February 12, 2018

Developers, funders say tax reform likely won't pull rug out from housing credits

Photo | Contributed
Photo | Contributed
The Corporation for Independent Living relied on housing tax credits to develop its Capewell Town Homes in the shadow of Colt Park, in south Hartford's Dutch Point neighborhood.
Photo | Contributed
Tax-credit funded projects like Capewell let corporations and wealthy investors promote housing while tax-sheltering income.
Karl Kilduff, Executive Director, The Connecticut Housing Finance Authority
Julie Carmelich, Historic Tax Credit Coordinator, CT Historic Preservation Office
Michael Freimuth, Executive Director, Capital Region Development Authority

State, federal housing and historic tax credits facts

• The historic rehabilitation tax credits are available for properties listed on the State Register of Historic Places and the National Register of Historic Places.

• Post-rehabilitation uses can include housing and commercial development.

• In the past two fiscal years (FY 2016 and FY 2017), the State Historic Preservation Office (SHPO) reserved $63.4 million in state rehabilitation tax credits for 36 projects totaling $297.5 million in eligible expenditures.

• For the current fiscal year the SHPO has reserved $28.8 million of its $31.7 million annual allotment. This leverages $114.2 million of eligible rehabilitation costs.

On-going projects of note include:

• J.R. Montgomery & Company Industrial Complex in Windsor Locks: Post rehabilitation-use, Housing

• Neiditz Building, 111 Pearl St., Hartford: Post-rehabilitation use, Housing

• Boese, Peppard Lace Mill, 2 Merritt Place, Norwalk: Post-rehabilitation use: Supportive house and services

Source: CT Dept. of Economic and Community Development

Some Connecticut housing developers and funding agencies, while wary of fallout from recent federal tax reform on the desirability of two popular forms of housing tax credits, are not yet sounding alarms.

While the reduction of the corporate income tax rate to 21 percent from 35 percent was welcomed by American businesses and investors, others worry about the parallel effect of curbing investors' appetites for the tax-liability offsets that housing tax credits offer, experts said.

A lower federal corporate tax rate means the banks, insurers, utilities, large manufacturers and services providers, among others, who over the last three decades have purchased federally issued low-income housing tax credits (LIHTCs) and state-issued housing tax credit contributions (HTCCs), don't have to rely on them as much to trim their state and federal tax bills.

However, some experts said the impact won't be severe because businesses will still want to leverage housing tax credits to cut their IRS and state-income tax bills even more.

And, another plus is that federal tax reform didn't alter the accessibility or value of housing tax credits issued by Connecticut to spur development of affordable rental and owner-occupied dwellings, observers said.

"Businesses will continue to take advantage of any tax-savings opportunities they have,'' said Cal Vinal, president and CEO of Hartford's Capital for Change, formerly Connecticut Housing Investment Fund Inc. Vinal added that some businesses, reviewing the implications of tax reform, may be learning for the first time about the tax benefits of housing tax credits and, thus, inclined to use them.

Capital for Change helped amass tax credits, Vinal said, used for ongoing development of the Capewell Town Homes, a project of The Corporation for Independent Living, in the city's South End, and with San Juan Center Inc.'s renovation of two, six-unit apartment buildings in the North End's Clay-Arsenal neighborhood.

Electricity-natural gas provider Eversource, by far Connecticut's biggest purchaser of millions of dollars of state-issued housing tax credits over the years, said that the utility will continue to invest. Over the last 15 years, Eversource spokesman Mitch Gross said the utility has acquired tens of millions in housing tax credits.

Eversource's tax-credit sponsorship of low-income housing, Gross said, has put it in partnership, along with Capital for Change, with such local nonprofit developers/preservationists as Habitat For Humanity Hartford, Mutual Housing Association of Greater Hartford, and the Hartford Preservation Alliance.

