The one residential sector that has managed the quickest resurrection after the turmoil of the housing crisis and ongoing recession is affordable housing.

Admittedly, this is a niche sector that doesn’t play by the same rules as other housing markets, including multifamily, but it still faced tough times as late as one year ago, and as well as things appear now, there are still crosscurrents of concern.

The main difference between affordable housing and other types of real estate, whether single-family or commercial, is that it is largely funded by tax credits, or to be specific, the Low-Income Housing Tax Credit.

In a broad-brush way, it works like this: Each state is awarded a set amount of tax credits based on census information. Then, in a competitive process, for-profits, not-for-profits, housing authorities, etc., apply for an award of credits for projects, which if won, flow to the developer entity for a period of 10 years or until the project is completed.

The actual financing comes from the selling of credits to investors, generally for less than they are worth.

Big corporations buy the credits to offset profits, and in past years the two biggest buyers were Fannie Mae and Freddie Mac.

Back in 2006, before the country began slipping into recession, tax credits generally sold for about 90 cents to 92 cents on the dollar. Then came the recession and Wall Street crash. The government took over the failed Fannie and Freddie, and with other companies losing money instead of being profitable the demand for tax credits plummeted making the financing of affordable housing more difficult.

According to Jeffrey Adams, an attorney with Arnall Golden Gregory in Atlanta and a specialist in structuring financing for affordable housing, the pricing for tax credits in some instances had fallen to between 55 cents and 60 cents on the dollar.

Things looked so bleak that a part of President Obama’s stimulus package created stop-gap financing measures to help stimulate affordable housing.

Even one year ago, the affordable housing market remained so weakened that "folks were turning in their tax credit awards in hopes of getting whatever was remaining of the stimulus money," said Adams. "If there wasn’t any stimulus money left, they were begging to find interested investors."

Now, in 2011, all the troubles appear to be in the rearview mirror. First off, companies have returned to profitability, and the demand for tax credits — especially from big banks and insurance firms — has turned into a stampede.

Tax-credit pricing varies within a new range of respectability, generally at the 75- to 85-cent levels and trending up, said Ken Outcalt, senior vice president of development with The NRP Group, a Cleveland, Ohio-based affordable housing developer. "Prices should stabilize this year at 88 cents to 90 cents."

"There is a lot of demand for the credits due to the large banks, insurance companies and other institutional buyers being profitable and anticipating significant tax liabilities going forward," Outcalt said.

In addition, he said, there is another driver for the credits: the Community Reinvestment Act, which requires banks to invest in their local communities. Two of the best ways to do that is to invest in credits or make direct loans for affordable housing transactions.

Although tax credits haven’t been awarded for 2011, NRP Group, one of the country’s largest affordable housing developers, has been busy. It is active in 11 states and is closing deals from last year’s awards, including the 96-unit, second phase of a multifamily project in Corpus Christi, Texas, and a residential center for homeless families in Phoenix.

The Michaels Organization of Marlton, N.J., also ranks as one the country’s biggest affordable housing developers. It, too, is on a roll.

"We are as busy now as we have ever been, probably busier," said Milton Pratt, a senior vice president at Michaels Organization. "The work never completely left us. Someone here still gets a call every day about whether we would be interested in a new project."

Among other developments, Michaels is undertaking a residential tower in Wilmington, Del., and a high-rise refurbishment in Honolulu, and constructing a 68-unit multifamily structure in Sarasota, Fla.

For developers, competition for tax credits has become intense, or as Outcalt said, "cutthroat." In Georgia, Adams reports there were 70 applications for 30 projects that got tax credit awards in 2010 and he expects even more demand in 2011.

Tax credits are only part of the financing for affordable housing. As Pratt pointed out, there are usually multiple layers of financing, with much of the rest coming from what is called "soft funds," or funding from various city, county or even federal entities.

Soft funding to some extent remained available through the heart of the recession, but with local and state governments having to squeeze down budgets, these types of funds are endangered.

"If you eliminate any of these sources, such as local government support, it has to be made up somewhere else," Pratt explained. "These are the challenges many developers are facing."

Outcalt added, "We have concerns with respect to soft funding."

Unfortunately, that’s not Outcalt’s only worry. He has also been keeping a watchful eye on what’s happening in Washington, D.C.

"This program has been the most significant driver of affordable housing construction, far surpassing any of the other Department of Housing and Urban Development-based programs that were created," he said.

And historically the tax credit has been supported on both sides of the aisle.

However, with all the pressure in Washington to find ways to reduce deficits and balance budgets, "there is always concern that things like tax credits may be reduced or eliminated," Outcalt said.

"Even though this program has been highly successful in meeting a small part of the huge need for affordable housing, there is always the fear that tax credits could fall out of favor."

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