Capital Markets Outlook: Roadblocks Could Hinder Deals


By Donna Kimura

Two big issues loom over the affordable housing industry as it heads into the new year—tax reform and construction costs. Both could have a major impact on new deals in 2018.

The good news is that the low-income housing tax credit (LIHTC) is one of only two credits, along with the research and development credit, to be explicitly retained in a tax reform outline prepared by the Republican leadership.

“Unified Framework For Fixing Our Broken Tax Code” envisions repealing other business credits, including New Markets, historic, and renewable energy tax credits.

“To see the housing tax credit in the framework is an acknowledgment that it is good tax and economic policy, as well as an affirmation of all the work the industry has done in advocating for this program,” says David Gasson, executive director of the Housing Advisory Group and vice president of Boston Capital. “It really has to do with congressional members seeing properties and becoming believers in the program. The fact that we’re one of two tax provisions that were denoted in the framework as valuable to the American economy is quite significant.”

The brief, nine-page document is only a starting point, with much heavy lifting still to be done if Congress wants to overhaul the tax code.

“Do not overreact to this framework,” Gasson says. “This is not gospel. It’s going to change. In the end, more than likely, what Congress will do will look very different than what was released in the framework. That includes the corporate rate.”

The Republican framework proposes to cut the corporate tax rate from 35% to 20%, which could significantly devalue LIHTCs for investors. President Donald Trump has called for a 15% rate. The industry was jolted by the prospect of tax reform at the beginning of the year when wary investors pulled back while weighing their risks and figuring out how to proceed. The market has since settled down, with many deals assuming a 25% corporate tax rate.

Much still needs to be figured out by the tax writing committees of the House and Senate. The early proposal is estimated to cost a staggering $1.5 trillion, according to some reports.

For the housing industry, the next steps are to thank legislators for preserving the housing credit and then work with them on implementing the details, including changes proposed in the LIHTC bill (S. 548) by Sens. Maria Cantwell (D-Wash.) and Orrin Hatch (R-Utah), Gasson says.

The bill, which seeks to increase annual LIHTC allocation authority by 50% as well as make other changes, has amassed strong bipartisan support, and officials are looking for an opportunity to include it in a tax package.

Despite a pretty rosy outlook for the LIHTC program, uncertainty remains until tax reform is resolved. Investors and lenders will be sensitive to any proposals that could affect the market.

“It was clear the market in general reached consensus around pricing at an assumed 25% corporate tax-rate level this year,” says Adam Oates, president of SunTrust Community Capital. “I think we’re into a little more variation in the market. We’ve seen some deals getting priced closer to a 28% or 30% assumed tax rate. On the other side, you still have noise being made around 15% or 20%. We expect to see some investors tick a little bit up or a little bit down depending on their outlooks. There may be a little more pricing variability than we had in the spring this year.”

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Source: Affordable Housing Finance