Uncertainty for Federal Tax Credit Programs

Uncertainty picture 2Since November, financial analysts have been concerned with the future of federal tax credit programs for investment in low income affordable housing and other community and economic development projects.

With Donald Trump as President and a Republican-controlled House and Senate, the prospects of tax reform have increased dramatically. This has heightened concerns that the LIHTC program could be significantly hampered, or even eliminated, under a sweeping tax reform effort.

Specifically, Trump has called for slashing the business tax rate from 35% to 15%. If the corporate tax rate is reduced, LIHTC pricing will have to drop to maintain current market yields. It is estimated that the drop could be between 5 and 10 cents drop per dollar of credit for a 9% LIHTC deal. The alternative is that investor yields drop and prices remain the same.

According to Vihar Sheth, senior vice president and director of business development at U.S. Bancorp Community Development Corp., who spoke in November at AHF Live: The Affordable Housing Developers Summit in Chicago: “There’s almost a zero percent chance” that the tax rate changes alone. Other complex moves, such accounting and tax credit regulation changes, will be involved.”

Another analyst, Jeff Weiss, president of Alden Capital Partners, has stated that he does not believe the LIHTC will be eliminated. Speaking at the AHF summit, he said: “Your choice is a public-private partnership or HUD. You have a Republican Congress and a Republican president. They’re not going to say, ‘Let’s go back to public housing.’ They’re going to go to states’ rights, with states having the ability to push credits.” Still Weiss acknowledged that LIHTC syndicators will have to “sharpen their pencils to make deals work.”

Communication between syndicators and investors about placement and timing is also going to be critical to getting deals done. Although corporate tax reforms may take a few years to fully take effect, financial analysts are advising developers to close their deals if the numbers work.

Another threat to community and economic development will surface if the pending House budget hews to the Heritage Foundation’s Blueprint for Change (see preceding article about HUD). The Heritage report advises eliminating the Treasury Department’s Community Development Financial Institutions Fund ($238 million), which issues New Markets Tax Credits on a competitive basis to certified community development entities. However, the Community Reinvestment Act (CRA) provides a strong incentive for banks to invest in tax credits, and these CRA obligations will likely remain in place. In addition, the coalitions of investors and supporters of housing and economic development will strongly push back on threats to these federal tax incentive programs.

Liz Tracey-4x5For information about affordable housing and community development financing resources, contact Liz Tracey, Senior Principal, LDC at: liz@lesardevelopment.com.

Liz Tracey is an expert on affordable housing and community development finance using tools such as the Low Income Housing Tax Credit and New Markets Tax Credits.