic Development Authority, as a cornerstone of affordable housing efforts.

In a recent memo, WHEDA said it has been contacted by a number of developers and consultants about “turmoil” in the tax credit market and that changes in pricing have “created funding gaps and delayed closings” on projects that have received tax credits, and is “causing challenges” for those applying tax credits early next year.

WHEDA is considering policy and process changes for credits already awarded and pushing back its application deadline for next year from Feb. 3 to March 3, the memo said.

On Wednesday, WHEDA offered a brief statement that acknowledged possible impacts of federal tax changes on tax credit pricing, but didn’t reply to specific questions, including how many developers statewide have experienced changes in pricing, how many have seen funding gaps, and if changes have jeopardized projects.

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“We anticipate a successful 2017 LIHTC (Low-Income Housing Tax Credit) season that will create and preserve affordable housing across the state,” it said.

The city is seeking to create housing for the homeless as well as units for those with lower incomes under its Affordable Housing Initiative, proposed by Soglin in the fall of 2014 and first made part of the 2015 budget.

The plan aims to build 250 housing units with support services for the homeless and another 750 “affordable” units over five years.

City officials see the combination of city support and tax credits — secured through WHEDA — as the most potent way to create such housing in locations across the city near transportation, schools, groceries and other basic needs.

The rent revenue generated by low-cost housing, especially for the homeless, simply isn’t enough to make projects feasible and any significant reduction in the value of tax credits is a threat to the city’s efforts, O’Keefe said.

“I don’t think you can overstate the importance of these resources to the projects we’re assisting,” he said. “This means everything.”

Investors cut prices

Under the tax credit program, the federal government allots a finite amount of tax credits to state housing authorities, which use competitive processes to distribute them to developers for affordable housing projects. Investors such as big banks buy the credits as an offset against federal income taxes.

The city’s Affordable Housing Initiative invests city and sometimes county funds in select projects, which demonstrates a local government commitment and improves the project’s chances of being selected by WHEDA for the federal tax credits.

Until now, investors have paid a premium price for the credits. But now, prospects of a significant reduction in corporate tax rates makes credits potentially less valuable. Investors are suspending the purchase of credits for new projects, reducing the price they’re willing to pay for credits, renegotiating the terms of current commitments, and even withdrawing from commitments, a city staff memo to Soglin says.

As investors cut the price they are willing to pay, projects can face financing gaps that are hard to fill. If a developer loses tax credit support, it would have to turn to the city or county, WHEDA, or seek private or other assistance.

So far, no investor has pulled out of a Madison project, but local developers have been contacted by investors seeking to renegotiate the amount they are willing to pay for the credits in projects that haven’t started, O’Keefe said, adding that changes could create $500,000 to $1 million gaps in projects that usually have very tight financing margins.Heartland, a company of Heartland Alliance, is assessing the impact of uncertainly in the market on $7 million in tax credits WHEDA allocated to help create 45 units for homeless families at the $11 million Madison Family Supportive Housing project at 7933 Tree Lane on the Far West Side set for construction early next year.

“We’re working very hard to minimize the impact,” Underhill said, adding that projects close to closing and construction are in the best position to negotiate with investors.

The city recently awarded Heartland $1.57 million and the nonprofit is preparing to seek tax credits to help fund a $10.9 million redevelopment with about 60 units for adult singles and some units for couples at 1202 S. Park St.

Early estimates show the project could now face a roughly $500,000 financing gap due to drops in tax credit prices, Underhill said. “We’ve been crunching a lot of numbers and considering as lot of strategies,” she said.

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