Benjamin Franklin once wrote in a letter that “nothing can be said to be certain, except death and taxes.”
While the founding father may have been spot-on in his quote about the newly drafted U.S. constitution and the permanency of our newly established government, the complexity and effectiveness of those taxes is something that has been debated for centuries.
The legislative agendas from five of the largest multifamily housing industry organizations have targeted tax reform as an issue of primary concern for 2014.
While the rank of importance of agenda items vary from organization to organization, there are some common items within tax reform that several organizations shared, and the one overlapping issue across all five interviewed is the push for the retention of the Low Income Housing Tax Credit (LIHTC), which is designed to encourage investment and development in affordable multifamily housing with added economic boost of job creation and an expanded inventory of low-income units.
“It is by far the most successful program for the construction of affordable housing we’ve had in history,” says Jim Tobin, senior vice president and chief lobbyist at the National Association of Home Builders (NAHB). “It is a well-run program. Think of it as a public-private partnership. It is well-administered; there’s a lot of accountability; and it has worked very successfully. It’s so successful that it is continuously over prescribed. There just aren’t enough credits for people who want to use or buy them and subsequently create affordable housing.”
Beth Wanless, senior manager of government affairs at the Institute of Real Estate Management (IREM), notes that the tax credit’s success has led to the creation of more than 2.6 million affordable housing units since its inception in 1986, and that if the credit were to be eliminated, it could lead to the disappearance of more than a million LIHTC units of affordable housing stock by 2020.
“There is still a shortage of affordable housing units; therefore, it’s important we focus on securing this tax credit for the future,” she says.
Greg Brown, vice president of government affairs at the National Apartment Association (NAA), said at press time that the organization was still “in the midst of determining [its] legislative priorities for next year,” but anticipated that its priorities for 2014 would likely be agenda items that carried over from 2013 including tax reform, housing finance reform and immigration. Last year, NAA told MHN that its top priority was tax reform.
Cindy Chetti, head of government affairs at the National Multi Housing Council (NMHC)—which works closely with NAA—says that tax reform is at the top of the list of items they are watching this year and that “the Low Income Housing Tax Credit Program is important to many of our members.” She also cited carried interest and the estate tax as important factors of tax reform that NMHC is tracking.
While the LIHTC may seem like an easy target for tax reform advocates, Michelle Kitchen, director of government affairs at the National Affordable Housing Management Association, says that it is irreplaceable at the moment.
“If it went away it would be much harder to preserve older affordable housing properties; it would probably be more difficult to construct new affordable housing properties,” she says. “At this time I don’t know if there is a substitute for the program.”
Wait, there’s still more.
With the anticipation of a tax reform draft from Sen. Max Baucus, D-Mont., sometime in November, organizations are keeping tabs on wording that targets carried interest. Proponents for the increase of carried interest might argue that it will level the taxation playing field for Wall Street hedge fund managers; however opponents in the multifamily industry say that an adjustment would deliver a blow to the recovering housing industry.
“Real estate accounts for roughly 50 percent of the 2.5 million partnerships in the United States,” IREM’s Wanless says. “In reality, an increase on carried interests could potentially place more stress on the recovering real estate sector. As Congress focuses on ways to offset the cost of lowering general tax rates or of increasing the perceived fairness of the tax system, it is imperative to maintain a fair tax treatment of carried interest.”
Tobin agrees and says that NAHB is monitoring any legislation that would alter carried interest, which he says is a target because of its use by “hedge fund guys” to essentially make more money and pay less taxes.
“The challenge for us is reminding people that with real estate you are talking about someone who is putting a deal together, you’re talking about a durable asset in a building, not just trading stocks,” he says. “The real challenge is trying to separate real estate from the hedge fund guys or the venture capital guys when it comes to the carried interest debate.”
While Chetti cited carried interest as being a concern of her organization, she says that NMHC along with NAA have partnered up to educate organization members and policy makers about multifamily industry-related issues that could stem from housing finance reform.
“Our biggest roadblock is ensuring that members are educated about the multi- housing industry and that goes for both tax reform and housing reform,” she says.
Within the context of a one-size-fits-all GSE/housing finance reform option, NAA’s Brown says that the multifamily industry struggles to distance itself from its single-family counterpart, which can sometimes hinder lobbying efforts.
“As we know, the multifamily programs at Fannie Mae and Freddie Mac did not contribute to their financial problems or to the overall housing crisis,” he says. “On the contrary; they made money for the American taxpayer and did not experience the troubles seen in the single family programs. Our task is to continue to remind Congress of this and urge them to pursue policies that retain the successful components of the current housing finance system and not apply a one-size-fits-all approach.”
With regards to housing finance reform, Tobin says that NAHB has worked closely with NMHC and the National Association of Realtors (NAR) to provide lobbying and congressional testimony to work on getting more private capital into the hands of those entities.
“Getting the GSE structure out of the unilateral hands of the director and letting congress work its way through all the nuances of putting more private capital back into the housing finance system and creating an explicit limited federal guarantee for the mortgage backed security system is absolutely vital to the multifamily industry, and it’s something we’re working hard on day in and day out,” he says.
On the affordable housing front, aside from preservation of the LIHTC, NAHMA’s 2014 legislative agenda will focus on sequestration impacts on the industry, issues pertaining to Section 8 contract funding, specifically, working to reverse the short-funding approach HUD has adopted as a result of dwindling government money. Additionally, it aims to restore funding to Rural Renters Assistance subsidies and passing comprehensive pragmatic rental assistance reform.
“NAHMA’s position has been and continues to be that it is the federal government’s responsibility to fund the project-based Section 8 program at a level that contracts can be renewed on time, in full for the 12-month terms of the contract,” Kitchen says of HUD’s short-funding of Section 8 programs. “That funding should be obligated up front at the time of the renewal. In order to make the numbers work, HUD has gone back to the short-funding of the contracts where you only may be guaranteed a couple of months on your contract and then they’re going to have to process funding all over again when the new money becomes available in the new fiscal year.”
Kitchen says the short funding tactic is disruptive, inefficient and a byproduct of sequestration cuts.
Another hot-button issue that some of the organizations are targeting is immigration reform and how it relates to the health of the multifamily and construction industries.
Immigrant labor specifically is a huge driver in both multifamily and single family industries, and both are facing a shortfall of labor in the year ahead and, according to Chetti, it is important “that some of the caps they put on certain types of labor don’t disadvantage the real estate industry.”
According to Tobin, about 25 percent of the construction workforce is immigrant, saying that the immigration policy is “an economic issue.”
“One of the things that we think is vitally important to the immigration bill is the creation of a workable guest visa program so that people can come in across the borders from anywhere in the world, and come and work in America in the construction industry, make a living and stay here for a short period of time, maybe renew that visa one more time and continue to work here and then go back to their countries and then come back if they want,” Tobin says. “We need labor, and we need an immigration policy that fosters the ability for that labor to travel to America, and it’s really specific and really acute when it comes to the construction sector.”
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