The Impact of the Election on Affordable Housing

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Sean Mashian

Sean came into the Baker program with a background in public accounting and finance. He most recently interned at Capstone Advisors, a diversified real estate investment, development and asset management company. In his role as Summer Associate, Sean helped update asset management models for over 1 million square feet of real estate, and worked on special development projects as they arose Sean also has career experience in complex analysis models for the calculation and presentation of discounted cash flows, IRR, hurdle rates, cap rates, financial statement analysis, and profit & loss projections for purchases and developments across the country. He also has received CPA licensure in California. Sean graduated cum laude from UCLA in 2013 with a Business Economics major and an Accounting minor

With the new Republican stronghold taking over the US Government, tax reform is expected to be one of the top items on the agenda. Legislators are aiming to significantly reshape, and scale back, the corporate tax code and tax rate.  Developers and investors are not waiting to scale back on their reliance on federal tax credits in their investments.  Thus, the Low-Income Housing Tax Credit (LIHTC) has seen its value drop, and the federal government is seeing a weakening in its primary monetary instrument for creating new affordable housing in the US. Is this new drop in in the value of the tax credit permanent?

Donald Trump and Paul Ryan

Since its introduction in 1986, the LIHTC has been a popular tool used by the government to build millions of affordable housing units. The basics of the program are simple. Developers compete over tax credits from the government, and then sell them to investors for use in lowering their payments on Tax Day. The popularity of the deal comes from the ability to claim the credit on the bottom line of the tax return. Investors also benefit from their ability to claim losses on tax returns based on the property investment. These credits have been praised as a way to help everyone win. Developers obtain cheaper financing and incur less taxes over the ten-year tax credit period, and governments provide affordable homes to their constituents. But the value of the tax credit is tied directly to the corporate tax rate. If taxes go down, as many expect to happen under Republican politics, the value of the tax credits will shrink.

The uncertainty alone has already caused banks and investors to revisit terms with developers. Many previously committed investors, who were in the final stages of funding low income developments, are holding off their funding for the deal, or are providing less equity per-dollar of credit. The value of the tax credits has already dropped as much as 15 percent. For example, developers in San Diego claim the tax credits were worth over a dollar each prior to the election. Now, the market prices it closer to 90-95 cents per credit. Nationally, this can lead to hundreds of millions of low-income housing dollars to vanish.

But that is not to say that investors have completely lost all interest in the program, as they did in 2008, the last significant disruption in the LIHTC equity market. A study done by Novogradac & Company, a CPA firm, found that demand throughout most US states remained healthy but rather the divide comes from tax credit pricing. The tax credit program has been successful in the past, with high levels of bi-partisan support, and shapes up to be ultimately resilient in the face of tax cuts.

Affordable housing such as 850 Eastwood in Illinois is supported by the Low Income Housing Tax Credit

How does one shape the affordable housing tax credit in the face of tax cuts? One way to do this is to simply increase the amount of credits the government provides. Affordable housing developers currently are lobbying for the tax credit to be increased if Congress passes any kind of major infrastructure package. The fact that the tax credit has such strong bipartisan supports bodes well for the future of the credit, and many of the largest affordable housing developers, such as Boston Capital, express optimism. David Gasson, vice president at Boston Capital, expects a bipartisan group in Congress to support an enhanced version of LIHTC. “What we’re working with Congress on is, at a minimum, the value will be consistent, if not greater,” he said. “So we’re hoping that actually after tax reform, the value is greater for affordable housing.” Affordable housing developers are also one of the most creative developers that exist. Part of the reason affordable housing has been so successful in the past is because developers have always found ways to make their projects work.

Ultimately, the tax credit market has seen a bit of a shake-up since the elections. While Republican’s talk of knocking down the corporate tax rate may have caused a bit of a shock in the current tax credit market, the fact remains that the future of affordable housing remains as bright as it has ever been.

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