Affordable housing tax hike veto brings relief for now

Industry groups of all stripes have come to fear the end of the General Assembly session, when unheralded bills affecting their bottom lines can appear suddenly and become law with little debate.
This year affordable housing developers felt the sting of a late-night legislative surprise, as lawmakers passed a 25-percent tax hike on their revenue a few hours before the Fourth of July.
To their relief, Gov. Lincoln D. Chafee came to the rescue and vetoed the bill, and House Democratic leaders have indicated they do not expect to return for a special session for an override vote.
But the lingering differences that spawned the bill between affordable housing developers, and the cities and towns that host them remain and are likely to generate new tax fights going forward.
Municipalities have battled with affordable-housing developers for years over how much their properties can be taxed. In response to a series of court cases on the subject, a 1995 law set the amount communities could tax affordable housing developments at 8 percent of gross rental receipts, as opposed to collecting conventional property taxes.
The bill vetoed by Chafee, sponsored by Rep. Lisa Baldelli-Hunt, D-Woonsocket, would have hiked those payments to 10 percent of gross rent.
At the start of this year, Providence already had begun denying new affordable housing projects – such as West Elmwood Housing’s Sankofi development – the existing tax rate on the grounds that state law only guarantees that rate to rehabilitation projects, not new construction.
In Barrington, a stronghold of resistance to affordable housing, town councilors are exploring potential legal challenges to the state law that sets taxes on affordable housing projects, including the Providence policy.
If new construction isn’t covered by the law, then the town may seek to raise taxes on controversial affordable housing projects built from scratch even before this year.
The affordable housing developments affected by the laws include both deed-restricted for-profit projects that accept federal Section 8 housing vouchers and developments built by local nonprofits using any combination of private and government funding, including proceeds from the state’s latest $12.5 million housing bond. “I oppose this legislation because it will destabilize the low-income housing market,” Chafee said in his veto message. “Even owners who are legally permitted to raise rent levels may not realize additional revenue, due to the low incomes of these tenants. Moreover, it is likely that future affordable housing development would stall due to the increased cost and uncertainty this change would introduce into the affordable housing market.”
Executives at nonprofit housing corporations say any tax hike above 8 percent would cause them to cut services to vulnerable residents and some projects not yet completed will be frozen or abandoned.
“We do have two projects in development right now where the financing has been approved based on an 8 percent tax, and I don’t know how we are going to make it work at 10 percent,” said Steve Ostiguy, executive director of Church Community Housing Corp. in Newport, referring to the Belleville House senior Section 8 project in North Kingstown and the Sandywoods Farm art and agriculture village in Tiverton.
Ostiguy said a tax hike would also put pressure on resident services at the five facilities his organization operates, especially an assisted living facility in Middletown that is struggling with cuts to state funding already.
He estimated the rate hike to 10 percent would cost Church about $90,000 annually.
In the brief July 3 House floor debate on the Baldelli-Hunt bill, supporters said the purpose was to raise revenue for perpetually cash-strapped cities and towns.
Votes for the Baldelli-Hunt bill came largely from progressive Democrats representing cities, typically a group supportive of affordable housing, while Republicans – often skeptical of housing projects – opposed it.
No estimate of how much revenue the tax increase to 10 percent would have produced for municipalities was been released. Calls to Baldelli-Hunt were not returned.
Peter Walsh, spokesman for quasi-state lender Rhode Island Housing, said his organization did not have an estimate how much the increase would have cost the projects, representing 25,182 units, they were involved in financing. Rhode Island Housing Executive Director Richard Godfrey asked Chafee to veto the bill as did General Treasurer Gina M. Raimondo, an expected gubernatorial candidate in 2014.
Chris Hannifan, executive director of the Housing Network of Rhode Island, said based on past experience, she expects the most recent disputes over affordable housing taxation will wind up in court again.
Although maintaining existing projects and services is the first concern for many developers, the bigger concern of a tax increase for the state might be a chilling effect on future investment in affordable housing.
In 2012, the number of applications to build under the state’s Low and Moderate Income Housing Act, which allows developers to sidestep local zoning if they accept affordability restrictions, dropped to the lowest total since 2005.
In 2007, there were 22 applications under the Low and Moderate Act proposing 739 housing units. Last year, there were three project applications proposing 96 units.
Although market-rate developers have signaled interest in ramping up apartment construction, weak economic growth, land-use restrictions and resistance from adjacent property owners have kept building limited.
An illustration of how precarious some affordable projects are is visible on Cranston Street in Providence’s West End, where the Medina Village apartments went bankrupt and were repossessed by the U.S. Department of Housing and Urban Development in 2010.
Without a $21 million redevelopment financed with a mix of state-supported loans, state grants, federal grants, federal tax credits and private loans, the dilapidated 83-unit property may have been abandoned.
The partially redeveloped complex would be subject to the tax increase, which could impact completion of the project.
Frank Shea, executive director of Olneyville Housing Corp., said in addition to scaring away banks that lend to affordable housing projects, the tax increase could scare away the investors who buy tax credits.
While those investors won’t pay any of the tax bill, they stand to lose their entire tax credit purchase from an affordable project if it defaults.
“Something like this could freeze private funding,” she said. •

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