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Changes to the Federal Tax Code threaten LIHTC-Financed Affordable Housing Projects

January 19, 2018

  

The December 2017 approval of the Republican Federal Tax Plan cuts back on the value of Low Income Housing Tax Credits (LIHTC), which is anticipated to significantly reduced new affordable housing developments.  Since 1986, the LIHTC has contributed $9 billion per year in affordable housing development, generating a total of 3 million housing units for families earning 60% or less of the area median income (AMI).  However, the reduction of the corporate tax rate has also lowered the value of the LIHTC— which corporations get in return for their investments.  According to Michael Novogradac, managing partner of Novogradac & Company, the new tax law will reduce the growth of subsidized affordable housing by 235,000 units over the 10 years.

 

Under the LIHTC program, state governments award credits to affordable-housing developers, who transfer them to corporations in exchange for equity in rental buildings whose units are set aside for low-income tenants. Corporations use the credits as a coupon against future taxes. Low-income housing tax credits have been particularly popular among banks because affordable-housing investments help satisfy their obligations under the Community Reinvestment Act. The contraction of the value of LIHTCs comes at a time when there has been a surge of new renters.  Since 2010, the country has added  1 million new renters each year — about twice as many as the previous rental peak in the 1970s and ’80s (according to a 2017 report by Harvard’s Joint Center for Housing Studies).  Over the next decade more than a million units of affordable housing financed by low-income housing tax credits and other government programs are set expire and shift to higher rents while the younger half of the millennial generation will move into their 20s and 30s, adding to the pool of renters and exacerbating demand levels. 

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