The Outlook For LIHTC In Trumpland
Donald Trump may be more known for his brand and reality TV stardom, but his roots remain in real estate. Unfortunately for affordable housing and LIHTC advocates, Donald departed from his father’s business in that he pursued the “spare no expense” aspects of luxury housing. It’s fair to say that he may be vaguely aware of low income housing finance, but has never considered it for his own developments.
The LIHTC program enjoys bi-partisan support so we hope that it will not be at risk of elimination and replaced with “something terrific”. But what about the other policies? How will the new administration affect the value of the credit during the next four years?
Regulations and the CRA — President-elect Trump has been pretty clear regarding his disdain for rules and regulations. Dodd-Frank is the most at risk, but what’s not discussed is the continued enforcement on the Community Reinvestment Act. An argument that has been recently put forth is the strong correlation of CRA concentration with LIHTC prices. Before you assume that CRA enforcement is a Democratic issue and despised by the Republicans, recognize that the Financial Institutions Reform Recovery and Enforcement Act (FIRREA), which included provisions to increase public oversight of the CRA, was signed into law by George H.W. Bush. However, if we’ve learned anything in the past month it is that the Republican party of the past does not behave like this one.
Taxes — If the corporate tax rate drops to 20% or even 15%, will this lead to reduced demand for LIHTCs? That is a likely scenario, as a reduced tax liability may even result in a flood of secondary offerings. The extent of this softening is difficult to determine as a number of purchases were down to meet CRA requirements and economics were not the primary motivation.
Interest Rates — As we saw in the nadir of the credit crisis, as bank profitability goes, so goes the demand for LIHTC. The recent run-up in bank stocks suggests that investors believe the new administration will be good for banks. However, the factors that benefit banks will not translate to further improvement in LIHTC demand. For example, the recent steepening of the yield curve helps bank profitability but hurts the value of long-duration assets like the LIHTC.
Time To Drain The Investor Swamp?
The past downturn dealt a near death blow to the LIHTC market because the industry allowed the buyer market to become concentrated in the banks and GSEs (Fannie Mae and Freddie Mac). This lesson went unheeded and the market returned to its favored buyers. Perhaps the momentum behind tax reform could offer an opportunity to again address this lack of investor diversification. Affordable housing investment was not always dominated by large corporate entities. In fact, individual taxpayers played a prominent role in financing affordable housing development during the early 1980s.
That role changed with the passage of the Tax Reform Act of 1986. The result was the passage of new passive loss, passive credit and at-risk rules. Among other changes, the new rules established a financial disincentive for individual taxpayers to claim credits in excess of their marginal tax rate multiplied by $25,000. These rules have not been updated since 1986 and continue to suppress individual demand for tax credit investments.
Making LIHTC Great Again
The technology exists today to aggregate multiple individual investors without burdensome administrative costs. In addition, new laws including the 2012 JOBS Act and tax law changes favoring LIHTC investing have laid the groundwork for the re-introduction of individual investors to the LIHTC market. Individuals who are seeking social minded investments will provide an important supplement to current investor base, and provide a committed presence to underserved communities, primarily those located outside of Community Reinvestment Act (CRA) markets.