Novogradac Survey: Tax Reform’s Impact Varies, Depending on Perspective

Published by Brad Stanhope on Tuesday, December 4, 2018
Journal cover thumb December 2018

The tax reform wave that hit in late 2017 cleaned up the beach or destroyed the real estate, depending on your point of view.

Regardless of perspective, tax reform affected how people in affordable housing, community development and historic rehabilitation do business.

In an informal online survey by Novogradac, 48.8 percent of respondents said that tax reform had a moderately negative affect on their business in 2018. Out of five optional answers, tax reform having a “moderately positive” affect was the next most popular answer at 18.6 percent. That tax reform “greatly improved” and “greatly hurt” the business tied at 11.6 percent of respondents, while only 2 percent of respondents said tax reform didn’t affect their business.

The headline provision from the sweeping legislation was a drop in the corporate tax rate from 35 percent to 21 percent. That resulted in a reduced appetite for many tax credits.

“In the good days, you could do an [affordable housing] deal and not need much outside debt,” said  Kim Datwyler, executive director at Neighborhood Nonprofit Housing (NNH), a developer and owner of affordable housing properties in Utah. “You could have a golden deal. Now we have gaps on our deals.”

However, Brett Magers, executive vice president and chief lending officer of Legacy Bank and Trust in Springfield, Mo., said tax reform increased his bank’s available capital.

“It made us a little more inclined to invest in human capital and technology, said Magers. “Small community banks have a hard time keeping up, so we ramped that up.”

Novogradac’s poll also asked whether respondents changed their business model due to tax reform and whether the new base erosion anti-abuse tax (BEAT) applied to their organization.

A slight majority of participants–53.5 percent–said tax reform didn’t change their business model, while the other 46.5 percent said it did. 

An overwhelming 92.9 percent of respondents said BEAT didn’t apply to their organization.

Following is the experience of a few of those who participated in the survey.

Lower Tax Rate Hits LIHTCs

Tax reform was part of a perfect storm of problems that hit Utah’s affordable housing market, according to Datwyler.

“Utah is facing its biggest affordable housing crisis in at least 40 years and maybe in recorded history,” Datwyler said. “There just aren’t enough units, pricing is off and Utah’s strong economy and low unemployment have combined to drive up the demand for units.”

She attributes the shortage to a combination of tax reform, tariffs and labor shortages. She said it was obvious even before the legislation passed.

“In our state, there’s one round of funding and applications are due the first Monday in October,” Datwyler said. “Last year, there were rumblings and we knew the tax rate was going to be adjusted downward. But I doubt that many investors thought it would end up where it did.”

The corporate rate dropped and during 2018, approved low-income housing tax credit (LIHTC) developers began to pass on the credits, leading the state housing agency to step in and provide state credits to fill the gap. That didn’t fully fix it.

“We did not apply [for credits] this year,” Datwyler said. “We chose to sit out and see what happens. Income averaging could help out, but outside of the Wasatch Front [the metro area that includes 80 percent of Utah’s population], market rents are never going to hit what you need. It’s all in disarray.”

The impact isn’t limited to Utah.

Mike Hynes is CEO of Lexington, Ky.-based Winterwood Inc., where he oversees construction and real estate development in the four-state region of Kentucky, Indiana, Tennessee and West Virginia.

“We can still do business,” Hynes said. “Not a lot changed except the investment amount. The market pretty much stabilized, but what changed is the site selection and the technical details. The sites we looked at aren’t able to [pencil out] anymore–they need a basis boost or help. We might have been able to overcome the gaps at the full previous tax-reform rate, but it’s pretty much put a strain on local resources.”

Back in Utah, the state created an affordable housing commission to examine the difficulty, including a hope to get a $100 million bond for affordable housing. Datwyler said the new environment changed the way NNH conducts business.

“This is when you know you become a gambler,” Datwyler said. “There are so many unknowns and it’s so unsolvable. What will credit prices look like? Will changes in the [Community Reinvestment Act] CRA make a difference?”

She said rural residents are the losers.

“You will see fewer projects in rural areas unless something is done,” Datwyler said. “Major population centers will probably figure it out, but this affects all of us and we need all the players at the table. … There needs to be an emphasis on everybody working together or we will see a reduction in units.”

Hynes said his company is more cautious.

“We definitely are taking a more conservative view toward everything, particularly where it involves private activity bonds,” he said. “We also haven’t taken on new funding for historic tax credit properties.”

More Money for Investment

Not everyone lamented lower corporate tax rates.

“Like everybody, we were excited to see it pass,” said Magers. “We had to do some accounting, but the excitement for the future was huge. That’s significant for our company, because we get to take $700,000 or $800,000 in savings.”

As noted earlier, Magers said that was reinvested in people and technology.

Magers now is focused on the New Markets Tax Credit program, but earlier in his career was involved with the LIHTC and historic tax credit programs.

“[Tax reform] affected tax credit pricing, but it also added stimulation for extra capital,” Magers said. “It’s tough on tax credit pricing. Projects have trouble making it and I hate that for the industry, but there is more money to leverage affordable housing.”
Legacy is a 70-person bank with about $250 million in assets. Magers says tax reform helps.

“There’s more capital to invest,” Magers said. “When you cut taxes as much, banks are more aggressive.”

Journal December 2018 Special Feature graphic

Landmark Legislation

In the year since tax reform legislation passed, investors, developers, syndicators and others involved in various tax incentives are finding their way. Whether they think tax reform helped, hurt or didn’t affect their businesses, they agree it was important.

“There was some [previous] regulatory reform for small business, but nothing was meaningful like this,” Magers said. “The bottom-line change and effect were immediate. … It was a major confidence boost instantly for small business. It changed instantly. It’s worth it now, it inspired more risk-taking.”

Hynes said tax reform was the biggest change in his nearly two decades in business.

“Absent the Great Recession, I’ve never seen this type of disruption in the market, ever,” said Hynes. “This is a new one for me. As an industry, we’ve recovered quickly, but at the time, it was an existential crisis and required all hands on deck.”