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Affordable Outlook: What’s in Store for 2014?

It’s tempting to label every new year as especially pivotal. And although each one undoubtedly brings about significant developments for every industry, some years do indeed prove to be particularly consequential.

Will 2014 be such a monumental year for the affordable housing industry? Time will tell. As the year unfolds, here are several issues to keep an eye on that may determine the answer.

Low-Income-Housing Tax Credits

Accounting Rule Change

On Dec. 11, 2013, the Financial Accounting Standards Board (FASB) adopted a new set of accounting rules that should make low-income-housing tax credit (LIHTC) projects more attractive to investors. The changes are the result of an industry-wide effort that began in 2010 to make accounting treatment for LIHTC projects more favorable. The change allows corporate investors, under certain conditions, to use a new proportional amortization method of accounting instead of the less favorable equity method. Under the equity method, losses created by LIHTC projects were categorized as a component of the investor’s operating income. Under the new rules, the losses and amortization of the investment will be included in the income tax expense section of the income statement. For the affordable housing industry, the major benefit will be that LIHTC investments will no longer create a drag on the operating income of the companies that make the investments. As such, the investments become more attractive.

Fixed Rate Expires

This is bad news for the affordable housing industry although it is something that can and may be reversed in the near future. The law that expired fixed the interest rate for certain LIHTC projects at a minimum of 9%. For projects that receive allocations after Jan. 1, 2014, a floating rate will be used instead of the fixed rate. Because the floating rate is based on the federal cost of borrowing, it will likely be more than a full percentage point below 9%. As of Jan. 2014, the rate was 7.6%. That means a LIHTC project would lose a substantial amount of tax credits, as much as 18% of a project’s total LIHTCs over 10 years, according to affordable housing insiders. The good news is it would not cost much for Congress to renew the fixed rate—only $8 million over 10 years as determined by the Congressional Budget Office. However, it does require congressional action, and as such, there is no certainty as to if and when this may happen.

LIHTC Pricing Distribution

Demand for LIHTCs remained strong in 2013, keeping the tax credit pricing at high levels. In the last quarter of 2013, the pricing distribution ranged between $0.80 and $0.90, with the median price being in the high-80s. It will remain to be seen if the trend will continue through 2014.

Federal Action

2014 Budget Passed

President Obama has signed into law the $1.1 trillion omnibus appropriations bill for fiscal year 2014. Included in this bill is all funding for the United States Department of Agriculture (USDA) Rural Development (RD) and the United States Department of Housing and Urban Development (HUD) programs. Of note, RD programs, specifically the Sec. 521 Rental Assistance (RA) program, has $1.110 billion in fiscal year 2014, a $250 million increase over fiscal year 2013. The Sec. 538 program, however, will have a level of $150 million, the same as recent years. In regard to the definition of rural for RD programs, the appropriations bill maintains the current definitions of rural for all communities until September 2014, opting not to change definitions based on the 2010 census for now. For HUD, both HOME funding and Community Development Block Grants are up slightly over fiscal year 2013. Check out the funding charts for all RD and HUD programs comparing fiscal year 2014 appropriations to fiscal year 2013.

Tax Reform

Another year, another attempt at the ever elusive reformation of the tax code. With the top Democrat, Sen. Max Baucus (D-MT), halfway out the door as he becomes President Obama’s next ambassador to China, and the top Republican, Rep. Dave Camp (R-MI), leery of rocking the boat in an election year, prospects for tax reform appear bleak. However, it remains a hot topic in Washington and thus a bill could still surface prior to the 2014 election season. The Hill reports that House Republicans want to drop the top corporate and individual rates down to 25 %—from their current 35 % and 39.6 % respectively. That would require the elimination of trillions of dollars of tax breaks and could spell trouble for the affordable housing industry. Whether a bill emerges merely as campaign fodder or whether one emerges that has a legitimate chance of passing remains to be seen. With 2014 being an election year, the former seems more likely. 

Volcker Rule Approved

On Dec. 10, 2013, final guidance was released interpreting Sec. 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, also known as the Volcker Rule. The Volcker Rule puts in place prohibitions and restrictions on certain types of equity investments and thus affects the tax credit equity market. Specifically, the rule contains an exemption for investments in historic tax credits and a provision exempting public welfare investments. That, in essence, provides a blanket exception for LIHTC and new markets tax credit investments and should make them more attractive to investors.

HUD Releases 2014 Income Limits

These income limits are used to determine income eligibility for HUD’s assisted housing programs, including public housing, Sec. 8 and Sec. 202. Income limits are based on the median family income (MFI), which for fiscal year 2014 is $63,900, a slight uptick from fiscal year’s 2013 level of $62,400. As a result, more people will be eligible for assistance and seeking affordable housing, which will further increase the shortage in affordable housing stock.

Affordability Gap Widens

Harvard Joint Center on Housing Studies Reports

The Harvard Joint Center on Housing Studies released two reports in 2013 that illustrate the desperate need for affordable housing today: "America’s Rental Housing: Evolving Markets and Trends" and "The State of the Nation’s Housing 2013." Some of the more astonishing figures leave no doubt that the affordability gap is growing at an unacceptable pace. For example, in 2011, 11.8 million renters with extremely low incomes (less than 30 % of area median income) competed for just 6.9 affordable units—a shortfall of 4.9 million units. The affordability gap has more than doubled since 2007, as the number of extremely low-income renters has grown by 2.5 million while the number of units they could afford has decreased by 135,000. Both reports, while painting a rather bleak picture, provide plenty of quality information that could be used to inform and educate those involved in the affordable housing industry. There are ideas floating out there that could help improve the desperate situation, such as the funding of the National Housing Trust Fund, expanding the Rental Assistance Demonstration (RAD) program or expanding the use of LIHTCs, but congressional action seems unlikely, especially in an election year.

New Faces

Watt Named FHFA Director

In what is surely good news for the affordable housing industry, Melvin L. Watt, the former democratic congressman from North Carolina, was confirmed in January as director of the Federal Housing Finance Agency (FHFA) after a long and contentious delay since he was nominated to the post the previous May by President Obama. Watt has a history of supporting affordable housing legislation and is considered an ally of the industry. The National Housing Conference supported Watt’s confirmation, among other affordable housing groups and it is believed he will play a critical role in determining the future of Fannie Mae and Freddie Mac. In addition, affordable housing advocates hope Watt will be able to fund the National Housing Trust Fund (NHTF), which was established by the Housing and Economic Recovery Act of 2008 but denied funding when Fannie and Freddie were put into conservatorship later that year. Now that Fannie and Freddie are making a profit, many affordable housing advocates are calling for them to contribute to the NHTF.

Hernandez to Head USDA’s Rural Housing Service

Tony Hernandez was confirmed as the Rural Housing Service (RHS) Administrator. Most recently director of the Division of Local Government for Colorado, Hernandez also worked for Fannie Mae as director of the Colorado legislature. This is more good news for the industry as Hernandez is described as results-oriented and focused on developing initiatives that will enhance the livability and sustainability of communities. 

The aforementioned developments are all interlinked and, should things play out in a manner favorable to the affordable housing industry, will become quite evident as the year unfolds. For example, should the new FHFA Director Watt work with Congress to fund the NHTF, the NHTF would then provide states with dollars that would be used to preserve LIHTC developments, helping to alleviate the affordability gap. Working together, the various players can ensure that 2014 is indeed a consequential and productive year for the affordable housing industry.

Liz DiamondLiz Diamond is a vice president with Lancaster Pollard in California. She may be reached at ldiamond@lancasterpollard.com.


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