Affordable apartments face funding gaps, delays
By now, construction should be well underway on a development that would create 64 apartments on Milwaukee’s north side.
But that $13.7 million project is facing a funding gap tied to last November’s surprising election results.
Around half of its financing is coming from federal tax credits given to developers of affordable apartments.
Investors throughout the country are paying less for those tax credits because they believe President Donald Trump and the Republican-controlled Congress will likely cut corporate income tax rates. Such tax rate cuts would make the tax credits, which are used over a 10-year period, less valuable to banks and other firms that buy them from developers.
So, the development at W. North Ave. and N. 15th St., and other U.S. apartment projects, are facing a decline in prices paid for the tax credits. That has developers cutting expenses and trying to find other sources of cash to fill those financing gaps.
“It’s all about uncertainty in the market,” developer David Block said about possible tax rate cuts. “Investors hate uncertainty.”
Block is director of development at Chicago-based Evergreen Real Estate Group LLC. That firm is working with Milwaukee-based Legacy Renewal Corp. to create a project known as Legacy Lofts at the Blommer Ice Cream Factory.
The Blommer project would convert the three-story former Blommer Ice Cream Co. building into 36 apartments, and combine that with 28 newly built units at 1500-1504 W. North Ave.
All but 10 of the apartments would be set aside for people earning no more than 60% of the Milwaukee area’s median income. The developers are required to lease those apartments at below-market rents in return for receiving the tax credits.
Those credits are given to developers in an annual competition under the program, which has had bipartisan
Congressional support since its 1986 launch. The Wisconsin Housing and Economic Development Authority in 2016 awarded credits for the Blommer project, which the developers had planned to begin constructing by early 2017.
However, President Donald Trump’s election, along with Republicans keeping control of Congress, led investors to assume that significant tax cuts are coming.
As a result, tax credits that before the November election were selling for $1.02 to $1.12 for each $1 are now selling below $1, Block said.
That has reduced the expected sale proceeds of the Blommer development’s tax credits by about 15%, Block said.
That translates to a funding gap of around $1.3 million for the $13.7 million development, he said.
At just over $7 million, the housing tax credits still make up the largest part of the project’s budget, according to a city comptroller’s office report.
The Blommer development, which includes restoring the 107-year-old former ice cream factory, also is using historic preservation tax credits and other public and private funds.
The gap created by the decline in housing tax credit prices is being filled with a $400,000 loan from the state housing authority, $307,500 in equity cash from Evergreen and $635,000 in city funds.
That city funding, to be paid through rebates of the development’s property taxes over roughly 20 years, was proposed by Mayor Tom Barrett’s administration and unanimously approved Tuesday by the Common Council.
The developers expect to begin construction in August. The apartments are to open in September 2018.
Plans for two other affordable apartment buildings on Milwaukee’s north side were delayed as the developer, Gorman & Co., filled financing gaps created by the decline in tax credit values and an increase in construction costs.
“It’s just killing us,” said Ted Matkom, Wisconsin market president for Gorman, which is based in the Madison area.
Gorman had planned to begin construction in April on both the Washington Park Townhomes, which would create 40 two-story townhousestyle apartments at the former Esser Paint site, 3131 W. Galena St., and the conversion of the former Fifth Street School, 2770 N. 5th St., into a 48-unit apartment building for seniors.
Both projects are now starting, Matkom said. Each will take about a year or so to complete.
The $9 million Washington Park Townhomes is filling the financing gap with a $300,000 federal grant, provided through the city, and a $400,000 grant from the Wisconsin Economic Development Corp. to help do an environmental cleanup on the project site.
With the Fifth Street School conversion, Gorman reduced costs by about $500,000 on the $13 million project, Matkom said. The firm also is getting a $250,000 loan from the state housing authority.
Meanwhile, a Walker’s Point project, the 60-unit 704 Place Apartments, remains on hold as the developers seek additional funds. Impact Seven LLC and Milwaukee-based Rule Enterprises LLC plan to construct the fourstory building at 704 W. National Ave., replacing a warehouse that would be demolished.
That $11.2 million project in 2016 received tax credits now valued at $5.3 million. Its funding gap was partly closed in May, when the state housing authority provided an additional $715,000 credit award.
Rice Lake-based Impact Seven also is seeking around $550,000 in possible city funds, to be provided through property tax rebates, as well as a state environmental cleanup grant and other cash sources, said Kristine Giornalista, vice president of real estate development for the firm.
The developers need to begin construction by the end of this year to meet a December 2018 tax credits deadline to open the apartments, she said.
Other high-profile projects dealing with the tax credit price drop include the $32.4 million renovation of the historic Milwaukee Soldiers Home into 80 apartments for veterans and their families.
Madison-based Alexander Co. in May received $14 million in affordable housing tax credits to help finance a redevelopment of Old Main, the Soldiers Home’s main building that opened in 1869 and closed in 1989.
The firm’s other funding sources initially included $2 million to be raised in donations from foundations and individuals, said Jonathan Beck, Alexander Co. development project manager.
With the decline in tax credit values, the project is now seeking $4 million in a fundraising campaign that will be launched this month through the Greater Milwaukee Foundation, Beck said.
The early response from prospective donors has been positive, and the firm is sticking to its plan to begin renovations at Old Main by December, said President Joe Alexander. A bridge loan from the nonprofit Local Initiatives Support Corp. will help the project stay on schedule, he said.
Old Main’s conversion is to be completed by spring 2019. Alexander Co. wants to convert other Soldiers Home buildings to veteran housing if it receives additional tax credits in the 2018 competition.
The historic buildings are on or near Mitchell Blvd., between I-94 and W. National Ave., on the grounds of the Zablocki Veterans Affairs Medical Center.
Similar stories are told by developers of other affordable apartment buildings throughout Wisconsin.
“On our other projects around the state it definitely is taking a hit,” said Cal Schultz, who operates Oshkosh-based Keystone Development LLC.
Schultz is looking for additional funding sources for two pending projects: the 28-unit Whispering Echoes Townhomes in Winneconne and the 40-unit Cranberry Woods Townhomes in Wisconsin Rapids. Both received tax credit awards in May.
“I think they’ll come together,” Schultz said. “It is just becoming more difficult.”
Impact Seven is facing a similar challenge for its proposed 50-unit Garden Terrace Apartments in La Crosse, Giornalista said.
Also, Gorman must close funding gaps tied to its 42-unit Washington School Apartments in Sheboygan and a 59-unit building at Madison’s Union Corners project, Matkom said.
Those problems are showing up “in every state in the country,” said Michael Novogradac, managing partner of Novogradac & Co., a San Francisco-based accounting and consulting firm.
Nationally, the cash raised by selling tax credits, which totaled around $13 billion in 2015, could be reduced by as much as $2.2 billion, depending on how much corporate tax rates are reduced, according to a report by Novogradac & Co.
That reduction in cash could translate to 16,000 fewer affordable apartments developed annually throughout the United States, the analysis said.
A drop in affordable apartment development would hurt moderate-income renters nationwide, said Sally Peltz, chief executive officer at Legacy Redevelopment Corp., Evergreen’s partner in the Blommer project.
Milwaukee ranks No. 8 on a list of the top 10 U.S. cities with the greatest shortages of affordable apartments, according to a May report by Carrollton, Texas-based MPF Research Inc.
“There continues to be a huge demand for affordable housing,” Peltz said. “We need more of that in this country.”