Affordable housing development has been disrupted by new tax reform legislation, leaving a void in funding. New financing tools are needed to fill the gap.
The Section 42 Housing Tax Credit Program (LIHTC) will be significantly impacted by the changes to the tax code. These credits encourage affordable housing and have funded over three million affordable housing units since 1986 in every state across the US in both urban and rural areas.
Buying a passive Housing Tax Credit has traditionally been the safest and most profitable way to make an investment in local disadvantaged communities. The credits are popular with financial institutions, major corporations in the financial field and banks. Housing Tax Credits are typically bought to both offset future corporate tax liability and satisfy CRA credits from the Community Reinvestment Act through a limited partnership interest.
However, by lowering the corporate tax rate from 35% to 21%, the new tax legislation makes Housing Tax credits worth less and affects their overall value.
The Housing Tax Credits currently account for 90% of all affordable rental housing created in the United States today. By one estimate, the new tax law will reduce the growth of subsidized affordable housing by 235,000 units over the next decade, compounding an existing shortage.
The Need For Affordable Housing
The need for affordable housing is greater than ever today. According to the Pew Research Center, more U.S. households are renting than at any point in 50 years. The number of renter households jumped by nearly a third between 2004 and 2016 and country has added about one million renters since 2010 alone according to the Harvard Joint Center for Housing Studies.
Housing prices continue to increase, even as wages remain stagnant. This creates an affordability issue for most people interested in purchasing a home. Nearly 40 million Americans live in housing they cannot afford. Too much of their gross monthly income is dedicated to housing payments. More than 11 million people who rent pay half their income for housing, and over 38 million households can’t afford their housing.
These numbers are not only staggering but unsustainable, according to the The State of the Nation’s Housing 2017, an exhaustive report from the Joint Center for Housing Studies of Harvard University.
Low-income renters in particular have seen their residual income decline by 18% since 2001, according to America’s Rental Housing report. This is due in part to a shortage in the low-cost housing market.
The pricing of the Housing Tax Credits credits has already dropped 10% creating a funding gap for future development. That combined with an overall decrease in funding for US-HUD has squeezed the already limited resources of state and local governments.
In addition, there has already been a shift in funding goals for many states from locating affordable housing projects in areas with a high concentration of low income and minority residents to less impacted areas where the costs to build projects are higher — which is adding additional stress to the widening the funding gap. As interest rates rise, the gap will rise as well.
New Solutions Needed
This unmet need provides an opportunity for organizations like CDFIs to service the market. CDFIs—short for Community Development Financial Institutions—support economically disadvantaged communities by creating housing opportunities and affordable financing options in underserved communities. My company, DRI Fund, is one such CDFI.
We’re concerned about the burden the new tax bill will impose on already stressed affordable housing development.
“Financial resources to preserve or expand the current affordable housing stock will become more scarce under the new tax plan,” says Steven Kirsch, Managing Director of DRI Fund. “However, these changes will also create new financing and affordable lending opportunities in that sector, which were not available previously.
One example of the private market addressing the affordable housing issue is the Noah Impact Fund offered by the Greater Minnesota Housing Fund, a CDFI in Minnesota. The goal of NOAH is to preserve the affordability of naturally occurring affordable housing for working families and seniors with low and moderate income. Specifically, they are raising private investment to preserve 2,000 unsubsidized, at-risk, affordable rental homes in the Twin Cities metro area.
There are more opportunities for alternative lenders, debt and equity investors, and CDFIs to think outside the box and fill the funding void created by tax plan with creative financing mechanisms.
Stacey Kirsch is the chief marketing officer at DRI Fund, a a social impact asset manage and CDFI based in Southfield, MI.