Michael Novogradac Looks Back on 25 Years of Affordable Housing Challenges and Opportunities
Twenty-five years of affordable housing conferences have gathered thousands of development, investment and compliance professionals to discuss the opportunities and challenges they were facing at the time. Looking back at those challenges and opportunities, Michael Novogradac, CPA, shared some lessons and strategies gleaned from those years for attendees at Novogradac's 25th Annual Affordable Housing Conference yesterday in San Francisco.
Starting in August 1993, Novogradac reminded the audience that the low-income housing tax credit (LIHTC) had been expired for 13 months and an act of Congress was required to re-enact the program. “It strikes me,” he said, “Nothing’s a greater challenge than having your program have ended and having to get Congress to pass a law to re-enact your program. So as we’re facing challenges going forward, always remember that hopefully we won’t face situations like that where the program was ended for a fairly long period of time.”
Fortunately, the LIHTC was made an indefinite part of the tax code in 1993. But when control of Congress changed hands in 1995, the affordable housing community faced a new challenge. A new Ways and Means Committee chairman, Rep. Bill Archer, proposed a sunset for the LIHTC that would have required the program to obtain annual approval from Congress. That proposal was ultimately defeated and very soon after the conversation changed from a direct challenge to the LIHTC to a significant opportunity: In 1997, legislation was introduced to increase the cap from $1.25 to $1.75 per capita.
From 1997 through 2000, the affordable housing community worked to gather support for the cap increase, eventually getting support from 86 percent of House members and 81 percent of the Senate. “It’s interesting to look at this bill and look at how much support we had,” Novogradac said. “We have great support for the Affordable Housing Tax Credit Improvement Act right now but that was monumental support. So definitely it’s achievable and shows you why we want to keep pushing members of Congress to support low-income housing tax credit legislation because that is achievable.”
After weathering a challenge to the LIHTC in 2003 when President George Bush proposed corporations be allowed to deduct dividends paid, which could have led to a dramatic drop in demand for tax credits, the LIHTC became an important recovery tool following Hurricane Katrina. “Thanks to the efforts of everyone at the time who was working on behalf of the tax credit program and demonstrating to Congress how valuable it was, we then saw Congress turning to the low-income housing tax credit as a means of helping revitalize hurricane- or natural disaster-damaged areas,” Novogradac said. Specifically, LIHTC funding was temporarily increased in the Gulf Opportunity Zone Act to $18 per capita in the GO Zone from 2006 through 2008. This increased funding was “recognition that the [LIHTC] was doing well, doing good work, and it’s a means of providing capital quickly to develop affordable housing.” Those provisions were eventually extended to cover areas affected by hurricanes Rita and Wilma and other natural disasters in the following years.
Building on the congressional support for the LIHTC, the affordable housing community spent the next few years identifying a series of enhancements to the program. Those enhancements eventually became the Housing and Economic Recovery Act of 2008. “That bill had a lot of improvements to the tax credit program that made it more useable,” Novogradac said. While the opportunity posed by those improvements and the cap increase the bill included were celebrated, the affordable housing community was again quickly faced with yet another challenge in the form of the Great Recession.
A dearth of investors led to a dramatic fall in LIHTC equity prices. The affordable housing community was ultimately successful in getting two programs enacted to address the crisis: Treasury Section 1602 Tax Credit Exchange Program (TCEP) and the HUD Tax Credit Assistance Program (TCAP), both enacted as part of the American Recovery and Reinvestment Act. “The amazing part to me about the tax credit program is that it was only needed for one year,” Novogradac said, noting that equity market pricing rebounded as quickly as it had fallen.
In 2013, conversations around tax reform became more serious and to address the potential implications, Novogradac & Company issued a report: Affordable Rental Housing After Tax Reform. While, as we know now, it took several years for corporate tax rates to actually be lowered, that analysis and the increasing focus on the potential of tax reform began to raise awareness in the affordable housing community about what might lie ahead.
When, in 2017, tax reform became much more likely to happen, the LIHTC community faced numerous challenges. On Nov. 2, 2017, a House bill was introduced that would have eliminated private activity bonds, which finance more than half of affordable rental housing that will be developed over the next 10 years. Novogradac analysis showed that close to a million units over the next 10 years would not be renovated or built to serve low-income families if private activity bonds were repealed in combination with lower corporate tax rates. Private activity bonds were not repealed in the final package that was approved. “If you had told me a year ago or two years ago that having the corporate tax rate be reduced to 21 percent and losing a couple hundred thousand rental units over the next 10 years that I would be in some way happy, I would have said, ‘No way.’ And maybe happy is not the right term. Maybe relief is probably the better term,” Novogradac said. “When I think about we could have lost a million units and then we only lost 200,000, I did feel a great sense of relief.” That said, he reminded the audience there is still a lot of work needed to continue to educate lawmakers.
“Over the last 25 years, we’ve faced lots of ups and downs in the affordable housing community, but we have been very resilient. We’ve really fought back all the greatest challenges, to a greater or lesser extent, and there’s been a lot of opportunities that we’ve capitalized on,” Novogradac said. “And I myself, looking forward right now, think I’m not sure we’ve been in a long time in a better place than we are looking forward.”
Several positive aspects Novogradac highlighted were:
- private activity bond unit production is very high,
- U.S. Department of Housing and Urban Development’s income numbers are increasing,
- the new opportunity zone incentive likely can be used for affordable housing,
- a temporary 12.5 percent increase in LIHTC authority passed this year,
- an income averaging set-aside option was enacted, and
- Congress approved increases in HUD funding.
Looking ahead, Novogradac said, “I think there’s more opportunity to expand, to sort of be on the offense … I don’t think we’re going to be as much on the defense. I think there’s a good chance of advancing a 4 percent floor or something akin to a 4 percent floor if not this year potentially next year, as well as a number of the other provisions of the Affordable Housing Tax Credit Improvement Act. So I myself standing here today at our 25th annual affordable housing conference couldn’t be more optimistic about what is coming in the years ahead. That being said, I also know that back in 2008 after passing HERA, little did I know that there was a Great Recession coming. So I’m also concerned, or at least I’m monitoring what sort of troubled waters could be out there so we can just as easily deal with adverse circumstances should they arise.”