We should have seen it coming, but here at ViaHome we were shocked to read that this week’s tax reform bill (the “Tax Proposal”) proposes to eliminate tax-exempt multifamily bonds (“Multifamily Bonds”). These bonds, together with the housing tax credits they generate, support some 40% of affordable housing starts nationwide. In 2016, housing developers used $14 billion in Multifamily Bonds to support affordable housing. Eliminating this financing source will be tremendously disruptive.
In this post, we’ll do our best to explain what’s going on as well as give you our take on what it means for the future of affordable housing development.
Bonds – What’s the Big Deal?
The Low-Income Housing Tax Credit (“LIHTC”) is the primary federal subsidy for affordable housing. LIHTC comes in two varieties, the more valuable 9% Credit, and the 4% Credit. 9% Credits can generate 2x-3x the amount of financing for a project compared to the 4% Credit. Once awarded, developers bundle these credits and sell them to investors; this process can raise roughly 25%-70% of a development’s cost, allowing the project to proceed.
States can award only a limited amount of 9% Credits in a year (the “Tax Credit Cap”); competition to obtain them is fierce. 4% Credits, however, are not subject to the Tax Credit Cap, as long as an affordable housing development also uses Multifamily Bonds as a finance source.
The Tax Proposal simply deletes the Multifamily Bond language from the tax code. By the text of the tax code itself, if you kill Multifamily Bonds, you kill 4% credits; you must have one to have the other. In addition to effectively killing off 4% Credits, the Tax Proposal will increase the borrowing cost for affordable housing by repealing its tax-exempt status.
What’s behind this proposal? The Tax Proposal argues that the federal government should not subsidize the “costs of private businesses” – a curious claim in light of the Tax Proposal’s other provisions. We suspect it might have more to do with raising revenue so that the Tax Proposal’s cost doesn’t violate parliamentary rules. Whatever the reason, it’s clear these proposals will upend affordable housing development in the future.
Time to Think Outside the Box…
Multifamily Bonds and 4% Credits are a hugely important part of our arsenal in the affordable housing fight. If passed into law as drafted, the Tax Proposal will do incredible harm to the housing sector and to working families in general. We think that when Congress sees how important these tools are, they will ultimately preserve them.
Despite LIHTC’s successes, the Tax Proposal reminds us that we cannot rely on LIHTC alone. LIHTC transactions, though effective, are extremely complex, exceedingly expensive, and currently do not produce units at the rate needed to alleviate the housing gap.
At ViaHome, we are thinking hard about innovative ways to finance affordable housing developments alongside – or without – LIHTC, and the Tax Proposal has motivated us to double our efforts. We’ll be talking about some of our ideas over the next several months, but we want to hear from you. Naturally occurring affordable housing? New CRA investment opportunities? If you’re thinking about something new, reach out to us and let’s talk.