From a small northwestern observatory…

Finance and economics generally focused on real estate

Low Income Housing Tax Credits

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This coming Monday, I’m making a presentation at Seattle’s Rainier Club to the Real Estate Roundable about Low Income Housing Tax Credits.  It’ll be more-or-less a tag-team event — another fellow from the not-for-profit community will talk about their focus, while I’ll present the for-profit perspective.

These two communities (for-profit, and not-for-profit) really aren’t in competition with one another, although it seems that way sometimes.  Both are recipients of a fairly finite pool of tax credits.  In some locales, they work in tandem since the two groups bring different strengths to the table.  In the Seattle market, where we’re headquarted and do much of our business, the two groups tend to go it “alone”.

Right now, though, these two groups are working together to try to get some sort of LIHTC relief out of Congress.  In short (and this is a very truncated overview), tax credits are awarded for projects and can be used to offset other income for Federal tax purposes.  The credits have to be used straight-line over a multi-year period, with no carry-backs or carry-forwards.  Thus, the recipient of the tax credits (usually a developer of an affordable housing project) will sell or syndicate the tax credits to corporate buyers.  Individuals can’t use the tax credits due to the passive loss rules, and corporate buyers need to be able to look down the road and predict a steady stream of taxable income in future years against which the credits can apply. 

In recent years, the most likely buyers have been financial services firms — banks and insurance companies.  In fact, some of these companies have subsidiaries set up just to buy the tax credits and help finance the projects.  With the current roilling in the financial services sector, these industries have basically shut down buying, so the affordable rental housing development business is on the skids right now.  This is a huge problem — something like half of the total apartment construction in America in the past 10 years has been in the affordable housing sector.  With the collapse of home buying, the demand for affordable rental housing is soaring.    In addition, this construction activity provides jobs, buys building material, and generates urban redevelopment. 

You would THINK that such a win-win business would have Congress jumping to provide very modest support — ad actually the dollars needed to get this sector back on its feet are trivial compared to what’s being spent for the rest of the bailout.  The problem is, it’s difficult to come up with a quick solution to this problem that DOESN’T use the financial sector as the conduit.  Simply put, the financial sector is so heavily intertwined with the afforable housing sector, that the solution will either have to be channeled thru the banks and insurance companies OR we have to invesnt a new and costly conduit from scratch.

The first solution (using the financial sector as a conduit) is repugnant to Congress right now, since they’ve already sent the financial sector to the woodshed.  The latter solution (re-invent the wheel) is both silly and probably un-do-able.  So where does that leave us?  With a gaping hole in our nation’s housing strategy and no quick fix in sight.

The good news is that there is widespread agreement that SOMETHING has to be done.  Unlike the auto industry, there aren’t any nay-sayers complaining that affordable housing should be allowed to collapse.  However — and this is terribly ironic — affordable housing woes affect all 435 Congressional districts approximately equally (OK, urban ones a little worse than others, but you get the picture).  As such, we don’t have the Congressional delegation from one state (say, Michigan) championing this bail-out above all others. 

Now it’s just a matter of finding a solution that Congress can stomach.

Written by johnkilpatrick

January 23, 2009 at 6:29 pm

Posted in Affordable Housing

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