Summary of Boston Visit

My trip and this research is thanks to a Travelling Scholarship from the Winston Churchill Memorial Trust (www.WCMT.org)

I  spent the second half of the Boston visit meeting with a couple of developers as well as Mass Housing and the State's Department of Housing and Community Development.

There are more bodies involved in affordable housing delivery than is first apparent. The people I met who are involved in Affordable Housing Delivery talk of an 'ecosystem' that has grown up to support its delivery. I have summarised some of the main player's functions and purpose below.

Mass Housing is a non profit that was set up based on funds and commitments from banks during the period of bank take overs in the 1980s. If a bank wanted to take over another bank they had to demonstrate a commitment to community banking and the shortcut to doing this was to make commitments to support Mass Housing. Mass Housing is an affordable housing bank who's mission is to do what others will not. It has powers to raise funds through tax exempt bonds and lends the on to developers at preferential rates. Mass Housing also issues mortgages specifically to assist households on low incomes. Mass Housing last year made $369m in loans to 30 affordable housing projects (including refinancing) and $1.2b in mortgage loans.

The Department of Housing and Community Development is a state agency which allocates Tax Credits and other Federal and State subsidies. It often supplies soft loans to developments. These are loans at the Federal minimum interest rate of 4% but the principal and interest is rolled up and not paid until the property is 're-syndicated' or refinanced after 15 years when the Tax Credits come to an end.

Massachusetts Housing Partnership. (MHP) This is a non profit that was founded n 1990 via the State Interstate Banking Act. This required banks that purchased Massachusetts banks to make funds available to MHP for affordable housing.   MHP lends money as hard debt to affordable housing developers at low rates (5.5% was quoted by one developer) to cover about 20% of the development costs of low income housing projects. They specifically can only lend up to a maximum of $15m on an individual transaction.

Larger non profit developers who develop affordable housing themselves, but also in conjunction with other smaller local non profits, typically Neighbourhood Development Corporations. e.g. Community Builders Inc

The Neighbourhood Development Corporations are defined in law and operate to undertake a wide range of activities (not just affordable housing) to assist those on low incomes in their neighbourhoods. e.g. Jamaica Plain Neighbourhood Development Corporation.

Private for profit developers. I have not yet met with one of these organisations

Management operators. I have not yet met with one of these organisations

The Syndicators - these organisations put funds of investors together to invest in affordable housing and gain the benefits of Tax Credits. essentially the investors buy the tax credits. Usually at 90c + per $1. In some markets the purchase price is over $1. e.g. R4 Capital

Investors - these are usually banks, but were corporations for a while during the period after the housing crash. I have not yet met with one of these

Other bodies such as CEDAS which supports non profits  by funding feasibility studies, fees etc.

Some issues that emerged from the discussions

i) the management operation requirements have a strong tax compliance requirement. If their is a failure to comply then this could effect the availability of Tax Credits and the investor will loose money and will be fined by the IRS. Therefore about 80% of the management of affordable housing is undertaken by about 5 specialist for profit  management organisations in Massachusetts. Each with a minimum of 2,000 properties under management.The Non profits manage about 20% of the stock.
ii) The smaller non profits rely on fees from deals to fund their real estate operations and these occur may be once every 3 years.   This means that these organisations struggle developing and/or retaining their development skill and rely on consultants or larger non profits to help them deliver the schemes
iii) The state generally distributes Tax Credits so that their is no concentration of funds into one or a small number of developers. This means that developers receive funds irregularly. In respect of the funding round last year, there were 80 projects submitted in the preliminary round, 40 in the second round and 25 were selected from these.
iv) the cost of preparing a funding bid is very high as it has to be ready to commence in 6 months from the allocation. This means all zoning (planning) soil reports design approvals etc. have to be in place. Costs at risk of $200k would not be unusual.
v) Tax Credits have to be spent within 24 months or they are withdrawn. This is a very serious penalty and creates a focus on delivery.
vi) the state limits the Tax Credits being invested into one deal to $1m. This essentially limits the LIHTC funding to just under $10m and total development costs to about $20m. This financial limit in turn limits the size of projects. (average total development costs are $375k).
vii) Transaction costs for lawyers and accountants per scheme are very high - between $250k to $350k.
viii) Project size is pushed up in order to achieve economies of scale due to the transaction cost. The maximum size is limited because of the limits on the amount of Tax Credits that are allocated per scheme by the state. LIHTC projects tend to be around 50 to 75 units per scheme as a result.