By some estimates, the new tax law will reduce the production of affordable housing by 235,000 units over the next decade, according to the New York Times. The new, lower corporate tax rate and with it, a reduced appetite for low-income housing tax credits (LIHTCs), is a setback for affordable housing advocates.
Trent Brooks understands the concern. As a 30-year multi-housing finance veteran, he has experienced the sectors ups, downs, and cycles. His current long-term view is one of manageable concern—not gloom.
“Tax credit prices have declined around 10% from pre-reform levels. The tax credit equity piece of the capital stack is now smaller. Accordingly, getting affordable housing development to ‘pencil-out’ is more difficult,” says Brooks, president of RED Mortgage Capital headquartered in Columbus, Ohio.
Recently Brooks sat down and shared his views on affordable housing’s way forward:
You’re concerned but not overly worried. Why?
There’s no question the recent tax reform has an adverse effect on subsidized affordable housing. It is the multifamily housing sector with the largest imbalance between supply and demand. Although the relative reduction in tax credit equity is a setback, I have confidence that our capital markets system will efficiently fill the current gap. The need for truly affordable housing development is simply too great.
What’s your approach?
At RED Capital we are very proactive with our clients. We carefully design multiple financial models customized to a client’s specific development and investment strategy.
We are able to provide direct mezzanine financing as part of our internal balance-sheet platform. This, combined with the tax credit equity and our senior debt programs, helps developers create a financing structure that makes sense.
Are you limited to mezzanine financing?
No. We look at every part of the overall development to identify creative solutions. As one of the largest non-bank affordable lenders in the country, we offer a broad array of affordable loan products for our clients.
What’s your post-tax reform outlook for the affordable multifamily sector?
It’s still too early to make a full determination about overall effects of the new tax law. The good news is we no longer need to speculate about what the new tax law will look like. Now we know. The early reviews are mixed on whether the new tax law will ultimately be beneficial to our industry in the long-run. In the affordable housing sector, we certainly have much work to do in terms of preservation and new affordable development. At the same time, the reduction in the marginal tax rate will likely bring more capital into the overall multifamily space for recapitalizations, development, and preservation oriented renovation of workforce and affordable housing.
What else do you like?
The new tax law will hopefully attract more capital to increase the development of Class B rental housing as well as increase the preservation of our older rental housing stock.
How can companies like yours do more to help?
Technology is key. RED Capital recently transformed our entire servicing platform. This has allowed us to provide more efficient service even better asset management and market surveillance for our clients. We are also using IT to re-engineer the front-end customer facing processes in a way that improves our borrower’s access to the lowest cost of capital for the acquisition, development, refinance, or recapitalization of affordable housing.
Learn more about RED Capital Group.
Trent Brooks is the president and national head of production for RED Mortgage Capital, LLC, the mortgage banking arm of RED Capital Group. Brooks has over 30 years of experience in executive roles across the CRE industry.
