Statement of Dianne Bolen, Executive Director, Mississippi Home Corporation, Jackson, Mississippi

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

March 13, 2007

Mr. Chairman, Representative Ramstad, and Distinguished Members of the Subcommittee:

My name is Dianne Bolen, and I am the Executive Director of the Mississippi Home Corporation (MHC).  MHC was created by the State of Mississippi as a non-profit housing finance agency to provide the opportunity for safe, decent and affordable housing for low and moderate income Mississippians.  MHC accomplishes this mission through federal, state and corporate housing programs.

Thank you for the opportunity to appear before this subcommittee to discuss tax issues related to the redevelopment of communities in the aftermath of Hurricane Katrina, which struck our State on August 29, 2005.  The storm wrought significant devastation not only to Mississippi’s Gulf Coast communities, but also throughout the southern half of the State.  Many residents find themselves with homes having sustained significant damage or completely destroyed.  A majority of these residents had no flood insurance.

Impediments to Development

Developers in Mississippi currently encounter many impediments to affordable housing development.  The cost of insurance on the Gulf Coast greatly concerns all residents of Mississippi.  Developers must pay higher insurance premiums for any development on the Gulf Coast, and this cost adversely affects the affordability of all housing.  It is estimated that the cost of insurance has risen 280% since Hurricane Katrina, and some insurance companies plan to leave Mississippi altogether.  With less competition between insurance companies, costs will not go down in the foreseeable future.

Developers find it difficult to find affordable land outside the FEMA proposed flood zones.  Due to the short supply of land, the cost has increased, thereby increasing total development costs.  New construction must now conform to new elevation standards and the International Building Code, which increases design and building costs.  These costs particularly impact affordable housing developers, who cannot absorb these increases.

The lack of affordable housing on the Gulf Coast discourages the return of a workforce sufficient to complete the rebuilding process.  This has led to a shortage of contractors and subcontractors in the area, which in turn leads to higher labor costs for skilled and unskilled labor.  The lack of professionals such as city engineers, architects, and building inspectors make delays lengthy and often times unforeseeable. 

The lack of infrastructure in many areas still limits the location of developments funded by GO Zone tax credits.  While the larger communities on the Coast have largely rebuilt their infrastructure, the high land costs in these communities forces developers to search for available land in outlying areas that have not rebuilt their infrastructure sufficiently to sustain developments of 35 units or more.  Most coastal communities still lack basic services such as fire/rescue and local police forces.  The smaller medical facilities have not returned to their communities, forcing large segments of the population to rely on the larger functioning hospitals further away.

Local communities still have many zoning and building code issues to address before developers can move forward on their respective projects.  When finally resolved, these important measures will govern where tax credit developments will be placed.  In the meantime, developers must wait for the respective zoning boards and city councils to come to a consensus.

GO Zone Tax Credits

The Gulf Opportunity Zone Act provided Mississippi with an additional $106.2 million in Low Income Housing Tax Credits with which to replenish the State’s rental housing stock lost to hurricane Katrina.  It is estimated that as many as 8,500 affordable rental units were destroyed or severely damaged by the storm.  These units housed the majority of the Mississippi Gulf Coast’s workforce, and we cannot complete the rebuilding process without these families.  To date, the Mississippi Home Corporation has allocated approximately $55 million of its GO Zone tax credits, approximately $35.4 million in 2006 and approximately $19.6 million in 2007.  The $55 million tax credits will help fund over three thousand affordable housing units for families who earn at or below 60% of the area median income. 

Immediately after the hurricane, Gulf Coast communities were not prepared to begin rebuilding.  Katrina wiped entire communities off the map, and the cleanup process and rebuilding of infrastructure has taken some time.  Only now are some communities ready to begin accepting developments.

As the population begins to return to the Gulf Coast, we must provide affordable workforce housing for the communities.

Difficult to Develop Areas

The GO Zone Act designated the 49 Mississippi counties eligible for FEMA individual and public assistance as Difficult to Develop Areas (DDA), which allows developers who receive GO Zone tax credits a 30% boost in eligible basis.  This basis boost offsets the increased cost of building in the disaster area, which includes increased costs for labor, materials, land, and insurance.  Without the boost provided by the DDA designation, developers cannot make their projects cash flow due to the high cost of rebuilding combined with the rent and income restrictions placed on developments funded with Low Income Housing Tax Credits. The GO Zone Act provides that the GO Zone shall be treated as DDA for properties placed in service by December 31, 2008.

