Is costly housing tax credit untouchable because of industry’s clout?

March 03--JEFFERSON CITY --Missouri spends more on its Low-Income Housing Tax Credit program than nearly any other state. But of the $140 million it spends per year, less than half actually goes to housing.

Only 43 cents of every dollar is used for construction, an inefficiency that has been cited in audits and criticized by state senators and Gov. Jay Nixon. The rest of the money is lost in an accounting haze or flows to federal taxes, investors and middlemen.

Yet bills scaling back the program have died in the Legislature repeatedly in the last four years. A group of financiers and developers has fended off changes and appears poised to do so again, despite pressure from the governor.

The political fight showcases a complex subsidy that has stymied most other economic development legislation.

Its defenders point to the thousands of affordable homes that have been built, which they say provide stability for working-class families and help elderly people stay out of nursing homes. Critics say the costs are bloated, enriching a small circle of insiders.

This year is viewed as the last-gasp opportunity to tackle the program's shortcomings, given that few legislators understand the issue's intricacies and those pressing hardest for change -- Sens. John Lamping, R-Ladue, and Brad Lager, R-Savannah -- are leaving the Legislature after this session.

"We don't lead the way on many things, but we're No. 1 or No. 2 on low-income housing tax credits," Lamping said. "It doesn't look right, it's not right and it needs to be fixed. It doesn't pass the smell test."

HOW IT WORKS

Tax credits are basically vouchers that reduce the recipient's taxes, with $1 in credits eliminating $1 of taxes owed. Thus, they are like grants of public money. In this case, developers sell the credits to generate equity for construction projects.

Congress set up the program by establishing a federal low-income housing tax credit in 1986. Each state receives an annual allotment of federal credits, based on population.

The Missouri Legislature approved a state credit in 1990 and expanded it to match the federal program in 1997.

Under that formula, Missouri could issue up to $145.3 million in federal credits and a like amount in state credits this year. However, the state plans to hold its share to $137 million.

Developers compete fiercely for the subsidies, which are awarded by a group of gubernatorial appointees and statewide elected officials who make up the 10-member Missouri Housing Development Commission.

The projects are geared to those who make no more than 60 percent of the median income. That means that in St. Louis, a single tenant can make up to $28,200 a year. For a family of four, $40,260 is the maximum. At least 40 percent of a project's units must go to tenants in that income group. They pay rent that is at least 15 percent below the market rate.

While every state uses federal low-income housing tax credits, Missouri's approach -- matching the federal program with state credits -- is somewhat rare.

Many states use bonds, low-interest loans or direct line-items in the state budget to help fund affordable housing development. Only 14 run their own tax credit program, according to Novogradac, an accounting firm that tracks tax credit programs nationwide. And of those 14, just two -- California and Georgia -- spend more on the credits than Missouri does.

When they're awarded the credits, developers usually sell them to middlemen who recruit investors, typically insurance companies, large corporations or wealthy individuals hoping to write down their tax bill.

State low-income housing credits generally fetch only 40-something cents on the dollar. This payback is far less than other popular state tax credits, like the one for historic preservation. And it's roughly half the payback of the federal low-income housing tax credit program.

Take Richardson Ridge Villas, a 48-unit apartment complex being built off Jeffco Boulevard in Arnold by developer Patrick Werner. When it's done, it'll rent to people 55 and older at $410 a month plus utilities, with 10 handicapped-accessible units.

Richardson Ridge will cost $5.8 million to build, according to its tax credit application, with other costs including an $850,000 developer fee, bringing the total project cost to $8.4 million, or $175,000 per unit.

In late 2012, the housing development commission awarded Richardson Ridge $12.3 million in low-income housing tax credits over 10 years -- half state, half federal -- which generated more than $8 million in equity after the developer sold them to syndication firms that put the deals together. While the federal credits fetched 85 cents on the dollar -- generating nearly $5.3 million -- the state credits sold for just 45 cents.

Supporters say the social and economic benefits offset the costs. Far from the eyesore image associated with public housing, privately managed projects funded by tax credits are built to high standards and include features such as energy-efficient windows and community rooms.

