On the second episode of Buchanan Ingersoll & Rooney’s
Tax Facts podcast, Becky Lando and Michelle Yarbrough Korb
discuss the latest in the utilization of low-income housing tax
credits and how new changes have made these vehicles even more
attractive for investors.
Becky Lando is a shareholder at Buchanan and a member of the
firm’s real estate team. Michelle Yarbrough Korb is also a
shareholder at Buchanan with a practice focused on the affordable
housing industry.
In the episode, Lando and Yarbrough Korb discuss:
- What low-income housing tax credits are and how they work.
- What changes the recent COVID-19 relief bills made to
low-income housing tax credits and how changes affect those who
want to invest in affordable housing construction. - How eviction moratoriums affect low-income housing tax credits
and whether it’s good or bad news for landlords. - The Housing Choice Voucher Program, commonly referred to as
Section 8, which also saw changes due to COVID-19 relief. - Expectations on future legislation or changes that would make
affordable housing more or less of an attractive investment from a
tax perspective. - The need to work with experienced counsel before jumping into
the world of affordable housing investment.
You can listen to Tax Facts in many places: on Apple Podcast, Google
Podcasts, Spotify, Pocket
Casts, and more.
Listen to the
Podcast
Podcast Transcript
Becky Lando: Hello and welcome back to Buchanan
Ingersoll & Rooney’s Tax Facts, a podcast about
the world of tax law, real estate law and changes that affect
businesses and investors. I’m your host today, Becky Lando, a
shareholder at Buchanan and a member of our firm’s real estate
team. I’m joined by my colleague Michelle Yarbrough Korb, a
fellow shareholder at Buchanan, whose practice is focused on the
affordable housing industry. Michelle works with developers, public
housing agencies and their related entities on the development,
investment and utilization of low-income housing tax credits and
federal programs. Welcome Michelle.
Michelle Yarbrough Korb: Hello Becky.
Becky Lando: In the first episode of Tax
Facts, we talked about opportunity zones and a handful of
important dates and deadlines that affected many taxpayers. If you
haven’t listened to that yet, I recommend you check it out.
Today we’re going to talk about another advantage for investors
and developers in the multifamily and construction space, the
low-income housing tax credit. Michelle, before we dive into some
of the details and recent updates, can you first explain to our
listeners what exactly the low-income housing tax credit is and how
it works?
Michelle Yarbrough Korb: Sure Becky, I’d be
happy to. So, the low-income housing tax credit, which is also
known as LIHTC, is the largest production vehicle for affordable
housing. It’s a dollar-for-dollar reduction in federal tax
liability, and it’s claimed pro rata over 10 years. You apply
for this allocation of low-income housing tax credits from a state
allocating agency, and each state has its own unique process and
deadlines that are set forth in its qualified allocation plan. Now,
if you are fortunate enough to receive an allocation of low-income
housing tax credits, you can monetize those by receiving capital
from investors who in turn received the vast majority (roughly 99%)
of the tax credits, the depreciation and the losses. And most
investors in this space are Community Reinvestment Act investors.
This is a heavily regulated area, and it carries significant
restrictions on the use of the property and the income of the
tenants for at least 30 years. Many parties are involved and need
to be satisfied – from the IRS, the state allocating agency,
investors, lenders, just to name a few. So, there are two types of
low-income housing tax credit, the 9% and the 4%. The amount of the
credit equals the building’s qualified basis multiplied by the
credit percentage. Until 2015, the tax credit percentage was a
floating present value rate under both programs. So, the 9% credit
supports new construction and rehabilitation. It’s highly
competitive, and in 2015 it was fixed at 9%. The 4% credit supports
a project financed by tax exempt bonds or it may be applied to
building acquisition costs with a rehabilitation project.
Becky Lando: So, you mentioned that there was a
state allocation, but just to be clear, these credits, although
they’re allocated at the state level, they’re still in fact
federal tax credits? Is that right?
Michelle Yarbrough Korb: Yes, that’s
correct.
