On the Hill: Legislative Agenda 2010

Multifamily organizations are focusing on the LIHTC program and how real estate partnerships are taxed

The 2009 Congress will most likely be remembered for the massive overhaul of the U.S. healthcare system. And, with the bill expected  to come up for a final vote early this year, Congress’ focus will move on to other areas, some that will affect how developers, investors and owners of multifamily properties do business.

But while healthcare reform moves to the back burner, Congress will have a new concern, namely, the mid-term elections, as all 435 seats in the House of Representatives, and one-third of the Senate seats, are up for grabs.

And, with the likelihood that the U.S. economy will remain weak, Congress is expected to make job creation a focus. Many bills that come up for a vote will be looked at for their job creation potential, says Greg Brown, assistant vice president, government affairs at the National Association of Homebuilders (NAHB).

The perception by a number of voters is that many in Congress “spent so much time to get so little done” in 2009, says Jim Arbury, senior vice president of government relations for the National Multi Housing Council (NMHC). He says many elected representatives may be reluctant to “stick their necks out” during this election year when it comes to major legislation.

Whatever the legislative climate is, however, Brown says multifamily organizations are focusing on two major issues in 2010, namely, proposed initiatives needed to re-invigorate the Low Income Housing Tax Credit (LIHTC) program and legislation that will change how real estate partnerships are taxed.

Risks and rewards

On Dec. 8 of last year, the House of Representatives passed legislation that would tax an investment manager at the level of ordinary income, of up to 35 percent, rather than at the capital gains rate of 15 percent.

While the primary target of the legislation is private equity, hedge funds and venture capital firms, it also applies to real estate partnerships, and many multifamily organizations find this problematic.

A typical real estate investment group includes both limited partnerships, which contributes most of the equity in the deal, and a general partner, who manages the investment or development, and who is liable for various risks associated with this, such as brownfield remediation or problems that could arise during construction. In return for the general partner assuming this higher level of risk, the limited partners contractually agree to a set level of return to the general partner on the investment gains at the conclusion of the project. This portion of the general partner’s investment return is “carried interest.”

The NMHC and the National Apartment Association (NAA) have jointly denounced the proposed change in taxation level, saying it would halt the economic recovery in its tracks and worsen the nation’s affordable housing problem. Brown worries that the change will alter the “risk-reward” ratio of building or buying an apartment building in an under-served or marginal area.

“The developer is likely to develop somewhere else, if the risk-reward ratio is not optimal,” Brown says. The new compensation formula will also likely favor large developers or investors, he says, who have greater access to financial sources on Wall Street, or can borrow the entire cost of the development, which smaller developers, especially in this capital-constrained environment, are unlikely to be able to pull off.

Multifamily trade groups will also focus on finding ways to boost the LIHTC program, one of the key ways through which affordable housing has been built and preserved in recent decades. The recession, and problems at major financial institutions, particularly Fannie Mae and Freddie Mac, large funding sources for the program, have caused a steep fall in investment in the program. Investment in the LIHTC has fallen from approximately $9 billion in 2007 to between $4 billion and $5 billion in 2008, and the level could have even been lower for 2009.

A coalition of affordable housing advocacy groups called A.C.T.I.O.N. (A Call to Invest in Our Neighborhoods) has called for a three-pronged approach to get the LIHTC program back on track:

• An increase in the Housing Tax Credit carry-back for up to five years,

• An extension for the Housing Credit cash-exchange program (Section 1602) from the American Recovery and Reinvestment Act for one more year; and

• Allowing the LIHTC potential investor base to be expanded to pass-through entities—namely LLCs and Subchapter S corporations—and closely-held corporations.

Under present law, an investor holding an LIHTC may carry it back one year to reclaim taxes paid for that year. Under the new proposal, there would be two changes to the provision of the law. For existing holders of tax credits, they would be allowed to carry back those credits for five years with the proviso that they have to reinvest all of the proceeds from that carryback into new LIHTC investments, Brown says. The second change is designed for new investors, who would be allowed to carryback their tax credits for five years, which will make the investment more attractive to investors who are uncomfortable with the 10-year payout period for LIHTCs.

The cash-exchange program provided “gap funding” to jump-start stalled affordable housing projects in 2009, as many of the program’s traditional investors exited the market.

Broadening the investor base to include entities such as LLCs can play an important role in boosting the LIHTC program, Brown explains. In addition to increasing the pool of investors, it is likely to attract smaller financial institutions and other businesses, which could focus on developing multifamily properties in their communities. This could mean more development of affordable housing in rural areas, or special needs housing, such as Alzheimer’s facilities, properties that many larger investors for the most part ignore, Brown notes.

The National Afffordable Housing Management Association (NAHMA) will concentrate on several issues for the 2010 legislative session, according to Michelle Kitchen, director of government affairs, NAHMA. One priority is providing full and timely funding for project-based Section 8 contracts. NAHMA is satisfied that significant progress has been achieved on that front over the last year. Nevertheless, some owners and management agents reported delayed Section 8 payments when HUD was funded through temporary spending bills known as continuing resolutions. NAHMA wants further improvements in the administrative and legislative process that would improve the timeliness and reliability of Section 8 payments under future continuing resolutions.

Also, the organization will be monitoring proposals by the Department of Housing and Urban Development (HUD) and Rep. Barney Frank, chairman of the House Financial Services Committee, to preserve affordable rental housing. NAHMA also wants continued funding for HUD’s limited English proficiency technical assistance program, which would enable translation of a number of important agency documents into multiple languages. Through this program, HUD has already provided translations of four multifamily model leases, the resident rights and responsibilities brochure, and other official forms.

All in all, it will be a full legislative menu for a Congress that is likely to be under the microscope this year.

“In an election year, it can be hard [for Congressman and Senators] to keep focused on the issues,” Kitchen said. “It can be a challenge to keep high-priority legislation moving.”

Strength in numbers

With many important issues looming for the multifamily industry this year, the major industry trade associations are presenting a united front to keep their legislative agenda moving forward.

Last November, NMHC and NAA announced they would continue their joint legislative program. The four major issues the partnership will focus on are the restructuring of Fannie Mae and Freddie Mac and the ramifications associated with it; assuring that climate change legislation contains workable, cost-effective building energy standards; opposing proposed “carried interest” legislation; and working to defeat the Employee Free Choice Act, or “card check” legislation, on the grounds that it would disproportionately increase the political power of unions at considerable cost to employees and businesses.

Many of the multifamily organizations “chime in together” on issues of importance to them finding it beneficial to have joint meetings with congressional staffs, says Kitchen.

Sometimes these coalitions expand their reach beyond multifamily organizations. Arbury says his organization is united with 32 other organizations across an array of industries to oppose the card check legislation.

Working together can pay dividends, as the legislative terrain can be tricky to navigate. For example, NAHB’s Brown notes that a House extender bill would continue the life of the federal block grant program for the LIHTC, which the NAHB supports, but would pay for it with funds generated from a change in the taxation of carried interest.