Tax Overhaul and Affordable Housing

Interesting piece from the NY Times on the new tax overhaul's impact on affordable housing construction - much of which is dependent upon tax credits. Given the reduction in the overall rates, the attractiveness of the tax credits are also reduced. This may end up leading to less construction and therefore will increase the demand (and the value) of existing assets.

On top of this, rising interest rates and more stringent financing standards from traditional bank lenders are slowing the overall construction pipeline as well.

We love investing in affordable housing (although typically we look for market-rate workforce housing) and this will be yet another tailwind to the portfolio.

From the article:

SAN FRANCISCO — The last time that Congress approved a sweeping overhaul of the federal tax code, in 1986, it created a tax credit meant to encourage the private sector to invest in affordable housing. It has grown into a $9 billion-a-year social program that has funded the construction of some three million apartments for low-income residents.

But the Republican tax plan approved last month amounts to a vast cutback, making it much less likely that such construction will continue apace. Because the tax rate for corporations has been lowered, the value of the credits — which corporations get in return for their investments — is also lower.

“It’s the greatest shock to the affordable-housing system since the Great Recession,” said Michael Novogradac, managing partner of Novogradac & Company, a national accounting firm based in San Francisco.

According to an analysis by his firm, the new tax law will reduce the growth of subsidized affordable housing by 235,000 units over the next decade, compounding an existing shortage.

Already, developers and city agencies are scrambling for new financing and scaling back longer-term plans. ...

For now, there is little to suggest the rental burden will get better anytime soon. Over the next decade the younger half of the millennial generation will move into their 20s and 30s, adding to the pool of renters. Over that same period, more than a million units of affordable housing financed by low-income housing tax credits and other government programs are set expire and shift to higher rents, according to the Joint Center.

One result of the surge in higher-income renters is that units that policymakers politely refer to as “naturally occurring affordable housing” — run-down buildings where lower-income residents can afford an apartment without subsidy — are being pulled toward the higher end of the market.

In Redwood City, on the peninsula between San Francisco and the heart of Silicon Valley, private equity firms have been snapping up buildings that house lower-income service workers and repositioning them for higher-income tech workers. The pitch to investors is straightforward: With housing scarce and demand rising, there are returns to be made buying old buildings, marketing to new tenants, and steadily increasing the rent.

Full Article here:

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