For the affordable housing industry, 2018 has been all about navigating the new environment post-tax reform. The year marked the first increase to the low-income housing tax credit (LIHTC) in over a decade, the anticipation of the new Opportunity Zone (OZ) incentive to spur investment in distressed communities, understanding the new income-averaging option for the LIHTC program, and the return of Fannie Mae and Freddie Mac to the tax credit investment market.

Affordable Housing Finance, with help from its Editorial Advisory Board members, counts down 10 notable news events for the industry in 2018.

1. Omnibus Housing Boost

Affordable housing programs were big winners as part of the $1.3 trillion omnibus spending plan agreed to by Congress in March. “The omnibus was good for LIHTC and appropriated housing,” says Bob Moss, principal and national director of governmental affairs for CohnReznick.

The LIHTC program received a 12.5% increase for the next four years. This was the first increase for the program in over a decade. The timing was crucial, with several measures in tax reform expected to reduce affordable housing production.

The omnibus bill also increased funds for the Department of Housing and Urban Development (HUD), including public housing and HOME programs. And the new legislation expanded HUD's Rental Assistance Demonstration program to include Sec. 202 housing for the elderly communities with Project Rental Assistance Contracts (RAD for PRAC).

2. Expanding the Income Range

In addition to the increase in LIHTCs, the omnibus introduced “powerful income averaging”for the LIHTC program, says Bart Mitchell, president and CEO of The Community Builders.

One of the most significant changes to the program in years, income averaging was established as a third minimum set-aside election and is seen as a way to serve more families. It allows LIHTC-qualified units to serve households earning as much as 80% of the area median income (AMI) as long as the average income limit at the property is no more than 60% of the AMI. A development using income averaging must make at least 40% of the units affordable to eligible households.

Many states were making moves to implement the program in 2018. Eden Housing, a veteran affordable housing developer and owner, and U.S. Bancorp Community Development Corp., an experienced LIHTC investor, closed a deal in the fall to finance the rehabilitation of two properties in Marina, Calif., making it one of the earliest deals to use income averaging.

The move allows the apartments of 33 existing residents at the Charles Apartments and Cypress Gardens whose incomes exceed 60% of the AMI to qualify as tax credit–generating units at 70% or 80% of the AMI.

3. Tax Reform Impact

While 2017 was dominated by the threat of tax reform and the ultimate passage of the Tax Cuts and Jobs Act in December, the new year brought uncertainty of what the effects would be on the LIHTC program due to the lower corporate tax rate.

According to a July report from the Urban Institute, the recent tax reform legislation “will have an uncertain effect on future LIHTC investments because a reduction in corporate taxes lessens the financial incentive for corporations to make equity investments in tax credits.”

“If LIHTC investments falter, developers will not build affordable rental housing and existing units will be lost,” says The Low-Income Housing Tax Credit: Past Achievements, Future Challenges, noting that the housing credit is especially critical to rural communities that may be most vulnerable to decline in program investments.

It was a sluggish start to the year, with the average price per dollar of credit about 92.5 cents in the second quarter of 2018, according to AHF’s annual mid-year survey of syndicators. Yields to investors averaged about 4.7%. In comparison, prices averaged about 95 cents and yields to investors about 5.4% in the same quarter the prior year.

But LIHTC market activity had been gaining momentum in the second half of 2018, according to syndicators at the annual AHF Live conference in November. However, it was noted that there’s still a big separation between pricing expectations in terms of what returns investors are seeking and what developers need to make deals work.

4. Opportunity Knocks

As the year progressed so did the popularity of OZs, an incentive that came out of the 2017 Tax Cuts and Jobs Act. This new community development tool is aimed at spurring investment in low-income neighborhoods while offering capital gains tax relief to investors.

Governors were able to nominate 25% of their state’s low-income community census tracts for OZ designation, with the end result of 8,761 designated OZs in all 50 states, the District of Columbia, and five U.S. territories.

Qualified OZs retain their designation for 10 years. Investors can defer tax on any prior gains until no later than Dec. 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund (QOF), an investment vehicle organized to make investments in these areas. In addition, if the investor holds the investment in the QOF for at least 10 years, the investor would be eligible for an increase in its basis equal to the fair market value of the investment on the date that it is sold, according to Treasury officials.

According to Treasury secretary Steven Mnuchin, the federal government anticipates that $100 billion in private capital could be dedicated toward creating jobs and economic development in OZs.

