The High Cost of Affordable Housing
Why so little of it gets built in Hawaii
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Makani Maeva, Hawaii director for the VitusGroup, knows from
“Building affordable housing is complicated,” says Makani Maeva.
She should know. As Hawaii director for the VitusGroup, an affordable-housing developer, she recently completed the Lokahi Apartments, 307 rentals in Kona. Between January 2007, when another developer laid the project in her lap, and July 2010, when the apartments first were offered for rent, almost all the financial and technical details of the deal changed dramatically: The permanent loan went from $16.4 million to $19.2 million; the original equity investors – GMAC, Wachovia and others – had to be replaced; $7.8 million in affordable-housing credits from the County of Hawaii became unavailable, replaced by a soft mortgage of $11.75 million from the state’s rental housing trust fund; and the cost of construction rose from $53 million to $60.6 million, largely due to interest costs.
“It’s like fried rice,” she says. “Because I thought I had one thing in the refrigerator, I thought the project was going to be structured one way.” In the end, though, the recipe changed completely.
The complexity of Lokahi’s financial arrangements is hardly unique. In fact, the average affordable-housing project in Hawaii is funded by at least seven financial instruments – industry insiders say some projects require as many as 14 – each of which comes with its own rules. That’s just the financing. The truth is everything about affordable housing is complicated and constantly changing – the money, politics, regulations, ethics. If you want to “fix” the system, you have to consider them all.
What is ‘affordable housing’?
Too often, affordable housing is equated with public housing and poverty. But the affordable-housing crisis affects a broad swath of the middle class. Developer Chuck Wathen, who recently founded the Hawaii Housing Alliance and is a longtime advocate for affordable housing, notes it would take 3.19 firemen to be able to afford the median-priced home on Oahu. It would take 3.63 school teachers or 5.2 hotel front desk clerks. “What we have isn’t just an affordable-housing problem,” Wathen says. “We have an income problem.”
He also notes that the shortage of “workforce housing” is most acute in the rental market: “A Mainland city of this size would probably have 400 apartment communities of over 300 units.” Yet there’s no financial incentive to fill this gap.
Kevin Carney, Hawaii vice president of EAH, a nonprofit affordable housing developer, explains the math. “It just doesn’t pencil out to do a rental project,” he says. “Let’s say you’re serving a market segment at 100 percent AMI (area median income) – a family of four that makes $80,000 a year or so. The rents you can charge at that income level just aren’t going to cover your debt and operating expenses. So you can’t build it. Instead, you build a condo and you sell those units to people with incomes of, say, 200 percent AMI or more. Then they turn around and rent them out as long-term investments.
“That’s our ‘shadow’ apartment market in Hawaii.”
The VitusGroup recently completed the Lokahi Apartments,
Government programs account for almost all affordable-housing development, either through subsidies or by regulations that require developers to include affordable units in their market-priced developments. But neither approach has supplied much housing in the past two decades.
The centerpiece of affordable-housing finance is HUD’s Low Income Housing Tax Credit, which is administered in Hawaii by the Hawaii Housing Finance & Development Corp. LIHTC (pronounced Lie-Tech) was created to spur the private development of affordable housing, awarding dollar-for-dollar tax credits in exchange for guaranteeing a project will remain affordable for at least 20 years. By some estimates, LIHTC has played a role in the development of as much as 90 percent of all affordable-housing units in the country. Hawaii is no different.
Darren Ueki, HHFDC’s finance manager, explains that there are two kinds of LIHTC credits, one worth 9 percent and the other 4 percent of a project’s development costs. “We’re basically giving out anywhere from $27 million to $28 million in (9 percent) tax credits a year.” Yet he acknowledges that demand for affordable housing is much greater than that. In 2007, an HHFDC report projected the state would need to create more than 28,000 rental units over the following five years. Even by the most liberal estimates, the LIHTC program creates fewer than 300 units a year in Hawaii. That’s not surprising, since those credits only account for a small fraction of the cost of development.
For example, the credits don’t cover the cost of the land or predevelopment planning. (Developers say that, for an affordable-housing project to work in Hawaii, the land must essentially be free.) In addition, the developer must find investors with tax liabilities to purchase the tax credits. During the housing bubble, developers sold credits at nearly face value, and sometimes higher. Once the credit markets crashed, the prices plummeted to 60 cents on the dollar, though they are back to about 90 cents. Typically, the proceeds from these sales account for nearly all the equity in an affordable-housing project. “The problem,” says Carney, “is that will only produce between 30 to 40 percent of your equity needs. So you’ve still got to come up with the other 60 to 70 percent.” That, too, is affected by LIHTC rules.
For example, there’s the property’s income stream, the money earned from rents or sales. As in a market-price project, the affordable-housing developer can borrow money against this revenue, but the project’s income is restricted by HUD regulations, which limits the amount of rent (or mortgage payments) the developer can charge to 28 percent of the customer’s monthly income. At 60 percent AMI, for example, a two-bedroom unit at the Lokahi Apartments rents for only $833. That’s what makes it affordable. But these rent rules limit the property’s income and the debt it can support. Moreover, the lender will usually only permit an 85 percent debt-to-income ratio, reserving the remaining 15 percent as cash flow to cover operating costs and profit. Thus, the $60.6 million Lokahi Apartment project could only secure $19.2 million in permanent financing, less than a third of the development’s total cost. The balance had to be painstakingly cobbled together from federal and state subsidies and loans. In fact, for the typical two-bedroom affordable rental unit, the state has to kick in another $150,000.
Putting the financing together is a slow process. One EAH project in Ewa has been in planning for 10 years. Maeva eschewed the cumbersome 9 percent LIHTC credits altogether, opting instead for the state’s low-interest Hula Mae loan program, in which HHFDC issues tax-exempt bonds to help finance affordable-housing projects. An added bonus is that participants automatically qualify for 4 percent LIHTC tax credits.
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