2017 has been a year of ups and downs as well as a lot of uncertainty for the affordable housing industry.
Affordable Housing Finance, with help from its Editorial Advisory Board members, takes a look at 10 notable news events for the industry from the past year.
1. Tax System Overhaul
President Trump signed the first sweeping tax reform in over three decades into law on Dec. 22. While the thought of potential tax reform had been a concern for the affordable housing industry for years, it came front and center in 2017.
The industry’s grassroots efforts to advocate for the low-income housing tax credit (LIHTC) over the years proved to be a success as the program was only one of two tax credits unveiled in the Republican leadership’s Unified Framework for Fixing Our Broken Tax Code in September and then was retained in both the House and Senate bills.
The industry then rallied to save private-activity bonds (PABs), which had been repealed in the House version.
However, in the end, LIHTCs and PABs have been preserved in the final bill. In addition, the New Markets Tax Credit has been retained through 2019, and the 20% historic tax credit will be taken over five years.
Bob Moss, principal and national director of governmental affairs at CohnReznick, says the inclusion of LIHTCs and PABs has been a team effort on part of the industry.“You can never underestimate grassroots support and advocacy,” he says.
However, several provisions in the final tax bill, including a reduced corporate tax rate, could deal a blow to affordable housing production and preservation in the years ahead.
The industry will continue its work in 2018 to seek modifications to keep the LIHTC whole despite the corporate tax rate being lowered from 35% to 21%.
"The industry will now seek modifications to the housing credit to ensure we continue to produce at least as much affordable housing as we did prior to tax reform," says Emily Cadik, director of public policy at Enterprise Community Partners. “The preservation of the housing credit and housing bonds in tax reform demonstrated yet again that we have many affordable housing supporters on both sides of the aisle, which will provide a strong foundation for these ongoing efforts."
2. Stalled LIHTC Market
The year started off on rocky footing for the LIHTC market with just the talk of potential tax reform. LIHTC investors pulled back after the November 2016 presidential election, causing housing credit pricing to fall. However, by mid-year the market had started to stabilize with many deals assuming a 25% corporate tax rate with no adjusters.
3. Bipartisan LIHTC Legislation
In addition to being included in the sweeping tax system overhaul, the LIHTC saw strong bipartisan support from the House and the Senate in 2017.
Sens. Maria Cantwell (D-Wash.) and Orrin Hatch (R-Utah) introduced the Affordable Housing Credit Improvement Act, S. 548, in March. The bill aims to increase LIHTC authority by 50% and garnered 21 co-sponsors, including 11 Democrats, nine Republicans, and one Independent.
Later that month, Reps. Pat Tiberi (R-Ohio) and Richard Neal (D-Mass.) introduced companion legislation, H.R. 1661, to strengthen the LIHTC. It has 121 co-sponsors, including 61 Democrats and 60 Republicans.
Affordable housing leaders will continue to work with Congress to advance these measures in 2018.
4. Natural Disasters
Mother Nature walloped the South Central and Southeast regions of the United States in September and October. Developers are still recovering after Hurricanes Harvey, Irma, and Maria left their marks. Unfortunately, it’s been a slower process in Puerto Rico and the U.S. Virgin Islands, which were devastated by Hurricane Maria.
Affordable housing developers jumped into action after the hurricane to get supplies to its employees and residents on the islands. Nonprofits Volunteers of America and National Church Residences also sent employees to Puerto Rico in November and December to help with relief efforts.
In addition to the hurricanes, the wildfire season in California in 2017 have been the most destructive on record.
5. Rising Construction Costs, Labor Shortages
Rising construction costs and a shortage of labor have also plagued developers in 2017, and those issues are only being exacerbated by the natural disasters this past fall.
Patrick Sheridan, executive vice president of housing at Volunteers of America, says it has been difficult to get three proposals in hot urban markets because there is so much demand for the construction trades.
“Likely we are going to see some cost increases and some shortages in products,” Sheridan says. “Certainly building relationships with contractors you trust in markets you are working in and working closely with those folks to bring them in early on the job as well as being flexible to have a good contingency with your budget will go a long way in making sure you’re not short at the end of the day.”
Bart Mitchell, president and CEO of Boston-based The Community Builders (TCB), adds that the nonprofit also has seen a lot of construction cost pressures in many of the markets where it works over the last couple of years.
In addition to maintaining a good reputation as a preferred partner with the local construction community, TCB has focused on efficiencies and scale.
Construction in non-urban markets also has been a challenge, says R. Lee Harris, president and CEO of Kansas City–based Cohen-Esrey, adding that if you lose a subcontractor in a smaller market, the next bid could go up significantly. “On a 36- or 40-unit property, that can be a big hit to your deal. We are all going to see that exacerbated, particularly with the hurricane issues.”
