For an affordable housing project in Brooklyn, a small change to a federal affordable housing program could mean a difference of $7 million.
The project, a 128-unit apartment building planned for 1601 DeKalb Avenue, is not alone. The value of the Low Income Housing Tax Credit program, which has helped finance more than 3 million apartments since it was created in 1986, hinges on interest rates set by the Treasury Department. For that reason, during a down market, when the federal government cuts borrowing rates to mitigate financial fallout, this key program takes a hit.
“The construction of affordable housing is a great economic stimulus for communities,” said Spencer Orkus, a managing director at L+M Development Partners. “It is unfortunate that the rate drops just as municipalities and economies could use that extra bump.”
Affordable housing developers are hopeful that the federal government will step in to change that, either as part of the spending bill currently being hashed out by Congress or early in the Biden presidency. They are pushing lawmakers to disentangle the tax credit from interest rates and instead set a floor of 4 percent.
That would mean the credits, which can be sold to investors to raise equity on a project, will be worth more and become more attractive to corporate investors, who receive a reduction on federal income taxes for 10 years based on the rate.
According to the New York Housing Conference, the change could mean a difference of $240 million, or 1,700 affordable housing units being built or preserved in New York City alone. The change, according to the organization, would generate 23,000 apartments in the next decade. An analysis by accounting firm Novogradac estimates that the change would finance 126,000 affordable apartments nationally between 2020 and 2029.
“We have a stalled affordable housing pipeline right now,” said Rachel Fee, executive director of the NYHC. “This is one way to jumpstart that pipeline.”
During the last major financial crisis in 2008, the federal government set a floor rate for 9 percent tax credits. These are limited in supply and awarded to developers by state and local governments, whereas the 4 percent credits are provided as-of-right to projects financed with private activity bonds. Though the idea of setting a 4 percent floor has garnered bipartisan support over the years, it has often been coupled with more controversial measures. Washington Most recently, Sen. Maria Cantwell of Washington state proposed a measure that would set the 4 percent minimum rate, along with other reforms, in June 2019.
With interest rates hovering just above 3 percent, and state and local governments running low on cash, developers say the change is more important than ever. Rick Gropper, principal of Camber Property Group, which is developing the DeKalb Avenue project, said setting a 4 percent floor would free up more local subsidies, since developers using the credits would be able to put more equity into their projects.
“They could then take that money and reinvest it in other projects that really need it,” Gropper said.
A spokesperson for the city’s Department of Housing Preservation and Development called the tax credit “the most powerful federal tool cities have to create and preserve affordable housing” and said setting a floor rate would result in $200 million more in financing each year.
According to the NYHC, the city lost out on approximately $200 million in affordable housing funding due to the Trump administration’s 2017 tax overhaul. The tax law reduced the corporate tax rate to a flat 21 percent — down from a graduated rate that ranged from 15 to 35 percent — which reduced demand for the credit among investors. Hudson Companies’ Aaron Koffman called the tax credit the “lifeblood of affordable housing.”
“To be able to just make this one move and change it so dynamically, without it costing anything, is so transformative,” he said. “It will give a much needed boost at a time when things are really on the ropes.”