In the Cape Fear Region, there aren’t many ways to get affordable units on the ground. But there is one federal program, the Low-Income Housing Tax Credit (LIHTC), that has.
What’s LIHTC & How Does It Work?
The Reagan-era initiative, run by the Internal Revenue Service, has been around since 1987. Since then, Wilmington developers have used the tax credits for about 43 rental projects, putting into service over 1,900 affordable units.
Scott Farmer is the executive director of the North Carolina Housing Finance Agency, which administers the program in the state:
“Developers who want to build apartments for households generally serving 60 to 80% of area median income (AMI), or below can apply for this resource.”
The Department of Housing and Urban Development estimates in 2020 for a family of four in Wilmington this would be an income level below $62,800.
But Farmer says the program is a limited resource: “We receive about 150 to 170 applications a year; we’re able to fund about 40 projects a year through this program.”
When developers apply for the program, they have to choose whether to select a 9% credit (typically for new construction), which is up to a 70% subsidy, or a 4% credit (typically for rehabilitation projects), which is up to a 30% subsidy. The U.S. Department of the Treasury has a formula to calculate the credit rates based on the credit period length, the subsidy level, and the interest rate.
If the developer’s application is approved, the units have to remain affordable for at least 15 years. And in most cases, they sign an agreement that extends the affordability for another 15.
Farmer says the program basically works through investors like banks and equity firms buying up the credits to decrease their tax liability:
“The credits are allocated to real estate developers, who then, in turn, sell them to investors who are looking to offset their [tax] obligations. So it’s a way to get private investment into low-income housing that folks otherwise would not necessarily be interested in being a part of.”
So in essence, when the developer sells the credit(s) to the bank or investor, they then turn around and pay the developer.
For example, Farmer says, “They [the investors] will pay them 90 cents on the dollar for the tax credit. And that’s money they can use towards the construction of the project. And it’s money they don’t have to borrow. So by selling the credits, they’re [the developers] able to keep the rents down because they carry less debt than they otherwise would.”
Issues With LIHTC
But Pamela Atwood, director of housing policy for the North Carolina Housing Coalition, says she’s concerned that this program has become the primary source for producing affordable units:
“And so in order to provide housing, we have to rely on subsidies. And instead of a government providing the subsidy directly, we rely on this private market. And so the concerns I have with the local housing tax credit program are in this privatization.”
And, she says, the program has basically paved the way for the federal government to divest from putting money into building housing for people who are low-income.
Another wrench in the system, Atwood says, is how much money developers are able to raise through these credits, which is dependent on the market.
“And that drives how much money is available that year. So if it’s not a particularly attractive year, we build fewer units, and so I have concerns around that. I think we’re starting to question if we should be leaving it to the market to try and fix this problem.”
In other words, if developers can’t sell their tax credits -- or can’t sell them at a profitable enough rate -- then the basic idea falls apart. If developers can’t translate credits into cash, then they’re stuck back at square one, having to take out larger loans to fund construction, and charging higher rents to pay back a larger debt.
Local scrutiny of the program erupted when the owners of the Driftwood Apartment complex, a recipient of these tax credits, tried to sell the property.
The U.S Department of Housing and Urban Development has since halted, but not permanently blocked, the sale. If approved, Driftwood’s new owners would still be required to keep the units affordable for another 15 years -- but the displacement of residents is a real concern.
And while 15 years may sound like a long time, affordability regulations for all tax-credit projects eventually lapse, meaning private developers could convert low-income housing into market-rate units.
But some developers argue that this does not happen often because the ones who use these credits usually reapply for them, which then restarts the compliance period for another 30 years. Another reason is that these units can be significantly smaller than the typical market-rate apartment, which can mean a harder sell.
Local Developers Who Use LIHTC
Katrina Redmon is the CEO of the Wilmington Housing Authority. They’ve been the developer of 6 of these tax credit projects in Wilmington:
“We do plan to keep all of our properties. And our waiting lists are very high. The need for housing that is affordable for the incomes that people have in relation to jobs and retirement in our area is extremely large.”
Another local developer who has used the credits is Stephanie Norris of Norco Management Holding, Incorporated and Terroir Development, LLC. She and her family have been building multifamily affordable housing since the 1970s.
And this year she’s applied for her project, Estrella Landing, -- and she says another local developer, Marshall Rich of BRAD Residence at Canopy Pointe, LLC, has applied, too:
“I often describe the tax credit program as being the biggest bang for the buck in your community, or in our community in this case, because for example, Estrella Landing is 84 units, the Residence at Canopy Pointe is another 72 units. I mean you’re talking about bringing 150 units potentially into the community at one time.”
Norris’s Estrella Landing proposed project, off of Gordon Road, will also have a mix of incomes. She plans to have about a quarter of the units at 30% AMI -- that would be a family of four making under $26,000 a year, considered ‘very low income’ -- but a majority will be serving residents earning 60% AMI. And about ten percent will be for those making 80% AMI. The units will be between one and three bedrooms.
She says the credit application is extensive and once selected, there’s a good deal of work involved with maintaining affordability requirements and managing the property.
“I mean it’s a challenge; it sometimes makes you cry, cuss, and fuss but when you complete a property, but when you see a single mom who is in a difficult situation that needs to be on her own two feet, and you can offer her a safe, affordable nice place to live. It’s just so worth it.”
Going Beyond LIHTC In Wilmington
Despite some successes, Katrina Redmond says the Low-Income Housing Tax Credit program can’t be the only way to get affordable housing in Wilmington:
“We’re going to have to take an honest look at the tools in the toolbox and realize those tools are tired, those tools do have limits. What are the things that we can do to break the barriers to the limits on those, and I wish I had those answers. It’s going to take a village to come up with the answers to those questions.”
Developer Stephanie Norris even envisions the county establishing some sort of fund for affordable housing developers:
“I could apply for it and the other tax credit developers could apply for, say a $500,000 loan that the county ends up getting paid back over time. [And] it’s got great terms and low-interest rates. We're not looking for gifts, we're just looking for fair debt service on properties like this, that we can leverage, that can really make an impact on these properties to keep the rents even lower.”
With two recent high-profile projects, the Government Center and Project Grace, New Hanover County is requiring an affordable housing component since the developers are building on county-owned land.
For the Government Center, the approved development agreement says that Cape Fear Stonewater will have at least 5% of the multi-family units be slated for workforce housing. The development team says they plan to, “serve households making 65% - 80% of the area median income as adjusted for household size. By way of reference, this works out to around $33,000 to $41,000 for a single-person household or $38,000 to $47,000 for a two-person household in New Hanover County.”
And according to the original Memorandum of Understanding (MOU) with Zimmer Development Company, Project Grace will also have at least 5% of the multifamily units slated for workforce housing for at least ten years. The county defines this housing as those earning 60 to 120% AMI.
While these two projects will generate a few dozen affordable units, there are some 30,000 cost-burdened households in New Hanover County struggling to pay rents or mortgages.