Clocktower Tax Credits, LLC, is pleased to report that the recently enacted “Tax Cuts and Jobs Act” has kept most of the previous provisions that support affordable housing creation and historic rehabilitation intact. Unfortunately, as noted below, credit pricing in both historic preservation and affordable housing will be reduced due to the change in the corporate tax rate and other specific changes.
The original House of Representatives bill had eliminated the Historic Tax Credit (HTC) entirely. There was talk that a federal credit supporting historic rehabilitation was elitist and only benefitted a small slice of well-off Americans. This would have been unfortunate, not only because there are so many structures worthy of saving and preserving, but also the costs of doing so are high and rising. If cut by the bill, it would have left only the preservation tax incentives enacted by the states, and many states still don’t have an effective and robust credit available to developers. In the final bill, the only major change to the program has been to stretch out the 20% tax credit from one year to five (in properties purchased after January 1, 2018). Several analysts who’ve studied this provision expect it will reduce the prices that investors will pay into federal historic tax credit partnerships by $.07 to $.10 on top of the reduction caused by the rate change.
The Low Income Housing Tax Credit (LIHTC) program provides developers who qualify a credit of up to 90% of the cost of a project spread out over 10 years. In addition, there is a 40% credit over ten years for projects that use Private Activity Bonds to fill the gap left if the project didn’t qualify for the larger credit. The LIHTC program has more political clout than the HTC, so there wasn’t much talk of eliminating it outright. There was discussion though, of eliminating the Private Activity Bonds, which would have seriously diminished affordable housing production by eliminating an important financing component in the projects that didn’t qualify for the 90% program. Luckily, that did not come to pass in the final bill signed into law. Both programs are retained, but the reduction in the federal corporate tax rate from 35% to 21% will likely reduce LIHTC pricing approximately 14%, according to Michael Novogradac, a leading accountant and authority on tax credit law. Another issue reducing the value of the LIHTC, according to Novogradac, is the effect of the Base Erosion and Anti-abuse Tax (BEAT). This is a complex provision affecting different LIHTC investors differently. The upshot is it will reduce LIHTC appetite among corporate investors and pricing will be reduced accordingly.
In conclusion, the real estate tax credits developers use to economically house lower-income Americans and restore worthy architectural properties were saved, albeit in reduced form. The next few months will determine what effect, exactly, the bill will have on tax credit pricing as institutional investors analyze the bill’s effect on their tax credit appetite. The reduced federal tax rate’s negative effects on federal credit pricing will actually increase the demand and pricing for state tax credits. We encourage all developers with existing projects looking for investors, or with new projects ready to break ground, to contact us and discuss strategies to maximize their tax credit yield for both state and federal tax credits.