Franklin Street Family Apartments in Mountain View, Calif., offers 51 energy efficient apartments for low-income renters. Part of the financing for this $23.4 million project came from Google via the federal government's Low Income Housing Tax Credit program. Photo credit; ROEM Corporation

Over the past several years, corporations ranging from the supermarket chain Kroger to the communications giant Verizon have provided financing for affordable housing, and lowered their tax liabilities to boot, through their purchases of low-income housing tax credits (LIHTCs).

Congress' Joint Committee on Taxation estimates that government tax expenditures for credits to C corporations (i.e., those taxed separately from their owners) could total nearly $35 billion for the fiscal years 2013 through 2017, or 21 percent more than the previous five-year period’s total.

One of the more active companies on this front has been Google, the search-engine behemoth. It has invested in more than 15 affordable housing developments nationwide through four LIHTC funds. The individual amounts vary depending on the development, but investments tend to range “from a few million [dollars] to tens of millions of dollars,” Kojo Ako-Asare, who head’s Google’s corporate finance team, tells MFE.

Google’s most recent investment is the $6.5 million in equity it provided through its syndicator, AEGON USA Realty Advisors, for Franklin Street Family Apartments in Mountain View, Calif., which celebrated its grand opening on Sept. 4. Developed and built by ROEM Corporation, Franklin Street offers 51 one-, two-, and three-bedroom apartments to families with incomes at or below 50 percent of Santa Clara County’s median household income, which for the years 2007-2011 averaged $89,064, according to the latest Census Bureau estimates.

Franklin Street’s amenities include ample open spaces and parking, a computer center and free Wi-Fi (the first time ROEM has offered that amenity), a fitness room, a library, and services that include classes for computer use and English as a second language. Residents also receive transit passes for nearby public transportation.

“The location of Franklin Street is spectacular, with its proximity to downtown and the light rail,” says Christoph Gabler, a senior vice president with AEGON, for which Franklin Street is “a repeat relationship” with the developer. “ROEM has consistently performed well above expectations and has a reputation of building high quality projects.”

Solar panels power this community, which achieved LEED Platinum certification for sustainability and energy efficiency. Franklin Street is designed to exceed California’s Title 24 energy standard by 22.2 percent. Its landscaping includes drought-resistant plants and a natural stormwater runoff system.

“You’ll definitely see more investment [from Google] like the one in Mountain View in the coming months,” says Ako-Asare, whose company contributed $81,859 to residents of Franklin Street for computers and Internet access. “At the end of the day, we’re looking for investments that make good financial sense and will have a positive impact for the local community. Our commitment to affordable housing hasn’t changed.”

Private-public partnership
Franklin Street Family Apartments is one of 24 communities Santa Clara-based ROEM has completed. ROEM—which ranked 18th among developers in affordable apartments started in 2012, according to MFE’s sister publication Affordable Housing Finance—partnered on this $23.4 million project with the city of Mountain View, which along with Google and Citi Community Capital provided financial support by investing in 4 percent low-income housing tax credits. (ROEM and Citi have partnered on 15 consecutive deals.)

Derek Allen, ROEM’s director of development, tells MFE via email that his company has been working on the Franklin Street project, which sits on 1.03 acres, for about seven years. ROEM began construction last November and completed the project in March. Allen lauds the city of Mountain View for the “critical role” it played through a series of outreach and community design meetings.

Franklin Street offers four one-bedroom, one-bath apartments at 748 square feet with monthly rents ranging from $549 to $937; 31 two-bed, two-bath apartments at 986 square feet with monthly rents of $655 to $1,122; and 15 three-bed, two-bath apartments at 1,134 square feet with rents ranging from $753 to $1,291 per month.

Working with the architectural firm KGTY, ROEM developed three- and four-story C-shaped buildings with design features that Allen claims “make this project indistinguishable from market-rate luxury housing.” These include a strategic use of natural stone, ironwork, precast stone, heavy timber framing and smooth plaster to create a complimentary palette of colors and textures. “ROEM and KGTY were able to take a challenging site and create a vision of higher design standard to complement neighboring market-rate multifamily and single-family properties,” Allen says.

Filling a void
Franklin Street Family Apartments is a much-needed addition to a market where affordable housing is scarce. DataQuick, the real estate information service, estimates the median selling price of homes in Santa Clara reached $655,000 in June, 19.1 percent higher than the same month in 2012, and $100,000 more than the June 2013 median for the entire San Francisco Bay Area.

ROEM has four other affordable multifamily and senior housing projects with a total of 346 apartments under development or in construction in San Jose and Santa Clara. Allen says LIHTCs continue to be his company’s “most critical funding source” to develop high-quality affordable housing. “Coupling 4 percent LIHTCs with tax-exempt bonds through a prescriptive application … allows municipalities with a gap funding source to partner with the developer in assembling a sound financing package with guaranteed timing,” he explains in an e-mail.

The lion’s share of financing for LIHTCs still comes from major banks and insurance companies. Banks like the credits partly because it helps them satisfy their obligations under the Community Reinvestment Act to invest in poorer neighborhoods.

But where investors could once purchase tax credits for as little as 60 cents on the dollar, the credits have appreciated and become more competitive, to where investors are paying up to $1.15 on the dollar in markets where community redevelopment is particularly active, according to Jeff Whiting, president and CEO of the Indianapolis-based syndicator City Real Estate Advisors, who is also president of the Washington D.C.-based Affordable Tax Credit Coalition.

“This means the taxpayer is getting a tremendous bargain” from LIHTCs, Whiting says. Gabler of AEGON adds that the market seems to have stabilized for the time being at a price point “that is pretty fair to both developers and investors, but it feels tenuous and fragile.”

C corporations have cooled on purchasing LIHTCs lately, partly because companies can’t amortize the cost of the real estate on their balance sheets over several years, so their cash flows take a hit. Google and some other companies get around this, explains Whiting, through effective-yield accounting that includes having an insurance guarantor behind the investment.

On Sept. 13, the Financial Accounting Standards Board (FASB) is expected to vote on a different kind of real estate accounting method that would allow for amortization over 15 years, “so investors don’t have to take losses above the line,” says Whiting. He adds the investment under this rule change “would look and act more like a bond.”

If FASB approves this new rule, it could lure more C corporations like Google into the low-income housing arena again, says Whiting. “Google being in this sector has been good for the market, because these are really smart people and they like this asset class for a reason.”

Gabler concurs, although he also sees the rule change as a potential double-edged sword. “One could argue that the LIHTC market is already oversubscribed. More investors could very well change the fragile pricing balance.”

John Caulfield is senior editor for MFE’s sister publication Builder.