Syndicators cheer tax bill, ready for future fights

A collective sigh of relief could be heard throughout the affordable housing industry when President Bush signed a tax bill that did not include a proposed measure that may have hurt the low-income housing tax credit (LIHTC).

Tax credit syndicators are thrilled with the recent victory, but warn that a controversial proposal to eliminate taxes on income from corporate dividends may not be dead, but only sleeping.

"We won a reprieve this time, but we will see this come back," said David Gasson, vice president of Boston Capital. "The industry is going to have to stay on its toes."

LIHTC supporters, he said, will have to be vigilant about the possibility of tax reform in the years ahead. It was dividend taxes this year, but it may be a different proposal next time.

Bart Harvey, chairman and CEO of The Enterprise Foundation, issued a similar statement. "We expect the administration will come back with its dividend proposal as well as other tax cuts that pose similar threats to the other tax credits vital to community revitalization efforts," he said.

The housing tax credit was spared because Congress cut the administration's original $726 billion tax cut proposal in half, so the plan could no longer accommodate the high-cost, dividend-tax exemption proposal, Harvey said.

The centerpiece of the Bush plan was the elimination of dividend taxes, the taxes that shareholders pay on corporate dividends. It's a move that many people felt would reduce corporate investment in tax credits. An analysis by Ernst & Young estimated that affordable housing production could have fallen by 40,000 apartments if the plan had been enacted.

Under the final tax package, the tax rate on both dividends and capital gains will fall to 15% for most taxpayers through 2007. Lower-income people will pay 5% through 2007 and will not pay any tax on dividends and capital gains in 2008, after which the rate will return to today's higher rates.

The key, however, is that the plan does not include an excludable dividend amount concept, so it will not affect tax credits. In other words, the reduction in taxes on dividends applies at the shareholder level regardless of what taxes are paid or credits are utilized at the corporate level.

While it is generally agreed that the reduction in dividend taxes will not harm the LIHTC program, some feel it may reduce the value of tax-free municipal bonds. Several industry experts speculated that investors will re-evaluate their tax-exempt bond investment plans and holdings now that they can earn corporate dividends at a reduced tax rate. According to The Bond Buyer, Standard & Poor's chief economist David Wyss said municipal bonds are "still tax-favored," but there may be a slight negative impact.

Throughout the tax debate, prices and yields for LIHTCs held steady despite a very real threat hanging over the program.

"We're very relieved to see that the tax plan as enacted will have no effect on the low-income housing tax credit," said Joe Hagan, president and CEO of the National Equity Fund (NEF). "Certainly, we were concerned about what the original proposal might do to tax credit investments - as were a lot of affordable housing investors and developers."

"Through the first part of this year, our project investments have been unaffected by the tax package debate, largely because we had more than $200 million from our 2002 funds on hand for projects in the first six months of this year," Hagan said. "Our discussions with investors indicate that they will be holding steady on their NEF commitments for our upcoming 2003 funds."

The original tax proposal froze some LIHTC investors, but many were beginning to feel more comfortable as the final bill began taking shape. "We have started talking to buyers now," said Victor MacFarlane, managing principal of MacFarlane Partners in San Francisco, shortly before the bill was signed. "It seems to be loosening up a bit."

His real estate investment firm had been holding off on selling tax credits for about a half-dozen projects, he said. MacFarlane Partners develops its own projects and also invests with other developers.

The delay did not disrupt construction on any of the projects because the company was putting up its own funding. "It, however, will impact returns because we anticipated the credits would be sold sooner," MacFarlane said.

Most syndicators are feeling good about the demand for tax credits now that the threat to the program has passed.

"The market for tax credits is very strong," said Marc Schnitzer, managing director at Related Capital Co. "The new tax bill does not disturb or upset the investment environment for LIHTCs. The bill does not create any negative impact on a corporation's ability to use tax credits and leaves in place long-standing tax incentives previously approved by Congress. In fact, to the extent some investors were waiting on the sidelines for results of the bill, they're now jumping in with both feet."

It's now business as usual, he said. As long as interest rates remain low and stable, he expects extremely strong demand for tax credits. "We are seeing some downward pressure on LIHTC yields, reflective of the general interest-rate environment and the lack of attractive alternative investments," Schnitzer added.

Many praised the efforts of the National Council of State Housing Agencies (NCSHA) in protecting the tax credit. The key to the victory was keeping the focus on the potential loss of housing, said Barbara Thompson, NCSHA executive director.

"If anything, the industry demonstrated how successful we can be in motivating our proponents," said Boston Capital's Gasson. He gives credit to Sen. Olympia Snowe (R-Maine), who called for a much smaller tax cut than was originally proposed. "If she had not stuck to her guns, I don't think we would be celebrating."

In the end, the dividend-tax fight raised people's consciousness about the LIHTC program and illustrated how much support there is for it.