A few months before the 2016 election, residents of an old affordable-housing complex near downtown Worcester, Massachusetts, were about to get some long overdue upgrades. The 132-unit building had been locked into 40 years of affordable pricing thanks to Department of Housing and Urban Development financing awarded in the 1970s, but now that mortgage had run out and the owner wanted to sell. The Community Builders (TCB), a nonprofit real estate developer specializing in affordable housing projects, bought the building with plans to keep it affordable—and give it a makeover. By the second half of 2016, they had secured a series of funds, including federal tax credits to add two more units, update 40-year-old kitchens and bathrooms, and gut the 70s-era electric baseboard heating that had made the heating bills for residents skyrocket during the cold New England winters.
Around the same time, halfway across the country, in Aurora, Illinois, the Community Builders were also hatching a plan to preserve dozens of low-income housing units in Coulter Court, a struggling downtown building. By renovating an old department store building two blocks away that had been vacant for more than five years, they planned to create a three-story mixed-use space, with the top two floors transformed into 38 affordable apartments for working artists. The new building would help sustain the older one. “We thought, now we’re going to get economies of scale, so Coulter Court is going to work way better, and we’re going to preserve affordable housing for particularly vulnerable folks,” Will Woodley, TCB’s Chicago director of development, says.
The Community Builders is one of thousands of developers across the nation that builds affordable housing every year. They often rely on the low-income housing tax credit, an indirect federal subsidy used to incentivize the construction and repair of affordable housing properties. Developers like TCB sell these credits to large financial institutions, often banks, for cash that they then use to build affordable housing. The incentive for banks is that the credits can then be used as deductions lowering their overall tax bill.
The scope of the program is enormous: the credit is used to finance 9 out of 10 affordable units built in the United States, and since its inception has helped create about 2.9 million rental units nationally. In 2016, the Worcester project received about $9.4 million of capital from the credits, while the one in Aurora got about $15.9 million. “The only way it worked is if we threw every tax credit known to man at this thing,” Woodley says.
But Republican plans to overhaul the tax system before the new year threaten to vastly devalue this credit, leading to the loss of nearly 1 million affordable housing units in the next decade. “This will have a severe impact on the construction and preservation of affordable homes throughout the country,” Diane Yentel, president of the National Low Income Housing Coalition, said in a statement. “This bill, taken altogether, is irresponsible and unacceptable.”
Michael Novogradac, the president of accounting firm Novogradac and Company, estimated earlier this month that “hundreds and hundreds of thousands of units of affordable housing would be lost over the next 10 years.”
The LIHTC program includes two kinds of credits—one allows LIHTC credit buyers to deduct 9 percent of the cost of construction from their tax bill, and another lets them deduct 4 percent. The 4 percent credit may appear to be less valuable, but that also makes it less competitive when states choose whether to award the credits to developers.
More than half of affordable housing projects nationwide rely on the 4 percent credit. This type of credit can only be claimed for tax purposes if at least half of the construction project is funded using “private-activity bonds”—these are tax-exempt bonds that states award to qualified projects aimed at a public good, such as housing or public schools.
Both the House and Senate bills technically retain the existence of the low-income housing tax credit, but the House version—which passed earlier this month—proposes getting rid of the tax-exempt status of private activity bonds. This would gut the widely used 4 percent credit, leading to the loss of between 788,000 and 881,000 units in the next decade alone.
On the Worcester project, for example, private activity bonds made it possible for the developers to claim the 4 percent credit, and that brought in almost a third of the project’s total budget. “If the 4 percent credit goes away, then financing tools that we use to make projects like this one possible are going to go away,” says Eliza Datta, the New England region’s Vice President of Development at TCB. “And we are going to have to make some pretty significant adjustments on how we approach financing.”
The Senate bill is better for affordable housing because it maintains the existence of private activity bonds. But both versions are predicated on Trump’s long-time priority to reduce the corporate tax rate from 35 percent to 20 percent. If the corporate tax rate drops significantly, the downstream effects could also be devastating for affordable housing development. With smaller tax bills for corporations come fewer incentives for tax-bill-shrinking LIHTC credits. An analysis from Novogradac estimates that a 20 percent tax rate would reduce LIHTC equity by about 15 percent, translating to a loss of $1.2 billion or more annually for affordable housing development.
