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Monday, May 10, 1999 202-224-0894
Subcommittee on Housing and Transportation
to Hold Hearing on Low Income Housing Tax Credit
Sen. Rick Santorum, vice chairman of the subcommittee on Housing and Transportation, has scheduled a hearing on the low income housing tax credit.
"Finding affordable, safe housing can be a frustrating challenge for low income families," Santorum said. "The low income housing tax credit helps to fill a critical need for those families. Our hearing will point to the successes of this program and raise awareness of the need to increase the cap on each state's allocation of the housing credit."
2:30 p.m. Wednesday, May 12, 1999
Room 538 Dirksen Senate Building
Honorable Bob Graham
United States Senator
Mr. David Herlinger
Executive Director, Colorado Housing and Finance Authority
Mr. Patrick Barbolla
President, Fountainhead Companies
Fort Worth, Texas
Mr. Rich Barnhardt
President, Penn Rose Properties Inc.
Mr. Howard Cohen
President, Beacon Residential Management
Mr. Richard J. Ferrara
Executive Director, Housing Opportunities Commission of Montgomery County
Ms. Rita Alice Brown
Resident, Dunlap Apartments
Senate Banking, Housing and Urban Affairs Committee
Subcommittee on Housing and Transportation
Hearing on the Low-Income Housing Tax Credit
Prepared Testimony of Mr. Howard Cohen
Beacon Residential Management
2:30p.m., Wendesday, May 12, 1999
My name is Howard Cohen. I am the president of Beacon Residential Properties Limited Partnership, a division of The Beacon Companies. Our primary office is located in Boston, Massachusetts.
Beacon has been in the business of developing and managing affordable housing since the late 1960s. From the 1960s through the 1980s, Beacon developed and continues to manage over 5000 apartments utilizing the section 236 and section 8 programs and both FHA insured and HFA financing. These developments serve both families and the elderly. In 1995, Beacon began developing housing utilizing the low-income housing tax credit and now has a development pipeline of approximately 2600 hundred units located in Massachusetts, Connecticut, Pennsylvania, North Carolina, and Michigan.
I want to spend my few minutes with the Committee to discuss two uses of the low-income tax credit program that I believe are extremely important and were not even on the horizon when the tax credit program was initially formulated. Both these uses involve utilizing the credit in the preservation and redevelopment of existing federally aided assets and thus should be of particular interest to this Committee.
The first use is the preservation and improvement of existing section 236 and section 8 developments. In Massachusetts, in particular, preservation of existing assisted developments has been a major area of concern for the last dozen years. It is estimated that we are currently losing 3000 units of federally assisted housing per year while the tax credit program is assisting approximately 2000 units per year. With the termination of the LIHPRA program and the expiration of section 8 contracts, I am seeing this concern spread to other states in which we work.
Over the last ten years, under its Qualified Allocation Plan, Massachusetts has allocated over 60% of its credit authority to preservation of existing housing, a majority of which has been federally assisted developments.
We currently are working on four such developments. One of these developments is Mandela Homes. Let me spend a couple of minutes discussing Mandela because it touches upon several of the issues of concern to this Committee as well as the credit.
Mandela is a 276-unit development located in a rapidly improving part of Boston's Roxbury neighborhood, near Northeastern University and the Boston Medical Center. It is less than two miles from downtown Boston. Mandela's residents work at the hospital center, as security guards and parking lot attendants in downtown, and in restaurants and hotels. The typical working wage is $10 per hour.
In 1996, the development's fifteen-year section 8-disposition contract had expired and the existing owner desired to terminate the annual extensions and convert the development to market rate housing. Beacon formed a partnership with the residents of Mandela and, through a complex series of steps, our partnership was able to wrest control of the development from the existing owner. The partnership has now substantially completed a major renovation of the development. Under the terms of the partnership agreement between the residents and Beacon, Mandela will remain as affordable housing in perpetuity.
The key financial ingredient to the success of Mandela is the low-income housing tax credit. The state allocated $1,350,000 of tax credits, or slightly less than 20% of the total annual allocation to the redevelopment of Mandela. This provided Mandela with over $10.5 of equity. The tax credit investor is a fund put together by the Massachusetts Housing Investment Corporation, a non-for-profit corporation formed by a consortium of Massachusetts' banks in response to CRA concerns. The particular fund has banks as well as Fannie Mae as investors. MHIC is also providing a $7 million construction loan.
