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Bush Policy Keeps Katrina's Victims Homeless

Most Affordable Housing In New Orleans Is in Jeopardy

Builders With Tax Credits Conclude Many Projects Lack Economic Viability

The Wall Street Journal, April 11, 2007

Developers awarded federal tax credits to build affordable housing in post-Katrina New Orleans are concluding that many of the projects aren't financially feasible and are unlikely to get built before the government's 2008 deadline.

After Hurricane Katrina destroyed more than 82,000 low- and moderate-income rental units in 2005, the federal government substantially increased Louisiana's tax-credit allocation, giving the state $170 million in low-income housing tax credits specifically for hurricane-ravaged areas.

Tanglewood, a 384-unit development in New Orleans, is being repaired and upgraded with the help of low-income tax credits allocated after Hurricane Katrina.

Under the terms of the agreement, the developers must be ready to rent the units by the end of 2008 or lose crucial financial benefits that could help push their projects along. But according to the Louisiana Housing Finance Agency, about 65% of the projects that were awarded tax credits are in jeopardy because developers can't get them off the ground. Some private developers say the number of projects in jeopardy is much higher, perhaps as much as 80%.

"It's a dire situation," says Milton Bailey, president of the housing agency. "It means a lot of teachers, carpenters, firemen and mailmen, every day kind of people, won't be able to come home. It's a tragedy on top of a tragedy."

Developers of affordable housing typically finance construction with a combination of conventional debt, tax-exempt mortgage-revenue bonds and from cash from selling tax credits to investors. But the cost of construction and insurance along the Gulf Coast has risen so high that the traditional forms of financing aren't sufficient, creating what developers call a "financing gap."

For example, developers estimate that the per-unit cost to build a new two-bedroom apartment averages about $150,000, up 30% since Hurricane Katrina hit. Meanwhile, insurance costs have gone up as much as 500%.

The problem is that developers don't believe they can charge enough rent to offset the gap and make a profit. Median incomes in Louisiana are $36,729, some 21% below the national average.

"A very low-income population is only going to be able to afford low rents, so if you have high development costs, you're going to have a disconnect," says Nicolas Retsinas, director of Harvard University's Joint Center for Housing Studies.

"Developers of affordable housing will lose money on nearly every single project in New Orleans," says Ghebre Selassie Mehreteab, chief executive of NHP Foundation in Washington, one of the nation's largest nonprofit owners of low-income housing.

NHP, one of the few developers that has actually broken ground on developments in New Orleans, received $2.5 million in annual tax credits for the 877 units it is in the process of rehabbing and rebuilding. It plans to build 3,000 affordable housing units costing $300 million in the Gulf Coast region.

But Mr. Mehreteab says the group's developments are economically feasible only because the organization received $10.3 million in philanthropic grants for post-Katrina construction, including $4.5 million from the state of Qatar, $3 million from the Ford Foundation and $1 million from Freddie Mac and the Freddie Mac Foundation.

Mr. Mehreteab has been outspoken about the need to fill the "financing gap" by adding soft loans and grants from philanthropic sources. "Low-income tax credits are essential but fall short," he says.

The tax-credit program was created in 1986. Developers are awarded the tax credits and in turn sell them to investors, often financial institutions, which receive a dollar-for-dollar reduction in federal taxes over 10 years.

Although all of the $170 million in tax credits -- plus an additional $13 million -- for Louisiana have been awarded, only 5% of the proposed units have started construction. "There are many different levels of complications and risks in doing a tax-credit deal in a disaster area," says Andy Kopplin, executive director of the Louisiana Recovery Authority, which makes recommendations on expenditure
allocations. "That is making many investors nervous."

Some of the construction problems associated with disaster areas: higher building costs, shortages of supplies and materials, difficulty in locating land owners, and the reality of a crush of people applying for building permits.

Harold Foley, a developer of affordable housing based in Alpharetta, Ga., was scheduled to begin construction on a 38-unit multifamily development in New Orleans last July. But the project was stalled in part because Mr. Foley had trouble selling the tax credits to investors, some of whom wondered whether the development was viable. Some investors also questioned whether enough people will return to Louisiana to fill up the new developments.

"We're forging ahead without any real sort of reliable data, so it's been hard to convince investors to lend their dollars here," says Mr. Foley, who is finally set to begin construction on his $4.5 million complex next month.

The Louisiana Housing Finance Agency has been trying to convince Congress to extend the Dec. 31, 2008 deadline requiring units built using tax credits to be ready for renters. (An extension has passed in the House but is being reviewed by the Senate.) In addition, the Louisiana Recovery Authority has allocated nearly $600 million of federal community-development block grants, which funds such
activities as infrastructure development and housing, to supplement the tax credit.

"I think between those two, we've saved a number of affordable-housing projects that would have collapsed because investors felt they were too risky," says Mr. Kopplin.