January 29, 2017
By Kathryn Skelton
Lewiston Sun Journal
President’s corporate tax-cut talk leaves developers short of funds
LEWISTON — Nathan Szanton has big, $12-million plans to fill a 175-foot, ugly, empty stretch of Lisbon Street with 63 sharp, modern apartments.
Heading into last fall, he had hoped to break ground this July.
Then Donald Trump’s election changed the financial landscape.
Now before Szanton can fill that gap, he’s got to fill a serious, last-minute hole in his budget.
Trump’s promise to markedly lower corporate tax rates has big businesses including banks suddenly less interested in buying the tax credits that fund projects like Szanton’s.
What that means for Lisbon Street? The coveted low-income housing tax credits Szanton received in December from the Maine State Housing Authority are now worth $870,000 less than they were three months ago.
Across the river in Auburn, it’s the same thing: The $7.8 million Spring Street housing development is suddenly $500,000 short.
The same thing is happening to projects across the state and the country.
“Developers and MaineHousing are progressing cautiously,” MSHA spokeswoman Deborah Turcotte said Friday. “We simply can’t make up the difference with more money. We just can’t write a check. That’s not how things work.”
William Shanahan, president of Northern New England Housing Investment Fund, a Portland-based nonprofit that sells tax credits to raise money for developers’ projects, said it boils down to uncertainty.
If impending federal tax reforms drop the corporate income tax rate from 35 percent — Trump said last week he’d like to get it as low as 15 percent — then businesses that buy tax credits as a way to offset their tax liability feel less urge to buy them.
That might happen. Or it might not.
“I’m going to a conference next week and the only thing on the agenda is how do we address this, what do we do in the short-term. It applies to every state, every project,” Shanahan said.
“I’ve given this advice to both of those developers (behind the Lewiston and Auburn projects): If there’s no urgency — meaning you’re not going to lose your permits or you’re not burning through fees or something — a good strategy might be to wait to see how tax reform unfolds.”
‘WE’RE NOT GOING TO PULL THE TRIGGER . . .’
MSHA awards low-income housing credits once a year in a highly competitive process. Turcotte said to their knowledge, all six projects awarded in December across the state have been impacted by the recent drop in the tax credit market, but none have been stopped.
“It’s going to require some additional conversations with our partners and we’re exploring all the options,” Turcotte said. “It’s a matter of looking at each deal, looking at financing sources and knowing that people are going to need to make concessions; that’s the way it is right now.”
Szanton, principal of the Szanton Company, was counting on those tax credits to fund $7.8 million of his $12 million downtown project and said he was grateful to learn this winter he’d be getting them.
“The bad news is that since the election on Nov. 8, because the incoming Trump administration and Congress have been talking about cutting corporate tax rates significantly, the market for these affordable tax credits has gone down about 11 or 12 percent,” he said. “That drop from 98 cents per dollar of credit to 87 cents per dollar of credit means an $870,000 hole in our budget just since the election.”
Had that not happened, “the next step for us after receiving the allocation of these coveted tax credits would be for us to call up our architect and say, ‘Go. Begin the process of designing the building right down to the last 2-by-4 and screw, so that contractors can bid on it and know exactly what they’re bidding on,'” he said.
That’s a several-hundred-thousand-dollar commitment, and right now that’s not happening.
“We’re not going to pull the trigger on that until we have figured out how to deal with this gap in the financing,” he said.
He’s hoping it’s a matter of a two-month delay — a September groundbreaking instead of July — but that may be optimistic.
“In my 20 years in this field, tax credit prices have only fallen this far this fast once and that was in 2008 when the Great Recession hit,” Szanton said. “Real estate development is full of obstacles; I’ve never worked on a project where there wasn’t major obstacles. I’ve never had a project get this far and not find a way to get it done, so I do believe we’re going to find a way, I just don’t know what it is yet.”
Developer Ethan Boxer-Macomber from Anew Local Community Development, behind the 62 Spring St. project in Auburn, said he’s still hoping to break ground in June or July. He was counting on tax credits to fund $5 million of that $7.8 million project.
“In the grand scheme of things, (a $500,000 shortfall from the soft tax credit market) is not an insurmountable barrier, but it’s something that’s going to take some time to figure out,” he said. “We’re bracing ourselves for the possibility that this could take a little longer to sort out. We’re going to get ourselves shovel-ready in the meanwhile.”
Boxer-Macomber said his team will keep pushing forward with the design. He’s hoping MSHA will be able to step in with more help.
“It’s tricky,” he said. “Imagine you went to build a house and you got your loan approved and you hired your architect and your builder and you’re getting ready to start and the bank said, ‘Well, your interest rate might be 4 percent or it might be 12 percent. Want to keep going?'”
Greg Payne, a development officer at Avesta Housing, which also received tax credits in December for a 38-unit project in Scarborough, said it’s too soon to tell if it will delay that project.
Payne, who is also director of the Maine Affordable Housing Coalition, is anxiously watching Congress to see if low-income housing tax credits are nixed entirely in the tax reform process, and lobbying Maine’s delegation to keep that from happening.
“In Washington, as folks huddle behind closed doors to talk about what they want the tax overhaul to look like, you get the strands of information you can and try to understand whether you’re extremely vulnerable or just slightly vulnerable, and the folks who are in the know seem to suggest that the initial signs are good,” Payne said. “Now that doesn’t mean it might not turn all of a sudden and change.”
He’s watching Housing and Urban Development funding in that same vein and hoping it stays intact.
“There’s a lot of uncertainty right now,” Payne said. “If you are a developer who needs to close a couple months from now, that’s hard. If you’re a developer who’s working on a project and it might not close until the fall, that feels a little bit better. For now we are in that awkward place, ‘Oh my gosh, what’s going to happen here?’ That is a hard way to operate.”
Shanahan, the Portland tax credit broker who also sits on the board of the Maine Real Estate & Development Association, said the drop to 85 or 87 cents on the dollar “is not a catastrophic free-fall — it’s where we were two years ago.” Prices of late had been high, “unprecedented,” and that high wasn’t going to last.
“We’ve all waited for an event, for an adjustment in the market,” Shanahan said. “Conveniently, at the election time tax reform was a reality and everybody took a pause and that’s where we are now.
“Right now, if you go to investors, they’re going to give you a very low-ball number because they haven’t got anything to operate from,” he said. “It’s kind of wait-and-see. I know that’s not what they want to hear. But, the deals that get done in early 2017 I suspect are going to look a lot different from the deals that get done in late 2017.”