Low Income Housing Tax Credit

A couple of weeks ago, I attended Novogradac’s Low Income Housing Tax Credit Finance conference in Las Vegas.  There was an interesting tension in the air at the start of the conference.  Everyone was looking around the room wondering if others in attendance were as unnerved as they were about the recent uncertainty in the LIHTC industry.  So, what had everyone on edge?  Trying to figure out how the industry will look inside of the Trump Presidency.  Whether you’re happy or sad about the election results, there is one thing that is for sure, change is coming. What kind of change?  No one really knows.  Needless to say, many previously bullish investors are taking a step back to catch their collective breaths to see what happens next.

Business tax rates currently hover between the 34-39% area.  Initial campaign promises by the Trump Administration proposed business tax rates being lowered to the 15% level.  As a business owner myself, I can say this sounds somewhat appealing on the surface.  However, there’s a realization that in the industry that I work in would likely cease to exist at that point.  The investors took note of this as well.

LIHTC Financing

For those that don’t know how the LIHTC industry works, it helps to have a little background information.  The following explanation is a very simplified version of the process.  The program began as a part of the Tax Reform Act of 1986 and offers tax incentives to investors to develop equitable housing for low income residents.  In order to qualify for the tax benefits, a developer must agree to set aside 40% of a development for renters earning no more than 60 percent of the area’s median income or 20 percent of the units for renters earning 50 percent or less of the area’s median income.   These units are subject to rent restrictions including maximum permissible gross rent, and allowances for utilities.

Low income housing tax credits are allocated from the state in two different types; 4% and 9% credits.  To keep things simple, lets just talk about the 9% tax credits.  A newly constructed building or the substantial rehabilitation of an existing building is eligible for the 9 percent credit of the eligible basis of the project taken over a 10 year time period.  If the qualified basis for an LIHTC project is $10 million, then 9 percent credits produce an annual tax credit of $900,000, totaling $9 million for the investor over 10 years.

Developers will typically sell or syndicate these credits to generate revenue as developers do not typically have an extraordinarily high tax liability.  Who typically buys these credits?  Extremely high net worth investors and large corporations which range from banks to telecommunications companies and many other industries.

Investors and corporations buy tax credits because they have a high tax liability (we said before it ranges between 34-39%).  If all of the sudden a new administration pushes to have the tax rate dropped to a level near 15%, the tax credits become unneeded. Many investors are left wondering, are we going to need these investments anymore?

Industry Change

The only inevitable thing in this world is change.  Are we going to see the business tax rate drop to 15% and kill the entire LIHTC industry?  I don’t think so.  Will we see tax rates go lower?  I’m fairly certain of that.  My guess is somewhere in between 20-25%.  Unfortunately, that will mean some renegotiation for projects in the pipeline of a lot investors and syndicators.  One good item of note that was discussed during a panel at the Novogradac conference was that there doesn’t seem to be many investors that have pulled out of projects at this point.  Although, several were looking to renegotiate terms, even as late as at the closing table.

It’s unclear when we will see business get back to normal in the LIHTC investing world.  Everyone is collectively waiting for the other shoe to drop with the new administration to get some indication of where things are going.  Recent indications from the Ways and Means committee supports keeping the LIHTC platform in the reform tax code.  The rest……to be continued.

Written By:  Nathan M. Gillette