"We purchase these tax credits from the state of Connecticut as part of our economic development efforts and will continue to participate in the state program,'' Gross said. "While changes to the federal housing tax credits may make some future projects difficult to finance going forward, we remain committed to helping develop strong communities, and the work done by these nonprofit organizations benefits the entire community."

Affordable housing

Congress in 1986 authorized the federal housing tax credits to spur creation of shelter, most of it rentals, for the nation's neediest.

According to the federal Housing and Urban Development's (HUD) homepage, low-income housing tax credits issued between 1987 to 2015 have funded development nationwide of nearly 46,000 housing projects and 2.97 million housing units.

The money exchanged for LIHTCs is a vital funding stream for for- and nonprofit developers/sponsors/managers of new or renovated low-income housing. Typically tax-credit proceeds are combined with bank loans or mortgages, and equity from developers/investors, to finance the properties' construction and operation.

The Connecticut Housing Finance Authority (CHFA) annually awards its allotment of some $8 million in LIHTCs, that when fully leveraged by developers, generate roughly $80 million in project funding, said Executive Director Karl Kilduff. Corporations and wealthy individuals eager to shield at least some of their annual income from state and federal taxes purchase the credits. CHFA's next LIHTC awards are set for late March.

The credits are a vital funding linchpin to Gov. Dannel P. Malloy's long-running efforts to create enough housing to effectively end homelessness in the state.

Since 2011, Connecticut said it has invested more than $1 billion to build, renovate or preserve some 23,000 living units. By yearend 2017, more than 12,000 units had been built, with 11,300 more units under construction or in various phases of development, state officials said.

According to the governor's homepage, in 2012 he unveiled a 10-year housing revitalization plan and pledged $300 million in funding. Much of that funding has come through companies' and investors' purchases of state and federal housing tax credits.

In the months of fiery debate leading up to Congress' reworking of the federal tax code in December, to spur corporate investment and job creation, there was uncertainty among housing investors and their financial advisers about the fate of LIHTCs, Kilduff said.

As early as Nov. 2016, the U.S. housing community had begun devaluing LIHTCs amid expectations that a federal tax cut, or changes in tax laws or deductions, might ebb demand for housing credits, he said. The result was that projects that calculated housing tax credits into their financing had to tap other sources to fill the gaps.

"There was a hit to projects last year,'' Kilduff said.

State credits

The state Department of Economic and Community Department manages the state's popular Historic Rehabilitation Tax Credit Program. In the past four to five years, the state has approved minimum 25 percent tax credits for some 30 to 35 applicants to refurbish mixed residential or non-residential buildings.

The program yearly receives a $31.7 million credit allotment, from which eligible recipients can collect up to $4.5 million per project, said Julie Carmelich, who oversees the program.

Carmelich said it is too early to gauge fallout from tax reform on demand for the historic rehab tax credit.

"We're kind of in a wait-and-see situation,'' she said. "I don't know when it's going to shake out.''

In Hartford, the Capital Region Development Authority (CRDA) has not relied in the past — nor is it likely in the future — on housing tax credits to assist developers with financing many of their office-to-apartment conversions that have transformed downtown in recent years, said Executive Director Michael Freimuth.

CRDA and its development co-partners, however, have used federal historic tax credits to readapt qualified, older office and commercial buildings to other uses, mainly housing, Freimuth said. Tax reform eroded the value of those credits by prolonging the payback period from one to five years, but down the road, CRDA expects, he said, to be involved with more new, "infill" construction in Hartford's neighborhoods, rendering those historic credits useless to them.

However, Freimuth, who has spent decades in economic development in Connecticut and New York, and others said the financial impact on LIHTCs from tax reform is inevitable.

"The tax reform act inheritably lowers the value of federal credits,'' Freimuth said. "Simply by lowering the corporate rate, the relative value of the deduction is lowered. The net effect is that the credits are priced downward when purchased/sold, thereby reducing the amount of equity that can be raised for a project. This in turn leaves a gap in project financing."

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