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Bridges - Fall 2012

Bridges - Fall 2012

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Bridges is a quarterly review of regional community development issues, projects and regulatory changes for lenders and community groups.
Bridges is a quarterly review of regional community development issues, projects and regulatory changes for lenders and community groups.

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Published by: Federal Reserve Bank of St. Louis on Jan 24, 2013
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Taking FinancialEducation to theNext LevelWhy Did Young House-holds Lose so MuchWealth During the Crash?
Coming Together To Preserve Affordable Housing
program designed to meet thisneed, providing a dollar-or-dol-lar credit against tax liability toencourage the private develop-ment o aordable housing. Theprogram has helped nancemore than 52,000 aordableunits in Missouri since it began,and has brought considerableeconomic activity and jobopportunities to the state andthe region. Today, however,many o these aordable unitsace uncertain utures.The LIHTC program requiresan original compliance periodo 15 years, ater which inves-tors in properties are reeto exit partnerships. Thoseproperty owners who wishto continue oering rents ataordable rates ace toughchallenges as propertiesapproach Year 15, including:
restructuring ownershipwhen limited partners exit,
nding capital or repairsand rehabilitation,
renancing andrestructuring debt,
continued on Page 2
2,0001,5001,0005002012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
 Year Units Arrive at Year 15
   N  u  m   b  e  r  o   f   L  o  w  -   I  n  c  o  m  e   U  n   i   t  s
13,541 units
Number o Low-Income Units Approaching Year 15 in the St. Louis MSA 
SOURCE: LIHTC Database, United States Department of Housing and Urban Development. Retrieved from http://lihtc.huduser.org/.
By Ross Clarke
ccording to data rom the2010 American Com-munity Survey, morethan hal o all rental unitsin the St. Louis region areoccupied by people who paymore than 30 percent o theirincome toward rent. Manyare working amilies whosewages don’t stretch ar enoughbeyond rent payments toallow or savings, or to pur-chase health insurance ortransportation. A signicantnumber o these householdsare considered to be extremelylow-income, paying more than50 percent o their earningstoward housing costs. Recenttrends also indicate heighteneddemand in the rental marketand, in some areas, increasesin rent prices. There is a clearneed or aordable rental hous-ing in the region today.The Low Income Hous-ing Tax Credit (LIHTC) is a
Local and RegionalEconomic Developmentin Rural West Tennessee
     I     N     D     E     X
Affordable Housing
continued rom Page 1
ater Year 15, especially inweaker housing markets, suchas many parts o the Midwest.Nevertheless, the Year 15 pro-cess is lengthy and challenging,and requires a great deal o preparation.Between 2012 and 2022,more than 13,000 properties inthe St. Louis region will arriveat Year 15. (See Figure 1 onpage 1.) Recognizing the chal-lenges at hand, the CommunityDevelopment department o the Federal Reserve Bank o St. Louis convened a meeting o representatives o state and cityagencies, and local organiza-tions with extensive experiencein the LIHTC eld. The goalswere to clariy the issues relatedto Year 15 in the region; allowthose involved to share success-ul strategies to negotiate thisprocess; generate ideas or new,creative strategies; and plannext steps, both short- and long-term. Some o the most press-ing issues were ound to be:
the reluctance o banks torenance debt on properties;
the capacity and stabilityo some nonprot propertyowners;
county-by-county vari-ability regarding propertyassessment and the result-ing property taxes imposedi properties are valued atmarket rate;
declining external neighbor-hood conditions;
a need or a city-wide planor the spatial developmento LIHTC properties; and
a need or improved com-munication at state, city andindividual property levels.Several attendees remarkedthat this was the rst time allparties had gathered to addressthese issues, and the willingnessto engage in constructive discus-sion about the challenges andpossible moves toward actionwas evident. Perhaps mostencouraging was the desire o many o the participants to orma LIHTC working group to beginto address these challenges col-laboratively; the group held itsrst meeting in September.Similar working groups havehad considerable success inother cities. In Portland, Ore., agroup was ormed comprised o sta rom state and city housingdepartments, local and nationalnonprots, and other LIHTCproperty stakeholders. Thegroup was tasked with assess-ing the risk o loss o aordableunits approaching Year 15 anddeveloping recommendations toavoid this loss. The results o the group’s meetings impactedthe city o Portland’s Preserva-tion Agenda and the state’sQualied Allocation Plan. Another successul LIHTCworking group is led byNovogradac & Company, aSan Francisco-based account-ing and consulting rm with awealth o LIHTC experience.They hold monthly coner-ence calls and meet annu-ally to discuss best practicesor the LIHTC industry and
ongoing issues with physicaland asset managemento properties,
high expenses and lowlevels o revenue and cashfow, especially or smallerproperties, and
