A Developer's Jackpot

Low-income housing tax credits are subsidies that builders can get from the Texas Dept. of Housing and Community Affairs (TDHCA) to build new apartment complexes that rent at least 40% of their units below market rates. The IRS funds the subsidy by forgoing tax receipts that are bundled into credits and parceled out to states according to population. Texas is eligible to award about $25 million in credits annually, but that pot is actually $250 million deep because tax credits are good for 10 years.

Technically, the distribution of that quarter-billion dollar kitty is overseen by the TDHCA governing board, whose members meet once a year in July to review project applications. But in reality it is controlled by five people ­ board members Margie Bingham, Florita Bell Griffin, and Lydia Saenz, who form the tax credit subcommittee; the agency's tax credit manager, Cherno Njie; and executive director Daisy Stiner. These five decide which 50 or so applications go before the full board, whose members typically flip through them in a two-hour meeting and vote on which projects to approve. The agency gets requests for about five times as many credits as it has to give out, and this year some developers paid lobbyists upward of $100,000 to help them compete. Why are developers going to such lengths to build housing for poor folks? Those of you with or without a house on Boardwalk will understand.

Everyone knows we will always have poor people in Texas, and that low-cost housing is always in high demand. But how do you make money building apartments for people who can't pay much, and still keep city safety inspectors and tenants associations off your back? Well, the government will grant you up to $1 million off your tax bill for the next 10 years if you promise to keep your rents affordable. Of course, you'll never earn that kind of money unless you can get cash up front to build your villa in the first place. But guess what? You can sell those $10 million in credits to a corporation for 75 cents on the dollar. Soon you've got a check from General Structures Inc. totaling a whopping $7.5 million! That'll cover more than half of your construction costs, and lenders who once showed you the door are now more than happy to finance the rest.

You're on the road to capital city, and not all the money has to be spent on studs and shingles. As the developer, you can put about 15% of the total cost of your project, say about $2 million, in your pocket as a fee. (Already, that $50,000 you spent preparing your tax-credit application doesn't seem like much at all.) Maybe your buddy has a construction firm, so the two of you partner up as the builder. That's more money you can keep. Altogether, you calculate, that $1 million tax credit has already returned more than twice that much in income. But you're just getting started. Once the villa is complete, the rents start rolling in. Sure, you can't charge folks a lot, as per your agreement with the government, but just wait. In 15 years the rent restrictions will be lifted, and you'll be able to charge more. If you invested in a good architect, quality materials, and a high-growth area, you'll be surprised what the market will bear. Or if you're bored with the rental business, sell your villa ­ it's easy, the units are full and the mortgage payments low ­ and invest in digital television. You had no idea how well your tax dollars could work for you.