AP Photo/Jeff Roberson
Robert Goldman always kept close tabs on Capitol Hill tax talk. Reform proposals had been bopping around Capitol Hill in recent years, but nothing had happened. Before the 2016 election, the Montgomery Housing Partnership (MHP), a nonprofit affordable housing organization in Silver Spring, Maryland, that Goldman heads, had started the intricate financing process required to renovate Parkview Manor, a 1950s-era complex of more than 50 low-rise garden-style apartments that the nonprofit organization owns in Hyattsville, Maryland, a northeastern suburb of Washington.
Designed for people of modest means, many housing developers see garden apartments as a tear-down-worthy relics of a bygone era. Luxury buildings with more and smaller apartments are all the rage now, ones that command higher rent than fewer dwellings on a larger tract of land can. But since MHP owns the affordable housing development, Parkview residents did not have to worry about displacement and could look forward to $6 million in upgrades that include HVAC systems, water heaters, kitchens, and bathrooms.
Once a certain Republican real-estate developer moved into the White House with a Republicans majority in Congress ready to slash and burn the U.S. tax code, life got complicated for affordable housing developers like Goldman. The major tax credit program that fuels affordable housing construction and preservation projects hinges on the corporate tax rate and he knew that rate was about to plunge.
He just didn't know how much.
Low-Income Housing Tax Credits (LIHTC, pronounced lie-tek) are integral to the construction and preservation of affordable housing stock. These financial instruments are the backbone of the IRS-administered public-private partnerships that build or, in the case of Parkview Manor, renovate affordable rental housing in the United States. Private companies that invest in affordable housing developments offset their taxes by buying tax credits from developers who use the proceeds to finance new housing or renovate older buildings.
However, there were inklings in the affordable housing sector as early as the summer of 2016 that the Trump candidacy was no fluke and the prospect of a tax code overhaul was quite real. Sensing a Republican victory, investors' demand for the tax credits began to weaken, sending the price of the credits tumbling even before voters cast any ballots.
By the time that Congress finalized that searing Tax Cut and Jobs Act of 2017, a 14 percentage point drop in the top corporate tax rate from 35 to 21 percent—not the 25 percent rate that had once been bandied about (and that many developers and investors had literally banked on)—the value of the tax credits went into a nosedive. Where credits came in at a few cents over a dollar in 2017, some housing analysts see the value of the credits dropping as much as five cents this year.
The tax credits provide investors with a dollar-for-dollar reduction on their federal income taxes over a decade. The higher the corporate tax rate, the more valuable the credits become as a tool to reduce investors' tax liability. As a result of this high demand and competition for credits, the price investors are willing to pay for each credit goes up.
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Once President Trump signed the tax reform bill into law and reduced the top corporate tax rate, investors' demand for the housing credit decreased even more because they suddenly faced a much lower federal tax liability. With reduced investor demand, the price investors were willing to pay for the credits also dropped.
Affordable housing developers, who receive equity capital from the investors who purchase the tax credits, were ultimately left with holes in their project budgets because the lower credit prices meant that there was less equity available to finance affordable housing.
The tax cut forced Goldman to scramble in January: When the price of a credit dipped from $1.04 to 85 cents on the dollar, the original Parkview Manor investor decided to bow out since the deal was no longer as attractive as a tax reduction mechanism. Tax credits made up about 20 percent to 25 percent of the project's financing, so Goldman had to find other financing to close the gap.
He was in good company. A for-profit developer in Texas put an apartment project on hold. A continent away, a Catholic Church-affiliated affordable housing developer in rural Oregon did the same for a renovation of three 1980s-era apartment properties.
To build a project, affordable housing developers can't rely on equity and debt alone. They typically cull together multiple sources of capital, a process that can take more than a year. Filling the gaps that the corporate tax cut drilled into the affordable housing market is now the major preoccupation for developers from coast to coast.
Either developers score more tax credits and interested investors or they have to find other types of federal, state, or local financing to close the gaps. Or they completely rework or abandon a given project. A limited amount of credits, competition for those tax breaks, and problematic government financing in a revenue-depleted environment creates new stresses for developers already forced to be nimble and innovative to make housing happen for not only for the poor, but for people of modest means, the elderly, and people with disabilities.
Alyssa Katz notes in her American Prospect article, “The Harm to Affordable Housing,” that unlike Western Europe where governments provide social housing, under the 1986 Tax Reform Act, the United States consigned housing for moderate- and low-income Americans to the marketplace, with LIHTC as its porous foundation. While global cities like Vienna have long built public housing that works, the United States is more interested in demonizing the people who need it than seeing them well-housed.
LIHTC exists in a vast universe of arcane regulations, obscure acronyms, and complex formulas. The upshot is this: The federal government provides tax credits to state housing agencies that award them to affordable housing developers. Private investors who buy the credits from those developers receive commensurate tax deductions; housing developers get the funds they need to get housing projects moving.
One type of tax credits (known as 9 percent credits) get allocated directly to state housing agencies on a per capita basis through a competitive process and can be used for up to 70 percent of construction. A second type of credits (known as 4 percent tax credits) are automatically triggered when used with tax-exempt bonds for 30 percent of construction costs.
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(With many in the affordable housing industry disgruntled with the ramifications of the corporate tax cut, Congress engaged in a rare (and successful) bipartisan show of arm-twisting: Democrats secured additional 9 percent credits to hand out to states; Republicans fixed a “grain glitch” loophole that favored cooperatives over corporate feed-producers in agricultural states.)
