The biggest question for 2018 asks, “Is the industry prepared to meet the demand for 4.6 million new apartment units by 2030?” Among the design, tech, and psychographic changes multifamily properties are considering in order to meet this 2030 goal, we must also consider where the tax bill needs clarification and where new legislation will emerge to lay a future foundation.
We have explored the impending implications of the tax reform passed last year and identified trends to watch in first quarter of 2018.
Tax Reform and HUD
Last October, Republicans re-worked the tax code, “with House members narrowly clearing a budget blueprint that would allow a tax bill to pass Congress without any Democratic votes.” And in December, the House passed the tax bill. It has been described as a “1,000-page piece of legislation, affecting every corner of the United States economy.” It is quite clear that given the size and scope of the law, language will have to be clarified in several areas for the bill to function as legislators intended.
One of the most significant items was the cut in the federal corporate tax rate from 35% to 21%. Coupled with the long-promised 13% across-the-board spending cuts, this could be devastating for HUD housing as low income Americans currently depend heavily on housing vouchers and community block grants. With available low income housing dropping more than 60% between 2010 and 2016, and weakened incentives for banks to invest in affordable housing projects, the outlook for public housing in general looks bleak.
Implications for Multifamily Housing
It does appear that tax reform will be offering some benefits with respect to “flow-through” entities and depreciation losses.
The multifamily industry is made up primarily of “flow-through” entities such as partnerships, LLCs, and S Corporations, which “pass the company’s earnings through to the partners who pay taxes on their share of the earnings.” Industry interest groups are working to ensure that the bill is interpreted correctly and allowing multifamily businesses to fully qualify and receive the 20% deduction designed for qualifying income earned by the pass-through entities (e.g., LLCs, partnerships and S Corporations).
The new law will permit deductions for business interest, but will require an extension of a building’s depreciation period from 27.5 years to 30 years. Ambiguity related to existing or future buildings is still present in the interpretation of this provision, and could be read to require that the “remaining life of existing buildings be depreciated over 40 years when owners opt to deduct business interest.” The verdict is still out, but industry groups are working to confirm that the 30-year depreciation period applies to existing buildings.
Low Income Housing Tax Credit Crisis
Created in Congress in 1986 as Section 42 of the Federal Tax Reform Act, the Low Income Housing Tax Credit (LIHTC) program was designed to encourage rehabilitation and construction of low income rental housing. The incentive for investors, both individual and corporate, is a federal income tax credit. In return for investing equity capital in development of housing projects that meet eligibility requirements, investors receive the tax credits for 10 years.
And the LIHTC has long been held up as a beacon of hope in efforts to solve the crisis in affordable housing. While it has created three million housing units, which is 90% of all affordable units built since 1986, nearly 99% of all counties nationwide are still experiencing an affordable housing crisis.
The new tax reform plan, which passed in late 2017, did not “dramatically weaken the incentive to partake in the LIHTC program,” as predicted. The incentive will still be there to take advantage of the tax credits. The cost burden of building affordable housing will not fall to the private sector.
It turns out that the bill will retain the 4% LIHTC and the Historic Tax Credit, both of which were repealed in the House bill. It is widely known that “the 4% LIHTC funds a third of all affordable housing construction, while the HTC has been used to fund renovations to more than 40,000 historic structures since 1981.”
Lawmakers were also able to extend several tax provisions that expired at the end of 2017, including one that had been introduced in the Senate (S. 2256) and that would renew the Energy-Efficient New Homes Tax Credit and the Energy Efficient Commercial Buildings Deduction through 2018.
Hopeful Signs in California, Chicago, Denver, and Atlanta
In 2017, the affordable housing crisis was a main focus for the California Legislature. The result was Governor Brown’s signing into law a landmark “housing package” of 15 bills, all of which are designed to increase the state’s supply of affordable housing. These bills include measures for existing and new state funding for affordable housing developers, along with strategies to promote affordable multifamily development. For example:
“Senate Bill 2 (Atkins), the Building Homes and Jobs Act, establishes a new $75 recording fee on real estate transactions (excluding new home purchases) to create a permanent source of state funding for affordable housing . . . The fee is projected to generate roughly $200 million to $300 million per year. Over the long-term most funds will be distributed to local governments to fund affordable housing development.”
“Senate Bill 3 (Beall), the Affordable Housing Bond Act of 2018, places a measure on the November 2018 statewide ballot to raise $4 billion in bonds, with $3 billion going to fund affordable housing development through existing state programs.”
California can often be viewed as a legislative bellwether, especially with respect to certain social issues. It looks like as if this is the case when compared with news from Chicago, Denver and Atlanta.
In December 2017, Chicago Mayor Rahm Emanuel announced a Flexible Housing Subsidy Pool (FHSP), a one-of-a-kind supportive housing rental subsidy model that combines both housing/rental subsidy expertise and intensive case management to effectively house residents who are experiencing homelessness.
The City of Chicago FHSP is modeled after the Los Angeles version and establishes a rental subsidy source that allows the city to quickly house and provide supportive services to the most challenging and costly homeless populations, including individuals who are high utilizers of emergency rooms and the criminal justice system.
To get the subsidy started, Mayor Emanuel introduced an ordinance to dedicate $500,000 for FHSP from the Affordable Housing Opportunity Fund (AHOF) and $500,000 in 2018 corporate funds. The Chicago Housing Authority will contribute $800,000 in HUD funds that was approved by the CHA board in November 2017.
Denver’s Social Impact Bond (SIB) program, created in 2014 and launched in 2016 to address affordable housing in the City, showed evidence of it working as described in a 2017 report.8 With an $8.7 million private investment and approximately $15 million federal investment, the program is aimed at measurably improving the lives of people post in need by driving resources toward better, more effective programs.
By providing resources, including housing, for 250 of Denver’s most vulnerable, the city hopes to reduce close to $7M in costs to support these citizens.
New Atlanta Mayor, Keisha Lance Bottoms, recently launched the $1 billion Atlanta Affordable Housing Initiative to increase and expand citywide affordable development and anti-displacement efforts. Included in the initiative is a creation of the Atlanta Rental Housing Initiative, a promise that public land will not be sold to private investors without a commitment to affordable housing, and the implementation of a new zoning policy wherein all residential construction citywide must include affordable housing.
Despite the few bright spots in cities like California, Chicago, Denver and Atlanta, the outlook overall for 2018 is ambivalent at best. The new tax reform will have far-reaching implications for the multifamily market in general. The takeaway is that as the industry continues to explode, increasing efficiency and streamlining multifamily management operations with innovative solutions like intuitive software has become more important than ever.