“This credit is the only significant production program for affordable housing in the country,” said Beverly Bates, senior vice president of development operations at the Community Builders. “Affordable housing is a layer cake. It is not unusual to close a project with six, seven, eight sources of funding. But the tax credit is almost always going to be the biggest one.”
That’s not to suggest that the low-income housing tax credit works perfectly. An auditor from the Government Accountability Office testified this summer that the program lacks oversight. The Internal Revenue Service has not audited most of the state agencies that administer the LIHTC in decades, the GAO found. A PBS Frontline investigation from May found three instances where large affordable housing developers were charged with stealing money from the program.
But such bad actors are “the exception, not the rule,” says Bates, and overall, housing advocates note the tax credit program has seen major success in creating more affordable homes and, with them, some other benefits. A study released this week by the Bipartisan Policy Center, for instance, shows that the credit has been instrumental in leading to better public health outcomes.
If the Senate bill passes as is, lawmakers in Washington will have to reconcile the House and Senate versions before sending a final bill to the president. This means that the piece of the affordable housing calculus currently removed from the Senate bill—the gutting of private activity bonds, and thus the 4 percent credit—could still make a comeback. “Worst case scenario is they do away with the private activity bonds and reduce the tax rate,” Bates says. “Which means you have way fewer tax credits in general, and they are worth less.”
Many affordable housing projects have already experienced some of the roadblocks that may lie ahead after tax reform. Immediately after the November 2016 election, all of TCB’s LIHTC-dependent projects ground to a halt. Trump’s victory and the dominance of the Republican congress appeared to make tax reform more likely. Investors on the Worcester building, the Aurora project, and dozens more of the 60 affordable housing projects in the Community Builders’ pipeline at the time said they were going to have to reprice the low income housing tax credits they had previously agreed to purchase. Across the 10 affordable housing projects that TCB had planned to complete in 2017—including the ones in Worcester and Aurora—about $8 million of low income housing tax credit equity value was lost. As Bates says, “No deal went unscathed.”
In Worcester, investors repriced credits from $1.17 per credit to 99 cents. Applied across the whole project, that change meant a loss of about $2 million. “There is no obvious place to go when you have a gap like that,” says Datta. “Pre-election when we were working on this last fall, all of our partners were already doing what they thought was the maximum. To see that $2 million gap open up, that was a big challenge.”
The state of Massachusetts stepped in with more money and closed some of the shortfall, and the project was able to get a chunk of incentives from the state’s utility company to finance the changes they’d planned for more energy-efficient heating. When TCB went to the city of Worcester to ask for more funds, the city agreed. But they had to rescind the extra funds after the Trump administration released its budget proposal; the money the city had planned to use, it turned out, might also be subject to cuts under the new budget.
They did eventually find the money, and the project closed earlier this month, with construction set to start imminently. But the delay meant increased construction costs, more budget reshuffling, and tweaks by the architects—not to mention more time without the necessary apartment upgrades for residents. Meanwhile, a handful of uninhabitable units have had to remain vacant while awaiting repairs.
“It took us nearly a year to get back to where we were,” Datta says. “The residents have been patient. We were hoping we would be able to make tangible improvements, but we haven’t been able to follow through. We have to keep saying ‘oh it’s still coming.'”
In Aurora, the situation was quite similar. After investors repriced the low income housing tax credit, TCB had to go back to the Illinois state housing agency and to the city of Aurora to try to close the gap of approximately $1 million. Both were able to give them more financing, and the project was only delayed by about a month. “We were lucky,” Woodley says.
Datta says that while TCB and other housing developers await a final verdict on the fate of housing credits in tax reform, they are not slowing down on affordable housing projects—”yet.” But some of their investors, she says, have already made one preemptive adjustment: for deals closing in the next weeks that include the 4 percent low income housing credit, they are asking that the sales of all private activity bonds be completed before the end of the year—a precaution to make sure investors can still claim the tax credits even if tax rules change on January 1.
“In the hierarchy of needs, very few things are more destabilizing for a family than to not have housing, at all, or housing that they can afford, or housing that is safe,” says Bates. If tax reform makes the low-income housing credit less valuable, she says, a decrease in the production of units is inevitable. “And you can take that all the way to its logical conclusion: You’re going to start to see more people who are not housed—who are homeless.”