Much-awaited guidance came out from the Internal Revenue Service in October, bearing good news for the affordable housing industry and enough of a start to get money off the sidelines. Earlier in December, President Trump also boosted the program with an executive order to establish the White House Opportunity and Revitalization Council, a group of 13 federal member agencies and chaired by HUD secretary Ben Carson, to focus on ways to more effectively use taxpayer dollars for OZ revitalization efforts.

5. Construction Cost Concerns

Rising construction and labor costs have continued to be a concern for developers and the finance community. In fact, it was a top issue going into 2018 for roughly 20% of developers who participated in the annual AHF 50 survey.

The industry saw construction costs increase for the 21st straight month in July, according to IHS Markit (Nasdaq: INFO) and the Procurement Executives Group, which noted that steel prices in the United States are at or near peak levels, and labor costs continue to increase in all regions of the country.

The increase in both materials and labor saw developers and their partners trimming costs, seeking additional subsidies, and evaluating different options even when it comes to usually routine construction loans. LIHTC syndicators, in AHF’s annual mid-year survey, also raised a red flag about increased construction costs and said an escalation could threaten already tight LIHTC deals in the second half of the year.

6. The Year of Housing Legislation

Advocates continued their work to get support for the Affordable Housing Credit Improvement Act—H.R. 1661 sponsored by Reps. Carlos Curbelo (R-Fla.) and Richard Neal (D-Mass.) and S. 548 sponsored by Sens. Maria Cantwell (D-Wash.) and Orrin Hatch (R-Utah)—in 2018. After getting income-averaging, one of the 22 provisions in the Cantwell-Hatch bill, done in its entirety in the omnibus, the industry was still looking for a 50% increase in the LIHTC, the 4% floor, and other smaller provisions.

In addition, several other lawmakers were acknowledging and addressing the nation’s affordability crisis. According to the National Low Income Housing Coalition, the United States has a staggering shortage of 7.2 million rental homes affordable and available to extremely low-income renters and a national “housing wage” at $22.10 per hour for workers to afford a modest two-bedroom rental home, an increase from $21.21 in 2017.

Sens. Angus King (I-Maine), Todd Young (R-Ind.), and Cantwell, along with Sens. Chris Coons (D-Del.), Cory Gardner (R-Colo.), Dean Heller (R-Nev.), Doug Jones (D-Ala.), Tim Kaine (D-Va.), and Marco Rubio (R-Fla.), introduced the Task Force on the Impact of the Affordable Housing Crisis Act to get a new comprehensive look into the affordable housing crisis.

Sen. Elizabeth Warren (D-Mass.) introduced a sweeping housing bill in September that seeks to build more than 3 million new homes in 10 years and bring down rents by 10%.

Warren’s solution to the affordable housing crisis is to attack the problem from multiple angles, including increasing investments in the National Housing Trust Fund (HTF) and Capital Magnet Fund, expanding the Community Reinvestment Act (CRA), and creating incentives for local governments to eliminate unnecessary land-use restrictions.

Rep. Cedric Richmond’s (D-La.), with co-sponsors Reps. Elijah Cummings (D-Md.), Barbara Lee (D-Calif.), and Gwen Moore (D-Wis.), then introduced the House version of Warren’s bill in December.

Additional bills came from Sen. Ron Wyden (D-Ore.) for the creation of a tax credit to help middle-income renters and another to help first-time homebuyers, Sen. Kamala Harris (D-Calif.) to create a refundable tax credit for renters paying more than 30% of their gross income on housing and utilities, and Rep. James E. Clyburn (D-S.C.) to increase the annual allocation for LIHTCs to help make up for the affordable housing units projected to be lost as a result of changes in the recent tax reform legislation.

7. Rock the Vote

At the polls in November, voters demonstrated a willingness to support new taxes to help develop affordable housing and try to solve homeless crisis, says Richard Gerwitz, co-head of Citi Community Capital.

From propositions to bond measures on the state and local levels, voters said yes to addressing the affordability crisis.

With sky-high housing costs one of the California’s biggest issues, state voters passed two propositions to fund needed housing programs for low-income and homeless individuals and families. And voters in San Francisco supported Proposition C, which is expected raise an estimated $300 million annually for city homeless programs by taxing big businesses.

Also in California, Proposition 10, a measure to expand rent control in the state, was soundly defeated. “This was a very significant win for both the affordable housing community as well as the market-rate community,” says Michael Costa, president and CEO of Highridge Costa Housing Partners.

Oregon voters came out in support of affordable housing, approving Measure 102 to amend the state Constitution to allow governments to partner with private and nonprofit partners to build more affordable housing with bond revenue. And in the Portland metro area, a $652.8 million bond to create more affordable housing was passed.