It typically takes a tax credit developer 18 to 24 months from the time an allocation is received to reach placed in service status.  MHC is authorized to allocate approximately $35.4 million annually in GO Zone tax credits for 2006, 2007 and 2008.  If the GO Zone DDA designation expires on December 31, 2008, due to the current placed in service language, and HUD subsequently fails to designate the GO Zone counties as DDA, the developer will lose the 30% basis boost and be exposed to a risk in development cost.  MHC expects this will discourage developers from applying for GO Zone tax credits in 2007 and 2008.  MHC’s last application cycle ended on March 9, 2007.  The scoring of these applications is expected to take up to 120 days, which means developers would receive notification of their awards in July of 2007, leaving them only eighteen months in which to place their developments in service and receive the 30% basis boost provided by the DDA designation.  This deadline would be difficult, if not impossible, under ideal circumstances, let alone in current conditions.

Proposed Extensions

The Mississippi Home Corporation respectfully asks Congress to extend the placed in service deadline for GO Zone tax credits to December 31, 2010.  In addition, Congress should extend the GO Zone Act’s Difficult to Develop Area designations from December 31, 2008 to December 31, 2010.  These extensions will provide developers with valuable time to overcome the myriad delays listed above.  Without the extension, increased costs and delays, both foreseeable and unforeseeable, would rob Mississippi of the benefit intended by the GO Zone Act’s additions tax credit award.  I have attached to my testimony a copy of a letter from Mississippi Governor Haley Barbour to Chairman Rangel and Congressman McCrery in which the Governor expresses his support for the extensions mentioned above.

MHC has measures in place to ensure developers complete tax credit properties in a timely manner.  Developers will be monitored to ensure timely completion of their respective developments and that any delays are genuine and unavoidable.  MHC continues to strive to provide affordable housing as soon as practically possible.

In summary, I would respectfully ask the subcommittee to remember that entire communities were leveled by Katrina.  This requires a monumental act of rebuilding, taking into account many small pieces to an enormous puzzle.  Affordable housing remains an integral part of that puzzle, without which we cannot rebuild sustainable Gulf Coast communities.

Again, I thank the Subcommittee for the opportunity to appear before you today.

February 28, 2007

Congressman Charles Rangel
Chairman, House Committee on Ways and Means
Congressman Jim McCrery

Ranking Member, House Committee on Ways and Means

The Gulf Opportunity Zone Act provides Mississippi with additional tax credits for 2006, 2007, and 2008.  These additional tax credits will provide much needed housing for Gulf Coast residents in the form of affordable rental units.

The GO Zone legislation provides that properties financed by tax credits placed in service in the calendar years 2006, 2007, and 2008 will be treated as Difficult to Develop Areas (DDA), which provides a 30% boost in eligible basis for the properties.  This boost in eligible basis provided by the DDA designation helps developers overcome increases in costs associated with development in the areas most affected by Hurricane Katrina.

The DDA designation for tax credit properties on Mississippi’s Gulf Coast helps offset the increased costs of insurance, labor, and materials.  Many insurance issues still wait to be resolved, and demand for labor outpaces the supply, thereby increasing the cost.

The DDA designation as written in the GO Zone legislation is set to expire on December 31, 2008.  It generally takes a developer 18 to 24 months from allocation of tax credits to placed in service status under ideal conditions.  The Go Zone deadline threatens to repeal the DDA status for any project not placed in service by December 31, 2008, thereby increasing the overall cost of development and reducing the affordability of the individual units.  For developments receiving tax credits in 2007 and 2008, the fastest development timeline of 18 to 24 months still places the placed in service date outside the timeframe provided by the GO Zone legislation.

In addition, there is one additional item that I would place as the highest priority to be addressed immediately so that the investment in affordable housing in Mississippi is not curtailed:

To alleviate the pressures, I ask you to extend until December 31, 2010 the deadline for placing Low Income Housing Tax Credit developments in service, as well as the deadline for benefits to these housing developments available through the and GO Zone LIHTC Basis Boost.

This additional time would allow developers to overcome the increases in development cost while providing ample time to work with government agencies and local communities to provide affordable housing to areas of greatest need.

Sincerely,

Haley Barbour