By Michael J. Novogradac, CPA
If current corporate tax reform efforts are successful, the resulting changes to the tax code will affect the amount of equity that can be raised from the low-income housing tax credit (LIHTC), according to a report, “Affordable Rental Housing After Tax Reform: Calculating Corporate Tax Reform's Possible Effects on Equity Raised from Low-Income Housing Tax Credits.”
The principal efforts of affordable housing advocates during the corporate tax reform debate should be focused on the preservation, and even expansion, of the low-income housing tax credit. As Ways and Means Ranking Member Sander Levin noted during a recent hearing on tax reform, the LIHTC is not a loophole but a tax expenditure adopted on a bipartisan basis during the last major tax reform effort. At the same hearing, Ways and Means Select Revenue Subcommittee Chairman Pat Tiberi noted that the LIHTC “gets the best of both worlds.” As such, the report’s analysis is based on the LIHTC’s continued existence as a permanent part of the tax code.
To gauge the effect of lower corporate tax rates and longer depreciation periods on LIHTC yields and investor equity pricing, Novogradac & Company conducted an analysis that contemplates the possible ripple effects of these two tax reform outcomes on LIHTC investor yields, investor equity pricing and the amount of equity raised. The analysis was based on a series of calculations using an investor internal rate of return model, at a range of investor equity prices from $0.80 to $1.00, for 9 percent investments and 4 percent tax-exempt bond investments. The calculations considered the effect of the corporate tax rate dropping from the current level of 35 percent to 30 percent, 28 percent and 25 percent. The calculations also estimate the effect of extending the depreciation period for residential rental property.
Our evaluation found that if the amount of investor equity is held constant, lower top corporate tax rates lower LIHTC yields, therefore creating downward pressure on LIHTC investor equity pricing. Layering in the effect of extending depreciation periods would further exacerbate these reductions. For the equity market as a whole, this could mean a loss of $220 million to nearly $1 billion dollars, or more, in equity used to finance affordable rental housing. A loss this large in annual equity raised could lead to a reduction in the total number of affordable rental units built or rehabilitated each year to as high as 9,500 units or more.
The estimates presented in “Affordable Rental Housing After Tax Reform” are meant to serve as a reference point for the affordable rental housing community to consider as tax reform efforts advance. In light of the report’s findings, it would serve the future of affordable housing well to consider proposals that could help offset the projected losses from certain tax reforms. Such proposals could include a higher tax credit percentage, allowing the LIHTC to be claimed over a shorter period of time, allowing the full credit in the initial year of lease-up, or allowing more rapid depreciation of affordable rental housing properties.