Developers of three planned low-income apartment projects here that together are expected to cost about $21 million say theyve been able to sidestep a worrisome downturn involving one of their main sources of development moneyhighly coveted tax credits.


The problem, still threatening other planned low-income housing projects around the state, involves a funding gap caused by the nations tightening credit markets and, more specifically, reduced investor interest in buying such tax credits. Proceeds from those sales provide a big share of the funding for most of those projects.


The projects here that have steered clear of the dilemma are the 36-unit Bel Franklin Apartments and 35-unit Helena Apartments, both in downtown Spokane, and the 47-unit Walnut Corners, in the West Central neighborhood. The Bel Franklin and Helena projects involve the purchase and renovation of older buildings, and the latter project involves the construction of two new buildings (See story in our printed version on page B15).


The three projects are among 18 low-income housing projects statewide, comprising more than 1,000 planned living units, that have been approved for tax-credit funding this year by the Washington state Housing Finance Commission. Another proposed low-income apartment project here, the 50-unit Arrowleaf Village, planned in Airway Heights, is one of 18 other projects that are on a tax credit waiting list administered by the commission.


Ray Rieckers, of Spokane, who is a member of the commission, says hes pleased that the three projects here approved for funding havent been canceled or substantially delayed due to softer investor interest. He says, though, I think statewide there might be some that are in jeopardy.


The federal tax-credit program, though perhaps little understood outside low-income housing circles, is the largest affordable-housing program in the nation, so its absolutely critical in providing an incentive for the construction and rehabilitation of low-income housing, Rieckers says.


It provides a dollar-for-dollar credit that can be used to reduce federal taxes, and the Housing Finance Commission is the only agency in the state authorized to issue the credits. The commission determines the number of credits each developer should get based on a point system that considers various criteria, but gives priority to projects that will serve the lowest income tenants for the longest period of time.


Each year, the commission receives the tax-credit equivalent of a lump sum of state money, equating to about $2 per taxpayer, then disburses those credits among developers of low-income housing projects. This year, it had tax credits worth about $12.9 million to allocate, says Bob Peterson, its tax-credit manager.


Developers sell the credits to investors such as large banks and other corporations through an intermediary, called a syndicator, and those buyers then use the credits to reduce their tax liability. In recent months, though, investor interest in the tax credits has fallen due to the slumping economy, causing their value also to shrinkfrom slightly over a dollar per dollar of credit last year to less than 90 centsand, in some cases, far lessmore recently. As a result, developers counting on those dollars from such purchases have found themselves facing a sizable funding gap.


One reason for that softer tax-credit market is that the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which formerly were among the largest buyers of tax credits, have withdrawn largely from that market, Peterson says. Also, he says, companies nationwide that have seen their earnings plummet recently, and hence their tax liability as well, now are less motivated to buy tax credits.


In an effort to plug that gap, the Housing Finance Commission voted recently to boost the number of credits by up to 10 percent on all of the projects that have been approved to receive them. Peterson says it will get those additional credits from a national pool of leftover credits and from past projects that didnt need all of the credits they were allocated, but also may need to borrow from next years tax-credit pool to assist developers.


The Puget Sound Business Journal reported last month that the commissions strategy in response to the tax-credit value downturn has angered some developers of projects on the waiting list. They believe the additional money should go to them, rather than being used to augment projects that already have received funds, the Seattle-based newspaper says.


Rieckers says he disagrees with such arguments.


Theres not enough resources to go around every year, so those concerns are not necessarily new, he says. You simply cant serve them all. Youve got to make a cutoff somewhere.


Helen Stevenson, acquisitions and development manager for the nonprofit Spokane Housing Ventures, applauds the commissions action, saying, I think what they came up with was absolutely unique and very appropriate in the market.


Spokane Housing Ventures is the managing member of Bel Franklin Apartments LLC, which expects to spend about $5 million to buy the three upper floors of the four-story Bel Franklin Apartments building, at 225 N. Division, and renovate them into low-income apartments. A little over $4 million of that money is expected to come from the sale of tax credits.


Spokane Housing Ventures wasnt able to obtain any of the additional tax credits allocated by the commission, but was very fortunate to negotiate an agreement with limited partner Wells Fargo Community Development Corp., its tax-credit buyer on three previous projects, that enabled it to avoid a funding shortfall, Stevenson says.


She says the nonprofits purchase of the three floors in the Bel Franklin building, which is to be converted into a condominium ownership structure, is scheduled to close at the end of this month, and she adds, We hope to place the units in service and begin rent-up in April of next year.


Remodeling work will include installing new plumbing, electrical, and fire-suppression systems, as well as a new elevator, new roof, and a rooftop patio seating area, she says. Other improvements will include remodeling the buildings lobby, repairing the sidewalks surrounding the building, and putting in trees along the street, she says.


Stevenson says Zeck Butler Architects PS, of Spokane, designed the improvements, and a general contractor has been chosen for the project. She says she cant disclose the contractors name yet, but adds its a Spokane company that has done other low-income housing projects.


Spokane Housing Authority, doing business as Northeast Washington Housing Solutions (NEWHS), expects to spend about $7 million on the Helena Apartments project, at 173 S. Adams, which includes building purchase, renovation, and miscellaneous costs, says Steve Cervantes, NEWHSs executive director. A large majority of that money is expected to come from tax credits.


NEWHS hasnt solicited for equity investors yet, which it will do this summer, but the additional tax credits allocated by the commission should cover any shortfall in development money or at least give us some options, Cervantes says.


As for the project, he says, Basically, its a major gut rehabilitation that will include stripping out walls and installing all new systems throughout the three-story structure, which was built in the early 1900s and recently has been renamed The Pearl on Adams.


The end result will be virtually a new building in an old shell, although historic features will be preserved to allow the project to obtain historic-building tax credits, he adds.


The Spokane Housing Authority bought the building and underlying land last November and now is working on the project design. It expects to sell tax credits for the project to investors this summer and to begin construction soon thereafter, with the intent of opening the building in October 2009, Cervantes says.


Spokane Urban Ministries, a nonprofit formed last year, expects to spend about $9 million to construct the Walnut Corners low-income apartment buildings on lots west and southwest of the Spokane County Courthouse. James Kashork, the nonprofits board president, says a large percentage of that money will come from the sale of tax credits.


The tightening tax-credit market obviously changed the climate in which we were working, he says, but he adds, We did not end up with a funding gap that was insurmountable.


A number of prospective equity investors made proposals for the project, and Spokane Urban Ministries selected one and expects to have an agreement with that company within 30 to 45 days, Kashork says.


He says his impression, after speaking with the investors, is that theyre more eager to invest in projects here than in other areas of the country because the real estate market hasnt faltered as badly here.


Rieckers, who is director of housing and economic development for Spokane Neighborhood Action Programs and was a founding member of the Spokane Low Income Housing Consortium, says, I think the fall in the (tax-credit) market was much more dramatic than everyone anticipated. He says, though, that he thinks it was less of a problem here because of the incentive for banks to invest here due to the Community Reinvestment Act, the federal law that encourages financial institutions to meet the credit needs of their communities, including in the housing and low-income sectors.


Contact Kim Crompton at (509) 344-1263 or via e-mail at kimc@spokanejournal.com.