Affordable Housing Faces New Headwinds

Tax reform eases financial burden on corporations, but reduces their incentive to invest in federal low-income housing tax credit program. 


By Bendix Anderson

Since the Republican-led Congress passed its comprehensive reform of the nation’s tax code at the end of 2017, developers are finding it increasingly difficult to raise money to build new affordable housing for seniors.
“You have to look under every rock for funding,” says Michelle Norris, executive vice president of external affairs and strategic initiatives for National Church Residences, a nonprofit developer of affordable seniors housing based in Columbus, Ohio.
Nearly all the new affordable housing built in the United States is financed with money raised through the federal low-income housing tax credit (LIHTC) program. The buyers are typically large companies such as national banks. Those corporations are now paying less for tax benefits as a result of the Tax Cuts and Jobs Act signed into law by President Trump on Dec. 22, 2017. That means less available funds for affordable development. Congress increased the amount of LIHTCs available in the federal budget for fiscal 2019, signed into law in March of this year. It will be a big help, but not enough to undo the damage done by tax reform.
“While these LIHTC provisions together could increase affordable rental housing production and preservation by more than 28,400 homes, they would not offset the 235,000 affordable rental home deficit because of tax reform,” according to an analysis by Novogradac & Co., an accounting firm with a specialty in affordable housing based in San Francisco.
In the short term, developers who made plans to build before tax reform now have to fill the holes in their development budgets. They are turning to local and state housing programs for new funding — and that takes time. “It now takes a project six months to maybe a year longer than it once did to get under construction,” says Norris.
In the long term, the shortage of cash will make it even more difficult for seniors housing developers to keep up with the need for affordable seniors housing, which increases with each passing year.
LIHTCs survive tax reform
However, developers of affordable housing do have reason to celebrate — they are still in business. Congress not only opted to keep the LIHTC program in place, but passed an expansion of the program in March. Developers are even finding new ways to bring health services to their residents (see sidebar).
The last time Congress revised the federal tax code in 1986, it removed a whole generation of federal housing programs. Housing advocates worried that this time Congress would wipe out the LIHTC program established under Section 42 of the Internal Revenue Code.
Congress has been trying to pass a reform of the tax code for almost a decade. Through all those years, housing advocates such as the Affordable Housing Tax Credit Coalition and the National Housing Conference have met with legislators, toured affordable housing properties and invited them to ribbon cuttings to show off the LIHTC program.
Even with all of that work, the first proposal for tax reform from the House of Representatives only preserved half of the program. It kept the competitive LIHTC program, in which state housing officials hand out reservations of tax credits every year to developers, typically in statewide competitions.
It erased the federal tax-exempt bond program, which pairs LIHTCs with low-interest, tax-exempt bond loans — a financing recipe that has become more and more effective in recent years. Since 2016, the tax-exempt bond program has financed half of the housing units built or renovated with LIHTCs
The House proposal set off a frantic effort by housing advocates and the affordable housing industry. “There was a six-week sprint to save the bonds,” says Jennifer Schwartz, assistant director for tax policy and advocacy for the National Council of State Housing Agencies.
The final version of tax reform signed into law late last December includes both of the two parts of the LIHTC program. The tax reform measure also preserved other community development programs such as historic rehabilitation tax credits, which help pay for the restoration of historic buildings, and New Markets Tax Credits.
Falling prices for LIHTCs
But tax reform still creates a challenge for affordable housing developers. The whole aim of tax reform was to lower the top corporate tax rate from 35 percent, in addition to chopping away many loopholes and tax benefits. The new corporate rate is 21 percent, an even deeper cut than the 25 percent many investors were expecting.
The lower tax rate lessens the value of tax benefits like LIHTCs, which investors receive over a 10-year period. Corporations now have less need to lower their tax burden and less certainty that they will need tax benefits for the long term.
Investors responded immediately to the likelihood that they would not need as many tax benefits by cutting the price they were willing to pay. Immediately after the November 2016 election of President Trump, the prices investors pay for LIHTCs dropped from an average rate of close to a dollar for a dollar of tax credit down to the mid-90-cent range. These investors guessed, rightly, that with Republican control of the presidency and both houses of Congress, tax reform was likely to finally move forward.
“There was another drop in LIHTC prices after tax reform passed,” says Scott Hoekman, senior vice president for Enterprise Community Partners, an LIHTC syndicator based in Columbia, Md. This time prices sagged as low as the high-80-cent range in some cases.
“There was a five-cent drop in pricing, and then another five-cent drop,” says Norris. “Everyone had to recalibrate their financing plans twice.”
Lower tax credit prices have a direct effect on how much money developers have to build affordable housing projects. For example, a developer who won $10 million in LIHTCs might have sold them at a rate of roughly a dollar per dollar of tax credit before tax reform, raising about $10 million. After tax reform, the same project might only raise $9 million by selling the same credits at lower prices.
Many developers now find themselves in this position. They won reservations of LIHTC by promising to build affordable housing, but they now have less money to complete the projects they planned.
Construction start struggles
Developers who face holes in their development budgets only have a few options. They can either scramble to raise more money to pay for their projects, reduce costs, or simultaneously pursue both options.
Most developers carefully plan their projects to provide the most housing for the least amount of money. To win LIHTCs, developers typically specify a long list of features for a planned development. After they win credits, the developers can’t change anything that earned them points in the competition.
