Where Credit Is Due

Massachusetts: Converting 9% proposals into 4% deals

In most states, if not all, the demand for 9% LIHTCs significantly exceeds the supply each year, which means many solid developments fail to receive credits.

Housing officials in Massachusetts have been working together so more developments can be funded and ultimately built. The Department of Housing and Community Development (DHCD) and MassHousing have sought to convert 9% LIHTC proposals into 4% LIHTC transactions.

This helps unfunded deals, and it’s also a good use of resources. While 9% credits are scarce, many states have available volume caps to generate 4% credits.

Under the Massachusetts effort, the DHCD informs MassHousing of proposals that didn’t receive 9% credits in a funding round. MassHousing staff then review the deals to determine whether a proposal has sufficient cash flow to potentially be viable with a reduced subsidy as a 4% transaction. Staff members also look for additional financial resources that can make up the gap created by going from 9% to 4% credits.

“In the two deals that were completed, this involved using MassHousing soft debt, increased permanent debt, additional soft debt from the state, state LIHTCs, deferred developer fees, and an increase in historic tax credits,” says Tim Sullivan, MassHousing’s executive director.

In 2014, the first year of this collaboration, seven proposals were reviewed. Three were found to have the potential to work as 4% transactions with other funding. Two eventually moved forward—Voke Lofts in Worcester by WinnDevelopment and Sitkowski School Apartments in Webster by Neighborhood of Affordable Housing (NOAH). Both involved the adaptive reuse of historic buildings.

NOAH had tried many times to earn 9% credits in the DHCD’s competitive program before being steered toward the 4% program.

Completed and leased up at the end of 2015, Sitkowski School Apartments provides 66 affordable apartments for seniors. The development also plays a key role in the larger community, serving as the centerpiece of Webster’s downtown, says Toby Kramer, director of real estate development at NOAH.

The school’s former gym has been transformed into the new Webster Senior Center.

Financing for the approximately $20.5 million development included about $8.1 million in tax-exempt bond proceeds from MassHousing, which also provided a $1.6 million deferred-payment loan; $1 million from the Affordable Housing Trust; and a $1.75 million permanent loan. The DHCD awarded federal 4% LIHTCs and state LIHTCs as well as $1 million from its Housing Stabilization Fund and $715,000 in HOME funds. The Massachusetts Housing Investment Corp. provided more than $6 million in federal LIHTC equity and $3.3 million in state LIHTC equity. The development also used about $2 million in state historic tax credit equity from Selective Insurance and MAPFRE/Commerce Insurance.

In addition to the state housing agencies, the town of Webster was a strong partner, says Philip Giffee, NOAH executive director.

There were differing opinions about what should happen to the school building, including tearing it down, but many in town recognized that senior housing would be a good use, he says. An added incentive to convert the gym to a senior center made NOAH’s proposal a winner with the town.

For state housing officials, a new challenge has emerged: The tax-exempt bond volume cap is once again scarce and not as plentiful as it was in 2014. That means resources for 4% LIHTC and bond deals are tight for housing deals.