a general lack o prepared-ness or Year 15. Another signicant chal-lenge or LIHTC partnerships iscompetition rom newer aord-able housing developmentsthat open in close proximity toexisting properties. Tenantswith mobile Section 8 vouch-ers may leave older units andmove to these newer accom-modations, which can impactthe nancial viability o olderLIHTC developments.I these issues cannot beresolved, property owners maybe let with little option butto look or a way out. ThoughLIHTC requires properties tocontinue operating at aord-able rates or a urther 15 years,owners can request that thestate housing nance agencysearch or a new buyer throughtheir qualied contract processat any time ater the 14thyear o the original compli-ance period. I one cannotbe ound, owners are releasedrom all restrictions and areree to sell properties to anywilling buyers, who are onlybound to keep rents aordableor a urther three years. Mostproperties do remain aordable
continued on Page 4
Introduced as part o the Tax Reorm Act o 1986, LIHTC has helped fnance more than2 million privately developed aordablehousing units.
Developers o LIHTC properties are awardedederal credits, distributed by states in accor-dance with the rules laid out in their QualifedAllocation Plan. Developers then sell creditsto investors to receive capital up ront or development costs.
 There are two types o LIHTC credit: A com-petitive 9 percent credit that awards creditsequal to 70 percent o qualifed constructioncosts; and a noncompetitive 4 percent credit or projects fnanced with tax-exempt bondsand various other gap subsidies that providescredits equal to 30 percent o qualifed costs.
A minimum o 20 percent o all units must berented by tenants with incomes at or below50 percent o the area median income (AMI).Alternatively, owners can opt to rent at least 40 percent o units to tenants with incomesat or below 60 percent o the AMI. In manycases, 100 percent o available rental unitsare aordable, especially in properties oper-ated by nonproft organizations.
LIHTC requires properties to complywith restrictions or 15 years.
Legislation passed in 1989 introduced aurther 15-year required extended-use period.
Limited partners (investors) are not bound by extended-use restrictionsand are ree to exit in Year 15.
In some cases, general partners (owners)exit; but to do so, they must allow thestate housing fnance agency to attempt to fnd a qualifed buyer through their qualifed contract process.
I a qualifed buyer cannot be ound,general partners are then ree to sellto any willing buyer.
Certain nonprofts are given the right o frst reusal to purchase properties.
Why Did Young Households Lose soMuch Wealth During the Crash?
The Role of Homeownership
 As detailed in our recentarticle,
the Survey o Con-sumer Finances reported thatthe wealth o the median U.S.household in 2010 was 39percent lower than the medianhousehold’s wealth in 2007,adjusted or infation. The am-ily headed by someone under40 (henceorth, young house-holds) in the middle o the 2010wealth distribution likewisehad much less wealth than thecorresponding median youngamily in 2007. (See Figure 1.)The decline in the wealth o a young household measured atthe median o the distributionin 2007 and 2010, respectively,was 38 percent. The declinewas 20 percent among young
By William Emmonsand Bryan Noeth
ecently released surveydata related to house-hold nancial conditionsreveal large wealth losses invirtually every segment o theU.S. population between 2007and 2010, the most recent yearsin which the Federal Reserveconducted its triennial Survey o Consumer Finances.
Since thedeepest economic recession inmany decades occurred betweenDecember 2007 and June 2009,the 2007 and 2010 surveyseectively represent “beore andater” snapshots o U.S. house-holds’ balance sheets or a cross-section o American amilies.households that were memberso a historically disadvantagedminority, which we dene tobe Arican-Americans andHispanics, who may be o anyrace. The median wealth o young households that werenot members o a historicallydisadvantaged minority (includ-ing non-Hispanic whites, Asiansand other non-historically dis-advantaged minorities) was 42percent lower in 2010 than themedian wealth in 2007.The very large loss o wealthamong many young house-holds is notable or at least tworeasons. First, many younghouseholds are nanciallyragile. A serious nancialsetback early in lie can havelasting eects on amily mem-bers, including young children. According to the surveys, thehomeownership rate (denedto include primary residences,vacation homes and time-shares) among young amiliesdeclined about our percent-age points between 2007 and2010 (rom 50 to 46 percent).This almost certainly was due,in large part, to oreclosuresand other distressed exitsrom homeownership. Thehomeownership rate declinedby only two percentage pointsamong amilies headed bysomeone at least 40 years oldbut less than 62 (rom 77 to
continued on Page 4
1989 1992 1995 2001 2004 2007 2010$50,000$40,000$30,000$20,000$10,000
Median Net Worth o Families Headed by Someone Under 40
1989 1992 1995 2001 2004 2007 201060%50%40%30%20%
Homeownership Rate o Families Headedby Someone Under 40
1989 1992 1995 2001 2004 2007 2010100%90%80%70%60%
Share o Homeowners with Mortgages Among Families Headed by Someone Under 40
Families headed by someone who is under 40 but is NOT a member o a historically disadvantagedminority group (Arican-American or Hispanic origin)
      K      E      Y
All amilies headed by someone under 40Families headed by someone who is under 40 andis ALSO a member o a historically disadvantagedminority group (Arican-American or Hispanic origin)
SOURCE: Federal Reserve Survey of Consumer Finance

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