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Tax Bill Could Hurt Financing for Affordable Apartments

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Tax Bill Could Hurt Financing for Affordable Apartments


Lowering Corporate Tax Rate Also Seen Reducing Value of Tax Credits, Key Financing Tool for Affordable Units

Developers and investors in the affordable apartment sector will be carefully watching Congress’ work on tax reform this week as members and staff work around the clock to resolve differences between the House and Senate tax bills.

Both versions include a big reduction in the corporate tax rate. And one of the consequences of lowering the corporate tax rate is a reduction in value of tax credits, say experts — a key tool in financing affordable apartment projects.

“The frothy demand for tax credits has allowed us to sell them for more,” said Timothy Henkel, senior vice president of Pennrose, LLC out of Philadelphia, which specializes in the development of affordable and workforce apartment properties. “If after tax reform we can only sell them for less, that means less equity for the project. And that means there has to be other adjustments, like more credits or other sources of funds, which are already scarce. None of those things are good. It’s not a vampire stake through the heart, but it’s not good.”

The House version of the tax bill also eliminates private activity, tax-exempt bonds, another vehicle for underwriting affordable rentals. The final version of the bill could restore those bonds, though that is far from certain.

“There’s always been headwinds for these projects,” said Don King, an executive vice president at Walker & Dunlop who handles that shop’s Fannie Mae and Freddie Mac lending programs. “But now it’s just a little harder.”

The possible stumbling blocks come as the apartment industry confronts the impact of a large supply of new, luxury apartments — and a corresponding dearth of new mid-priced workforce and affordable units. Of the 502,894 apartments under construction being tracked by CoStar in the first half of 2017, 441,262 were 4- and 5-star quality units. Already, the glut of high-end apartments is slowing rent growth for that sector in many large markets.

High construction costs are largely to blame for the shortage in affordable units. Developers need to charge high rents to justify the development costs. Increasingly, they say, it makes sense for new apartment developments to have a mix of both affordable units – to take advantage of financing options – and market-rate units, as a way to make the project profitable.

“It’s a trend we see more and more,” added Pennrose’s Henkel. “If you could do a deal to embed 20% of the units as affordable, it gives you a way into Fannie financing and gives you more (financing) options.” Next year, Henkel said Pennrose expects to break ground on about 17 projects, totaling 1,200 to 1,500 units, in the New York/New Jersey area, Connecticut, Philadelphia, Washington, D.C. and the Southeast U.S.

Meanwhile, Fannie and Freddie are also making changes in the hope of encouraging more affordable rentals. Both of the agencies announced they would return to the Low Income Housing Tax Credit program they had abandoned when they went into conservatorship in 2008. The re-entry allows them to spend up to $500 million next year buying tax credits to pump equity into affordable apartment projects. The effect may be blunted by the expected decline in tax credit value, however.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, lowered the two bodies’ spending caps for 2018 to $35 billion each, from 2017’s $36.5 billion. But at the same time, the agency exempted affordable housing projects from those caps, allowing the GSE’s to buy up more loans in underserved markets.

John Doherty, National Multifamily Reporter  CoStar Group   


Source: Tax Bill Could Hurt Financing for Affordable Apartments

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