With the 35 percent corporate tax rate in play, banks, which invested heavily in affordable housing projects, appreciated that the credits helped them meet the requirements of the federal Community Reinvestment Act. The provision requires banks to demonstrate how they help the communities in which they operate. The tax breaks proved to be an attractive way to drum up interest from banks and other private entities, and enabled developers to shave off debt and keep rents manageable for people who fall within specific earnings limits, usually 60 percent of the area median income. That interest is expected to wane.
The upheaval in the LIHTC market is just one problem that developers face. They were already hard-pressed to build homes on the prices that are being paid for the credits, particularly since they only comprise a portion of any financing package. Prices for building materials have skyrocketed with the new Trump administration-imposed tariffs on commodities like steel, aluminum, and Canadian lumber, which mean additional costs. Declining numbers of skilled workers like master plumbers and electricians have also increased labor costs.
IN THE 1990s, Texas experienced surge of prison construction in rural communities. In their zeal to incarcerate more people, however, state and municipal officials overlooked one key thing: housing for prison guards and other workers. Granger MacDonald, a second-generation Texas home builder, started building in those rural areas and soon discovered that nearly every community in the state had a shortage of affordable housing. He built his first LIHTC property in the late 1990s in the city of San Angelo in West Texas.
“It does very little good for all of the Chamber of Commerce-type folks to chase new employers if they don't have anywhere for the employees to live,” says MacDonald, who is the chairman of the National Association of Home Builders.
As Congress moved to take up tax reform, MacDonald put his affordable housing development, which would bring more than 100 apartments to Bastrop near Austin—where about half of municipal workers live outside city limits because they cannot afford housing—on hold to wait out the final decision on the corporate tax rate. He closed on his deal after the tax deal passed and backstopped the project with a second lien from a private investor to get construction started.
Other affordable housing developers turn to government for relief when faced with equity gaps. Developers can apply for state and federal loan and grant programs. They can also try to persuade municipalities to reduce property taxes and to waive or reduce fees for building permits, sewer hook-ups, and the like.
But trying to persuade government housing officials to drum up additional funding to fill equity gaps does not always work. Some states have allocated available monies, and smaller and less financially robust municipalities cannot afford to give up revenue-generating fees and taxes. These factors make the decline in the value of the credits even more serious for smaller developers.
In 2016, Oregon Housing and Community Services awarded tax credits to Caritas Housing for a $17 million project to renovate 102 subsidized apartments for small families, seniors, and people with disabilities in Rogue River and Glendale in southern Oregon. Trell Anderson, Caritas Housing's executive director and director of Community Development and Housing for Catholic Charities of Oregon, worked on the assumption that the project would get 92 cents to the dollar.
But four months after Trump won, price of credits dropped to 82 cents, ultimately providing less equity per credit and leaving a hole in the project's budget. Anderson had no other option: He could not borrow more money for the project nor could he charge higher rents to the tenants. Going back to state officials was out since state-generated funds had all been allocated and municipal and private sources were not an option.
Anderson had only one choice: scaling back the renovations. Instead of upgrading all of the bathrooms and kitchens, he decided be very exacting about which rooms needed renovating and how much of a renovation to do. “You are burning hours with your architect and your contractor trying to figure out your scope of work,” says Anderson.
THE RETURN of mortgage lenders Fannie Mae and Freddie Mac to the LIHTC market in late 2017 after their ignominious conservatorship for their roles in the housing-sector meltdown and the Great Recession has buoyed some developers. Their re-entry bolsters the sector with additional sources of financing. “Anytime we pick up another source of financing of any kind, whether it’s for single family or multi-family [projects], we’re all very excited about it,” says MacDonald. “It’s like you welcome an old friend back to the dinner table.”
But two old friends can't really replace the many other investors who deserted the LIHTC market. With interest rates rising and material and labor costs continuing to increase, it may take another year or two to determine whether private investors will be as committed to affordable housing as they were when tax breaks were more appealing. (Trump has boasted that he'd like to see the corporate tax rate drop to 20 percent, but the talk has not really affected the sector yet.)
Back in Maryland, MHP's Goldman was luckier than most. Enterprise Community Partners, a nonprofit syndicator that raises capital for affordable housing developments, stepped in as the new investor. The project also secured a Federal Home Loan Bank financing and the state of Maryland provided funds from its Rental Housing Funds and Multifamily Energy Efficiency and Housing Affordability-Empower program. Renovations at Parkview began in July.
For Goldman, one of the major lessons learned is that four sources of funding—private, county, state, and federal, are all critically important. “We as an industry have to make sure that we have financing structures that are solid on all four levels,” he says. “So if one dips on one level, we are able to absorb that or have the flexibility to react, so that affordable housing can still get built.”
The markets have mostly stabilized after the tax tumult that set the affordable housing sector into its gap-filling exercise. This new reality means that hundreds of thousands fewer affordable rental homes will be available for the millions of individuals and families who want them. Building homes under these circumstances will demand a special tenacity from affordable housing developers even as they are accustomed to devising creative solutions out of the raw deals that low- and middle-income people get from their elected representatives in Washington.
Reliance on the public-private partnerships to finance affordable housing has not been the fail-safe that its architects envisioned. Low- and middle-income people needed affordable homes before the passage of tax “reforms” that only ensure that fewer such homes will be built in the years ahead. Not only should a future Democratic majority in Congress revisit the steep corporate tax rate cut, it should move boldly to design social housing policies to insulate Americans from the intense financial pressures of finding and keeping a home.
