By Mindy Tan
As the price of low-income housing tax credits, or LIHTC, comes under pressure, market watchers fret over the future of these housing projects.
“It’s a real problem and it’s significant enough of a problem that people are trying to figure out different ways to accommodate and plan and prepare,” said Kevin Jackson, the executive director at Chicago Rehab Network.
The plans vary, from some states contemplating the creation of a reserve of credits to combat a shortfall, to other states discussing giving out more credits to developments. In both cases, the end result is fewer developments.
LIHTC, which is a dollar-for-dollar credit system that allows corporations to offset tax liability by directly investing in affordable housing projects, accounts for 90 percent of all affordable rental housing created in the United States, according to the Illinois Housing Development Authority’s website.
Such tax credits have come under pressure following President Donald Trump’s promise to drastically reduce the corporate federal-income tax rate to 15 percent from the current 35 percent. Members of Congress meanwhile are eyeing a rate in the 20 percent to 25 percent range.
“There is still demand for the credits. It’s just that the amount investors are willing to pay for tax credits has gone down because of the impact that the tax reforms would have on the rate of return,” said Dirk Wallace, a partner in the Dover, Ohio, office of Novogradac & Co. LLP.
“We ran some analysis, the drop is anywhere from a few cents to 17 cents per credit,” said Wallace in a phone interview.
This has affordable housing developers jittery.
“The states are talking about increasing the tax allocation and giving each developer more tax credits. Obviously that means they are going to award less deals in the future, so you might see a decrease in the affordable housing construction going forward. For us it means it’s a lot more competitive moving forward,” said Alex Pereira, a project analyst at UP Development LLC.
According to accounting firm Novogradac, the credits that are designed to subsidize 70 percent of costs in a low-income project could drop to 83 cents per credit if the corporate tax rate is lowered to 15 percent.
And credits that are designed to subsidize 30 percent of costs could drop to 81 cents per credit if the corporate tax rate is lowered to 15 percent.
“What they are trying to do is simplify the tax code. Instead of all these tax breaks and tax credits, they want to just lower the rate. But I think what some might not realize is what these tax breaks fund,” said Wallace. “So if you drop the corporate rate, projects may not get funded, and that becomes an issue.”
“If we don’t have LIHTC, what will we have to create affordable housing?” asked Jackson. “We always need to be working on finding resources and support for people of all incomes. We don’t want to lose what we have.”