Maryland is among the most expensive states to operate affordable housing developments, but it remains cheaper than some of its neighbors.
A report from accounting and tax advisory firm CohnReznick LLP found the most expensive places to operate a property benefiting from low-income housing tax credits are in the northeast. Connecticut, with a gross expense of $7,671 per unit a year, and Massachusetts, which posted a $8,452 per unit in annual gross expense, were the highest in the nation.
The District of Columbia was also among the nation’s most expensive places to operate a development with a gross expense of $7,384 per unit a year.
Maryland, which has a gross expense of $5,881 per unit, is in line with states such as Pennsylvania, Illinois and California. By comparison Alabama, at $3,634 per unit, was the nation’s lowest.
Among the biggest factors influencing the cost of operating affordable housing units were property type and location.
The study found that it’s more expensive to operate older buildings that have been renovated than it is to run new construction. In fact it costs 24 percent more than the median to operate a historic building rehabbed from a previous use to residential.
It is also more expensive to operate affordable developments in states with a higher cost of living, especially metro areas on both coasts, because of associated personnel costs.
The report, CohnReznick’s first look at the cost of operating tax credit properties as well as housing tax credit performance, is issued as the low-income house tax credit turns 30 years old. It was created as part of the Tax-Reform Act of 1986.
Fred Copeman, who leads CohnReznick’s tax credit investment services practice, and Matt Barcello, a senior manager with the firm’s national real estate consulting practice, said the report provides developer’s information about costs associated with development in markets they’re unfamiliar with.
“What we have now is very helpful tool,” Copeman said.
Low-income housing tax credits are the federal government’s major incentive to entice private investment in affordable housing. But the tax credits are competitive and can be hard for a developer to obtain.
If a developer is granted the tax credits, they are sold to investors who use them to defray their federal income tax. The developer in turn receives an influx of cash that allows it to have reduced debt on a project, making developing affordable units feasible.
These tax credits played a key role recently in helping Sagamore Development Co. reach an agreement with the city, clearing the way for approval of public financing for its proposed $5.5 billion redevelopment of Port Covington in Baltimore.
As part of an agreement with the city Sagamore agreed to include affordable housing — so long as it’s awarded the necessary tax credits — for residents making up to 50 percent of the area median income.