Developers can reduce the cost of construction by changing smaller details of their plans, though. Reducing the ceiling height of a planned project from 10 feet to 8 feet can shave thousands of dollars off the cost per unit to build. Switching the grade of carpet or other materials also makes a difference.
Developers can also look for new sources of funding. However, many of the biggest funding sources have less money to distribute than in the past. Federal programs like HOME Funds and the Community Development Block Grant program have been sharply cut in recent years.
The president’s proposed budget for the fiscal year 2019, which begins Oct. 1, 2018, has no money allocated for HOME, although thus far Congress has declined to totally remove these programs.
“It’s not that every single bit of HOME and CDBG is gone… there is still some money left over,” says Norris. This little bit of funding is not nearly enough for all the developments with budget gaps. Many state housing agencies have also lost much of their ability to help through state housing trust funds, which were cut in many cases after the Great Recession and have not been replenished.
Some local governments are doing more to assist affordable housing projects. Cities like Columbus, Ohio, are now creating programs to help finance affordable housing development, usually with “soft financing” loans. These loans are effectively grants that don’t need to be repaid unless the property fails to provide housing to low-income people.
“The gap funding of the future is going to come from municipalities because they are the ones feeling the affordable housing crisis,” says Norris.
Closing these budget gaps can delay a project six months to a year, experts say. But many affordable housing projects face unyielding deadlines. For example, apartment projects using LIHTC funding need to be ready to rent by a certain date in order to preserve funding for the developer.
State officials may be able to help. In some states they can swap tax credits that require a project to be placed in service sooner with the same amount of tax credits that would give the developer more time to complete the project. They also help developers find ways to save money in the construction process or connect them with new sources of funding.
Congress intervenes to help
Going forward, developers will still plan new projects. Deals will get done, even with LIHTC prices at their new, lower level. For example, VOA is preparing to submit an application to receive low-income housing tax credits for Senior Residences at Three Springs, a proposed affordable seniors housing community in Durango, Colo.
But projects like Three Springs will likely need more tax credits to raise the same amount of money to build. The program overall may not be able to create as much new housing.
Congress has acted quickly to help, and expanded the LIHTC program in the newly approved federal budget for fiscal year 2019, but the changes won’t make up for the dip in LIHTC prices caused by tax reform.
Every year the LIHTC program finances more than 100,000 units of affordable housing. Roughly one-third of those new units are reserved for low-income seniors. No other program comes close. It’s a lot, but not nearly enough for all of the low-income seniors who need housing today, let alone the aging population to come.
Congress increased the amount of LIHTC funding available to affordable housing developers by 12.5 percent, plus some technical improvements to the program, which could increase the number of affordable housing units created or preserved by the program by about 28,400 over ten years. But that’s not enough to offset to impact of tax reform of about 235,000 units over ten years.
A growing crisis
The number of Americans age 65 and above is expected to balloon to 79 million by 2035, up from 48 million in 2016, according to the Harvard Joint Center for Housing.
After the age of 80, seniors typically become frailer and begin to require more health services. The number of seniors over 80 is also growing quickly, and is likely to double between 2015 and 2035 from 12 million to 24 million.
Roughly one-third of those older adults — 27 million — will earn less than 80 percent of the area median income by 2035, up from 15 million in 2015. The number of elderly renters earning 50 percent or less of the area median income, the threshold at which persons age 62 and above are generally eligible for federal rental assistance, will grow to 7.6 million.
But there are not likely to be enough affordable places in which to live for these seniors.
Nearly all the affordable seniors housing built or renovated in 2018 will be dependent on financing from the LIHTC program. Since Congress created the LIHTC program in 1986, it has financed more than 3 million units of affordable rental housing.
The U.S. Department of Housing and Urban Development’s Section 202 program can also help generate new affordable housing for seniors, but it has been hobbled by funding cuts.
For example, the program recently received an infusion of $10 million from Congress. That’s a tiny amount of money, just enough to keep the program from closing down altogether. With typical development costs of several hundred thousand dollars per unit, the funding would only pay for a few dozen new senior apartments.
Other affordable housing properties were once built with financing from now-defunct HUD programs like Section 8 and Section 236. HUD’s aging buildings total roughly 5 million affordable apartments, including about 1.4 million reserved for low-income seniors.
“Today, we only serve one-third of those who qualify for assistance,” says Jennifer Molinsky, a senior research associate at the Harvard Joint Center for Housing and lead author of Projections and Implications for Housing a Growing Population: Older Households 2015-2035. That means millions of low-income seniors struggle to pay for their housing without help.
“There’s been a significant increase in the number of senior households that pay more than half of their income for rent,” says Linda Couch, vice president for housing policy for LeadingAge, a nonprofit seniors housing organization based in Washington, D.C. that focuses on education, advocacy and applied research in the aging services field.
The burden of housing costs often forces seniors, particularly those with low incomes, to cut back on other basic necessities. “The seniors who have the worst-case housing needs are spending much less… on food, transportation and medicine,” says Couch.
Very low-income seniors who pay more than half of their income on rental housing spend one-third less on food compared with seniors who live in more affordable housing. They also spend half as much on medicine and cut their spending on transportation by more than half, according to the Harvard Joint Center for Housing.