Affordable Housing

As the multifamily apartment asset class continues to outperform, with rising rents and apparently ever rising demand, there is justifiable concern for the affordability of housing. Many of the multifamily units produced in recent years have been catering to the higher price-point end of the market, and much of what is in the development pipeline seems to be continuing this trend.

The US Congress has given the Affordable Housing industry reason to be more upbeat. Recently they made permanent the Low Income Housing Tax Credit (LIHTC, or "lie-tech") of 9%. There had been uncertainty leading up to this as to what the rate would be, and for what time period it may apply to. Up to the Congressional decision being confirmed, many developers had been underwriting potential projects based on a 7.5% rate. The difference between a 7.5% and a 9% rate is substantial and could determine the viability of many projects proceeding.

LIHTCs make a development project catering to lower income tenants feasible and profitable, which would not be the case without them. LIHTCs are a dollar for dollar tax credit, which is based off the development cost of the project. The 9% rate is applied to the eligible basis of the development, which typically includes all the hard costs but not land, and is awarded as an annual tax credit for 10 years.

The developer can utilize these tax credits personally or syndicate/sell them for cash to use as equity in the development. Historically the market to syndicate/sell these credits has been quite strong, with credits being sold for 85-95cents in the dollar. However the market of late has been extremely strong with credits selling for as high as 99cents recently, up from 94cents last year. Typical investors in these credits are entities with high tax liabilities such as financial institutions or petroleum companies.

Projects utilizing LIHTCs account for up to 90% of all Affordable Housing created in the US today. The tax credits were created under the Tax Reform Act of 1986, in response to other pieces of that same legislation that adversely affected investment incentives in rental housing. It is hard to imagine what the Affordable Housing situation would look like today without LIHTCs. There is mounting concern in many cities as to the affordability of housing, and rent control has begun to be mentioned in some West Coast cities as a potential tool to bring this under control. This should have developers & investors worried. Hopefully with the LIHTC rate being permanently set at 9% it will remove a layer of uncertainty for developers, and spur more development in this area.

If you have a development project or an investment property in need of capital, with either debt financing or equity co-investment, or you seek an experienced development/operational partner, please give me a call. Likewise, if you have capital to deploy we can assist with identifying appropriate real estate opportunities.