Still another big housing gap

Housing starts are at their lowest levels in decades, but there's one sector of the construction industry where demand is skyrocketing: affordable housing.

With home sales weak and foreclosures rising, demand for apartments, townhouses and other low-income rentals is so deep that hundreds of people are on waiting lists for new projects awaiting construction in the Twin Cities metro area.

Yet, despite that unprecedented demand, many of those projects are in limbo. Like the many homeowners who would love to buy but can't get financing, affordable-housing developers are finding themselves with a pipeline of viable projects, but no way to finance their construction.

"This is a difficult world we're living in," said Paul Fate, president and chief executive of CommonBond Communities. "Hopefully it's temporary, but things are turned upside down right now."

The problem is so pervasive that there's even money in the federal stimulus package to help grease the skids for some of these projects. That includes more than $5 billion in cash and credit aimed at helping fill the financing gap for these projects.

The biggest roadblock to financing comes from the evaporation of investors in federal tax credits, the primary financing tool for affordable housing for the past couple decades.

Those credits typically are awarded to specific projects and then bought by investors that include banks, lenders and other institutions able to use the tax credits to help offset their profits. But with few eligible institutions expected to post big profits, those tax credits have lost their luster.

"That market has just become extremely soft and that's reflected in the pricing," Fate said.

Tax credits' value falls

Not only has demand for those tax credits dried up, their value has declined. CommonBond said that six to nine months ago, those tax credits fetched more than 90 cents on the dollar, but today, investors are only willing to pay 70 to 72 cents on the dollar.

"That translates into a large gap in a deal," he said. "And that's assuming you can get an investor to invest to begin with."

Meanwhile, financing couldn't come soon enough for the growing number of families who are facing homelessness because of a job loss, eviction or foreclosure.

"The demand for what we do is just going off the charts," said Fate.

The St. Paul-based nonprofit - the largest in the upper Midwest - said more than 5,800 people are on a waiting list for 100 projects in the organization's portfolio.

For example, Trails Edge Townhomes in Maplewood opened in December with almost 600 requests for its 48 rental town homes. More than 55 percent of the residents have been through foreclosure.

"Meanwhile, it's gotten more difficult to either build new or acquire [existing projects ]," Fate said.

CommonBond has about a dozen shovel-ready projects in the pipeline, meaning that they have been planned and approved but are awaiting financing. That includes a 48-unit project called Lexington Commons in St. Paul for homeless people.

With the recession forcing a growing number of families to double up in housing with relatives or friends or going into homeless shelters, this is a problem facing nonprofits across the country. According to a national survey, upwards of 20,000 units are awaiting construction and rehabilitation but are stalled because they can't be financed, said Tom Bledsoe, president of the Housing Partnership Network in Boston, which represents and advocates for about 100 nonprofit housing providers across the country. Fannie Mae and Freddie Mac were the two largest national investors -- they represented more then 40 percent of the tax-credit market -- and they pulled out of the market more than a year ago. Those credits usually represent 40 to 50 percent of the financing required for an individual project.

CommonBond, for example, is ready to complete phase two of the Commerce Building apartments in downtown St. Paul, but a portion of the financing hasn't come together. That project, conversion of a historic office building into apartments for homeless people and low-income renters, had been approved to receive federal tax credits, but tax credit syndicators are shy of the investment.

The project has a $635,000 gap in funding, which it hopes it will be able to fill with local funding, other financing and additional commitments from a bank and tax-credit syndicator.

Aeon, another large local Twin Cities-based nonprofit housing developer and management company, also is trying to bring new affordable housing to the market with two local projects that have gaps in financing. Alan Arthur, Aeon president and chief executive officer, said that he's optimistic that he'll find the dollars to make the projects work, but in the meantime, people who need housing will be without it.

"Organizations like ours already look under every rock for capital to make [affordable housing projects] happen," Arthur said. "It's definitely a harder climate to work in; fewer projects will get done."

The $5 billion in the federal stimulus package is already being allocated to states, which will decide how it will get spent.

Bledsoe said that because about 20,000 affordable housing units are in jeopardy of not getting built or rehabbed because of the evaporation of tax credits, the stimulus package just isn't enough to close what he estimates is a financing gap in the neighborhood of $9 billion.

In Minnesota, about 7,900 affordable housing units were scheduled for construction or rehab, but now are in limbo, according to Chip Halbach of the Minnesota Housing Partnership. While the stimulus package is expected to help get some of those projects going and create jobs in the process, he expects the situation to get worse as unemployment rates and foreclosure proceedings increase.

"There's isn't any lasting fix out there, and we hope that Fannie and Freddie and some of the other banks will return to the market," Halbach said. "There's nothing on the horizon yet that would take care of the underlying problem."

Jim Buchta • 612-673-7376