For elderly tenants such as those at Richardson Ridge, the apartments also will come with services such as nurses to provide free health screenings and vans for transportation to doctors' appointments and the grocery store.

"It basically eliminates a lot of the problems that state agencies would have to fund or solve, and it does it at a much less expensive rate," said Craig Henning, executive director of Disability Resource Association Inc. of Festus, which will provide the in-home services at Richardson Ridge. He said there are already 400 people on the waiting list.

INEFFICIENT CREDIT

Missouri could build more housing to meet the demand if more of the state's money went into the projects.

So why is the state credit so inefficient? The reasons are many and complicated, say people who work with the credits.

There are far more customers for the federal credits because big companies know they'll have a tax bill to the IRS 10 years from now, but they may not in Missouri. And using a state tax credit reduces a company's ability to write down its federal tax bill, which dampens state prices a bit further.

Another reason is what accountants call "the time value of money," the idea that a dollar 10 years from now is worth less than a dollar today. To an investor, the 10-year payout stream on the state credits saps them of much of their value, and carries extra risk in case something goes wrong. Investors want to get paid for that, said Art Weiss, a tax credit broker in Chesterfield whose firm, Lisart Capital, has worked on a number of low-income housing deals.

"It's kind of like a mortgage in reverse," he said. "Investors are putting out all this money right now. They need to get some rate of return, because the benefit comes back over time."

That may be, said Craig Van Matre, a retired lawyer in Columbia who served on two state panels studying low-income housing credits for Nixon. But he said there's no reason why the investors' return should come on the backs of taxpayers.

"There's an enormous amount of -- in my opinion -- waste in this program," Van Matre said. "If I loan you $4,000, and you pay me back $1,000 a year for 10 years, you're paying 21 percent interest. Why are we doing that when the state has a AAA bond rating and we could borrow money at 2 percent?"

When he sat on the Tax Credit Review Commission in 2010 and 2012, Van Matre spearheaded a proposal to cut the payback time from 10 years to five. While that would cost the state more up front, it would make the program more efficient in the long run by lowering borrowing costs, Van Matre said. A commission report projected a five-year payback instead of 10 would fund 30 percent more housing units for the same amount of money.

The idea went nowhere.

"There is an enormous wall of resistance in the Legislature to seriously considering modifying this program," he said. "The people in the House just don't want to touch it."

The stalemate centers on where to cap the program's costs. This year, a Senate bill sponsored by Lamping proposes to limit low-income housing tax credit authorizations to $100 million a year.

The House leadership's bill would set a higher cap, gradually phasing the program down to $110 million by 2019. The House plan also would use up any savings by adding a bunch of new tax credit programs. Fiscal hawks in the Senate oppose adding new programs.

SYNDICATORS' ROLE

Ask senators why the tax credit bills have died five times in the last four years and they point to the political pull of an elite group of middlemen known as tax credit syndicators.

Because they benefit from the status quo, "the syndicators have no desire for resolution," Lager said. "There are literally three to five people keeping this from happening."

Unlike other credits, low-income housing credits aren't sold on the open market because federal rules require that the investors own part of the housing project. The syndicator puts together the deal and guarantees the credit stream.

The syndicators include St. Louis institutions such as U.S. Bank Community Development Corp. and the St. Louis Equity Fund. But the firms with the biggest chunk of the business are run by Jeffrey Smith of Columbia, Mo., Mark Gardner of Springfield, Mo., Stephen Holden of Dexter, Mo., and Joseph Shepard of Kirkwood.

Shepard, who is married to U.S. Sen. Claire McCaskill, D-Mo., is CEO of Webster Groves-based Sugar Creek Realty LLC, which bought the most credits of any syndicator last year -- about $41 million worth. Sugar Creek also paid the highest average price: 44.2 cents on the dollar, which means more money went into construction than at other syndication firms.

It's unclear how much of the remaining 56 cents amounts to profit for syndicators and investors given that taxes, the 10-year payout and overhead must be taken into account. The affordable housing industry pegs investors' profits at 4 cents and syndicators' take at 3 to 5 cents on the dollar.

