Magazine article American Banker

Prospect of Tax Reform Upends Affordable Housing Finance

Magazine article American Banker

Prospect of Tax Reform Upends Affordable Housing Finance

Article excerpt

Byline: Kristin Broughton

The mere whiff of corporate tax reform is said to be causing delays in bank-backed financing for low-income housing projects amid a severe U.S. shortage of affordable units.

Investments by banks in housing developments have hit snags in the two months since Republicans swept the elections, according to bankers, auditors and affordable-housing advocates.

The sense that tax reform is within reach for the first time in decades "immediately slowed things down," said Rob Likes, national manager for community development at KeyBank. "We're hearing about that from our clients and from the market."

What's the connection? The affordable housing market relies heavily on subsidies through the low-income housing tax credit program. Developers use the credits to fund as much as 70% of the cost of new housing projects. Banks make equity investments in the projects by buying the tax credits and in return claim a range of tax benefits over a 10-year period.

Some banks have taken a "bit of a pause" on making new investments, Roberts said, describing it as a "prudent" move as banks wait for clarity on corporate rates (and thus potential tax savings) drop. Such decisions leave last-minute gaps in financial plans that have taken years to finalize, observers said.

Banks walked away from affordable housing projects in "a few cases" last month, said Fred Copeman, a partner with the accounting firm CohnReznick who focuses on tax investments.

"There has been some market dislocation," Copeman said, though he declined to provide specifics. He expects the pace of new deals in the $14 billion market to slow down in the first few months of 2017 and then pick up again whenever the market has a better sense of where tax reform is heading.

"Different banks are approaching this differently," said Buzz Roberts, CEO of the National Association of Affordable Housing Lenders, whose members include several large and regional banks.

Some banks have taken a "bit of a pause" on making new investments, describing it as a "prudent" move as banks wait for clarity on corporate rates, Roberts said.

Evidence about the funding delays for affordable housing projects is mostly anecdotal at this point. Copeman, for instance, described an affordable housing deal in Virginia that was delayed a few weeks ago because the bank -- which he declined to name -- told the developer to restructure its offer. The project now faces a $1 million shortfall.

Still, the delays illustrate the awkward situation many banks -- especially big banks -- face as they plan for decade-long investments in tax-credit programs amid the uncertainty about future tax rates. Moreover, the situation provides a glimpse of how incentives may changes for banks to invest in social programs -- such as affordable housing or renewable energy --as the tax reform debate taxes shape.

President-elect Donald Trump and Republican leaders in Congress have made tax reform a priority in the coming year.

Trump promised on the campaign trail to lower the corporate rate to 15% from its current level of 35%. Meanwhile, House Republicans last year proposed a 20% corporate rate as well as the elimination of special credits.

Bankers and housing advocates said they feel confident that the low-income housing credit will remain intact. Most noted bipartisan support for the program. A House Ways and Means Committee staffer has sought to reassure the affordable housing community that the program won't be on the chopping block, Copeman said.

It's possible that lawmakers may also expand the low-income housing tax credit program as part of a tax overhaul, observers said.

But the legislative process is, of course, messy. And with Congress facing a packed schedule, it's hard to tell how long it will take before banks -- the primary investors in the affordable housing market -- have clarity. …

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