Making a Dent in Affordable Needs

The LIHTC program is struggling to keep up with affordable housing needs. How will legislative changes impact its viability? National Equity Fund’s Joseph Hagan weighs in.

Joe's finalJoseph Hagan’s association with the Low Income Housing Tax Credit (LIHTC) niche, a critical source of financing for affordable housing multifamily developers, goes back a long way. The president & CEO of the Chicago-based National Equity Fund, a syndicator that has raised more than $12 billion in equity for LIHTC projects, has been in the business since its early stages in 1986. Among other roles, he has served as director of multifamily housing at the Ohio Housing Finance Agency, which allocates credits for multifamily development. He was also president of the Affordable Housing Tax Credit Coalition and was named 2004 Syndicator CEO of the Year by Fannie Mae. From his vantage point, Hagan discussed the LIHTC market with MHN.

What’s the current state of the LIHTC market and the market rate for LIHTC?
It’s flush with capital. There are more investors in this market than there are deals. The best way to describe it is that there is no feasible tax credit deal in the United States that doesn’t have more than one investor bidding on it. I would say that the average price per credit across the United States is north of a dollar, probably $1.01. In some cases, you see prices as high as $1.25 for the credits.

Is the demand consistent nationwide?
You will always have a lot more demand on the coasts. You have a lot more demand in places like New York City or San Francisco in large part because of the huge amount of deposit base of the CRA (Community Reinvestment Act) investors. For the most part, we are not finding many holes in the market as far as investor demand.

How do the recent changes introduced by the PATH Act benefit the LIHTC market and developers?
The recent change under the Tax Act is that the 9 percent credit is now flat, meaning it will always be 9 percent and it will not fluctuate based upon interest rates. So if you have a deal that costs $1 million, (and) you take 9 percent, you end up with $90,000 of credits to sell in the marketplace. Before, under the old rule, the 9 percent credit would float based upon long- and short-term interest rates, among other variations. So the 9 percent credit for a while was somewhere around 8.2 percent. The developers now know exactly how many credits they have to sell, whereas before, based upon the floating rate, they would get less credits or maybe more credits.

What about the 4 percent credit? Were there changes there?
The problem is it’s all a matter of how much the federal government and its legislators decide would be the cost to the budget if they made the change. For the 9 percent credit change, it was a nominal cost to the federal government. The 4 percent credit had a higher cost to it, and in the midst of all the negotiations for all the extenders that came before Congress for that huge tax bill, they just did not want to fuss with it. So we are hoping that the next time they do a tax bill, they will re-examine the flat 4 percent credit. We are pushing to have them do that.

Is the LIHTC program adequately addressing affordable housing needs?
Absolutely not. We haven’t been able to keep up with the demand. If you think about it, every year there are thousands of units that come offline because they either get demolished or they get converted to market rate or whatever. We just haven’t been able to keep up with the need for affordable housing. We have a need for a substantial increase from Congress to the annual allocation of credits. Obviously, it is very expensive, and we have not had much traction with Congress to increase the allocation. There is a bipartisan commission on housing that recommended that they increase the annual allocation by 50 percent.

Are there any threats to the LIHTC market?
The threat to the market is that Congress has been looking at changing the Tax Code, especially reducing the corporate tax rate down to about 16 percent. Every time the corporate tax rate comes down, the LIHTC will not be as palatable to our investors. Right now, they are paying a 35 percent tax rate. Buying tax credits makes it much more palatable. If the tax rate is only 16 percent, it does two things: They might not be as interested in the credits, or more important, they don’t need as many credits. So we are constantly watching what’s going on with Congress in that regard as it deals with tax reform.

The depreciation period (for real estate) is another issue, and depreciation is a large part of our calculation. Whether or not it would have a huge impact, I just don’t see that at this point. It depends on how much they change depreciation, but it doesn’t seem to have a lot of traction at this point.