Shepard, who has made millions in his decades in the affordable housing industry, declined through a spokesman to be interviewed. A lawyer for Sugar Creek said Shepard spends less than 25 percent of his time on tax credit syndication and most of the business is handled by others at the firm.

Stephen Holden, who is a distant cousin of former Gov. Bob Holden, said syndicators incur a lot of overhead and assume a lot of risk because they must keep the housing project in compliance with federal tax law at least 15 years and often 30 years. Tax credits can be forfeited if properties aren't properly maintained and ready to rent.

"Remember these are restricted-rent projects, so it's not like you're getting a lot of cash flow," said Holden, who owns CRA Investments LLC. "If somebody rips up the carpet and puts cigarette burns on the counters and leaves it trashed, the question is, do you have available cash to get that ready and put it back on the market?"

INDUSTRY'S LOBBY

Given the millions of dollars on the line, the affordable housing industry stays well-connected at the state Capitol.

Gardner, who owns Gardner Capital Inc., has hired lobbyist Steve Tilley, the former House speaker. Tilley, who left the House in August 2012, also represents a housing developer, Maco Development Co. LLC of Clarkton, Mo.

Tilley keeps in close touch with his former colleagues by raising money for their campaigns. In 2012 and 2013, his firm, Strategic Capitol Consulting, received consulting fees from Lt. Gov. Peter Kinder and eight legislators, including House Speaker Tim Jones, R-Eureka, and Majority Leader John Diehl, R-Town and Country.

Other syndicators weigh in with legislators through an umbrella group, the Missouri Workforce Housing Association, which retains the high-powered lobbying firm of Gamble and Schlemeier. The association also employs as its executive director former state Sen. Jeff Smith, D-St. Louis, who lives in New York after serving a federal prison term for campaign finance violations.

Meanwhile, the other Jeffrey Smith -- the Columbia-based syndicator who runs Affordable Equity Partners Inc. -- has given thousands of dollars to House leaders over the years by using a web of committees with names such as Advocacy for Special Needs and Citizens for New Health Care Concepts.

In December, Speaker Jones received at least eight $2,500 checks from committees affiliated with Smith. The committees are all managed by Smith's longtime lobbyist, Harry Gallagher. Gallagher dismissed the notion that he was working to kill the tax credit bill.

"I am not really paying any attention to it because it's the same old stuff all over again," Gallagher said. "To me it's got to the point where it's boring."

Jones and Diehl denied Lamping's and Lager's accusations that the House is too close to the housing industry.

"It's really just improper rhetoric levied by a couple people who don't understand how to create jobs in this state and how to resurrect blighted communities," Jones said.

Diehl, a real estate lawyer, sits on the advisory board of the Jeffrey E. Smith Institute of Real Estate at the University of Missouri-Columbia, which was set up by donations from Smith. But Diehl said he was picked because he is a graduate of the MU College of Business. He said he barely knows Smith.

"I think I've had one conversation with him," Diehl said.

Nixon persuaded the housing development commission to delay releasing this year's credits -- $137 million for 30 projects -- until mid-March. The idea was to give senators leverage to negotiate with those refusing to change the program. The vote was 6-1, with Lt. Gov. Kinder casting the sole "no" vote.

So far, it doesn't look like the freeze has helped resolve the issue. Neither the House nor the Senate has debated the tax credit legislation yet.

Program backer Stephen Acree, executive director of RISE, a St. Louis-based nonprofit design firm, said shortening the payback from 10 years to five would mean less money getting lost in the gears of financing and more going to build housing. That'd be a good thing, he said, but those kinds of tweaks are not what the conversation in Jefferson City has been about.

"People hear cost cuts and it's code for killing the program," he said. "If we had people in a conversation about fixing this, and that conversation had goodwill about housing and community development, then there are ways to improve the program. But I don't think that's the case here."

Tim Logan of the Post-Dispatch contributed to this report.

Lamping's bill is SB740. The House tax credit bill is HB1501.

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