Whither LIHTC: H. R. 598 and LIHTC

Mary Levine at Parmenter asks about H.R. 598, “American Recovery and Reinvestment Tax Act of 2009″. I won’t pretend to have any well reasoned commentary, but I can suggest following the legislation at Novo.

Last week I ate lunch with a long time veteran of the industry with 20 years experience as an originator. My companion postulated that after a very successful run, it may be time to change the LIHTC program and recognize that LIHTC is not the sole vehicle for affordable housing. There is no demand for tax credits and on current performance it is likely to be 2011-12 before it picks up again if the GSE situation can be sorted out. Count on David Smith to keep you updated.

Over lunch what we hashed out is that nothing in the stimulus promotes the investment in affordable housing by outside firms nor does it enable the property to actually operate and generate a profit. Push all the money into the states that you want, if developers can’t get loans and properties can’t break even, none of this matters. The originator had strong words for the state agencies that historically held the upper hand. With credits going unused, they will now be required to think in new and challenging ways. LURAs may need to be renegotiated, QAPs may need to be rethought, and operating loans (or grants) will need to be offered.

Coming solely from the for-profit side of LIHTC, I see properties squeezed in a thousand ways. Underwriting standards over the past 5 years left something to be desired as DSCR fell from 1.25 to 1.15 to 1.1 and 1.05. There’s no cushion left for the lender or the owner in a time when delinquency is up, occupancy is stagnant or falling, and expenses continue to rise. If expenses cannot be cut, then income must be increased. Commercial income restrictions already hamper the profitable operation of properties in urbanized areas and the FCC removed the cable fees that previously provided some predictable non-residential income.

So what’s my half-baked plan for restarting LIHTC? Certainly half-baked, but I’m focused not just on reinvigorating investor interest but continuing operations. We have a tremendous need for affordable housing and need to be much more aggressive about its promotion.
1. CRA requirements must be raised and enforced to motivate financial investors. TARP money should be tied to CRA compliance and institutions should be strongly encouraged to meet CRA via LIHTC. Restrictions on commercial income should be reexamined.

2. Urban or transit friendly development is a favored QAP requirement. Unfortunately, because LIHTC developers compete with other developers who can realize greater revenues for this land, are frequently priced out of the market. If they can include a few retail bays, signage, or other methods of raising commercial income, they can compete.

3. Localities must provide some property tax relief. If you receive CDBG funds, you need to show that affordable housing is promoted and protected. Fixed costs in insurance, personnel, utilities, and property tax comprise an overwhelming amount of total expenses for properties. Maybe I’m just infuriated by Indiana’s abject incompetence in this area, but affordable housing provides an ongoing benefit to cities and states. They’re contribution should be recognized via property tax abatements.

4. The QAP needs some additional work. Acknowledging that sufficient demand should exist for some of the requirements, states may need to reexamine their urban/rural mix, very low income requirements, and show a willingness to make adjustments were necessary. We’re trying to protect affordable housing in toto and driving owners out of the program entirely does not serve this purpose.

5. Recognize that private developers are in business to make a profit. This doesn’t need to be obscene, but to expect developers to continue funding deficits caused by poor regulatory structure, QAP requirements, or aggressive taxation policies does not serve the industry well.

As I said, it’s half baked but represents this for-profit asset manager’s thoughts on what is needed for the long term health of affordable housing (separately from LIHTC).