Housing Rehab Equals 'Government Gone Wild'

Bryan Binkholder has no problem investing money to fix up homes. But when it involves spending more than $381,000 per home to fix up homes that will be worth $80,000 to $110,000 each upon completion, he draws the line.

“Chalk this up to another case of government gone wild, attempting to do something the free market would and will do at a greater efficiency and without tax payer dollars,” said Binkholder, a financial expert, investment adviser, active real estate investor and host of “The Financial Coach Show” on FM News Talk 97.1 in St. Louis. He shared his opinion with me during an online discussion stemming from the Friday publication of an article about the efforts of the nonprofit group, Beyond Housing, in the St. Louis Post-Dispatch.

The article in question used a plethora of facts and figures to highlight efforts to rehab homes in the crime-ridden North St. Louis neighborhoods that populate the Normandy School District. Unfortunately, however, it did not provide a cost-per-house breakout of dollars being spent or provide a glimpse of how many of those dollars were coming directly from taxpayers.

After reading the Post-Dispatch article, I set out to find people whom I hoped could provide just such a breakout.

Among those I talked to Friday were Jim Holtzman, director of the Office of Community Development for St. Louis County Government, and Chris Krehmeyer, president and CEO of Beyond Housing. It was a third person, however, who provided the kind of comprehensive information that caused me to seek Binkholder’s opinion.

Margaret Lineberry, the new Kansas City-based executive director of the Missouri Housing Development Commission, offered the most-detailed answers to my questions during an e-mail exchange that followed a friendly phone call Friday morning. In case you’re not familiar with MHDC, it’s an organization that administers federal and Missouri Low Income Housing Tax Credit programs, federal HOME funds, the U.S. Department of Housing and Urban Development Project Based Section 8 rental assistance contracts, the direct MHDC funding of several housing assistance programs and the Affordable Housing Assistance Program Tax Credit.

Most notable in my exchange with Lineberry was her reply to one of my questions:

QUESTION: I’ve heard criticism from some developers that rehab efforts similar to those described in the article involve spending as much as $275,000 to rehab homes that are not likely to sell for one-third of that amount. Are you aware of such spending taking place? If so, how does someone in your position justify MHDC’s participation in such efforts, especially in today’s economic climate?

LINEBERRY: The $275,000 figure you quote is inaccurate; the total cost per unit for these developments is as low as $161,230, ranging up to $247,000 on the high end. Importantly, all of the units described in the article that have been financed by MHDC must remain as affordable rental housing for at least 15 years, and must be rented to households making 60% or less of the area’s median income (for example, an annual income of $36,660 for a family of three in St. Louis County). Rental houses typically are not as well cared for by their tenants as are owner-occupied properties, and thus require the use of very durable (and sometimes relatively costly) construction materials. Our program also requires the inclusion of extra insulation, energy-efficient appliances, etc. At the conclusion of the mandated 15-year period, the houses can be sold to qualified low-income homebuyers, including the units’ current tenants, who may receive a discounted sale price based on the number of years they have lived in the property.

After explaining that the numbers included in the Post-Dispatch article do not represent all of the homes/projects included in Beyond Housing’s efforts, Lineberry provided information related to funding awards made by MHDC to projects developed by Beyond Housing. It’s this project-by-project information that is most troubling if, that is, you trust a financial expert like Binkholder. His assessments of the projects appear below in RED:

1. HILLSDALE MANOR 2009 — 37 single-family homes located on scattered sites within Hillsdale. The 3-bedroom homes will rent for $590 a month.

Tax Credits: Private investors made an up-front investment of $7,214,539.00, in exchange for receiving Federal Low-Income Housing Tax Credits of $650,000 annually over 10 years and State LIHTC of $650,000 annually over 10 years.

Loans: The construction funding was provided by a $5,300,000 participation loan, funded $4,750,000 by U.S. Bank and $550,000 by MHDC. The permanent financing was in the form of a $900,000 participation loan, funded $550,000 by MHDC and $350,000 by U.S. Bank.

BRYAN BINKHOLDER: Investors and loans (not counting interest) total $8,114,539. Divided by 37 homes, that equals $219,311 per home. Now they are giving out TAX CREDITS which are dollar for dollar against taxes (unlike deductions which benefit you basically at your tax bracket). It equals $13 million over the next 10 years or more than $375,000 per house in real dollars if we do a realistic accounting of what will be lost in tax revenue at all the various levels. As a note, some may claim property tax values will be higher, but this is a straw man argument since the value is not based on what you spent fixing it up but only on the appraised value based on the area.

2. MARY LOUISE ESTATES — 20 single-family homes located on scattered sites within Pagedale. The 3-bedroom homes currently rent for $615 a month.

Tax Credits: Private investors made an up-front investment of $4,940,126.00, in exchange for receiving Federal Low-Income Housing Tax Credits of $358,000 annually over 10 years and State LIHTC of $359,000 annually over 10 years

Loans: The permanent loan in the amount of $465,000 was funded by MHDC.

BRYAN BINKHOLDER: Investors and loans total $5,405,126. Divided by 20 homes, that equals $270,256. Throw in tax credits, and it’s at $7.6 million or $381,750 per house in real dollars.

3. CP 2004 CASTLEPOINT — 15 single-family homes located on scattered sites within St. Louis County. The 3-bedroom homes currently rent for $609 a month.

Tax Credits: Private investors made an up-front investment of $2,283,033.00, in exchange for receiving Federal Low-Income Housing Tax Credits of $207,000 annually over 10 years and State LIHTC of $207,000 annually over 10 years.

Loans: The permanent loan of $607,000 was in the form of federal HOME funds administered by MHDC.

BRYAN BINKHOLDER: $2.8 million from investors and loan, 15 houses: $192,668. Tax credits and loan (not counting interest) = $4.7 million or $316,466 per house.

4. BEYOND HOUSING — 20 single-family homes located on scattered sites within St. Louis County. The 3-bedroom homes currently rent for $654 a month.

Tax Credits: Private investors made an up-front investment of $2,922,980.00 in exchange for receiving Federal LIHTC of $286,000 annually over 10 years and State LIHTC of $286,000 annually over 10 years.

BRYAN BINKHOLDER: $2.9 million, 20 homes: $146,149. Tax credits put it at $5.7 million or $286,000 per house.

Obviously, Binkholder’s assessments differ from those of Lineberry and others deeply involved in the low-income housing rehab business. That said, who do you believe is right?