CRA investments' value hurt by talk of tax reform

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WASHINGTON — While the fate of tax reform is far from certain in Congress, the Republican push to lower the corporate tax rate is already having an impact on banks and other investors in low-income housing tax credits.

President Trump has been talking about a reduction to a 15% corporate rate, a big drop from the current 35% rate. Most industry observers are forecasting Congress will go with a 25% to 28% — and that level is already being priced into account, said Beth Mullen, a national director at CohnReznick, an accounting and tax advisory firm.

"At this stage, a 25% corporate rate is already being priced into deals that investors are closing right now," she said. "With the corporate rate going down, investors aren’t willing to pay what they used to.”

Before the election, the average price of a low-income housing tax credit was $1.02. Pricing has fallen to between 91 to 92 cents per credit on average.

Banks are major investors in low-income housing tax credits because it helps them meet their obligations under the Community Reinvestment Act. However, a significant reduction in the corporate rate could reduce demand for such credits.

Last year, $16 billion in equity was raised from low-income house tax credit investors, 86.3% of it purchased by CRA-motivated investors, mostly banks, according to a CohnReznick survey.

Originally, the Trump administration was hoping Congress would pass tax reform bill by the end of September. But that timetable has slipped, given the fact that Congress is facing a Sept. 29 deadline to deal with the debt ceiling and pass a new budget plan for the U.S. government. Most political observers believe it will be a struggle to pass tax reform by yearend.

"It is an ambitious schedule and we recognize that, but we are on that timetable," House Ways and Means Committee Chairman Kevin Brady, R-Tex., said in an Aug. 16 interview with Bloomberg News.

Brady said that President Trump's tax team and Republicans are committed to meeting the yearend deadline. "It won’t be easy," he said. "But I am absolutely convinced we can it achieve this year."

If a bill passes and there is a reduction in the corporate tax rate, some argue that there will still be demand for low-income housing tax credits.

"Financial institutions and other large corporations will still have tax liabilities they need to offset," said Peter Lawrence, director of public policy and government relations at Novogradac & Co. LLP. "But banks and other investors will likely pay less for the credits, because they will be less valuable due to corporate tax reform.”

Tax credits provide equity for the construction and rehabilitation of affordable housing. While debt makes up only a small portion of the financing because it is serviced by rental income. And rents are restricted so units remain affordable for 15 years or more.

To further reduce debt, developers generally rely on soft subsidies from government programs like the HOME program, community development block grants and grants from state and local governments.

"There is only so much debt these projects can carry," Lawrence said.

Compared with a single-family transaction with a 20% down payment and an 80% mortgage, a low income housing tax credit transaction is almost "flipped," Lawrence said, with the credits providing 50% to 70% in equity and the first mortgage providing about 10% to 20% of total development costs.

The vast majority of construction and rehabilitation of rent-restricted housing in the U.S. since 1987 has been financed with these tax credits.

Overall the program is "small" in the context of the entire housing market, Lawrence said. "But it is extraordinarily important in the context of affordable rental housing."

The Department of Housing and Urban Development estimates that 11 million families pay more than half of their income on rent.

The debate over the tax credits comes as Sen. Orrin Hatch, R-Utah., chairman of the Senate Finance Committee, and Mary Cantwell, D-Wash., have introduced legislation to expand the program.

The bipartisan bill introduced March 7 would increase the housing tax credit authority by 50%.

“The affordable housing crisis is exploding all across the country," Cantwell said in a press release. “If we do not act to increase the low-income housing tax credit — our best way to build new affordable homes — by 2025 over 15 million Americans could be spending half their income on rent.

At a recent committee hearing, Hatch noted that 25 million children live in households in which rent makes up a fairly large share of household income.

"This is a problem that should be ready for a bipartisan solution," Hatch said at the Aug. 1 hearing. "We’ve already introduced bipartisan legislation to address some of these issues. And, many are hopeful that cooperation on these efforts will continue. I believe they will."

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