Frank Levy is president of Newbury Management Co., a Des Moines company that has counted the development, ownership and management of low-income housing among among its specialities since its founding in the 1980s by his late father, Jim.

Newbury currently has mixed-income developments in the planning stages in Des Moines, Johnston and Davenport, as well as a market-rate project in Bettendorf. Levy is well versed in the language and process of tax credits, which provide financial support for projects such as affordable housing that are built and operate on thin margins.

The Business Record asked Levy to talk about the challenges of developing affordable housing. In all of his responses, Levy was quick to point out that any impediments were simply the cost of doing business. He was not complaining, just helping the Business Record understand this complicated segment of the housing industry.

Congress is threatening to make it even more complicated, reducing or eliminating low-income housing tax credits that are awarded to developers, then sold to syndicates, corporations and wealthy individuals, with the proceeds defraying construction and development costs. The tax reform bills that have been passed by the U.S. House and Senate also would eliminate or dilute historic tax credits that have saved countless buildings in downtown Des Moines and across the state. They often are used in projects that include affordable units.

In addition, the 20 percent corporate tax rate approved in the House and Senate tax bills would make the purchase of credits less attractive as a way of reducing overall tax liability.

How will changes in federal tax laws affect affordable housing?
Two major things are affecting affordable housing. A reduction in corporate tax rates would reduce the pool of interested buyers of tax credits. (My understanding is) it would affect pricing by pennies per dollar, not multiples of 10 cents per dollar. People are talking about prices coming from the low 90s to high 80s, perhaps. That’s a problem that you have to deal with, but it is not earth-shattering the way it was in the 2008 financial crisis when prices went from the high 90s to the mid- to lower 60s.

The reduction in the federal historic tax credit could affect the viability of certain affordable projects. In one version of the federal reform bill, the tax credit was eliminated entirely; that would have been a major blow. Now, the current amendment that Sen. Chuck Grassley, I believe, has sponsored would let the tax credit flow over five years. That reduces the present value of the tax credit but it doesn’t totally destroy it. What I have learned is that it might affect pricing by 15 to 20 percent; you would lose 15 to 20 percent of the value of the credit, which is 20 percent (of project costs). Again, it’s a material problem, but it is not earth-shattering. 

If the capacity overage in the industry combined with these limitations in the tax credit — the reductions in the value of the tax credit — were to produce a slowdown in the production of new housing, and if that created an easing up on cost increases, perhaps that would be some type of offset. Right now it is very difficult to bring the trades to a site and the costs are high, so although the national inflation rate is 2 percent or thereabouts, it seems like the construction cost inflation is 5 or 10 percent a year. Every time you put a deal together, it seems like there is a major step change in the costs. If that were to ease off some, because some of these other factors caused a slowdown in production, there could be some type of an offset.

Is it difficult to do a project in Des Moines?
The numbers would say no. I think Des Moines has its fair share, or at least its pro rata share, if not more, of affordable housing than the rest of the state. A number of developers have been able to figure out how to do it. Hubbell, Sherman, Conlin, ourselves, have been successful in developing affordable housing in Des Moines. The rents can be higher, so that can offset some of the difficulties. Occupancy can be very strong in Des Moines. As an example, we have just opened a project in Perry that’s affordable where the land was free because it was given by the city, but the construction costs were the same, and the rents were lower and the lease-up was slower, so in some senses that Perry project was harder than some projects in Des Moines.

Des Moines wants to put some attention on the suburbs. Is that where it is difficult?
I think the suburbs are pretty challenging. We have just applied in the low-income housing tax credit competition for a project in Johnston. It’s a great site, the community has so many great things going for it, the land is expensive and other aspects of the project are challenging, so the numbers are very tight. Right now, the emphasis within the Iowa Finance Authority, which is reflected in the scoring system for the low-income housing tax credit program, favors a variety of things that tighten the numbers. For example, cost caps, and developers having to forgo or reinvest portions of their developer fee, so I think that deals statewide, regardless of the geography, are just very tough to make things work right now. Tax credit caps that are most limiting are the maximum tax credits per bedroom, you could say, is a big limiter, and another one is the overall project cost caps. Since the bigger the project, the more the efficiency is gained, so because of these caps you have a relatively tight amount of dollars to work with whatever you build; you can’t build a particularly big building because of the overall cost cap.

I don’t want to come across as feeling entitled, because we are building projects at the pleasure of taxpayers. Our costs are $300,000 to $400,000 to put a project together, and that would be internal staff time and the application and pre-development costs. In our mind that is sort of on the low end of break-even without taking into consideration any of the risks, because you are signing personally on the loan, and projects are generally not set up to cash flow much or anything because the whole purpose is to make them affordable, so the rents are generally set up to be as low as the project can handle safely but without a lot of slack to produce cash flow. So you are not getting into the project for the cash flow because there is not an expectation of very much, so the primary thing you are after is the development fee. We find that the developer fee is proportionate to project size, and as I said, the project size is limited to about 40 or 50 units of new construction by the overall cost cap. We just find it very difficult to make a fee that is much greater than our cost. 

To try and adopt the the perspective of the (Iowa Finance Authority) board, the tax credits are a finite resource, the developer fee is considered part of the eligible costs, so it’s undeniable that an extra $1 of developer cost does draw down a finite resource. From a taxpayer perspective, that is optimizing a resource, a resource that is derived from the federal tax code.

Do you encounter pushback in some communities?
I guess I would say we haven’t encountered a town yet where an appropriately located, well-conceived project doesn’t have some chance of success with the city council. We have had pushback from elected officials in a variety of towns, and in some cases we thought the pushback was driven by unfounded neighborhood fears. But that is the nature of any kind of development; it doesn’t pertain just to affordable housing.

In the last two suburbs that we have tried to put projects together, in Bondurant, where we were unsuccessful, Johnston, where we have a project pending, we had very supportive city staffs and elected officials. 

Are there programs we are missing out on that could lead to more affordable housing?
In markets like Iowa where the rents are not higher than the national average, the creativity on affordable housing is going to be bounded by federal programs for affordability, which for the most part is the low-income housing tax credit program. Other markets such as California, Colorado may have the ability to be creative using the rent scale or local funding sources. Here in Des Moines, the local sources produce very small quantities of affordable units. We have been lucky to use the Polk County Housing Trust Fund as a source, but those dollars only pay for a handful of apartments per building if the building is otherwise market rate.

Let’s say that you are in Boulder, where the rents are very high. The primary constraints are land and entitlement. So the developer wants to build a building that might have huge entitlement hurdles to get through, and in a town like that the city can simply require that a portion of the building be affordable in order to get the entitlements. The rents on the market-rate units and the affordable units are so high that a developer can make the numbers work. But that dynamic doesn’t exist in Iowa. 

If you wanted to put together an affordable project, that generally means 60 percent to 80 percent of area medium income. Those rents are low enough compared to market rents that you need a substantial gap filler to take that rent hit in Iowa. The only gap filler that exists that can produce large quantities of units is the low-income tax credit. The discontinued Community Development Block Grant tax credit was able to produce quite a bit of affordability in large batches.

With affordable housing, it’s a very rare project that throws off a meaningful amount of cash flow. Companies that own or manage, the bigger they are, the better they do. If they are owned by a not-for-profit that built in the 1970s and have a lot of equity, they do better. But for the most part you can’t expect an affordable project in Iowa to produce meaningful cash flow and stay current with its maintenance. The developer fee is sort of the key attraction. But there were 30 or so applications this year (for low-income tax credits), so obviously the developer’s fees are enough. If corn is priced at the cost of production, you still get people growing it.