How tax reform could make housing affordability even worse

Credits bring investors to low-income areas

By KATHRYN VASEL
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NEW YORK (CNNMoney) - There's a housing affordability crisis unfolding in many parts of the country.

And the situation could get worse under potential changes to the federal tax code.

Lawmakers may take a scalpel to a set of tax benefits designed to entice developers to build affordable housing and public facilities -- like schools and hospitals -- in poor neighborhoods. Meanwhile, nearly 39 million households can't afford their housing, according to a report out this summer from the Harvard's Joint Center for Housing Studies.

"Tax credits have been really effective tools to attract private investments into low-income communities and for affordable housing," said Jeanne Golliher, president and CEO of the Cincinnati Development Fund.

She said many projects throughout the Ohio city wouldn't have happened without these incentives.

Other projects in the works in cities across the country could come to a screeching halt if the benefits disappeared.

Lawmakers are busy trying to reconcile the two versions of their tax overhaul plans, so it's unclear what the final bill will include.

Here's what's at stake:

Tax advantaged debt that helps fund affordable housing

The House tax plan eliminates private activity bonds. These tax-exempt bonds are issued by state and local entities, and the money from them is loaned to for-profit and non-profit private companies to fund eligible projects, including health care centers and libraries.

The affordable housing market also relies heavily on these bonds, which would be preserved in the Senate plan. If the bonds lose their tax-exemption status, more than 780,000 fewer affordable rental homes would be built or preserved over the next 10 years, according to Novogradac & Co.

The bonds are often used along with the low-income housing credit, which offers a tax credit to developers that build affordable housing. The credit reduces the amount of debt developers take on. At least half of current low-income tax credit production would disappear with the elimination of private activity bonds, according to Daniel Marsh, president and CEO of the National Development Council.

A tax credit that encourages building of low-income housing

Both tax plans seek to lower the corporate tax rate, which experts said would weaken the value of the Low-Income Housing Tax Credit.

If investors aren't getting as much of a savings from the tax credit, "they will seek other investments that will provide a higher return. That's simple economics," Marsh said.

The Low-Income Housing Tax credit is the federal government's primary tool to entice private equity to invest in affordable housing.

"It's a market-leveling tool," said Marsh. "It allows developers to meet income guidelines for renters that they otherwise wouldn't be able to meet."

Tax credits that help revitalize poor neighborhoods

House lawmakers are also calling for the elimination of the New Markets Tax Credit and the Historic Tax Credit. These credits help attract private investment into distressed communities and revitalize rundown older buildings.

The NMTC gives investors a credit against their federal income tax in exchange for investing in qualified projects. Currently, the credit is 39 percent of the original investment amount and can be claimed over a seven-year period.

The NMTC tends to focus on commercial spaces like health care centers and libraries and infrastructure like roads and bridges in low-income areas.

When left vacant, historic buildings are not only an eyesore for a community, but can discourage new construction and investments. But renovating older buildings can be a money pit, which is why experts said the Historic Tax Credit is so crucial.

Cities with current revitalization plans in process could be affected if any of these changes go into affect.

For example, if the credits go away, four projects to help revamp parts of Spartanburg, South Carolina, would be directly affected.

The city is undergoing a $60 million initiative to redeveloped its northside neighborhood -- a high-poverty rate area. The four projects include an early education childhood center, a community health facility, affordable housing building and a community center. The city has raised $10 million philanthropically, but needs other investments to fill the gap.

If the credits are eliminated, the city will likely have a tougher time finding investments and may be forced to scrap two of the projects.

"We are counting on the availability of New Markets Tax credits and private activity bonds for northside buildout," said Ed Memmott, city manager. "If we lose those tools, it will make our efforts in the northside much more difficult."

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