Becky Lando: So, from what I understand the
COVID-19 relief bill that was passed at the end of 2020 included
some changes to the low-income housing tax credit. Can you explain
what those changes were and how they affect those potentially
interested in investing in affordable housing projects?
Michelle Yarbrough Korb: So, the big news at
the very end of the year, in late December, is that the 4% tax
credit rate was fixed by the spending bill that Trump signed on
December 27th. Prior to this, the rate recently hovered just above
3%, so that’s almost a whole percent increase. And the benefit
to this is now many deals are going to pencil out in markets that
just previously didn’t support it. Sometimes lower rent levels
or lack of subsidy prevented those deals from working. So, we
envision that supply is going to increase, and we could also see an
impact on pricing that may result in new investors entering this
market.
Becky Lando: So, one of the other effects of
COVID-19 that a lot of people are aware of is that more people than
ever are struggling to pay rent. As a result, the CDC, as well as
some states and localities, instituted eviction moratoriums.
What’s the situation here? Are landlords on the hook? And could
you talk about this subject in the context of affordable housing
projects?
Michelle Yarbrough Korb: Sure. So a little
history on the eviction moratorium. It started under the CARES Act
and at first it only applied to tenants in certain rental
properties that either had federal assistance or federally related
financing. Then, in September of last year, the CDC director issued
a broader order that temporarily halted evictions. The Consolidated
Appropriations Act extended this. And then since then, the CDC
director has twice renewed or extended this order. It was most
recently set to expire on March 31st, but now it’s running
through the end of June of this year. Now, to be clear, the
moratorium is not rent relief. The rent is still owed. This is
merely providing a protection to struggling renters who’ve
given their landlord a declaration saying we’re not able to pay
rent. And we’re trying to avoid these situations where folks
become homeless and increase the spread of COVID-19. But these
tenants still have to agree to make their best efforts to pay what
they can, and that includes applying for available funds. So, the
good news for landlords is there are a lot of funds available.
Unfortunately, they’re still being rolled out. So, the first
tranche was under the CARES Act. It provided a funding stream for
emergency rental assistance. Then we had the Consolidated
Appropriations Act that also provided emergency rental assistance
for the payment of rent and rent arrears. And most recently in
March with the American Rescue Plan, just over $21 billion of
emergency rental assistance has been pushed out. And these funds
can be used to provide financial assistance from rent and utility
payments to other housing expenses, and those can be provided for
18 months. Now the American Rescue Plan also extended from the end
of this year to September 30th of next year the deadline to spend
the initial $25 billion tranche that was funded in December of
2020. So, the hope is by keeping the ban in place, the eviction
moratorium, through the end of June, that this rent relief from the
stimulus packages will get into the hands of renters and their
landlords and this will stabilize the situation by making landlords
whole and giving renters additional time as things stabilize,
vaccines roll out, to hopefully be able to find work and be able to
pay rent on a going forward basis.
Becky Lando: So, Michelle, another relevant
area affected by COVID-19 relief is the housing choice voucher
program, commonly referred to as Section 8, where tenants use
vouchers to pay a portion of their rent for a unit that’s on
the private market. Can you explain the impact of that?
Michelle Yarbrough Korb: So historically, many
landlords have been hesitant to get involved with Section 8 if
they’re in a jurisdiction that doesn’t have source of
income protection and they have a choice. But with the eviction
moratoriums, many landlords are struggling to collect rent. So, the
idea of regularly receiving a portion of each month’s rent in
the form of a voucher funded by the federal government is
attractive, as it’s a stable flow of income. And this also
carries over to benefits to both developers and LIHTC investors.
Subsidized projects are more attractive. Project based rental
assistance, where vouchers are attached to a project rather than
the tenant, are highly favored going forward. And there’s more
good news on that front. Additional vouchers will soon be
available. Again, in the March American Rescue Plan, $5 billion for
housing choice vouchers was authorized. Now these are going to go
to targeted populations that are at risk, and they focus on
homelessness and escaping violence. These will be administered by
public housing agencies across the country.
