Whither LIHTC, Part 4a

Posted: January 8th, 2009 | Author: mfguide | Filed under: Investment, LIHTC, News | 1 Comment »

Wherein we discuss the AHTCC’s lengthy proposal to create immediate and ongoing incentives to support affordable housing. A play in two parts:

With the particulars of the stimulus bill awaiting imminent release, everyone is putting forward their recommendations. Shortly before the holidays, the Affordable Housing Tax Credit Coalition weighed in with theirs. The white paper has five points:
1. Provide a special allocation of additional direct subsidy to be used exclusively by Housing Credit agencies to provide gap financing necessary for financial feasibility for properties which have received Housing Credit reservations or allocations (including bond financed properties).
2. Permit taxpayers to carryback the Housing Credit for up to five years and these Housing Credits should be used to offset Alternative Minimum Tax (AMT) liability during that period.
3. Allow accelerated Housing Credits to be claimed in the first year of the Housing Credit period.
4. Fix the 30% present value Housing Credit at 4%.
5. Make the Housing Credit a refundable credit.

AHTCC’s white paper provides an extended discussion of these ideas and starts with a strong lede:

[In 2007] approximately $9 Billion of equity was raised in the Housing Credit industry. For 2008, that amount is likely to be somewhere in the range of $4 to $5 Billion, a reduction in one year of 44% to 55%! Even worse, at this time, there is hardly any investor demand, which means that 2009 could be even bleaker than this year.

The result of this lack of equity capital is that thousands of critically needed affordable rental units will not be built or preserved and lower income families and seniors throughout the country will find it more difficult or impossible to find the decent, safe and sanitary housing produced by the Housing Credit program. Many projects which have been awarded Housing Credits will not be built due to lack of equity capital. Although it is impossible to know this number with certainty, our estimate is that hundreds of projects may not be able to move forward.

Special Allocation to state housing credit authorities
This special allocation, to be provided directly by the government using the same dispersal method as standard tax credits, would be used as a ‘soft second’ mortgage to fill the gap between equity and senior debt. The soft second could take various forms, either with variable payment terms “so that rents would not need to be raised to pay for the debt service associated with the loan and so that the loan would be treated as bona fide indebtedness for federal income tax purposes. ” Or, these funds could be treated as part of eligible basis per Section 42 but not treated as generating income, or only in eligible basis but not depreciable basis.

	Project — CY 2007	Project — CY 2009
Total Development Cost	11,000,000	11,000,000
Qualified Basis	10,000,000	10,000,000
Total Housing Credits	8,000,000	9,000,000
Sources
Housing Credit Equity	7,200,000	6,300,000
First Mortgage Loan	3,000,000	3,000,000
Local Subordinate Loan	800,000	800,000
Total Sources	11,000,000	10,100,000
Financing Gap	-	900,000

Comment: I appreciate that AHTCC modified the total housing credits to reflect both the increase to 9% via HERA and the decrease to $0.70/$1 credit reflecting no interest in the 2007 tax credit yields of $0.90/$1 credit. However I’m not sure $0.70 is low enough to attract buyers in this market. Except to meet CRA needs, in January 2009 it is very difficult to attract buyers at any price. We have a credit and financial slump on top of a cyclical downturn. This affects not just traditional buyers of tax credits such as banks and other financial institutions but also the larger corporations that might have a need to offset income if they weren’t facing a drop off in their main business lines and therefore little income to offset. For those companies making sufficient money to need tax credits, I think the education required to explain the investment type to them would take too long to get their money into the market in a reasonable period of time.

I also know that you can’t get loans in 2009 at 2007 prices. Pricing is higher, underwriters are much more skeptical of “and then a miracle happens” scenarios, and I don’t see them passing the more rigorous stress testing as easily as before. Furthermore, I’m not convinced that the “Local Subordinate Loan” that helped restructure the debt on deals in the past is still around. Cities and counties cutting spending to avoid raising property taxes too much are unlikely to provide any additional financing, much less a soft second. I’m willing to be wrong about this, however.

The bigger surprise is that AHTCC recommends an allocation of $5b in 2009, $4b in 2010, and $3b in 2011. This is a massive amount of spending, representing 50% of all tax credit investment in the first year, which would likely squeeze out traditional lenders or reduce the tax credits to purchased by private investors to negligible. If lenders are not lending (by choice or by inability to compete) then they are not generating profits that require offsetting.

Loss carryback up to 5 years and AMT offsets
The paper identifies two problems with current tax treatment: 1. tax credits cannot currently offset profits for the entire financial boom since 2004; 2. companies subject to the AMT (hint: their names start with ‘F’ and end with ‘e’) cannot use these to offset any profits subject to AMT.

Comment: AHTCC claims that the problem with the short carryback period (currently 2 years) is that companies with too many tax credits will simply sell their ‘overage’ at a greatly reduced price, lowering demand for new tax credits. While this change might reduce the risk that institutions dump their existing tax credits, it does nothing to generate additional investment. HERA already allows investors to use tax credits for buildings placed in service after 2007 against AMT, and this provision would not change that.

I’ll have Part 4b posted shortly.

“Whither LIHTC” is a continuing series on the difficulties of investing and financing affordable housing. More articles can be found via the LIHTC tag.

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