The Tax Cuts and Jobs Act will have far reaching effects on the residential housing market, especially on low-income housing and historic building renovations. Here's an overview of the changes to the Low-Income Housing Tax Credit (LIHTC), the Historic Tax Credit (HTC), and the New Markets Tax Credit (NMTC), and what they can all mean for developers and builders.
Low-Income Housing Tax Credit
Since its inception, the LIHTC has helped finance almost 3 million rental units. While Congress left this tax credit untouched in the Tax Cuts and Jobs Act passed in 2017, lawmakers ignored warnings of how the lowering of the corporate tax rate would affect it. Cutting the corporate tax rate meant a corresponding drop in the value of the tax credits offered by the LIHTC. In 2016, observers predicted the value of these tax credits would drop by 14 per cent if the federal government lowered the corporate rate to 20 per cent.
The lower value means fewer investors using the credits.
The lower value means fewer investors using the credits. Also, it will require states to come up with more money for low-income housing developments on their own. Some experts predict investors will continue getting out of their existing investments under the LIHTC, driving down the credit's value even more.
Over the past decade, many multifamily developers and builders have concentrated on building in high land price areas, like city centers, to cater to nearly 3 million new renters with high incomes. So, today, there's plenty of housing choices for people earning over $100,000 a year. on the other hand, those earning the median income of $37,300 have fewer affordable options, and often have less than $500 a month leftover after paying rent.
Sidelining the LIHTC means fewer accommodations for the elderly, those with lower incomes, and the disadvantaged. If the predictions prove true, contractors and developers will build 260,000 affordable living spaces less over the next decade. This could still change if lawmakers move to support the value of the LIHTC credits.
Sidelining the LIHTC means fewer accommodations for the elderly, those with lower incomes, and the disadvantaged.
In early 2017, senators introduced the Affordable Housing Credit Improvement Act of 2017 to strengthen the LIHTC. It hasn't gone anywhere yet, but in the light of having a similar bill in the House, it's possible Congress will revisit the negative tax credit issues caused by the 2017 tax law.
In a related development, Fannie Mae and Freddie Mac announced in November they were getting back into the LIHTC market. Then in February, Fannie Mae "announced a $100 million low-income housing tax credit fund" to support affordable housing. The credits will go to places affected by Hurricane Harvey, Native American housing, and multifamily projects in underserved areas.
New Markets Tax Credit
This credit goes to the private investors who fund businesses or developments in places where 20 per cent of the people live in poverty or where family incomes are at least 20 per cent lower than area incomes. This credit typically funds construction projects that include community centers, job training centers, grocery stores, mixed-use commercial, and, even, hospitals.
Investors who claim the tax credits for a qualified project can reduce their tax liability equal to 39 per cent of their investment and do it on a dollar for dollar basis over seven years. Using this credit, developers and contractors have built out 178 million square feet of manufacturing, office and retail space since 2003. The recent changes to the tax laws didn't extend this credit, and it is due to expire at the end of 2019. Legislators introduced the New Markets Tax Credit Extension Act of 2017 to the U.S. Senate in February 2017 where it was referred to committee, and it remains. The legislation would make the credit permanent.
Historic Tax Credit
While this credit survived through tax reform legislation, it saw a lot of changes, according to an article in the National Law Review. Gone is the 10 per cent tax credit for rehab expenses on buildings dating before 1936 and not listed on the National Register, or otherwise certified.
The recent changes to the tax laws didn't extend this credit, and it is due to expire at the end of 2019.
Taxpayers who rehabbed a historic building used to be able to get a tax credit for 20 per cent of what they spent. Now, investors must claim the 20 per cent "ratably over a five-year period starting the year the building is put into service." Also, when corporations calculate the new Base Erosion and Anti-Abuse Tax (BEAT), they can't claim any of their HTCs or NMTCs. And since the HTCs usually get shifted to investors in historical projects, the requirement to claim the investment credits over five years dampens the credit's value.
Overall, recent changes in the tax laws will make it harder for developers and contractors to secure funding for projects that answer the call for affordable housing, community redevelopment, and historic redevelopment. If legislative proposals to shore up and extend these tax credits fail, financing these projects will no doubt fall more to private activity bonds; a solution that historically also relies heavily on the LIHTCs.