6. New Leadership at HUD
Although retired neurosurgeon Dr. Ben Carson was confirmed as the secretary of the Department of Housing and Urban Development (HUD) in early March, it has been slow going to get other key officials confirmed at the agency.
At the beginning of August, the Senate confirmed Neal Rackleff as assistant secretary for community planning and development as well as Anna Farias as assistant secretary for fair housing and equal opportunity.
Industry leaders then urged the Senate to confirm Pam Patenaude’s nomination as deputy secretary in mid-September.
Just days before Christmas, the Senate confirmed Susan Israel Tufts as assistant secretary for administration, Leonard Wolfson as assistant secretary for intergovernmental relations, and Irving Dennis as CFO.
However, still pending for the Senate in the new year are confirmations for Brian Montgomery as commissioner of the Federal Housing Administration and Robert Hunter Kurtz as assistant secretary of public and Indian housing.
7. Preservation of Public Housing
“Born of necessity. Nurtured by visionaries. Implemented by realists. The Rental Assistance Demonstration (RAD) and Moving To Work (MTW) programs have, in 2017, become the inevitable and only way to preserve and protect public housing by transforming it into RAD and MTW where it can join ‘the rest of the world of real estate’ and be best positioned to continue to provide safe, secure, affordable homes for its current and future residents through the ever watchful stewardship of its leaders at the federal, state, and local levels," says Conrad Egan, senior advisor for the Affordable Housing Institute.
In May, HUD announced that $4 billion in new private and public funds had been leveraged by RAD to rehabilitate or in some cases replace affordable housing properties through new construction since the program was enacted in 2012. HUD also estimated that RAD transactions have leveraged $19 for every $1 in public housing funds.
Fiscal year 2017 was expected to significantly outpace fiscal year 2016. In addition, the fiscal year 2017 HUD appropriations law recently authorized another 40,000 public housing units to convert under RAD.
8. Fannie and Freddie to Re-enter LIHTC Market
Fannie Mae and Freddie Mac announced in November that they would return to the LIHTC market as investors. They previously had been two of the largest investors prior to being placed into conservatorship by the Federal Housing Finance Agency (FHFA) in 2008.
Each enterprise will have an annual investment limit of $500 million, less than a 5% market share for each. Within this funding cap, any investments above $300 million in a given year are required to be in areas that have been identified by FHFA as markets that have difficulty attracting investors.
9. Cities, States Step Up
TCB’s Mitchell applauds the many states and cities that are stepping up their funding and zoning reform for affordable housing in response to a massive affordable housing crisis.
“Obviously all that California and its major cities are doing, but also Washington, D.C., New York City, New York state, Illinois, Chicago, Massachusetts, Boston, and others,” he adds.
California leaders passed a historic package of housing legislation in September, including a bill by Sen. Toni Atkins (D-San Diego) that will raise an estimated $250 million a year for affordable housing by imposing a $75 fee on the recording of certain types of real estate documents, not including the sale of residential or commercial property.
In addition, “the local support is evidenced by the passage of bond measures and taxes in localities in the face of decreasing federal support, particularly to house homeless populations,” says Richard Gerwitz, managing director and co-head of Citi Community Capital.
10. Portfolio Acquisitions
A number of large, high-profile portfolio acquisitions took place in 2017 as buyers moved to increase their holdings and preserve affordable units while sellers looked to either exit the market or reposition their businesses.
Beacon Communities acquired National Development Corp., adding 5,300 units to the Boston-based firm’s holdings. The move brought the number of units owned by Beacon to about 17,500 and expanded the company’s presence in 14 states.
Enterprise Homes took over The Shelter Group’s portfolio of affordable housing properties. The acquisition included 4,153 apartments in 43 developments—35 in Maryland, seven in Pennsylvania, and one in Virginia—financed through the LIHTC program. Approximately three-quarters of the properties serve seniors, with the remainder targeted to families. The acquisition triples the number of properties owned by Enterprise Homes. Its portfolio now consists of more than 7,000 homes and rental residences for seniors and families. The Shelter Group shifted its focus to its Brightview senior living business.
In 2017, Hudson Valley Property Group announced that it acquired 1,009 affordable homes in seven properties throughout northern New Jersey in a deal valued at more than $180 million. The portfolio had been owned by Kline Enterprises.
Avanath Capital Management, in joint partnership with New York–based Oak Tree Management, acquired an affordable housing portfolio of 17 apartment buildings with 198 units in Brooklyn, N.Y. The properties were acquired from a private investor for $73 million.
Avanath also acquired three affordable housing communities with 468 units in Sacramento, Calif., for $56.5 million from an affordable housing developer in an off-market transaction.