Austin, Texas, voters also passed the largest bond ever dedicated to affordable housing in the city.

8. Midterm Shake-Up

Affordable housing advocates have some work to do after November’s midterm elections. The Democrats retook the House, and Republicans continued control of the Senate. In all, almost 100 new legislators, who will join the 116th Congress, will need to be educated about the LIHTC and other affordable housing programs.

In addition, several big affordable housing champions are retiring or lost re-election. One big loss is the retiring Hatch, who was a co-sponsor of the Affordable Housing Credit Improvement Act. On the House version of the legislation, co-sponsor Curbelo lost re-election. New lead sponsors will have to be identified in both the House and Senate.

However, LIHTC champion Rep. Neal, who has been a co-sponsor of housing legislation over the past decade, will be chair of the Ways and Means Committee. Rep. Maxine Waters (D-Calif.), who also has been supportive of affordable housing programs over the years, will be chair of the House Financial Services Committee, and Rep. Nita Lowey (D-N.Y.) will become chair of the House Appropriations Committee.

9. RAD Reigns Supreme

The Rental Assistance Demonstration (RAD) program continues to make its case for aiding the nation’s aging public housing portfolio.

“RAD passes the 100,000-unit mark and continues to save public housing, including at least 60,000-plus units in New York City,” says Conrad Egan, chairman emeritus of Community Development and Preservation Corp. and former president and CEO of the National Housing Conference.

RAD has been an innovative approach by HUD to confront the aging supply of public housing and allows public housing authorities to convert some or all of their units to a project-based Sec. 8 platform and to access private investment through public-private partnerships to preserve the housing stock and address the backlog of deferred maintenance.

In September, HUD and local officials celebrated the groundbreaking of a public housing redevelopment in Austin, Texas, which marked the 100,000th public housing unit being converted through the RAD program.

The Housing Authority of the City of Austin, with developer partners Atlantic Pacific Communities and Madhouse Development Services, is undertaking the first redevelopment of one of its public housing properties, Goodrich Place, with the help of the RAD program.

In addition to reaching the milestone of 100,000 former public housing units converted to Sec. 8 with new long-term contracts, RAD has some other notable milestones, including:

  • Approximately 210,000 households have a better place to call home;
  • Approximately $5.75 billion in capital investment has been made for affordable rental housing stock repairs and improvements; and
  • Approximately $5.75 billion in capital investment has been made for affordable rental housing stock repairs and improvements.

“[The Community Builders] closed several significant RAD transactions in 2018 and so did hundreds of others,” says Mitchell. “[It was significant that] the RAD cap increased again with bipartisan support.”

10. The Return of the GSEs

With a few LIHTC investors retreating from the market after tax reform, the return of Fannie Mae and Freddie Mac to the market have helped fill that hole. Both of the government-sponsored enterprises made their first housing credit investments in about a decade after the Federal Housing Finance Agency approved their return to the LIHTC market in late 2017.

“Fannie and Freddie coming back to the market from the tax credit syndicator’s perspective was perfect timing,” Tony Alfieri, managing director at RBC Capital Markets–Tax Credit Equity Group, told attendees at AHF Live. “It did have the effect on the market that their regulator wanted them to have.”

Early in the year, Fannie Mae announced that it had closed on a $100 million LIHTC fund. The fund, known as Raymond James Affordable Housing Fund 11 LLC, will be managed by Raymond James Tax Credit Funds. Fannie is the sole investor in the propriety fund, which will focus on Hurricane Harvey–impacted markets, as well as rural markets and Native American housing.

In June, Fannie announced that it would provide a $26 million LIHTC equity investment to help finance the development of Far Rockaway Village, a 457-unit development in the downtown Far Rockaway area of Queens, N.Y. Fannie will back the project through The Richman Group Affordable Housing Corp., a Fannie Mae LIHTC fund partner.

And in November, Fannie committed up to $145 million in three LIHTC funds through syndicators Cinnaire, Ohio Capital Corporation for Housing, and Midwest Housing Equity Group that will focus on underserved rural markets.

Freddie Mac closed its first LIHTC fund with Enterprise Community Investment and its first equity investment within that fund in September. The national fund will provide developers with critical equity to create and preserve affordable homes.

Soon after, Freddie marked its second LIHTC fund with Hudson Housing Capital and its first investment within that fund. The Hudson Housing Tax Credit Fund will invest nationwide to create and preserve affordable homes

And in early December, AHF reported that Freddie had closed its third fund with Boston Financial Investment Management and initiated its first investment within the fund.