The disappearance of tax credit investors has put affordable housing developers and community development corporations (CDCs) in trouble, but most are trying to march forward despite stalled projects, ugly balance sheets and unclear notions from where the next source of investment may come.

The low-income housing tax credit market, which affordable housing development has depended on heavily in recent years, has been frozen for more than a year, and there are varying opinions – and levels of optimism – of when it might melt.

The biggest blow to tax credit investment was the pull out of Fannie Mae and Freddie Mac; between the two government-sponsored entities, they represented 40 percent to 45 percent of all tax credit financing.

Heap on the financial troubles for mega financial corporations like Citibank and AIG, which in past years were big players on the tax credit scene, and the nonprofits are looking at a monumental climate shift, not just a bump in the road.

“The affordable housing industry has to come to terms that the tax credit industry may not be the same for many years, or it may never be the same as it was in the good years,” said Joe Kriesberg, executive director of the Massachusetts Association of Community Development Corps. (MACDC). “I don’t think we can just hope to ride out the storm and hope to go back to the way it was in 2007.

“The investor market is really moribund.”

Stimulus Unhelpful, So Far

The Obama administration has promised millions in federal stimulus funds to fill the tax credit void for housing nonprofits. But the department of Housing and Urban Development (HUD) and the Treasury are still working out just how the distribution of those funds will work, and the cycle of promise-and-delay may be hurting development more than it helps.

David Smith, CEO of CAS Financial Advisory Services in Boston, said technical and administrative problems at HUD and the Treasury have stymied the stimulus relief. He is doubtful the $110 million promised for Massachusetts will be ready by the end of the third quarter, and will only trickle in starting in the fourth quarter.

But no date has been set in stone; developers have been waiting for this financing since it was originally announced in February.

Smith said the result has been that some developers are paralyzed by indecision, stalling to see how the stimulus shakes out before exploring other avenues.

“As a consequence, the relief offered by the Obama administration is actually slowing down the revival of the market,” Smith said.

Even when the money does materialize, it will come with strings attached. Recipients will be responsible for increased environmental and accessibility requirements that will raise construction costs. The stimulus money is being distributed from HUD and the Treasury through state departments, in Massachusetts’ case the Department of Housing and Community Development (DHCD), and Smith said it is likely to add on a processing fee as it passes through its hands.

“As the release becomes more real, it’s picking up unexpected costs that are making it more expensive,” Smith said.

There are approximately 25 Massachusetts projects, not-so-affectionately known as the “Class of 25” in the state’s affordable housing circles, which were stopped dead in their tracks when tax credit investors started to pull out in May 2008.

Now, those projects have been climbing over one another to secure financing. Currently, there are 20 projects on the “stalled” list, but that list changes constantly, as often as once a week according to Phil Hailer, a spokesperson for DHCD, and names are taken off and added back on fluidly as deals are promised and then fall through.

For these projects, the stall couldn’t have come at a worst time: they’ve already financed acquisition and pre-development costs, signed contracts for work, and are sitting on millions in liabilities.

For Westfield Community Development Corp., which had depended on the developer fees from its now-stalled Elm Street Revitalization project in Westfield to help smooth out its other financial problems, the tax credit crisis has meant its demise.

“They exist legally, but they don’t have any staff,” Kriesberg said.

Positioning While Patient

HAP Inc., a longtime nonprofit affordable housing development company out of Springfield, has two stalled affordable housing deals in the Class of 25: Butternut Farm, a 26-unit development in Amherst, and Cady Brook, 38 affordable units waiting for financing in Charlton.

“Everything is backed up about 12 to 15 months,” said Karen Leveille, HAP’s project manager for Butternut Farm. “We have to create a longer timeline for everything that we’re doing.”

Michelle McAdaragh, associate executive director for real estate at HAP, acknowledged the stall has hurt HAP’s balance sheet, saying, “Right now, we’re definitely spending more than what we’re actually making.”

But McAdaragh said the two stalled projects are far from a fatal blow to the development company.

“We’ve seen our slow times before,” McAdaragh said. “We’re not this small neighborhood organization that sees one tax credit every three years. We try to have multiple projects going at the same time.”

HAP is trying to focus on two projects where it may be able to start construction soon. Both are senior housing projects: Stevens Memorial Senior Housing in Ludlow, and Holland Senior Housing in Holland. HAP is looking for tax credit investors for those projects, but has also applied for HUD’s 515 Rural Development Voucher Program.

“We’re trying different strategies for the few new projects we do have,” said Leveille. “We still need to move ahead and insert new projects into the pipeline, confident that in a year from now the tax credit market frees up just a bit.”

The company has also ventured into purchasing single- and multi-family REO properties in Springfield. But even that hasn’t gone smoothly for them. They have recently run into problems with clouded titles after the watershed Massachusetts Land Court decision in U.S. Bank v. Ibanez invalidated several foreclosures with improperly dated mortgage assignments.

“The foreclosed properties are becoming more challenging even as we speak,” McAdaragh said.

Keep On Moving

Despite its troubles, HAP is doing exactly what all nonprofits and community development corporations should be doing, according to Kriesberg: they are acting as if they will continue to exist in a few years, when hopefully the investors return to the market.

“We can’t kid ourselves about the situation we’re in,” Kriesberg said. “We can’t wish it away. But we have to believe that we are going to survive, and you have to act like you’re going to be here in two and four and six years.”

Kriesberg said Westfield CDC is the exception to the rule; most CDCs and affordable housing nonprofits are strong enough to handle the downturn.

But with their balance sheets negatively affected by their predevelopment liabilities, they become less attractive to prospective investors looking for strength.

“Developer quality is more important than ever,” said Smith. “It’s not an issue of for-profit vs. nonprofit. It’s an issue of capacity, track record and financial strength that is ending up to be a differentiator in the market.”

Smith suggested developers take whatever financing they can get, even if it’s not optimal.

“My advice, in general, is take the best bid you have, if it’s a firm bid, take the pain and close,” Smith said. “That’s unpleasant medicine to take. But if you have a bid that’s a sizeable bid, it doesn’t have to be a spectacular bid, seize on the bid.”