Washington tax reform could mean fewer affordable housing projects in Iowa

Congressional efforts to overhaul the U.S. tax code could mean even fewer affordable apartments being built in Iowa and across the U.S. in the years ahead.

That's bad news for low-income families already struggling to find affordable places to live.

Eric Burmeister, executive director of the Polk County Housing Trust Fund, says U.S. House and Senate tax reform bills would shrink or eliminate federally backed tax credits that builders rely on to finance projects.

Rents across the Des Moines metro are on the rise as more people choose to lease rather than buy. Meanwhile, more low-income apartments are being renovated into market-rate units as property owners capitalize on the public's interest in living downtown.

The metro area is almost 8,000 units shy of meeting demand for single people making less than $15,000 annually, according to the Polk County Housing Trust Fund.

"I think next year we are going to be completely rethinking how we provide affordable housing in central Iowa based upon what happens with tax reform," Burmeister said.

What's at stake?

The U.S. House and Senate have approved different tax reform bills.

While neither takes direct aim at the Low-Income Housing Tax Credits used by developers of affordable housing units, each bill includes provisions that could dramatically affect how the program operates and how much money could be available for future projects.

One of those provisions is a reduction in the corporate tax rate.

Both the House and Senate bills call for cutting the corporate rate from 35 percent to 20 percent. That could limit private investment in the low-income tax credit program, according to Burmeister.

The Low Income Housing Tax Credit, created under the Tax Reform Act of 1986, provides incentives for private firms to finance the development of affordable housing projects.

It accounts for approximately 90 percent of affordable rental housing units built in the United States.

Here's how it works:

Each year the federal government allocates a certain amount of tax credits to each state based on population.

Developers apply for these tax credits through a competitive process administered by a state's housing finance agency. In Iowa, the program is run through the Iowa Finance Authority.

Once a developer is awarded credits, it sells them to private corporations on the open market to raise money to complete a project.

Corporations are willing to buy these credits because they can use them to offset their federal tax liability dollar for dollar.

Burmeister worries that if corporate tax rates are lowered, fewer private investors will be interested in buying the tax credits that fund affordable housing projects.

To qualify for the tax credit, developers must agree to lease a certain percentage of apartments at affordable rates for 30 years. The competitive nature of the program provides incentives for developers to offer benefits beyond the minimum requirements established by the program.

Thirty developers across Iowa have applied for $20 million in tax credits for 2018. Those projects would create 1,237 units for low-income residents statewide, but not all will win credits.

Twenty-five projects applied for the credits in 2017, and 12 received a slice of the $8 million awarded by the Iowa Finance Authority.

Only one project in the Des Moines metro received funding in 2017. Liberated Des Moines, 4415 S.E. 14th St., a 40-unit with new development with four units reserved for people coming out of homelessness, received $818,651 in tax credits.

The tax credits are renewable for 10 years, meaning Liberated Des Moines' credits will ultimately be worth $8.1 million.

Three central Iowa projects — two in Des Moines and one in Ankeny — received tax credits in 2016.

Wesley Peterson, director of government relations for the Iowa Finance Authority, has a more positive view of the proposed tax reforms.

"The folks I've talked to are very optimistic that the (program) hasn't been removed," he said. "There was a big concern that it would be eliminated altogether."

The agency is scheduled to award 2018 tax credits in March. That money is now "in limbo," Burmeister said, leaving developers to wonder if they will be able to finance projects next year.

Hubbell Realty Co. has applied for $820,000 in tax credits to fund a portion of its Melbourne IV development on Des Moines' south side. The project would add 64 rent-controlled units for low-income seniors.

If changes to the corporate tax rate result in fewer private firms interested in purchasing tax credits, financing for the affordable units could fall short.

That would leave Hubbell to decide whether to finance the project on its own or make changes.

"What we have to decide is whether it's the best use of the company’s capital," said Kris Saddoris, the company's vice president of development.

Private activity bonds

Not all projects claim Low Income Housing Tax Credits through this competitive process. Some projects financed by tax-exempt bonds can qualify for the credit.

But a separate provision in the U.S. House bill would eliminate tax-exempt private activity bonds issued by state and local governments and loaned to private companies to finance affordable housing projects. The Senate version preserves the tax-exempt bonds.

The House bill does "a fair amount of violence to affordable housing," Burmeister said.

Anawim Housing owns or manages nearly 740 units in the Des Moines metro. It is wrapping up work this month on Legacy Park, an $11 million effort to rehabilitate 137 low-income housing units in neighborhoods north of downtown.

The project received $3.5 million in financing over multiple years through private activity bonds issued by the state.

"Projects like that would not be able to happen without the tax-exempt bond program," said Russ Frazier, Anawim's president.

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Ten Iowa projects — an equivalent of 1,441 affordable units — were awarded $6.3 million in credits this year using the bonds.

Blackbird Investments received $1.2 million to renovate four century-old Army barracks and two horse stables at Fort Des Moines into 142 income-restricted apartments. The Southridge Apartments on Southeast Fifth Street were awarded $1.23 million in credits to build 259 new low-income units and 20 market-rate units.

Pioneer Development Services Inc. was awarded roughly $682,000 on Nov. 7 to build 180 low- to moderate-income apartment units at the intersection of South 91 Street and Cascade Avenue in West Des Moines.

Teddy Keusch, president of Indianapolis-based firm, said that eliminating private activity bonds could still kill the project, called Elevate at Jordan Creek.

Without those tax credits, "the whole financing structure would kind of fall apart," Keusch said.

Private activity bonds are also used to finance hospitals, transportation projects and mortgages for first-time home buyers.

The finance authority has awarded 30-year fixed rate mortgages and down payments to 6,000 Iowans since 2009, said Ashley Jared, a spokeswoman for the agency.

"We're in the works of figuring out another way to fund it. But (the elimination) would be a big impact on Iowans," she said.

What's next?

The accounting firm Novogradac & Company reports that cutting the corporate tax rate to 20 percent could reduce Low Income Housing Tax Credits by $2.2 billion annually.

Building affordable housing is already a "really, really risky" enterprise, said Burmeister, a former developer himself.

It's often a complex and competitive process to win tax credits, but if you understand how to manage the system, Burmeister said, you can make money.

How changes to the tax credit program could affect that process remain to be seen.

This week, the House and Senate sent its competing tax reform bills to conference committee where Congress members will try to reconcile differences in the legislation before sending a final bill to the president.

President Donald Trump has told congressional leaders he’d like the final deal even faster than the Dec. 22 goal that's been set.