Jan 12th 2018 | Posted in Mary Scott Nabers' Insights by Mary Scott Nabers

Hundreds of local government officials are scrambling because their 2018 plans for affordable housing projects have been turned upside down as a result of the new tax bill.

Most were planning to use federal tax credits for upcoming projects. The federal tax credits in the past have accounted for funding at least half of all affordable housing projects in the country. However, the amount of funding that will be available in the future has been significantly diminished.

Here’s what has happened – the newly enacted federal tax reform bill lowered the corporate tax rate – to the delight of many company executives.  However, estimates are that the reduction in the corporate tax rate from 35 to 21 percent will result in a 15 percent decline in the value of federal tax credits available to local governments. That decline in value, say real estate experts, will likely result in at least 300,000 fewer affordable rental units being constructed throughout the United States over the next 10 years. That’s because there simply won’t be enough funding in the program in the future. Now, cities and counties are being forced to rethink everything about their housing strategies. The reality is that they must now explore alternative funding options.

Nearly 3 million low income housing units have been constructed since the Low Income Housing Tax Credit program began in the late 1980s.  The number of new housing units has typically grown by about 100,000 every year. That will definitely change.

taxes One example of big changes occurring at the local levels of government!The program grants a federal allocation of tax credits to each state, based on population. Common practice has been for affordable housing developers to sell federal Low Income Housing Tax credits to investors, who use them to lower their own tax obligations when they are involved in the construction of new affordable housing projects.

Declines in the value of these construction incentives means investor interest also will be diminished and the amount that can be raised for housing projects will be reduced. As a result, some previously planned city and county projects will likely be put on hold or eliminated completely. Or, the projects may require a larger local investment at a time when local governments already are facing budget deficits and declining revenues. Innovative solutions and alternative funding sources will be critically important to public housing authorities.

Officials with the California Housing Partnership say the reduction of the corporate tax rate will cost the state $500 million per year in affordable housing funding and they have predicted a loss of 4,000 units. This comes at a time when the state is currently short 1.5 million subsidized housing units – just to meet current demand.

The mayor of Salem, Massachusetts, says that housing needs are one of the greatest challenges facing her city, the region and the Commonwealth.  In rural Oregon, the housing situation over the last 10 years has grown into what one newspaper calls “a full-on political, economic and social crisis.” Further reducing the rate of new construction could be disastrous but it is likely going to happen.

In addition to the probability of fewer affordable housing units being built, some development and redevelopment projects already in the planning stages could fall victim to the tax bill provisions. Plans for the city of Annapolis, Maryland, to redevelop two properties are now at risk. One project which was expected to be completed in the very near future could now take years, local officials say.

The Missouri Housing Development Commission voted not to put $140 million into the state’s Low Income Housing Tax Credit Program – funding that housing officials had planned to use to help fund a $9.6 million project. And, housing officials had also planned to seek $5.2 million in federal tax credits but the decline in those tax credit values will further exacerbate their funding problem.

County commissioners in Travis County, Texas, are concerned how devalued tax credits will affect a planned $30 million mixed-use affordable housing project in Austin. For a project that depends heavily on federal tax credits, even a 10-cents-on-the-dollar value drop could result in a “significant decline” in available revenue which would lead to project delays, according to one county official.

Change is occurring throughout the country and it will be significantly obvious at the local jurisdictional levels of government. The good news is that alternative funding is available and once public officials understand that there are few other options, the country could see a rebirth of innovative collaboration that may surpass what was accomplished in the past.

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Mary Scott Nabers

As President and CEO of Strategic Partnerships, Inc., Mary Scott Nabers has decades of experience working in the public-private sector. A well-recognized expert in the P3 and government contracting fields, she is often asked to share her industry insights with top publications and through professional speaking engagements.