Becky Lando: Staying on this topic of political
movement for a second, we know that President Biden is working to
change course on a number of fronts from the prior administration.
Housing continues to be the subject of attention. In fact, there
was a congressional hearing on housing issues mid-March, something
that hasn’t happened since 2012. Can we expect any future
legislation or changes that would make affordable housing more or
less attractive investment from a tax perspective or other
perspective?
Michelle Yarbrough Korb: So, there are going to
be more opportunities for developers to develop and thus investors
to invest because with the fixed 4% low-income housing tax credit,
this is going to increase the number of transactions using that
credit. Additionally, $1.2 billion has been allocated as disaster
low-income housing tax credits. This impacts 11 states as well as
Puerto Rico that experienced non COVID-19 disasters. And finally,
it’s anticipated that the Affordable Housing Credit Improvement
Act will be reintroduced following the Easter recess. While that
text isn’t available yet, a prior version of the bill would
expand the housing credit by 50%, among other measures. So,
there’s definitely looking to be a great number more deals on
the horizon and thus opportunities for investment. And because of
this, new investors may decide to come into the low-income housing
tax credit market based on this increased demand. But additionally,
the potential for an increase in the corporate tax rate that’s
being proposed to fund President Biden’s infrastructure and
climate proposal will make tax credits more attractive. So, this is
good for investors. The 4% LIHTC transactions are more attractive
investments. They will include lower leverage and if demand exceeds
investment, lower prices. It’s going to allow investors to be
more selective. More choices regarding structure and partners
strength. On the flip side, there’s going to be increased
pressure on developers. While potentially more deals will work out
(from a financial perspective), they’re going to have to focus
on the things that matter to these investors – guarantees,
liquidity, reserves as well as longer sight control, the escalating
supply costs, particularly lumber, certain appliances, and then
increased timelines for COVID-19 protocols or potential future
issues like this pandemic.
Becky Lando: Finally, this is understandably as
you’ve explained, Michelle and extremely regulated environment.
And there’s a lot involved when undertaking developments and
investments using these sought-after tax credits. Can you explain
what’s involved and why it’s so important to work with
experienced counsel before jumping into an affordable housing
project?
Michelle Yarbrough Korb: Sure. So of course,
the first thing you’re going to focus on is that you’re
structuring a transaction to score well because you need to receive
a reservation of low-income housing tax credits. And that process
and the application is different in every state, as we talked
about. So, you need to focus on getting those points. But assuming
you do receive those low-income housing tax credits, while
that’s the largest piece of the financing, it’s not enough
on its own to finance a development. So, when a developer is
seeking loans and subsidies, like project-based vouchers, it’s
important to account for all of the competing requirements and
restrictions. This is why you need to work with someone who
understands the competing requirements and all of the “what
ifs?” to achieve a successful development. You know, putting
it in context, the pandemic led to closing delays that pushed a lot
of site control timelines beyond anything anyone had anticipated
when they secured those sites. For example, they entered into an
option agreement. So fortunately, I’ve always advised my
clients to have control beyond the minimum requirement of your
state allocating agency and to build in viable options to extend
because you never know what will happen. So, as you can see, these
deals involve much more than just tax issues. You need to
understand things beyond the tax in order to succeed in the
affordable housing industry.
Becky Lando: Michelle, this is such an
interesting topic and one that’s top of mind for lawmakers as
well as our clients and folks that we deal with in the in the
markets that we serve. I want to thank you for being on the podcast
today to share a bit of your knowledge with our listeners. To hear
this and future episodes of Tax Facts, please make sure to
subscribe to this podcast on Apple Podcasts, Google Podcasts,
Spotify or wherever you prefer to listen. To learn more about
Buchanan Ingersoll & Rooney’s experience in tax and real
estate law, visit Buchanan Ingersoll & Rooney PC (bipc.com)
or more specifically Affordable Housing Lawyers | Buchanan Ingersoll
& Rooney PC (bipc.com). Until next time I’m Becky
Lando, along with my colleague at Buchanan Michelle Yarbrough Korb.
Thanks for listening to Tax Facts.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.