WORKHORSE IN AFFORDABLE HOUSING FINANCING AT RISK
By Jim Baugh
In recent weeks Homeport has opened its $11.3 million, 64-unit Hamilton Crossing apartment building for seniors in Whitehall and begun construction on 33 lease-to-own single-family homes revitalizing the Milo- Grogan neighborhood north of Downtown Columbus. What is important to understand about these “wins” for the community – and residents served by Homeport -- is that the developments were made possible through a federal program facing changes in Congress.
The Low Income Housing Tax Credit (LIHTC) program was created as part of our country’s last major tax reform act in 1986. It has produced 80 percent of all affordable housing in our country during the last 30 years. It also could be negatively impacted by the tax reform that Congress is currently considering.
As is typically the case with Congress, the House of Representatives and Senate, both currently controlled by the Republican Party, have different versions/ideas about what tax reform should look like.
The good news is that historically the LIHTC program has always received bipartisan support and both the House and Senate versions of the tax reform bill, also known as the Tax Cuts and Jobs Act, preserve the 9% (competitive) LIHTC.
So then why the worry from the affordable housing industry?
Both the House and Senate bills seek to reduce the corporate tax rate from 35 percent to 20 percent. A decrease in the corporate tax rate makes the LIHTC less valuable to investors. Lower credit prices equal less funding/equity for our developments.
One important difference between the two houses of Congress: the House version would make the 20 percent corporate tax rate retroactive to January 1, 2017, while the Senate version delays the start of the new rate until 2019.
The House version of the bill also proposes to eliminate Historic Tax Credits and private activity bonds. Historic Tax Credits played a significant role in the renovation of our Victorian Heritage properties north of Downtown and the successful conversion of Barrett Middle School to apartments in Merion Village. Private activity bonds, which get paired with 4 percent LIHTCs, are an important component to our future development strategy, and currently facilitate 40 percent of all affordable housing units that get built nationally.
In addition to the actual potential changes in tax law, the uncertainly and timing of when, and if, a bill gets passed creates uncertainty for investors and developers. It becomes difficult to figure out if a deal works without knowing where the pricing of credits will be. And, unfortunately, the uncertainty may cause some investors to simply stop investing until they know what will happen – not good news for communities like Central Ohio facing an acute shortfall in affordable housing.
The positive take away is that the Senate and House bills will be reconciled and there is a good chance that many of the items that the House wants to eliminate may be preserved in a final version of the bill. The affordable housing industry has a strong lobbying force and constituency, but as my Dad always said, “it’s all politics.” Stay tuned.
(Jim Baugh is Senior Vice President of Real Estate for Homeport).