Another month has passed since we met here in this space where I try to bring important news affecting the realm of commercial real estate in the Las Vegas Valley.
I focused on current events in Congress last time and this writing will continue that same course. Action on the Hill in the last month could have a direct effect on where investors look to place their dollars in the Las Vegas Valley.
Investors looking to get into the affordable housing game, or hoping to build onto their current portfolio, caught a break with the passage of the $1.3 trillion spending bill in Congress in late March.
The “massive” omnibus spending bill covered everything from defense to opioids and other items. But it also will give the low-income housing tax credit (LIHTC) program a 12.5 percent increase in allocation for four years (2018-2021), along with allowing income averaging, permanently.
The LIHTC tax credit program was created to help affordable rental housing projects get built. Much of the country, including Las Vegas, has a shortage of affordable housing. There is a definite crisis and the gap continues to grow.
The increase in allocation of credits might not be the ultimate fix to the continuing issue, though it doesn’t hurt.
For those of you who are new, or are interested in investing in affordable housing, locally or nationally, I’ll talk about the short history of what’s changed and what it means for the future.
LIHTC credits are allocated to the states based on population. These credits are eventually given to project sponsors of affordable housing developments. To raise equity for a project, sponsors sell credits on the open market to investors, mainly banks, though many tax credit syndicators are out there. Investors can use these credits to lower their federal tax liabilities.
I’ve simplified a large process. But something that’s important here is the sale of the tax credits to investors and what the typical price someone is willing to pay. The higher the cost per credit, the more equity that is available to get a project raised.
During the 2016 election cycle, talk of tax reform put quite a few in the affordable housing game to pull back or come to a halt. This eventually feathered out a little, though the market did take a hit in pricing per credit, something that is still occurring.
Reports around that time stated tax credits were being picked up for $1.05 and fell to something around the 90-cent range, though some say they could have gotten lower in some instances. That’s about a 14 percent reduction in the market.
An estimate by national accounting firm Novogradac &Co. LLP stated that tax reform will reduce the available equity for affordable housing projects by $1.7 billion annually — a 14 percent reduction in price per credit. This led to estimates of more than 23,000 less affordable housing units coming online nationally on an annual basis over the next decade.
This reduction in equity is based on the reduction in the corporate tax rate from 35 percent to 21 percent. What the reduction in the tax rate equates to is the value of any tax losses related to an LIHTC investment is lower than it was in the past.
Now, fast forward to the omnibus bill, which has a lift for LIHTC credits. Many in the industry say it’s not a total fix and more work needs to be done. It also doesn’t put the affordable housing investment market where it was before; however, the move will increase production of affordable housing going forward.
Novogradac estimates that 28,400 more units would be created due to the increase in LIHTC credits over the next decade. However, the group notes that the increase only extends over the next four years. The addition in credits doesn’t extend to all types of credits either — only to the 9 percent LIHTCs.
Overall, there is a long way to go, as Novogradac estimates show a loss of 235,000 units over the next 10 years because of tax reform. In Nevada, that loss is just over 1,700 units over the next decade that won’t be built because of tax reform, Novogradac estimates show.
The statewide estimates may seem marginal but other factors are also pressuring that market as well: Increasing interest rates and rising costs in construction also will weigh on the sector.
Positives are also hitting the market, including the LIHTC allocations increase. Congress made a positive move for affordable housing with an increase of roughly 10 percent in funding for the U.S. Department of Housing and Urban Development in the 2018 bill. The tax bill also preserved things such as private activity bonds, though they were trimmed.
Check back next month as I continue to keep tabs on this topic and other pressing matters in commercial real estate.