On the Trail
Sun March 16, 2014
As Lawmakers Debate Low-Income Housing Tax Credits, Syndicators Face More Scrutiny
(Updated 3/17 at 10:30 a.m.)
State Sen. John Lamping learned two important lessons during his relatively short tenure in the Missouri General Assembly: It’s hard to pass new laws; and it’s easy to stop changes to existing ones.
Lamping may have learned those relatively simple axioms in his battle to rein in Missouri’s low-income housing tax credit. He’s part of a group of lawmakers trying to curtail the incentive that develops housing for the working poor, elderly and disabled.
The Ladue Republican and others say the tax credit is too expensive and inefficient. But he says that syndicators – the businesses involved in buying and selling tax credits – are major obstacles to changing the program.
“Developers are OK with what we’re trying to do,” Lamping said. “It’s really the syndicators that have problem with us lowering the caps on low-income tax credits.”
Syndicators have become a focus of attention for two reasons: Some policymakers question the efficiency of developing affordable housing through the tax code. And others have contended those with a big stake in low-income housing – including syndicators -- have unduly influenced legislators.
Proponents of the credits say syndicators have an important role as a check and balance in developing affordable housing. For instance: State Rep. Chris Kelly, D-Columbia, said the current setup is far superior to a publicly funded approach that brought the state boondoggles such as Pruitt-Igoe in St. Louis.
“It is true that people have made money,” Kelly said. “But it’s also true that thousands of people live in clean, decent, safe housing, which suggests to me that the private sector model is a pretty good model.”
Dollars and cents
Here’s a recap on how the low-income housing tax credit works: A for-profit or non-profit company comes up with a housing proposal for the working poor, elderly or disabled and presents it to the Missouri Housing Development Commission. If the commission approves a project, the credits are issued in 10 equal increments over a 10-year period.
The tax credits are usually sold to banks or syndication firms, with the proceeds going toward reducing development costs.
One of the state’s major syndicators is Stephen Holden, who owns Poplar Bluff-based CRA Investments LLC. He says his role is getting a developer the best price on federal and state tax credits and making sure projects are underwritten properly so they are in compliance with the IRS.
“There is a considerable amount of risk involved,” Holden said. “The developer makes fees. The syndicator makes some fees. But I mean, I’ve got full-time consultants and staff who do nothing but check these projects. Every quarter, they review their financials to make sure how they’re coming along and staying within budget. I pay construction people to go out and visit every site, walk through all the sites, make sure maintenance is going well.”
Ultimately, he said, "I’m at risk to supplement the cash flow if the developer stubs his toe,” he added.
Another prominent syndicator is the St. Louis Equity Fund, a not-for-profit formed in the late 1980s.
John Wuest – St. Louis Equity Fund’s president and chief executive – said in an interview that his group has helped raise $450 million and build 6,000 units of housing in 25 years.
He said his organization gets banks and corporations to contribute to a fund, which is then used as a vehicle to develop low-income housing.
“In this past year, we raised about $26 million,” Wuest said. “And then the other side of equation, the people that are receiving the credits – like Beyond Housing – we solicit them to come and sell their credits to us.”
Wuest says his company typically pays anywhere from 43 cents to 44 cents on dollar for the tax credits, while Holden says most syndicators are paying 44 or 45 cents on the dollar.
Those numbers have become a source of controversy. State Auditor Tom Schweich’s recent audit on the program noted that the remainder of the money goes to the federal government in the form of increased federal income taxes, to syndication firms and to investors. (Another factor in the sale price of the tax credit, Wuest said, is that investors have to remain associated with a project for a relatively lengthy amount of time.)
“The program could be more efficiently run where a higher percentage of the credit goes to building housing,” Schweich said.
Both Lamping and Schweich suggested that it may be more efficient if state legislators directly appropriated money to develop low-income housing. Lamping suggested that approach may be better than using tax credits.
“Here’s what would happen. You’d have a group that would organize themselves,” Lamping said. “They would look at all the potential projects in St. Louis, St. Louis County. They would come together and say, ‘These are $100 million of projects that make tremendous sense – let’s make our pitch to the General Assembly and explain to them why.’ The General Assembly would decide whether it’s a good idea or not a good idea.”
Under that arrangement, Schweich says the “money would be appropriated dollar-for-dollar to build housing units rather than using the tax code and tax benefits as a means to encourage the building of those units.”
