Low-income housing developers scramble for financing amid uncertainty about tax reform

Financing for low-income housing across Minnesota has dried up in recent months, leaving developers scrambling to fill gaps or choosing to delay construction.

A 54-unit development in Ramsey came up $1.1 million short. A 56-unit development in Apple Valley found itself $400,000 short. A 70-unit development in Minneapolis' Prospect Park neighborhood is $1.3 million short.

Market watchers and low-income housing advocates attribute the pinch to the election of President Donald Trump and his promise to slash the corporate tax rate. Although the president's tax plan has not been sharply defined, the uncertainty surrounding corporate tax liabilities is depressing the market for low-income housing tax credits, they said.

"It is disrupting a market that was really working well," said Warren Hanson, president and CEO at the Greater Minnesota Housing Fund, a nonprofit affordable housing lender. "It's caused more than a hiccup throughout the whole state."

Reports from across the U.S. show developments that were humming along before the election are now caught short, sometimes with multimillion dollar gaps.

The low-income housing tax credit program starts with the Internal Revenue Service, which allocates tax credits to state agencies that divvy them up among developers. Those developers sell the tax credits to investors for cash to fund their projects. For investors, part of the appeal of buying tax credits is a 10-year, dollar-for-dollar tax write-off. Purchasing $1 million in low-income housing tax credits translates to a $10 million tax break over time.

But with investors uncertain of the future, the price that developers can obtain for the tax credits is declining — if the credits are selling at all. And that means the financing that low-income housing developers factored into construction budgets isn't coming through.

"The concern is that maybe these projects aren't going to get built or preserved in the future if the tax credit doesn't work as well," said Ellen Lurie Hoffman, federal policy director at the National Housing Trust, a nonprofit that works to preserve existing low-income housing. "There's already an incredible shortage of affordable housing in this country."

Created in 1986, the low-income housing tax credit is "the most important resource for creating affordable housing in the United States today," according to the Department of Housing and Urban Development.

Housing financed by tax credits must be affordable for households earning 60 percent or less of the area median income — and stay that way for at least 15 years. The median income in the Twin Cities area in 2016 was $85,800.

Before the election, low-income housing tax credits were selling for more than a dollar. A few days after Trump's surprise victory — which forced corporate investors to take his proposal to cut the corporate income tax rate from 35 percent to 15 percent seriously — the price dropped to less than $1.

"The reason why it's been a bit of a shock is that most low-income housing tax credit investors had assumed that Hillary Clinton was going to win the election on November 8," said Peter Lawrence, public policy and government relations director at Novogradac, a San Francisco-based accounting and consulting firm that tracks the low-income housing tax credit market.

Investors are trying to protect themselves in case their tax liability drops and their tax credits become unusable. Market-watchers say some investors have hit pause on their investments until more details emerge, while others are moving forward using a theoretical, lower tax rate as a guide.

"The investors are acting rationally," said Deidre Schmidt, president and CEO for nonprofit developer CommonBond Communities. "Nobody thinks they're bad guys because they're doing this. … But it is a difficult time right now, because the uncertainty is actually doing some damage in and of itself."

Over the long term, the challenge of putting together money for low-income housing developments may simply mean fewer of them, said Scott Hoekman, senior vice president and chief credit officer at Enterprise Community Partners, a nonprofit syndicator that connects investors with low-income housing developments.

This isn't the first — or the worst — decline in the low-income housing tax credit market.

When the housing market crashed in 2008, the low-income housing tax credit market crashed, too. In late 2009 and early 2010, the tax credits' sale value hovered near 70 cents on the dollar, data compiled by Novogradac show.

Then, the federal government stepped in and bolstered the program with more than $2 billion in stimulus dollars to jump-start stalled housing developments.

Affordable housing advocates said uncertainty about what the federal government will do now is the source of the breakdown — and they worry that tax reform could do away with the program altogether. A GOP tax reform task force released a report in June that didn't specifically mention the low-income housing tax credits but pointed to other tax credit programs as examples of problems in the tax code.

"That makes people nervous," said Lurie Hoffman of the National Housing Trust.

Still, the low-income housing tax credit has strong bipartisan support. Senators Maria Cantwell, D-Wash., and Orrin Hatch, R-Utah, introduced a bill in 2016 that proposed expanding the program by 50 percent. They're expected to introduce a new version this session, possibly as soon as this week.

Until more details emerge, though, investors remain hesitant and developers are still in limbo.

"We're hopeful, but extremely worried," Minnesota Housing Commissioner Mary Tingerthal said. Without the tax credit, "our ability to produce rental apartments that are affordable to people of modest incomes would dry up."

Emma Nelson • 612-673-4509