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Back in December, Stephen Acree got some good news.

The nonprofit he runs, the Regional Housing and Community Development Alliance, helped win $1 million in federal tax credits to turn a desolated block of north St. Louis Victorians into 40 new brand new apartments.

The competition was fierce — 24 St. Louis-area projects applied for the credits; six received them — and Acree’s group had a hand in three of the winners.

But these days, getting the credits is the easy part.

The market to re-sell them for cash to fund developments has withered in recent months, shrinking by nearly two-thirds. And that has projects all over the St. Louis region hitting the brakes.

"It’s almost impossible to find investors right now," said Richard Baron, chief executive of McCormack Baron Salazar, a major St. Louis-based builder of affordable housing. "Very little multifamily housing is going to get built, because there’s no money to do these deals."

The use of tax credits to fund real estate development has boomed in recent years, and it’s been essential to funding many hard-to-pull-off projects, using private capital to fund affordable housing and fix old buildings.

Missouri last year issued nearly $162 million in credits for historic renovation, a program widely credited with helping revive downtown St. Louis. The national low-income housing tax credit program was worth $8 billion in 2007, and created almost 75,000 units of affordable housing. And a program called New Markets Tax Credits spends $3.5 billion a year to spur new business in poor neighborhoods.

They work like this: A developer, nonprofit or housing agency applies for credits. Then they sell them for cash to investors. The cash helps fund the developer’s project and investor use the credits to write down their tax bills.

In past years, the biggest buyers have been big banks, investment houses and other huge, profitable, financial institutions. Lending giants Fannie Mae and Freddie Mac alone bought up to 40 percent of the low-income credits, providing a gusher of cash to build housing across the country.

But Fannie and Freddie are off the table now. Once-big buyers such AIG and Citigroup are on life support. Profits — and tax liability — have evaporated and that gusher has slowed to a trickle.

LOW-INCOME SLOWDOWN

While the market for historic credits — so important in St. Louis — has held up, experts say, the slowdown has been severe in the low-income arena. Nine billion dollars worth of those credits were issued last year, says Dan Smith, a tax partner with Novogradic & Co., a San Francisco-based accounting firm that specializes in tax credit programs. So far, $3 billion to $4 billion have been bought; the rest of them are still on the market. And investors paid 70 to 72 cents on the dollar, far less than the 90 to 95 cents typical in better times.

"That means that one-half to two-thirds of projects could not find an investor at any price," Smith said. And projects that could sell their credits generated less cash. It’s a big change from just a couple of years ago.

When Acree and others were working on the Crown Square redevelopment in Old North St guaranteed payday loans. Louis in 2007, they were able to turn $2.7 million in historic tax credits into $3.1 million in financing from a private investor. A return of $1.16 on the dollar.

"That’s not happening anymore," he said.

Instead, they’re scrambling to close a financing gap — no easy feat these days. Maybe that means more debt. Or a secondary source of financing. It complicates matters, and slows a project down.

Across Missouri, at least 30 projects that have been awarded tax credits are stalled right now for lack of financing, said Katie Watts, a government liaison for the Missouri Housing Development Corp., the state agency that runs the program.

Watts was recently in Washington, where she attended a conference learning about measures in the recently passed stimulus package to help bridge that gap. The bill includes $2.25 billion to help cover the difference between what credits are worth and what investors will pay for them. And the U.S. Treasury has agreed to buy back unused credits from states, at 85 cents on the dollar, to provide cash state housing authorities can then give developers as grants instead of credits.

PROFITS WOULD HELP

Those measures could help, experts say, but the best way to revive the tax credit market is to revive demand for them. That means getting the economy back on track. In other words, profits.

"The investment community really needs to make some money again, so they can use a tax credit," Thom Amdur, associate director of National Housing and Rehabilitation Association.

There are still some buyers. U.S. Bancorp’s Community Development Corp., which is based in St. Louis, bought more than $1 billion worth of credits last year for historic, low-income, New Markets and renewable energy projects, said chief executive Zack Boyers. It hopes to do the same this year, though Boyers acknowledged the credit markets make it hard to pull off as many projects these days.

"We’re very committed to the business," he said.

It remains to be seen how many others will wade in.

The St. Louis Equity Fund raises money each year from its investors — a mix of local banks and St. Louis-area companies — to buy credits and keep cash flowing into local development. It’s in the midst of surveying members to see how much they want to spend in 2009, said chief executive John Wuest. Last year, its funds came to $25 million, and it would like to hit that mark again.

"We just don’t know if that’s going to happen," he said.

Back at the other end of that flow of money, Acree is still looking for financing to revive that blasted block on Dick Gregory Place. He’s confident that he and his partners will find it, and find money for two other projects that have credits but no cash. Meanwhile, they’re laying out the project. But in this climate, it won’t be easy.

"We’re used to having to work hard," he said. "We’ll just have to work a little harder."

tlogan@post-dispatch.com | 314-340-8291

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