But there’s been some pushback to this idea.
Jeff Smith – a former Democratic state senator and executive director of the Missouri Workforce Housing Association – said a project must be essentially owned by a for-profit corporation to benefit from the federal low-income housing tax credit. That means a big chunk of the money appropriated by the state would go to pay taxes.
(And on Monday, Smith disputed Lamping's contention that developers were "OK" with cuts to the program. He added that developers aren't in favor of "cutting low-income housing support and moving the program from MHDC - which has effectively administered it – to the legislative process, where a single opposing Senator could filibuster an appropriations bill to kill the program each year.")
Smith added that “simply writing a check to developers puts all the risk back to taxpayers, when in the present system, investors bear all of the risk for the projects that don't come to fruition or are poorly managed.”
“If the state simply writes a check, there is no prospect for recapture, and all is lost in those cases,” said Smith, whose group represents a number of entities involved in developing low-income housing.
Wuest noted that his organization vets projects through an investment board – which means they’re not putting energy into developments that will flop. He said one option to make the credit more valuable would be to issue the credits over a five-year period – instead of 10 years.
In addition to listing direct appropriation as an option to change the program, Schweich's audit also raised the possibility of shortening the time period the tax credits are issued or making the credit refundable.
Question of influence
Some lawmakers have alleged that the biggest players in developing low-income housing – and tax credits in general – have had a disproportionate influence over key members of the General Assembly.
That includes Lamping, who said, “A long list of special interests control a select few of the General Assembly in a such a way that they’re able to keep laws from coming to be.”
“When I talk about political donors, there are philosophical donors – I’m a philosophical donor. Somebody who speaks to my views, I donate to their campaign,” Lamping said. “Then there are investors. And we’ve created a significant political investor class. And if it’s $100,000 or $1 million or $10 million, I guarantee you their return is 10- or 20-fold. And that’s what we have and that’s what we’re up against it.”
The Post-Dispatch recently reported that some the biggest syndicators are politically well-connected. The paper reported that Mark Gardner – who owns the syndication firm Gardner Capitol Inc. – hired former House Speaker Steve Tilley, R-Perryville, as a lobbyist.
And for a number of years, a series of political action committees with contributions from for-profit syndication firm Affordable Equity Partners have showered contributions to various political figures. (That company is run by Columbia, Mo.-based businessman Jeffrey Smith, who is considered a major figure in the low income housing tax credit industry.)
But Lt. Gov. Peter Kinder – a Republican who has long supported the low-income housing tax credit – says critics are overplaying their hand. He said on a recent episode of the Politically Speaking podcast that labor unions and trail attorneys are far more politically active than low-income housing tax credit interests. (For what it's worth, Lamping said he didn't find that argument particularly convincing.)
From 2011 to 2013, nine political action committees – with names like Quality Building PAC and Alliance for Building and Technical Education -- receiving contributions from Affordable Equity Partners distributed about $281,000 to roughly 90 different candidates. Gardner or his company donated about $90,000 during that same time period. Those totals are far below some of the state's prominent corporations or big individual donors.
“There are a few people like Jeff who have made a lot of money providing clean, safe, affordable housing,” said Kelly. “They like that system. They like the fact that they make money from it. But they also like doing that work. I don’t have a problem with a private-sector model.”
For his part, Holden says he hasn’t been to the Missouri capitol in 10 years. He hasn’t personally been involved in lobbying for the tax credit. And he's donated around $3,250 over the last three years to Missouri-based political candidates. (Both his company and the St Louis Equity Fund is a part of Missouri Workforce Housing Association.)
"I don’t anybody’s vote’s been bought," Holden said. "I don’t know of any developers or syndicators that have spent the kind of money that it would take to even tempt a legislator to not … to vote his own conscience."
He says one reason lawmakers may be hesitant to cut the program has to do with the tax credit’s benefit.
"There are a lot of projects in St. Louis that are probably in more than one senatorial district and in at least nine or 10 state representative districts," Holden said. "I think the state representatives and senators see that money gets to come back to their districts. And that it’s helping the seniors that they represent. And it’s providing housing for the working poor that are in their districts."
"So I think they’re more influenced by that and by organizations than they are by money," he added.
On the Trail, a weekly column, weaves together the intriguing threads from the world of Missouri politics.