- May 15, 2017
- Posted by: tjmuro
- Category: Economics, Low Income Housing
It was just before the election that the planned A.O Flats in Boston’s neighborhood was about to start as an oasis for families seeking affordable housing in a growing affluent area. However, elections accompanied by the biggest historical federal tax code overhaul, aimed to simplify tax laws as and slash taxes for the benefits of corporations, put many such multifamily affordable lending projects in trouble.
The proposed cut in corporate taxes has resulted in decline of federal low-income housing tax credits’ pricing, making them worthless to many investors. It is to be noted that these credits are the key financing for affordable housing projects. If present corporate tax rate of 35 percent declines by 20 to 15 percent, the credits will lose their worth to investors as an instrument to decrease their tax liability.
Bart Mitchell, CEO of the Community Builders Inc., states that investors presently getting tax deductions at 35 percent and confidently anticipating decline in the rate, are now paused and waiting. Mitchell’s notions indicate that potential cuts in federal corporate taxes have started to disrupt the low income housing market in the USA. Investors are increasingly scaling down their financial contracts, stimulating states and cities to arrange their own funds for financing these projects. This resulted Mitchell’s group to negotiate for construction’s cost reduction in view of pouring more of its money, and look to the Massachusetts Housing Financial Agency, the state’s housing authority, to subsidize multifamily affordable lending A.O Flats project in Boston.
The low income housing tax credits serve as the most important tool for developing affordable housing. Around $8 billion are issued to states and localities by the federal authority annually, to issue these credits to developers and investors who finance the rehabilitation or construction of rental houses for low to medium income families. Since last 20 years, over 1400 projects and 100,000 units have been built, acquired or rehabilitated via credits. Removing federal tax credits from housing funding pool would greatly crunch the affordable housing investment.
The benefits of federal tax credits
The contribution of investors serves as a subsidy to the rent charged for multifamily affordable lending units, which enables local housing agencies to rent them at below-market rates that are affordable for low to medium income people. Credits also subsidize the economy such as the credit for acquiring energy-efficient supplies and equipment, earned income tax credit for the working poor etc.
According to the tax experts, if housing credits get eliminated or reduced in a tax overhaul, an alternative source of investment must be determined by the government to keep the affordable housing project investments intact. Todd Crow, chairman of the board of the national Affordable Housing Tax Credit Coalition concerns that any overhaul in tax credits would make them less valuable.
The Decline in Tax Credit Value
The crunch in $50 million Bedford Greenhouse construction in the Bronx, NY is perhaps the biggest example showing the fluctuation in low-income housing tax credit market. Mitchell Netburn, the head of project renewal confirms that investors previously paying $1.15 to $1.18 per tax credit before election, have now come at the lower rate of as little as $1.05. This resulted in the shortfall of $2 million. Now the group is cutting its costs as well as seeking help from state, the city and private agencies to fill the gap. Similar is the case of Oakland Affordable Living Development project in Pittsburgh, intended to develop 49 multifamily affordable housing units, at the cost of $16 million. The turned back investors led to shortfall of $500,000.
Ben Rosen, real estate director of Skid Row Housing Trust in Los Angeles says that multifamily affordable lending units need to be built across all income levels. Any devaluation in tax credit would worsen the affordable housing crises nationwide.