Three years ago, the mere prospect of corporate tax reform drove down the value of low-income housing tax credits and, thereby, reduced capitalization of affordable housing. Despite that, roughly the same number of affordable units are being produced today as before the price plunge. The fragile improvement, however, is not enough to cover demand and gain traction through 2020.
The rebound is largely due to the rise in the annual allocation of credits made possible through a 2018 omnibus spending bill. Unfortunately, affordable housing was already in a crisis prior to the Tax Cut and Jobs Act as demand from low-income renters was outstripping supply.
“The tax reform exacerbated the affordable housing crisis,” said Matthew Rieger, president & CEO of Housing Trust Group, a Coconut Grove, Fla.-based developer of affordable, workforce and market-rate multifamily properties in the Sun Belt. “The expansion of the tax credit program got us back to par. But par is still a crisis.”
What’s more, low interest rates have assisted the return to par by providing affordable housing developers with more loan proceeds for construction and rehab, said John Gilmore IV, a senior vice president & managing director in the multifamily finance group at Walker & Dunlop in New York. The benchmark 10-year Treasury yield in late February was hovering around 1.5 percent, roughly 120 basis points lower than a year earlier. But there’s no guarantee that rates will stay low, he warned.
“When rates were up a year ago, it put tremendous pressure on affordable housing and jeopardized deals,” Gilmore said. “We’re just a couple of rate hikes away from having wider financing gaps in transactions.”
The affordable housing industry is at best treading water, according to investors, developers and others tied to the tax credit program. LIHTC developers added an average of 63,000 units per year to the market from 2010 through 2018, according to the Harvard Joint Center for Housing Studies’ State of the Nation’s Housing report in 2019. That’s well off the annual pace of 80,000 to 100,000 units before the Great Recession, according to CBRE. Meanwhile, some 4 million units with monthly rental rates of less than $800 a month have disappeared since 2011, according to the Harvard report.
Many see headwinds further restricting new supply, from the potential paring of affordable housing funding sources to the continuing rise of land prices and construction costs. In its recent budget proposal, for example, the Trump administration would cut some U.S. Department of Housing and Urban Development programs and eliminate others, including Community Development Block Grants and HOME funds.
Developers tap those HUD funding sources, as well as other federal, state and local mechanisms, to plug financing gaps in LIHTC deals. In 2016, banks, insurance companies and other corporations paid as much a $1.05 for a $1 housing credit, on average, according to Novogradac & Co., an accounting, valuation and consulting firm in San Francisco.
But average prices plummeted to around 90 cents in 2017, in anticipation of the Trump administration’s lower corporate taxes. Average pricing has since stabilized to around 93 cents per tax credit. Still, the sponsor, size and location of projects can dramatically influence the price, and a one-cent reduction equates to about $250,000 in lost funding, according to Rieger.
Renaissance Square, a 140-unit mixed-income apartment and townhome project in Puerto Rico, developed by McCormack Baron Salazar in 2019, utilized tax credits and Section 8 project vouchers to help fund the endeavor, pointed out Ricardo Álvarez-Díaz, co-founder & CEO of architecture and interior design firm Álvarez-Díaz & Villalón in Puerto Rico. The firm designed Renaissance Square and is working on several projects utilizing a mix of affordable financing sources in Puerto Rico, the Virgin Islands and the U.S.
“Even though the value of the tax credits may be a little less, they are completely necessary to finance affordable housing projects—80 cents on the dollar is still incredibly powerful,” he said. “But you need to identify different programs and mechanisms in order to make them successful.”
Proposed changes to the Community Reinvestment Act could further diminish the value of housing tax credits. The act requires banks to invest in the communities in which they are chartered. Buying tax credits satisfies that stipulation, so much so that it is the motivating factor behind 75 percent of investment in the tax credits, said Emily Cadik, executive director of the Affordable Housing Tax Credit Coalition, a Washington, D.C.-based trade association that represents some 200 organizations and businesses involved in LIHTC financing.
Suggested reforms to the act, however, would allow banks to meet that community investment obligation in different ways. That could decrease competition for the credits and, consequently, their prices, she added.
“If changes do anything to make housing credit investments less of an appealing way to meet CRA obligations, we’re going to see major investors in the program scale back significantly,” she said. “In the end, it just means fewer dollars for affordable housing and fewer people served.”
Meanwhile, efforts to shore up the LIHTC program have fallen short. The Save Affordable Housing Act of 2019, a proposal meant to prevent thousands of LIHTC units from leaving the affordable program annually after meeting the initial 15-year compliance period, went nowhere.
At the end of 2019, last-minute disagreements over the omnibus spending package jettisoned an LIHTC provision aimed at boosting supply. The provision, which is part of the proposed Affordable Housing Credit Improvement Act, would establish a minimum 4 percent rate for the 4 percent LIHTC. Despite its name, the 4 percent tax credit rate actually floats and was recently trading around 3.2 percent. That’s an important distinction for affordable housing developers because a higher rate provides more funding.
“Improvements like locking in the 4 percent credit rate would help reduce funding gaps in deals,” explained Josh Levy, a managing director of the affordable tax credit group at Berkadia in Philadelphia. “It’s something that we have been looking at for some time in the industry.”
The AHCIA also proposes to increase the allocation of the 9 percent LIHTC by 50 percent, although that provision wasn’t considered in the most recent spending bill. Cadik believes that congressional support for AHCIA provisions is building, but the only way to introduce them in 2020 would be to attach them to a bill to fund infrastructure, which is unlikely to materialize, or to a possible year-end tax bill.
Looking for alternatives
While tax reform and potential changes to the CRA could negatively impact the LIHTC program, housing finance organizations have begun to look for new ways to boost affordable housing supply. The Mortgage Bankers Association and its members recently formed two advisory councils to look at new business approaches, public policy, strategic partnerships and other innovative ways to create more affordable rentals.
Additionally, the Federal Housing Finance Administration last year told Fannie Mae and Freddie Mac that “mission-driven, affordable housing” should make up at least 37.5 percent of their loan portfolios, which are capped at $20 billion a quarter for each agency through this year. Other ideas include creating more housing density with affordable micro-unit or co-living buildings, Gilmore said. Ultimately, municipalities will have to find what type of solution works best for them.
“Micro units may provide New York City housing relief, but are they going to work in San Antonio?” he asked. “Affordable housing is a macro problem but, like real estate, it is very market specific.”