A lot of apartment developers have reason to worry about the tax reform proposals working their way through Congress.
The plan to reform the federal tax code that passed the House of Representatives in November wipes out several tax credits that developers use to finance plan to build new projects—including the federal historic rehabilitation tax credit and the New Markets Tax Credit (NMTC). The House plan would also damage the most important program for new affordable development, the federal Low-Income Housing Tax Credit (LIHTC).
“With the nation already in the midst of an affordability crisis, undermining the LIHTC will deal a crippling blow to keep housing affordable and available for those citizens who are most in need,” said Granger MacDonald, chairman of the National Association of Home Builders (NAHB).
Tax reform slices into affordable housing programs
In most parts of the country, it costs too much to build a new house or apartment to rent that home or sell that home at a price that a minimum wage worker can afford—without help from government housing programs. In 2015, more than 11.1 million renter households paid more than half of their income on rent, up from 3.7 million in 2001, according to the State of the Nation’s Housing 2017 report from the Joint Center for Housing Studies at Harvard University.
The LIHTC program preserves or creates roughly 100,000 units of affordable housing a year. Both the tax reform plans being considered in the House and the Senate preserve better-known part of the LIHTC program—the “9 percent” tax credits, which state housing officials typically distribute to affordable housing developments every year in regular competitions. This is a “tremendous achievement for the affordable housing community,” according to industry accounting firm Novogradac, which has joined with housing advocates to educate legislators about the strengths of the program.
But the House tax reform proposal would end the private activity bond program, which allows housing finance agencies to issue low-interest, tax-exempt bonds that automatically generate 4 percent LIHTCs when the bonds are used to provide debt financing to build or preserve affordable rental housing.
Killing the bond program would cut the number of affordable apartments produced by the LIHTC program overall roughly in half, according to an analysis by the National Housing Conference (NHC). For developers like Signature Urban Properties and Monadnock, which is halfway through a 1,300-unit affordable housing and community revitalization project in the Bronx, N.Y. called Compass Residences, killing these bonds leaves a $100 million financing problem, according to NHC. Development plans like these could potentially collapse.
For-profit developers have also used tax-exempt bond loans and 4 percent LIHTCs to create buildings that mix new affordable housing with luxury apartments, especially in high-rise developments like New York City.
The proposal for tax reform in the Senate is more generous. “The Senate tax plan would, however, protect important provisions to boost the production of affordable housing, including the Low-Income Housing Tax Credit and the tax-exempt bond program,” said NAHB’s MacDonald.
The Senate bill also now includes a few of the ideas from the Affordable Housing Credit Improvement Act, legislation introduced in the Senate by Sens. Maria Cantwell (D-Wash.) and Senate Finance Committee Chairman Orrin Hatch (R-Utah). State officials could allow a LIHTC property 25 months rebuild after damage from disaster like fire, hurricane or flood without risking recapture, for example. However, the tax reform plan does not yet include the more expensive ideas from Cantwell-Hatch, like increasing the LIHTC program by 50 percent.
Historic rehabilitation tax credit wiped out
Developers who fix up historic buildings would also be hurt by the tax reform proposal in the House, which would repeal the historic rehabilitation tax credit after 2017. The U.S. Senate’s version of tax bill still includes a portion of the federal historic tax credit.
Many downtown redevelopments have depended on the historic tax credits. Since its inception in 1978, the federal HTC has attracted $131 billion in private investment to the rehabilitation of 42,293 historic buildings, creating more than 2.4 million jobs. As a result of all this economic activity, these tax credit project have generated $29.8 billion in federal taxes. That’s more than the $25.2 billion cost of the tax credits, according a report by Rutgers University.