Greater Des Moines developers were told during a meeting last week with officials from the Iowa Economic Development Authority and the city of Des Moines that a tax credit program used to provide gap financing for multimillion-dollar developments has reached its $3 million annual cap on the ability to transfer the credits, a key element in financing the projects.
As a result, more than $7.4 million in credits for 11 signature developments in Des Moines, primarily in the downtown area, have been put on hold and the projects placed on waiting list based on the date city officials sent a letter to the IEDA certifying that the projects were located in blighted or brownfield areas.
The credits are for projects adding market-rate apartments downtown. Developers waited out the recession by focusing on low-income housing projects. As a result, the cap on tax credits for other types of housing projects had not been reached. Low-income projects are not affected by the current shortfall.
Developers large and small have reacted to the strengthening economy by renovating old office and industrial buildings and making market-rate apartments the main component of those projects.
Under state law, the tax credits can be sold or transferred to private financing entities to fill the gap between developer equity, other forms of financing and what a bank or other traditional lender will loan to the project developer.
The credits are considered a crucial part of financing large housing projects in Iowa, where rents generally are lower than in states with larger urban areas, yet construction costs are roughly the same.
Rick Tollakson, president and CEO of Hubbell Realty Co., pointed out that the reason the state has tapped out its fund is that Des Moines and other cities are flush with development opportunities.
Joseph Jones, senior vice president of public policy for the Greater Des Moines Partnership, agreed.
"It is a testament to all of the development going on in Des Moines and across the state that we're in this current situation," he said in an email.
The bulk of the financing shortfall is in Des Moines. A list compiled by the IEDA contained total of $11.2 million in pending requests as of Dec. 13. Developers in Davenport, Dubuque, Fort Dodge and Clayton County account for $3.8 million.
As a result, developers hoping to present new projects or waiting to sell or transfer unused credits are left with a financial shortfall that could jeopardize funding from financial institutions.
Local developers, the Greater Des Moines Partnership, and state officials will press the Iowa Legislature to at least raise the $3 million cap and make adjustments that could eliminate the ranking system.
Tina Hoffman of the IEDA said several aspects of the program are in need of change. In addition to addressing the cap on the ability to transfer the credits, local governments will not be able to designate new enterprise zones in June.
Though enterprise zone credits remain available, the ability to transfer them is not, and that could cause a problem for developers.
"We haven't seen this many projects before," Hoffman said. "It's a good problem to have, I guess."
The total enterprise zone housing tax credit fund is rapidly dwindling, with $26.7 million in credits awarded since the start of the fiscal year in July, leaving a balance of $8 million.
Minneapolis-based Sherman Associates Inc. had planned to utilize the credits for the rehabilitation of the Hotel Randolph downtown and a major residential development south of Martin Luther King Jr. Parkway, said Jackie Nickolaus, vice president of development.
"Most of us are still working through the implications of this," she said.
Kris Saddoris, vice president of development for Hubbell Realty, said one positive result of the financing issue is that local developers are working together to find a solution.
"It's kind of nice to see us all come together," she said. "We have good story; all of us have economic development coming up."
In addition, the funding gap hits all developers in equal measure.
"It creates a pause because we have given representation to lenders that we have ability to sell" the credits, Saddoris said.