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Affordable Housing Update - December 2016


12/20/16

Dear Clients and Colleagues,
 
“Tax reform is the buzz, but take a deep breath. The program has an established track record and affordable housing remains at the table with ample support in Washington.” – Bob Moss, CohnReznick’s Principal and National Director of Governmental Affairs.
 
We are in an environment of uncertainty and with that anxiety on the minds of many in the affordable housing industry. We would like to provide you absolutes and defi nitive answers, but given that we all are passengers on this tr ain we can only strive to provide you with the best view informed by our experience and access to accurate information.
 
Tax Reform
 
In a very positive development, we understand a majority of House Republicans on the House Ways and Means Committee expressed support at their recent retreat for including the Low Income Housing Tax Credit in the tax reform blueprint currently under discussion. The blueprint is being drafted into legislative language, and Ways and Means Committee Chairman Kevin Brady (R-TX) has indicated the bill would be ready should the Trump Administration want to move forward on tax reform early in 2017, however, Senate Finance Chairman Orrin Hatch has not indicated that he will support all of the House reform provisions should the plan not be revenue neutral. Any tax reform changes that are made will likely come with transition and phase-in periods.
 
The State of the Equity Market
 
We are aware of several funds in the marketplace that have been resized or delayed to cope with investors requiring more time to close or simply sitting on the sidelines for now. For the most part, we anticipate that investors will honor their existing commitments.
 
While it is still largely “business as usual” on the equity raising side for 2016 funds, investors are busy running scenario analyses and stress tests, with many using 20%-25% alternative tax rates. We have looked at over 60 deals that have closed this year and found that a decrease of $.11 to $.14 per credit maintains the yield at a 20% tax rate and $.08 to $.10 maintains the yield at a 25% rate. In addition to the corporate tax rate being speculative at this time, it remains to be seen what the ultimate provisions will look like and how any proposed tax and accounting changes might work together.
 
We anticipate that everyone—investors, syndicators, and developers included—will need to carefully manage their inventory risk going into the New Year, likely leading to a rather slow start in early 2017. Given the uncertainty of the timing for potential tax reform, equity adjuster provisions, rather than across-the-board re-pricing trends, may be the key to getting deals fi nanced until the new rules are in place. There has been a general acceptance of such provisions although the precise terms will need to be negotiated.
 
Tasks Ahead of Us in 2017
 
There are two big “preservation” tasks ahead of us: preservation of the housing tax credit program itself and preservation of the program’s purchasing/production power. We remain confi dent about the fi rst task. The housing tax credit program has historically enjoyed strong bipartisan support. Our study based on data collected on nearly 20,000 housing tax credit pr operties confi rmed that nearly all affordable housing units across the country are almost fully occupied. The housing tax credit program not only has been one of the most impactful tax incentive programs, it has also proven to be a safe and sound investment for investors. This is evidenced by a cumulative foreclosure rate of less than 0.7%. We describe these tasks as “preservation” not because we believe that the program is at risk. It is preservation because of our belief that we should never take anything as important as the housing credit program for granted.
 
Many people relate any potential short-term disruption to the 2008/2009 fi nancial crisis. At that time, the Community Reinvestment Act (CRA)—the lifeblood of the housing tax credit program—saved the day when CRA-motivated investors fi lled the 40% gap left behind by Fannie and Freddie. While CRA provides a lot comfort, we cannot passively rely on CRA alone to make the market whole.
 
CohnReznick’s preliminary analysis suggests that, for a “typical” 9% transaction, every 1% drop in corporate tax return requires a corresponding approximate 1% drop in price to hold the investment yield constant. There is a lot more to consider beyond this simplifi ed analysis. For example, how many projects would not be fi nancially feasible without additional soft fi nancing? What is the size of the possible equity shortage that could result from a c orporate tax rate reduction? Like 2008-2009, how long could a potential equity shortage last before re-pricing attracts the attention of economic investors willing to fill the gap? Regardless, any disruption to the program would only widen the already significant affordability gap. Industry practitioners have begun discussing tools to preserve the program’s purchasing power including a shorter credit delivery period.
 
Now is, the time for our industry to continue to work collaboratively. At CohnReznick, where approximately 750 professionals are involved in housing and other investment tax credits, we are extremely fortunate to have Bob Moss leading our advocacy efforts. Bob is working with the ACTION campaign, the Affordable Housing Tax Credit Coalition and the Housing Advisory Group to preserve and enhance the housing credit. He is in regular contact with key members of the House Ways & Means Committee, the Senate Finance Committee, and the professional staff of the tax writing committees. Thus far, Bob is getting largely positive feedback concerning retention of the housing credit as well as renewed interest in protecting it from unintended consequences.
 
We should not overlook the potential upside of what lies ahead. There has been considerable conversation about the connection between proposals that would permit the repatriation of corporate earnings currently held off-shore at lower tax rates and the incoming Administration’s proposed infrastructure program. A large infrastructure spending program could easily serve as a platform for the Cantwell proposal to increase the volume cap by 50%.
 
How We Can Help
 
As Bob said, it is the time to be more “creative” when it comes to policy solutions. We also share the belief held by many that it is time to be more collaborative in policy proposals, enabling the affordable housing industry to speak as one voice.
 
CohnReznick is committed to you and the industry-at-large and offers our help in a number of ways:
 
  • Advocacy support – The Tax Credit Investment Services (TCIS) group at CohnReznick continues to serve as a trusted gatekeeper of industry information. TCIS professionals were involved in producing 15 years’ worth of track record on the housing tax credit program and many other important initiatives. We are fully committed to making this data work for the industry’s collective benefit.
  • Industry intelligence – CohnReznick professionals participate in the industry from every perspective, working closely with legislators, state agencies, developers, syndicators, lenders, and investors. We are more than happy to assemble a team of experts to speak with you.
  • Strategic planning support – Whether it is to evaluate feasibility at the deal level, conduct a stress test, or assess possible risks, we can help you strategize scenarios, measure impacts, and evaluate solutions.
 
Contact
 

We will continue to stay closely abreast of all developments and will keep you informed on the latest industry news and movement in Washington. Should you have additional questions or for more information, please contact your CohnReznick partner and team.

For more legislative insight from Bob Moss, follow him on Twitter @BobMoss42 or visit our Capitol Connection webpage which includes his most recent article, Taking a Deep Breath: Rhetoric vs. Reality (12/5/16). Bob can also be reached at bob.moss@cohnreznick.com or 207-232-7150.
 
To learn more about Tax Credit Investment Services (TCIS) and to discuss general equity market conditions, contact Cindy Fang at 617-603-4524 or cindy.fang@cohnreznick.com.
 
Download the PDF version of this communication here.
 
 
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 
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