Housing developers warn that the effects of the coronavirus pandemic could trigger penalty clauses that threaten the completion of projects and require state and federal intervention.
Affordable housing projects could be the first to feel the effects, because they rely heavily on federal low-income housing tax credits purchased by private investors as a source of equity. Nonprofit developers are bracing for a potential collapse of investor demand for tax credits similar to the 2008-2009 financial crisis, which prompted the federal government to step in and buy back tax credits at a discount.
“If the tax credit market were to collapse, that sounds like a plausible scenario we might have to do again,” said Joe Kriesberg, president of the Massachusetts Association of Community Development Corporations.
Adding a new layer of risk to housing developments of all types is the prospect of a broad government-ordered shutdown of construction sites. Financing packages typically contain clauses which reduce investors’ equity contributions if developers miss certain deadlines to make progress.
“That’s a big worry right now with the construction stoppage in Boston,” Kriesberg said.
Even in less extraordinary business conditions, construction delays disrupt projects’ financing packages, said Brian Cook, an attorney at Goodwin Procter in Boston. Work stoppages as a result of government orders such as Boston’s building ban can prompt parties to invoke force majeure clauses in contracts, which excuse parties that are unable to complete milestones because of unforeseen circumstances such as natural disasters.
“In those situations, there’s certainly going to be an argument and dispute whether this constitutes a force majeure that would excuse the performance of one side or another: the contractor’s obligations to the developer, the developer’s obligations to the lenders, and going back in the other direction as well,” Cook said.
One Boston-area developer, who asked not to be identified, said he is worried that he’ll be unable to meet a Dec. 31 deadline to complete and lease up an affordable housing project. That would enable a multinational bank to invoke a “downward adjuster” reducing its equity investment.
“The investor gives us less equity, the project is in the red and we’re on the hook for it,” he said.
Revisiting Stimulus Package Strategies
Affordable housing projects could face a crisis similar to 2008-2009 when the low-income tax credit market collapsed, threatening thousands of projects and causing many developers to fail or reorganize, according to a 2009 report by the Joint Center for Housing Studies at Harvard University.
Projects that had been awarded LIHTC’s from state housing agencies but not yet sold them to investors were left in limbo, as Fannie Mae and Freddie Mac pulled out of the market and the other major source of investment, national banks, faced a capital shortage.
In February 2009, the federal government enacted a pair of programs to revive the market.
The Tax Credit Assistance Program provided over $2.5 billion in grants to state housing agencies to help finance gaps in projects’ funding. And the Tax Credit Exchange Program provided grants to states to buy back unused tax credits at the rate of 85 cents per dollar.
“There’s got to be a systemic solution,” said Rich Giordano, director of policy and community planning for the Fenway Community Development Corp. “If this [public health crisis] goes on for months, you’re going to need a comprehensive response to the problem from the state and the city, and it’s possible we need a federal response.”