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Where credit is due

M&T Bank Corp., filling a void created by the collapse of the financial markets, has become an investor in low-income housing tax credits in the Rochester market.

M&T has partnered with Conifer Realty LLC to finance the $20 million rehabilitation of the tower portion of a Mt. Hope Avenue property formerly known as River Park Commons and now called the Hamilton. It also is involved in the second phase of development at the site.

The Buffalo bank has joined JPMorgan Chase Bank N.A. as a leader in investing in low-income tax credits locally.

M&T has financed affordable-housing projects such as:

  • DePaul Community Services Inc.’s $25 million Bullshead Commons Campus on West Main Street;
  • Conifer’s $23 million renovation of the FIGHT Village Apartments on North Clinton Avenue near the Inner Loop; and
  • an $8 million renovation of St. Simon’s Terrace on St. Paul Street by Landsman Development Corp.

"On an after-tax basis, it provides a good return to the bank," said Richard Mueller, the Rochester-based administrative vice president of commercial real estate finance for M&T.

"On a pre-tax basis, it probably loses money. The tax credit itself is not income. It goes as a credit against our federal taxes. It comes off our income taxes as a direct credit, so it doesn’t flow through the income statement."

JPMorgan has been involved in $120 million worth of financing for affordable-housing projects in the Rochester market in the last 24 months, said Scott Schmid, a JPMorgan vice president in Rochester who oversees lending for that unit here and in other markets regionally. The financing represents 1,300 units of rental and for-sale housing in the area.

"Our main focus is on financing the development and preservation of affordable housing, 99 percent of which involves federal and state low-income housing tax credits," he said.

In addition to Bullshead Commons, Schmid has helped finance $30 million in renovations for 516 apartments at Norton Village, Fernwood Park and Ramona Park in Rochester. The three complexes were built in the 1940s for returning veterans of World War II.

Tax credits
The low-income housing tax credit was created in 1986. It provides a dollar-for-dollar reduction in a taxpayer’s federal income tax, while a conventional tax deduction only reduces the amount of taxable income.

Participants in such tax-credit projects are equity owners in the real estate, so the ventures do not provide much cash flow, Mueller said.

"They’re meant to basically break even," he said.

"It’s always been good for the bank. It’s become a win-win, where we’re helping to fill a gap in the marketplace and we’re getting good yields on our investments."

First Niagara Bank and the Bank of Castile also have been involved in low-income housing tax credits in the Rochester market, but on a lesser scale than M&T and JPMorgan Chase.

Traditionally, the most active investors in low-income housing tax credits have been the Federal National Mortgage Association, commonly known as Fannie Mae; the Federal Home Loan Mortgage Corp., or Freddie Mac; Wachovia Corp. and Washington Mutual Inc., said Conifer president and CEO Timothy Fournier.

"Fannie and Freddie left the market, and they controlled anywhere from a third to 40 percent of the low-income housing tax-credit market," Fournier said.

Wachovia, meanwhile, was purchased by Wells Fargo in 2008, and Washington Mutual was bought by JPMorgan Chase & Co. the same year.

M&T previously invested in low-income tax credits through investment banks or syndicators. They included the Apollo Capital Housing Program, later acquired by the Royal Bank of Canada, and the Enterprise Foundation, which has an office in Rochester.

Syndicators pursued and underwrote tax-credit deals, then found banks to buy the investments with a spread in the price. Investment banks might pay 90 cents on the dollar and sell to a bank such as M&T for 95 cents on the dollar.

"This was kind of the last best corporate tax shelter there was, especially for companies like Freddie Mac and Fannie Mae and the banks," Mueller said.

Buying tax credits also met criteria related to the Community Reinvestment Act, a federal law that encourages banks to meet the credit needs of communities in which they are located.

"When the economy ground down, companies started losing money," Mueller said. "There was no need to buy tax credits if you have no income that you were trying to shelter."

Consequently, syndicators had trouble finding buyers, Mueller said.

"We have some large customers locally who are in the affordable-housing business," he said. "All of a sudden, their source of equity went away. They said, ‘Look, you’re our bank; we know you’re at least familiar with the product. Can you help us?’

"The prices on these tax credits started dropping because of supply and demand. All of a sudden the yields became attractive enough where we thought, OK, maybe it’s time to start looking at these again."

M&T, in fact, has not posted a quarterly loss in 33 years. It has the best record for returns to shareholders among the nation’s top 50 banks.

Now, instead of a syndicator bringing a deal to M&T to consider, M&T deals directly with a property management firm, such as Conifer, Landsman and DePaul locally. The assets are managed and investments serviced by an M&T representative in Buffalo, Mueller said.

"It is a fairly specialized line of business," he said. "It’s a tough learning curve to get up."

M&T invested $44 million in affordable-housing tax credits over the last two years, Mueller said.

"We don’t have a broad community development department, so we would still work with some of the syndicators that we’ve worked with in the past," he said. "But now we’re bringing them into deals rather than vice versa. We need their expertise in helping to model out the returns.

"One of the risks in low-income housing is ongoing compliance issues. There are all sorts of tenant compliance and income restrictions that have to be maintained. We work with the syndicators who review all the reporting to make sure the project is in compliance."

The Mt. Hope Avenue tower is perhaps the most visible project.

"There were not many, if any, other investors out there nationwide that would be willing to make that investment," Fournier said.

Conifer a key
Genesee Riverfront Commons LLC, a wholly owned subsidiary of Conifer, bought a controlling interest in the Genesee Gateway Houses Inc. in April 2004, after a bankruptcy proceeding.

"It really was the divide physically between the University of Rochester and downtown," Fournier said. "It was a high drug and crime area.

"We separated the site into two projects. We did a complete restoration and rehabilitation of the Hamilton. Today it houses 202 units for families and seniors. That is all affordable. That part of it is complete."

The low-rise portion of the complex-all of which is a brownfield site-has been demolished, and environmental cleanup is under way. Conifer plans to build a 130-unit complex, of which 26 units would be affordable housing.

"Our hope is to pull the financing together and start that in spring or early summer," Fournier said.

Including the $20 million tower renovation, the total cost of the Erie Harbor development is $50 million, Fournier said.

"That includes all the brownfield cleanup and getting through the bankruptcy," he said.

"M&T is going to do that investment," Fournier said. "The low-income tax credit investment community is not very interested in that product, but M&T is doing that because it’s important to the community and also because of its relationship with Conifer."

M&T is Conifer’s lead corporate bank, Fournier said. It financed the management-led $16 million buyout of Conifer Realty Corp. from Home Properties Inc. in December 2000.

Conifer ranks 12th among property management firms in the Rochester market, with 2.45 million square feet of property managed locally. It manages 180 apartment communities in a five-state region, virtually all having an affordable-housing component.

"That represents a little over 11,000 units today," Fournier said. "This, clearly, is our focus."

Other local projects include the St. Michael’s Senior Apartments at North Clinton Avenue and Clifford Avenue, College Greene Senior Apartments in Chili, adjacent to Roberts Wesleyan College, and Jefferson Park Senior Apartments in Fairport.

With the economy seemingly on the mend, Mueller sees signs that traditional investors are beginning to pursue low-income tax credits.

"I don’t think the equity is going to come back in a big way soon," he says. "It’s going to be a while before the kind of equity comes back that was there a couple of years ago."

3/5/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].

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