Affordable Housing/HUD/Tax Credit

Affordable Housing Gets a Big Push From Spending Bill

April 19, 2018 Elizabeth Francisco
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While major strides were made this quarter in the affordable housing community with the passage of the Omnibus Spending Bill, the industry is facing potential setbacks amid President Donald Trump’s proposed steel tariffs.

With the industry’s goal to meet the demand for 4.6 million new apartments by 2030, we must continue to consider how to expand housing opportunity and new legislation that could emerge to further impact the industry.

Below, we will explore the benefits of the Omnibus Spending Bill, consider the potential implications of the steel tariffs, and identify trends to watch in the second quarter.

Omnibus Spending Bill

In mid-March, Congress passed a $1.3 trillion spending bill that includes many victories for the multifamily property industry such as increased Housing and Urban Development funding, expansion of the Low-Income Housing Tax Credit (LIHTC), changes in important tax policy for real estate investment trusts (REIT), and a short-term extension of the National Flood Insurance Program (NFIP).

HUD Funding

The spending bill provides a 10% increase ($4.6 billion) in overall HUD funding, increasing appropriations for HOME, Community Development Block Grant (CDBG), and the Housing Choice voucher program. This is $12 billion higher than the administration’s full-year request which would have cut funding by nearly 15%.

Additionally, the bill extends the Rental Assistance Demonstration (RAD) program through 2024 and increases the amount of public housing units that can convert under the RAD program from 225,000 to 455,000. The RAD program “allows public housing authorities to work with private sector developers and managers to preserve their affordable housing stock.”

Furthermore, the bill prevents HUD “from directing local governments to change their zoning laws under the agency’s Affirmatively Furthering Fair Housing (AFFH) rule.”

Low-Income Housing Tax Credit

The LIHTC program was designed to encourage rehabilitation and construction of low-income rental housing by offering a federal income tax credit to investors as an incentive. In return for investing equity capital in the development of housing projects that meet eligibility requirements, investors receive the tax credits for 10 years.

Last year’s passage of the tax reform notably cut the federal corporate tax rate from 35% to 21%. The Omnibus Spending Bill will be critical in restoring value to the tax credit by increasing LIHTC’s allocation by 12.5% for four years (2018-2021).

Additionally, the Spending Bill makes income-averaging a permanent part of the LIHTC program. Previously, the program required owners “to either rent 40% of their units to households earning no more than 60% of Area Median Income (AMI), or 20% to those earning no more than 50% of AMI.” Most owners can now reserve 40% of the units in a property for those with an average income below 60% AMI. This allows the program to be more flexible and include more mixed-income housing. The NMHC believes this expansion will preserve the value of the LIHTC program, a necessity since it is “the only public-private program that supports the development of affordable housing.”

Foreign Investment in Real Property Tax Act

The Foreign Investment in Real Property Tax Act (FIRPTA) was enacted in 1980 in response to concerns about increasing foreign ownership of farmland in the U.S. The main purpose of this act was to establish equity of tax treatment between foreign and domestic investors in U.S. real estate property.

In late 2015, Congress reduced the negative impact of FIRPTA on foreign investment in U.S. real estate by increasing the percentage of a property those investors can own from 5% to 10% without triggering FIRPTA. Congress also cut a tax penalty the act inflicted on foreign pension funds investing in U.S. real estate.  

The spending bill clarifies that real estate investment trust distributions received by a foreign pension fund are exempt from FIRPTA and “that foreign pension funds include both government funds established to provide retirement benefits and foreign-based multi-employer plans.”  

Although these provisions “represent real progress” in the multifamily family industry, repealing the act “or enacting additional reforms could unlock billions in foreign capital that could help to refinance real estate loans and drive new investment,” according to the NMHC.

National Flood Insurance Program

The Omnibus extends the National Flood Insurance Program through July 31, offering lawmakers the opportunity to work on a more “comprehensive reauthorization.” However, long-term extension and reform of the program is a key policy goal for the multifamily industry, to help better address the needs of the sector.

Congress must reauthorize the program periodically in order for it to continue functioning, according to the Federal Emergency Management Agency. Not renewing the program could even cause a lapse in as many as 40,000 home sale closings each month.

Steel Tariffs

In late February, President Trump announced he will impose tariffs on imports of steel and aluminum, sparking fear that the U.S. will start a trade war with China. The tariffs of 25% on steel and 10% on aluminum raised concerns for the real estate industry about the possible impact it could have on construction and multifamily development. “Policies that increase the cost of development stand in the way of meeting urgent housing demand as well as imperil the economic and employment gains achieved through tax reform,” said Cindy Chetti, senior vice president of government affairs at the NMHC.

Considering the costs that already go into a multifamily development, policies that could increase those costs will add additional stress on the industry. The tariffs could also reduce building construction, worsening the nation’s housing affordability challenge. Last year, the National Low Income Housing Coalition found that only 35 affordable homes are available for every 100 households categorized as extremely low income, and since the nation “needs to build 4.6 million apartments by 2030 to keep up with demand,” delays in construction could widen the gap between the affordable need and available homes.

Housing Developments in Austin

In mid-April, three Austin City Council members urged taxpayers to sign off on borrowing $300 million for an affordable housing initiative. The proposed initiative is nearly five times the size of any housing initiative ever approved by Austin city voters.

However, the money is not expected to even put a dent “in what the city estimates is a shortage of 60,000 units of lower cost housing.” According to a study conducted last year by Crain’s, Austin was one of the 10 most undersupplied lower-income housing markets in the U.S. However, the city is more concerned that the money will raise the tax bill of every Austin homeowner, rather than making it quicker, cheaper, and easier to build housing.

Overall Take-Away

Despite the tariffs on steel and aluminum adding stress to the industry, the outlook for the affordable housing industry for the remainder of 2018 is looking bright. The Omnibus Spending Bill will have far-reaching implications for the multifamily market and is an important step in addressing the nation’s affordable housing shortage. “As the country continues to struggle with housing affordability, this legislation makes significant progress on a number of fronts to expand housing opportunity and support key policy initiatives,” the NMHC said in a statement. “NMHC/NAA will continue to work with policymakers to further highlight our legislative and regulatory priorities.”

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