By: Kevin Oklobzija//August 20, 2021
By: Kevin Oklobzija//August 20, 2021//
Proposed legislation, a late-2020 law change and a possible bump in the corporate tax rate all should turn out to be beneficial for the affordable housing industry as objectives of the Biden administration play out.
When the federal corporate tax rate climbs, investment options such as Low Income Housing Tax Credits (LIHTC) become more attractive.
“Higher taxes drive the appetite for large institutional investors,” said John Bohrer-Yardley, of counsel in the real estate development and finance department of Woods Oviatt Gilman LLP.
The equity that is leveraged off the sale of the tax credits is often what makes or breaks the viability of a project for affordable housing developers, Bohrer-Yardley said.
“An affordable housing development is just like any other development project, but because rents are capped, you have to fill the financing gap,” he said. “And there’s a huge financing gap to backfill from what you’re missing from rents.”
That’s where 4 percent and 9 percent LIHTCs come into play. They can be attractive investments to the biggest banking and insurance institutions when it comes to return on investment, especially in an era of higher corporate taxes.
“Those tax exempt bonds procure more equity to fund affordable housing projects,” Bohrer-Yardley said.
For example, if a project has a total cost of $10 million and $9 million of the costs are eligible for tax credits, the developer will sell those tax credits. The developer gets money to pay for the project while the investor gets tax credits for 10 years, which ends up providing a 4 percent to 5 percent yield.
There was a time when the 4 percent and 9 percent LIHTCs didn’t return those rates, however. But the floor on the 9 percent LIHTCs was capped at that 9 percent rate of return by Congress in 2015. In December, Congress ensured that the floor on the 4 percent bonds won’t dip below 4 percent.
Earlier in 2020 those 4 percent LIHTCs hit a historic low of 3.07 percent. They often hovered around 3.15 percent last year, said Roger Brandt, founder and president of Rochester’s Cornerstone Group, which specializes in development of affordable housing.
“The legislation of fixing the rates has been a huge help already,” Brandt said. “Compared to the 3.15 percent, that’s a 33 percent increase.”
Investors like that certainty of the tax credit. And if the federal tax rate goes back up, LIHTCs will be even more attractive. When the Trump administration cut the corporate tax rate from 37 percent to 21 percent, investment in LIHTCs dropped off.
“All of a sudden they weren’t worth as much to our primary investors,” Brandt said. “It was a lot more valuable for them to save money at 37 percent than at 21 percent. Right now there are some investors sitting on the sidelines but it’s generally accepted that if the tax rates goes up, we’ll probably get a little more for our dollars in Low Income Housing Tax Credits.”
Which means more affordable housing should be built as communities seek to fill needs.
“Some of the refinements at the federal and state level are going to enhance developers’ abilities to do more projects and reach different levels of community members,” Bohrer-Yardley said. “And even one affordable housing project is a driver and catalyst for revitalization.”
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