The Looming Threat to Low Income Housing Tax Credits

Mar 21, 2017

Federal housing tax credits have supported the building of affordable housing for years, but with the new Trump administration has come market insecurity — putting the funding for some affordable housing projects at risk.

To be clear, the federal tax credits have remained the same. No laws have changed. But the way the credits work involve investors who know their value, similar to the faith investors have in the stock market. Introduce some uncertainty, investors balk, and the value of the tax credits dips — and affordable housing developers don’t have as much cash on hand as planned.

Here’s how it works: under the Low Income Housing Tax Credit program (LIHTC), development projects can receive tax credits. The developer can sell those tax credits to banks and other investors. The tax credits mean money back for the investors, while the developer gets cash-in-hand to help cover the cost of the construction project. This is especially important since affordable housing rents at below market rates — getting and selling credit helps bring down the cost of the project as a whole.

In 2016, for example, some credits were bought at a rates as high as $1.05 per credit, as the Boston Globe reports. Before the end of the first fiscal quarter of 2017, that price had dropped as low as $0.89. In that drop lies the difference between affordable housing projects finishing on time, or more projects delayed due to financing. It is basic supply and demand — as demand for the credit lessens, supply increases, and the price dips.

As the Globe reports, President Donald Trump has promised to revamp the national taxation system, and the House leadership has floated a “blueprint.” That’s where the uncertainty comes in. Investors worry that LIHTC reform could hamper their investments, and they have concerns about the kong-term value of their investments in tax credits.

“Essentially, an anticipated tax rate reduction is getting baked into pricing for deals that are getting put together now,” is how the National Real Estate Investor describes the issue. “Assuming that the current 35 percent federal tax rate does drop to 20 percent, as is proposed under the House ‘blueprint’ for tax reform, then investors are lowering their bid price by about a penny for each percentage point drop.”

Lower prices for the credits also means there’s less demand for the projects. More supply than demand for the credits, and there’s less investors willing to pony up, and less affordable housing projects getting completed — even if the demand for the housing keeps rising.

Affordable housing projects from Minnesota to D.C have already been feeling the pinch, slowing down or not getting built, according to Minnesota Public Radio. One expert estimated that $1 billion in affordable housing cash could be off the table.

“The biggest issue is that it was so abrupt. I think most folks didn’t expect Donald Trump to win,” Michael Novogradac, of the accounting firm Novogradac & Co., told MPR.  “Most folks thought the chance of corporate tax rates actually coming down weren’t that great. And if they did, they wouldn’t come down that dramatically.”

Not everyone is sitting idly by as the market shifts.

In D.C., the Department of Housing and Development is seeking input from the community. A bipartisan bill has been introduced in the Senate that would increase LIHTC credits by 50 percent. But it’s likely that this still won’t be enough to turn the tide for projects trying to sell tax credits now.