A Conversation with Bill Shanahan on Tax Reform

Bill Head Shot

For much of 2017, we were all anxiously waiting to see what tax reform would look like. The affordable housing community was concerned about the possibility of a cut in the corporate tax rate. Rumors of tax reform in late 2016 and early 2017 produced a drop in Low-Income Housing Tax Credit (LIHTC) pricing: nationally the average price dropped from $1.02 to $0.93 in a short period of time, leaving many projects with credit reservations with a funding gap that had to be made up with other scarce resources.
Now that the tax bill has been passed, we know the corporate tax rate is 21%, which will probably mean further erosion in equity pricing. Still, many questions remain. In this article, NNEHIF President Bill Shanahan offers his thoughts.

First things first: was the LIHTC program ever in jeopardy?
When tax reform was taking shape, the LIHTC program was not a sure thing. NNEHIF worked alongside local and national groups to educate legislators about the program and its importance. Eventually, there were only two expenditures that found their way into the House’s version of tax reform: housing tax credits and R&D credits. We all breathed a sigh of relief…and then the other shoe dropped.

Before we talk about that other shoe, explain how changes to the tax code – especially the corporate rate cut – affect the LIHTC program.
Although the Housing Tax Credit was preserved, the corporate tax rate was lowered from 35 percent to 21 percent. The two most significant drivers in calculating a return on a housing tax credit investment are the credits and the non-cash losses that the properties provide investors. Both reduce an investor’s tax liability, and with a lower corporate tax rate there are fewer non-cash losses for the investor. In order to get the same return at 21% that an investor would get at 35%, the investor will now pay less for the housing credits.

Now that investors have a lower tax rate they may not have the same motivation to seek tax credits to reduce their tax liability. Other tax code changes that deal with interest deductibility and depreciation will also affect LIHTC investments, and we are still trying to sort those out. Many will need clarification from the IRS or a legislative fix. Additionally, everyone with a portfolio of housing credit investments now has to think about the value of that portfolio vis a vis the new tax rules.

All of these factors are causing investors to pause. I expect that investors will certainly stay in the market, but it’s going to take time for them to adjust to this new legislation. Most of our investors still have to consider their CRA obligations – that will likely create demand, but it may happen later than usual this year.

Are housing investment funds still good investments?
Absolutely. The fundamentals have not changed; this is a mature asset class that has performed very well with virtually no defaults or foreclosures and very high occupancy rates. The 15-year holding period is a long-term investment, but the after-tax returns are better than investment alternatives. CRA rules also still apply and continue to be a strong motivator for investors.

Let’s go back to that other shoe…private activity bonds.
One of the biggest shocks came when the House came out with their tax reform package: it eliminated private activity bonds (PAB’s). These tax-exempt bonds are used extensively in the public sector for municipal projects, school and infrastructure improvements as well as housing production and preservation.

The Senate preserved the PAB’s in their version of the tax bill, so during the reconciliation process we did tons of advocacy, alongside groups like Maine Affordable Housing Coalition, Housing Action NH, and the Maine Real Estate Developers Association. We fought really hard to preserve PAB’s, talking constantly with our congregational delegation and educating legislators about the importance of keeping the bonds. In fact, we drew a lot of attention from other states in New England – and across the country – because Susan Collins is our Senator, and she has such a pivotal role in the Senate.

Are there any other highlights in the tax bill?
New Market Tax Credits (NMTC’s) will be preserved until 2019, however, there’s still some uncertainty about whether they’ll continue after that. Historic Tax Credits were adjusted to a 5-year credit, reducing its potency (and pricing) from the first-year “high premium” credit that it once was. There’s also something in the tax code called Opportunity Zones, which are closer in kind to NMTC’s than Housing Tax Credits. It’s a bright spot for low-income communities, but it’s complicated and unclear exactly what it is – or if it will help increase affordable housing.

Since the tax bill has been passed and parsed, now what?
We got through tax reform and we’ve got some ground rules, but it’s a challenge in early 2018 to understand them all. The fact that LIHTC survived with bi-partisan support is huge. Now we have budget battles to fight to preserve the other programs that buttress LIHTC. The most disappointing thing about the advocacy experience was that we were fighting from a very defensive position and not finding many allies. Right now it’s hard to find housing heroes that are championing housing initiatives, although there are a few. Meanwhile, the demand for affordable housing is not slowing down. We in the industry need to keep beating the drum and make policy makers understand why housing is a priority.