US Senator Ron Wyden announced on Wednesday a bill that he believed would close a loophole that would allow large investors to make oversized profits in taxpayer-funded, affordable housing.
The move is part of a larger housing bill drafted by Wyden, an Oregon Democrat who chairs the Senate Finance Committee. In an interview, Wyden said his goal is to protect low-income homes over the long term and deter predatory investors from getting hold of those properties in cities like Boston and Seattle, where property values have risen.
“Without this change, the problem will only get worse,” said Wyden. “More and more private equity firms will step in and gobble up profits at the expense of affordable housing and vulnerable tenants.”
If successful, the change would apply to current and future home listings that use the federal low-income tax credit to fund funding, he said. Under these agreements, large banks and other donors provide funds for the construction or renovation of affordable housing in exchange for 15 years of tax breaks. After the 15 years, the nonprofit organization should be able to take over the property inexpensively, say housing specialists.
This is how the multi-billion dollar program worked for many years. But recently, a handful of big investors are buying tax credits from banks before the 15 years are up. These new investors are often looking for more than just tax breaks, as WBUR reports; In some cases, they try to get large payments from the nonprofits – or take ownership of the real estate.
Wyden’s solution is technical, but it gets to the heart of a dispute that has surfaced in Boston’s South End and across the country. It would turn a confusing “right of first refusal” for nonprofits into an easy option to purchase the property.
“What we’re basically saying is that nonprofits don’t need approval from private equity firms to buy back the affordable units,” said Wyden. “It’s a small change. It makes it clear what Congress intended.”
Such a change would theoretically affect Denver-based firms like Alden Torch Financial, which are involved in a lawsuit with Tenants’ Development Corp in the South End.
Alden Torch has argued in court that it is a trustee responsible for protecting its investment clients and that TDC violated the tax credit agreement by purchasing the property without Alden Torch’s permission.
Fighting like this breaks out in many cities due to the lack of clarity in tax law. In Massachusetts alone, nearly 300 properties will have their tax credits expired over the next decade, and many could face the same type of dispute as TDC.
Greg Voyentzie, CEO of Boston Financial Investment Management, a large firm that manages tax credit funds for investors, said he would welcome a move by Congress to resolve these disputes.
Wyden’s proposed changes “that change and clarify the right of first refusal for nonprofits (ROFR) are necessary to remove any ambiguity under the existing law, which would be beneficial to all LIHTC stakeholders,” he said.
In one of the most recent examples of housing companies having little control over what happens to their tax credits over time, American International Group Inc. agreed in July to sell a large portfolio of its affordable residential properties to a Blackstone Inc. real estate unit . a large private equity firm in New York for $ 5.1 billion.
Kathleen McCarthy, global co-head of Blackstone Real Estate, said in a statement, “Our intent as owners is to keep these communities affordable. We do not intend to convert them into the market price. “
Wyden said he would bring his bill when the Senate returns from its August recess.