Two other elements of the Mandela financing plan may be of interest to the Committee. A $5 million permanent first mortgage is being provided by the Massachusetts Housing Partnership, a public entity funded by bank commitments. Further, Fleet Bank and PNC Bank of New England are providing second mortgage loans and grants through the Federal Home Loan Bank Affordable Housing Programs.
Thus, the full panoply of federal and state housing initiatives supported by this Committee were mobilized to preserve Mandela as an affordable housing development.
In a similar fashion, Beacon is currently working on the preservation of three section 236 developments. One of the developments would otherwise be at risk of prepaying its mortgage and being converted to market rate developments. The other two are in good locations and substantially occupied but in need of substantial renovation to remain as decent, safe and sanitary housing.
The second use of the credit that I want to discuss is its use in tandem with the HOPE VI mixed-financing, mixed-income public housing redevelopment program.
For the first time in the history of public housing HUD is permitting the involvement of private ownership and private capital in the development of public housing, often within the context of a mixed-income development. Subject to strict regulatory controls, the private owner redevelops, owns and manages the revitalized development. The financing for the development will often include a first mortgage loan from the FHA, Fannie Mae, or a private bank and an equity contribution generated through an allocation of low-income housing tax credits, as well as public sources of debt and equity.
The involvement of private development expertise and capital has enormous advantages for the HOPE VI program. In terms of impact, size, complexity, duration, goals, and degree of difficulty, HOPE VI developments bear little resemblance to the typical public or affordable housing development. A HOPE VI redevelopment effort is more analogous to a major public works project than the typical affordable housing development. A successful HOPE VI redevelopment effort should substantially aid the redevelopment of the entire neighborhood.
Most housing authorities have not been involved in significant new development for twenty years. The management needs in public housing are enormous and housing authorities must focus on improvements in day-to-day operations. For a major urban housing authority to redirect its focus and gear-up for a few huge redevelopment efforts would be a mistake. There are a number of regional and national developers and managers of affordable housing that have the demonstrated capacity to develop sustainable affordable housing developments serving families with a broad range of incomes. By relying on this private expertise, housing authorities are enabled to undertake developments that would be beyond their expertise.
The mixed-financing aspects of the HOPE VI program are a major step in forcing financial responsibility on a program that has distinctly lacked financial accountability. Private debt and equity forces more attention on financial feasibility, construction quality and long-term operations. In the past, housing authorities built developments, assumed they were competent to manage it, and hoped there would be enough income for operations. Private capital involvement has forced attention to the cost of operations, the adequacy of the available subsidy, the marketability of the development (particularly in the event the subsidy is reduced over time), the quality and experience of the management, and the need for reserves for replacements and operations.
Further, while HOPE VI is providing funds far in excess of what has traditionally been available for public housing modernization, given the scale of the typical HOPE VI program, additional resources are necessary. These funds are needed to finance the non-public housing units in mixed-income developments for which federal funds can not be used as well as the costs of infrastructure and other improvements that are beyond the scope of the federal contribution. Low-income housing tax credits are the major source of capital in the country for affordable housing development and are needed by housing authorities if the HOPE VI program is going to succeed.
In fact, in several of our developments, as much if not more funds will be provided from the syndication of low-income housing tax credits than from the HOPE VI program. For example, our HOPE VI development in Pittsburgh --- Allequippa Terrace --- will be financed with a $31 million HOPE VI grant and $30 million in tax credit equity. In Stamford a $26 million HOPE VI will be matched by $28 million in tax credit equity.
Most of the HOPE VI developments involve the construction or substantial rehabilitation of hundreds of low-income units while the typical tax credit development is probably around 50 to 100 units. Because of the scarcity of credits, most HFAs have limited the amount of credit that can be allocated to a particular development per year or funding cycle so that it has difficult to finance more than 100 to 150 units per allocation. This has meant that the HOPE VI developments have to be done in several phases which increases costs and complexity.
More importantly, as the HOPE VI program gets into full swing, this new demand for tax credit allocations for HOPE VI development has come into direct and substantial competition with the established uses. Many states are considering imposing further limits on allocations to HOPE VI developments. The difficulty in obtaining the necessary tax credit allocations will cause a substantial backlog in either HOPV VI developments or other critically needed housing.
HUD and NCHFA recently have become aware of this conflict and have started discussions to see what steps can be taken to ameliorate the problem. However, the only significant response is to increase the amount of the credit.
As these examples show, the low-income housing tax credit has become an integral part of the solution to the funding needs of the existing federally portfolio. These important, but unanticipated uses, are part of the reason the credit is so oversubscribed in most states.
I want to thank the Committee for this opportunity.