Affordable Housing: A Practitioner’s Action Plan for 2018

Enterprise Community Partners' Scott Hoekman outlines the firm's priorities in 2018, and how the firm is adjusting to the impact of new tax reform on affordable housing.

Scott Hoekman, Enterprise Community Investment Inc.
Scott Hoekman, Enterprise Community Investment Inc.

While strides have been made in the affordable housing sector over the last few years, the lack of supply and need for additional capital remain prevalent issues for the industry. While Enterprise Community Partners, one of the largest and most active nonprofits in the affordable housing sector, celebrated the retention of the Low-Income Housing Tax Credit (Housing Credit) in the new tax code, the firm continues to address the acute need for affordable homes and promote the tools necessary to make such projects a reality.

In a recent blog post, Enterprise discussed a new class of community investment vehicles created by a provision in the Tax Cuts and Jobs Act—the Opportunity Zone Program. This provision is designed to incentivize long-term capital to invest in distressed communities by providing tax benefits on investments in opportunity funds. This is the first new community development tax incentive program since the Clinton Administration, the blog post noted. However, the program still has to go through a formal rule-making process and will take a while before it’s set up.

Scott Hoekman, senior vice president & chief credit officer for subsidiary Enterprise Community Investment Inc., revealed to Multi-Housing News how practitioners like the nonprofit he works for intend to deal with the recent changes and what’s ahead for low-income housing projects in 2018.

How do you think this new tax bill will impact affordable housing projects?

Hoekman: Fortunately, the final tax bill retained the Housing Credit program and the tax-exemption on private activity bonds. Tax-exempt bond financing is what enables about half of all affordable housing projects to be eligible for Housing Credits, so we were relieved to see the bond program retained in the final bill (after being proposed for elimination in the original House bill).

Interview quote MHN Scott Hoekman

The biggest effect of the tax bill on affordable housing production is related to the reduction in the corporate tax rate from 35 percent to 21 percent. A lower tax rate translates into less capital for financing affordable housing. A recent analysis by Novogradac & Co. estimates that the final version of the tax reform bill would reduce affordable rental housing production by nearly 235,000 homes over the next decade due to the lower corporate tax rate and a change to the Credit’s inflation calculation.

The vast majority of the impact comes from the loss of investor equity resulting from the reduced corporate rate. There is also a concern that the “Base Erosion and Anti-Abuse Tax” (BEAT) included in the bill, which is effectively an alternative minimum tax on corporations with foreign ownership or affiliates. While this tax has nothing directly to do with the Housing Credit, the concern is that this new tax will make Housing Credit investment less attractive to some investors.

How will Enterprise Community Partners approach affordable housing projects going forward? Will the process change in any way due to the new legislation?

Hoekman: Enterprise greatly appreciates the patience, flexibility, creativity and commitment that developers, investors, lenders, state agencies and others showed throughout a year filled with uncertainty. Our industry was able to accomplish a lot in 2017, despite it all. There will still be some concerns as investors sort out the effect of the tax rate reduction and the BEAT on their existing and new investments, but we’ll work through it together and stay focused on producing desperately needed affordable housing.

Enterprise is advocating for the improvement of several programs such as the Housing Credit and permanently extending the New Markets Tax Credit. Why are these changes necessary?

Hoekman: The affordable housing crisis is vast and growing. Before the tax reform, we began advocating for a 50 percent expansion of Housing Credit resources to make headway in meeting the need for decent, safe, affordable homes.

In light of the decrease in affordable housing production we are now expecting as a result of tax reform and the lower corporate tax rate, expanding Housing Credit resources is needed even more now than before. And now that we have assurance that the Housing Credit will remain a permanent part of the tax code, it’s time to make common sense reforms to make the program more streamlined and flexible.

The New Markets Tax Credit is a critical tool for revitalizing distressed communities and creating jobs and opportunity for residents. Despite the proven success of this program, it is still only authorized on a temporary basis and must be extended every couple of years, which creates uncertainty for those hoping to invest through the program. We need to make this program a permanent part of the tax code and ultimately expand it as well.

What are your expectations for 2018 regarding affordable housing development?

Hoekman: While the Housing Credit is a vital tool for developing affordable housing, it alone cannot address the full range of our nation’s affordable housing needs. The Housing Credit often works in concert with United States Department of Housing and Urban Development (HUD) programs like the HOME Investment Partnerships Program, Community Development Block Grant and housing vouchers, especially to serve the lowest income individuals and families.

Though we were pleased that Congress rejected the administration’s proposals to eliminate or severely cut many key HUD programs in 2017, we recognize that Congress will face continued budgetary pressures in 2018 and are not taking continued funding for these programs for granted. Enterprise will continue to advocate on behalf of these programs, and as practitioners, we will continue to demonstrate the needs and the solutions such that robust production of affordable homes can continue.

Image courtesy of Enterprise Community Partners