Game Changers for Affordable Housing

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1 Game Changers for Affordable Housing for National League of Cities Congressional Cities Conference Peter Lawrence Director of Public Policy and Government Relations Novogradac & Company

2 Agenda Tax Reform? Key Changes to Impact the Low-Income Housing Tax Credit Impact on New Markets and Historic Tax Credits Opportunity Zones LIHTC Legislation

3 Private activity bonds retained (over half of affordable housing production) Low-Income Housing Tax Credit MORE THAN HALF

4 Inflation factor changed to: Low-Income Housing Tax Credit CHAINED CPI Will reduce future 9% LIHTC and private activity bond volume cap per-capita/small state minimum amounts.

5 Low-Income Housing Tax Credit Lower Corporate Rate Interest Expense Limitation Most LIHTC partnerships expected to elect out and shift to Alternative Depreciation System (ADS) for rental housing 100% Expensing through 2022 for: Site improvements, and Furniture, Fixtures & Equipment Likely negative impact of the Base Erosion and Anti-abuse Tax (BEAT)

6 35% 21% 9 Percent Property Price per Credit $0.95 $1.00 $1.05 $0.95 $1.00 $1.05 $0.82 $0.87 $0.90 $1.10 $1.10 $ Percent Tax Exempt Bond Property 35% 21% $0.95 $0.95 $0.81 Price per Credit $1.00 $1.00 $0.86 $1.05 $1.05 $0.89 $1.10 $1.10 $0.93 Assumes 4.5% 5.0% investor level yield in all scenarios Results may differ based on a change in underlying assumptions. Property not eligible for 30% basis bonus

7 Effect of Tax Reform on LIHTC Equity Pricing Affordable housing community had already lost investment and production in 2017

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12 FREDDIE MAC INCREASED VOLUME OF SECONDARY MARKET TRANSACTIONS CAULDRON OF AFFORDABLE HOUSING FUTURE BEAT FANNIE MAE REDUCED SIZE OF ANNUAL EQUITY MARKET

13 New Markets Tax Credit No statutory changes to section 45D 2017, 2018 and 2019 rounds from the PATH Act in 2015 remain at $3.5 billion each House bill had originally eliminated 2018 and 2019 rounds Efforts to extend or make the NMTC an indefinite part of the internal revenue code likely included in a future extenders package Corporate AMT repealed Unlike LIHTC, lower corporate rate is a slight positive for NMTC because investors pay taxes on gains at exit

14 Historic Rehabilitation House would have dropped the HTC entirely; Senate bill prevailed The 10 percent non-certified rehabilitation credit (for pre-1936 buildings) is repealed 20 percent historic rehab credit is claimed ratably over 5 years Pricing may drop 7% to 15% due to changes Tax Credit

15 Investing in Opportunity Act Allows investors with capital gains from sale of assets to defer those gains Similar in concept to Section 1031 Like-Kind exchanges Creates new incentive to invest capital gains in low-income communities Authorizes the designation of opportunity zones Governors (and DC Mayor) responsible for designating these zones by end of March Encourages investors to pool resources and risks in Opportunity Funds (O Funds). Investors can temporarily defer capital gains recognition if they reinvest in these zones Incentivizes long-term investment by stepping up basis 10 percent step-up after 5-year hold, 15 percent step-up after 7-year hold Provides shallower subsidies per investment than the NMTC, but can be used on a greater scale

16 More LIHTCs via Affordable Housing Credit Improvement Act 50 percent increase CANTWELL HATCH Incomeaveraging RETIRED Minimum 4 percent rate NEAL TIBERI Curbelo, R-FL-26

17 More LIHTCs via Affordable Housing Credit Improvement Act 50 percent increase CANTWELL HATCH Incomeaveraging RETIRED Minimum 4 percent rate NEAL TIBERI Curbelo, R-FL-26

18 More LIHTCs via Affordable Housing Credit Improvement Act 50 percent increase CANTWELL HATCH Incomeaveraging RETIRED Minimum 4 percent rate NEAL TIBERI Curbelo, R-FL-26

19 More LIHTCs via Affordable Housing Credit Improvement Act Note these assumptions: Assumed that states will increase their tax-exempt bond issuance for multifamily by 25% Assumed the absolute amount of soft subsidies going to tax exempt bond properties would remain unchanged To the extent that there is less deferred developer fee, that is offset with more taxable bond financing CANTWELL Approximately 131,000 more units over 5010 percent years increase HATCH RETIRED Incomeaveraging Minimum 4 percent rate NEAL TIBERI Curbelo, R-FL-26

20 More LIHTCs via Affordable Housing Credit Improvement Act Additional Resources Give states discretion to provide 30% basis boost for bond-financed projects Increase DDA designation from 20 to 30% Repeal QCT population cap Relocation costs included in eligible basis No basis reduction for certain energy tax incentives Indian areas generally treated as DDAs

21 More LIHTCs via Affordable Housing Credit Improvement Act Financial Feasibility 50% basis boost for ELI units Modify student occupancy rules Codify increased tenant income guidance Modify 10-year rule (limits apply to acquisition basis) Adopt uniform income eligibility for rural projects

22 More LIHTCs via Affordable Housing Credit Improvement Act Other Modify voucher rent-setting rule in LIHTC Clarify the community revitalization plan Prohibit local approval or contribution requirements Add selection criteria for Native American areas Restriction of planned foreclosures Clarify casualty loss rule Convert ROFR to purchase option Change the official name of the LIHTC to Affordable Housing Tax Credit

23 HUD Budget Note: amounts in millions FY16 Enacted FY17 Enacted President s FY18 Request Senate FY18 Bill House FY18 Bill President s FY19 Request Housing Choice Vouchers $19,628 $20,292 $19,317 $21,365 $20,486 $20,015* Project-Based Section 8 $10,620 $10,816 $10,751 $11,507 $11,082 $10,866* Public Housing Operating Fund $4,500 $4,400 $3,900 $4,500 $4,390 $3,141* Public Housing Capital Fund $1,900 $1,942 $628 $1,945 $1,852 $0 Section 202 $433 $502 $510 $573 $576 $563* Section 811 $150 $146 $121 $147 $147 $132* HOPWA $335 $356 $330 $330 $375 $330 CDBG $3,000 $3,000 $0 $3,000 $3,010 $0 HOME $950 $950 $0 $950 $850 $0 Homeless Assistance $2,250 $2,383 $2,250 $2,456 $2,383 $2,383 Choice Neighborhood Initiative $125 $138 $0 $50 $20 $0 Overall (gross) $46,978 $48,055 $40,722 $49,942 $48,034 $41,240 *Administration FY19 addendum proposes to add $1 billion to vouchers, PBS8, Public Housing Operating Fund, Section 202 and Section 811 rental assistance for seniors and people with disabilities.

24 Game Changers for Affordable Housing for National League of Cities Congressional Cities Conference Peter Lawrence Director of Public Policy and Government Relations Novogradac & Company