Can Opportunity Zones Provide Transformational Change In Affordable Housing?

There is an affordable housing crisis all over the country, and those involved in the market spent at least the time between President Donald Trump’s election and the immediate aftermath of his tax cut bill wondering if it was about to get worse.

As the country approaches a year under the new tax law, the affordable housing development and financing community is cautiously optimistic about Baltimore’s future. Part of that is driven by the preservation of the 4% and 9% Low Income Housing Tax Credits, part of it is due to the opportunity zones created by the new tax law, and part is due to the East Baltimore development plan made possible by the U.S. Department of Housing and Urban Development’s Choice Neighborhoods Initiative Grant.

The tax credits are worth less now, according to Housing Trust of America President Wally Scruggs, and that means that the difficult process of assembling financing for affordable projects has become even more piecemeal. But as the panelists at Bisnow’s Baltimore Affordable Housing Investment & Development event discussed, other funding sources have stepped up.

Avanath Capital Management uses capital raised in a series of investment funds to purchase affordable housing that has been around long enough for its tax credits to have lapsed. Senior Vice President Benjamin Finley said at the event that Avanath’s current fund, its third, has retained all of its investors from the first two funds except one, which started its own fund in the affordable market. The third fund has expanded its investor pool to 32, including international players for the first time.

“With attracting foreign investors, they get it and understand the need for affordable housing,” Finley said. “They have similar issues and regulations they have to deal with overseas, and they were quick to adopt this sort of model.”

“Getting it” or not was a common answer among panelists when asked why many developers and investors avoid the affordable housing space. The complicated financing structures and increased government oversight are intimidating, and market-rate developers are happy to stay in their lane, The Henson Development Co. Vice President Dana Henson said.

The creation of opportunity zones has changed that conversation drastically, perking up interest in census tracts designated as in need of further investment. Anywhere from $2 trillion to $6 trillion in unrealized capital gains could be deployed into opportunity zones, Finley said. If some of that capital goes toward affordable housing, the developments might not require every available tax credit.

“The [opportunity zone] market will be driven largely by capital markets and unrealized capital gains, so a lot of deals will not involve us, and we’re in favor of that,” said Maryland Department of Housing and Community Development Deputy Director John Maneval, who takes part in directing and overseeing the state’s tax credit programs. “Our agency is very supportive of [the Opportunity Zone] program; we too are waiting on rules to be finalized, but for those looking for a place to start in investing there, your first stop should be our agency.”

A major issue with the program is that there does not appear to be any requirement for affordability or involvement of the residents in those zones, at least in the version released Oct. 19. But for the elements of the tax law that have been in full effect for the past 10 months, Freddie Mac Multifamily Senior Director of Targeted Affordable Production Shaun Smith has been somewhat relieved.

“Across the country, the tax credit program has stabilized,” Smith said. “There were rough times at the end of last year when we didn’t know if we’d have bonds or not; tax reforms were new and we didn’t know how much investors would pay for credits.”

Smith confirmed that those LIHTC investments are worth less now, meaning that “fewer deals work easily,” but the federal government increased every state’s allocation of those credits in the most recent omnibus spending bill by 12%, which could be as much as a $2M windfall statewide, according to Maneval.

For each individual project, developers have to deal with the familiar issue of searching for alternate funding to fill the gap, but city and state governments have picked up some of that slack.

As the DHCD is in the late stages of resolving a 2017 settlement over housing discrimination, Maneval said that it is finally preparing to focus on more forward-looking projects with its funds. Mayor Catherine Pugh also announced a renewed financial commitment to affordable housing with the creation of a $20M trust fund. With that and with the additional tax credits, Enterprise Homes President and CEO Chickie Grayson said that the opportunity for more funding is also a challenge to make the money count.

“I know there will be a major push to put all of that money towards people making 30% AMI, but unless it’s matched with other funds that can help create more mixed-income housing, we would be building the very developments that were torn down 10, 20 years ago,” Grayson said. “All of us up here believes that the way to actually deal with affordable housing and build community is to build mixed-income housing … with some workforce housing, so there aren’t monolithic projects that people can look at and say, ‘That’s where the poor people live.’”

For years, another challenge in getting affordable housing built was changing the public perception of what it could be. The HOPE VI program, which traded out the massive public housing complexes popularly known as “projects” for lower-density communities made up of townhouses, duplexes and low-rise buildings, possibly contributed to the change, but that was instituted in the 1990s. A more dramatic change has come more recently, according to Finley.

“Going back to 2007, the image of affordable housing was of projects, and investors had no idea that the communities in which we invest look a lot like market-rate housing,” Finley said. “But we turned the corner on that [perception] years ago.”

Baltimore City contains 42 census tracts designated as opportunity zones, with 10 more located in Baltimore County. If they do become the investor catnip that some are predicting, more eyes will be on areas that either need designated affordable housing or contain affordable housing that needs preservation.

While the lack of restrictions in the current guidance is a cause for worry, affordable developers often have a leg up in knowledge of these underserved areas and plan on using it.

“Opportunity zones have provided a lot of excitement, and the sheer amount of capital surrounding the space is pushing us into a new model that we haven’t done before, which is development,” Finley said. “We’re looking into developing new properties so we can participate [in the opportunity zone program].”