Proposed Retroactive Changes Could Reduce Equity Available to Build Much Needed Affordable Housing

Published by Michael Novogradac on Wednesday, December 18, 2013 - 12:00am

Recently, we addressed the impact that Sen. Max Baucus’ cost recovery draft proposalwould have on the ability of investors to raise equity from Low Income Housing Tax Credits (LIHTC) to build affordable rental housing for low-income families.

In our analysis, we also noted that the proposal would be retroactive, and would reduce annual depreciation expense for existing LIHTC properties. We also noted that we were preparing calculations on the impact.

Well, the results are in.

We calculated the impact on yield solely from the retroactive application of the depreciation expense changes. For this purpose, we assumed the marginal tax rate stayed at 35 percent, in order to isolate the impact of the retroactive aspect of the proposed change.

For a 9 percent property about to be placed in service, the yield declines roughly 53 basis points.

For a 9 percent property that was placed in service 5 years ago, the impact is less severe, and the yield declines about 24 basis points.

For a 9 percent property placed in service 10 years ago, the impact is a reduction of only 7 basis points.

For a 4 percent, transaction, the impact is more severe, given the higher loss to tax credit ratio. For a property about to be placed in service, the loss is 143 basis points.

For a 4 percent property that was placed in service five years ago, the impact is a bit less significant, as the yield falls about 67 basis points.

And finally, for 4 percent property that was placed in service 10 years ago, the impact is a reduction of 19 basis points.

Even in the absence of tax reform being enacted, the mere suggestion that tax reform could include retroactive changes to annual depreciation deductions has the potential to damage the ability to raise equity for affordable rental housing developments. This is especially troubling after the Joint Center for Housing Studies’ recent study revealed that the percentage of middle class households using 30 to 50 percent of their income to cover rent and utilities more than doubled over the past decade, to 23 percent from 10 percent; our nation deeply needs more affordable housing, not less, and Sen. Baucus’ proposals could make it harder to raise capital for affordable housing investments.