Date: Fri, 26 May 2017 21:58:31
Subject: Comments on the State Housing Bond

Hi Randy –

I read with interest, and some frustration, the comments in the True North Reports about the proposed State Housing Bond. I had thought over the years that the Vermont Housing Finance Agency (VHFA), the Vermont Housing and Conservation Board (VHCB) and the Agency of Commerce Dept. of Housing and Community Development (DHCD) have explained how we approach financing affordable housing in the State.

The proposed $35 mil bond is planned to fill the large gap we have in funding and is not intended to be paid back with mortgage revenue. The pay back will be from the Property Transfer Tax. The purpose of the bond is to provide capital that cannot be provided by traditional mortgage sources or current state or federal subsidy funds. There has been a lot of review of Vermont’s affordable housing finance system, and more recently the structure of the proposed bond. All of the officials and external consultants we are working with concur that Vermont follows national best practices in financing, so I am not sure what the “red flag” is.

Vermont funders are very conscious of the scarcity of housing resources and carefully review what we will provide for subsidy. When a project comes to the funding agencies, we first look at how much amortizing debt the project can support based on the rent levels being targeted. Rents that are able to be charged for low income families are never enough to cover the entire cost to build affordable housing. If we want to continue to provide housing to lower income households and insure they have quality efficient affordable options in the areas where we want building, they must be funded with sources other than debt such as Housing Trust Funds from VHCB and tax credit equity.

VHFA has plenty of capacity to provide amortizing debt to affordable housing, but there must be the revenue from the project to pay us back. Most of VHFA’s debt comes from the issuance of bonds to private investors or the US Treasury who expect to get a return. Many of our bonds are issued with the Moral Obligation of the State or with FHA mortgage insurance so everyone demands strong underwriting and due diligence. We do find that many of our smaller rural properties cannot carry any amortizing debt because the community rent levels are too low compared to the capital cost to build the project. If incomes and rents were higher in Vermont then we would see more market rate housing, but to reach lower income households who have fewer housing options, funding beyond amortizing debt is a reality.

Funding the gap can be done in several ways. The largest source is private equity from the Federal Low Income Housing Tax Credit program (LIHTC) administered by VHFA. This is limited by the IRS. LIHTC and debt rarely fills the entire gap. The next source we most often rely on are the State dollars from the VHCB. They provide the gap funds to assist the project in meeting the affordability goals of the tax credit program. We also fill the gap with State tax credits and Federal funds such as HOME and Housing Trust Fund administered by VHCB, Community Development Block Grant (CDBG) administered by DHCD, USDA Rural Development funds, and any number of other special purpose funds. Our developers look long and hard for every available source before they go to State dollars. Programs for special needs housing and affordable home ownership often are not eligible for housing tax credits and must rely more on State gap funds.

The LIHTC equity is structured in a for-profit real estate partnership to allow the private investors to take advantage of the tax credits. These partnerships are structured so that the return to the investors is from the tax benefits and not the cash flow (so we can keep the rents low) and not from back end appreciation (so we don’t have to repurchase the property at the end of tax credit period of 30 years). The soft sources of equity, primarily VHCB, are usually structured as a 0% deferred loan. This is done for several reasons. First and foremost we see no immediate cash flow in the project to pay back the loans. (If the projects had that cash flow then we would require them to get true amortizing debt.) The other reason we structure the soft funds as mortgages (a lien) is to make sure that the project owners comply with all the State and Federal requirements and responsibly manage the property. A mortgage gives us recourse to foreclose if something does not work out or the project is mismanaged.

Another reason we structure the soft funds as mortgages, which you should be aware of as an accountant, is that if we put the funds into the project as a grant, then those proceeds will be considered income to the project owners (investors of the tax credits) essentially increasing their income at the same time they are purchasing a credit investment to reduce their corporate income taxes. If owner investors have to pay taxes on funds as grants it would significantly lower the price they are willing to pay for the tax credits, reduce tax credit equity (to be filled by other sources) and produce less units.

I will assure you that when projects come to funding agencies for restructure we look at whether any deferred debt can be paid back. Some is paid back if there is some other replacement source or projects have done better in their projected rent levels. However, you are right, there is very little expectation that these mortgages will have the capacity to be paid back without disrupting the project. If the incomes of the residents remain low (which they do as you can see by the attached information sheet) there is no room in the rents to pay back these loans. We do not want to raise rents and displace low-income residents at the end of tax credit compliance period just to pay back a deferred loan. Our state policy is to make sure that housing we invest in remains permanently affordable so we do not have to buy it back as we have had to do over the years with a number of federal housing programs. We also find that after 20 or so year’s projects may need recapitalization, and rather than requiring significant cash funds upfront for reserves, we allow the projects to refinance and roll over the deferred debt.

I also note the comment that incomes of current residents might rise in the future. We hope that that happens, but mostly income increases are not higher than increases in operating expenses and rents The majority of our affordable housing in Vermont is for elderly and disabled persons where income growth is minimal. We do look at resident’s income every year and do raise rents. I just cannot image if someone became a multimillionaire they would remain in the affordable rental housing In projects where there are market rate units’ over-income residents would be required to move to a higher priced unit. We actively work with residents of general occupancy units to make sure they are aware of affordable homeownership opportunities if it seems like they might be eligible. Unfortunately most of our residents tend to work at long term lower wage jobs where there has not been a lot of income growth.

Building affordable housing and maintaining our investments in communities is capital intensive. Vermont has fallen behind in its commitment by diverting some funds from the Property Transfer Tax Fund (PTT) to the General Fund, which in statute is to provide 50% of its revenue to VHCB. We hope in future years more PTT revenue can reach VHCB, but in the mean time we need to play some catch up. Issuing bonds as Vermont is proposing is happening in many states. These states often do this every few years because of the unmet affordable housing need and the withdrawal of the Federal government from providing housing capital. We are very proud that Vermont is trying to meet its commitments.

I am happy to review this in more detail with you and review the underwriting and compliance processes we have.

Thank you,