Sunday, October 10 2021
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The Biden administration’s bold plan to address the country’s growing housing affordability problem is a mixed blessing for the industry: they contain both unprecedented support and funding for housing programs as well as potential tax increases on real estate companies that could reduce investment.

The administrative and legislative proposals encompass a broad program that includes funding for new housing through increased use of low-income housing tax credits, expanding the capacity of government-sponsored enterprises (GSEs) finance small rental buildings, finance the maintenance of housing stock, and leverage federal support to encourage local and state governments to reduce barriers to housing supply.

But industry advocates fear the proposals do not do enough to spur much needed new development, and that the proposals to fund the infrastructure package could hamper the construction and preservation of much needed affordable housing.

Cindy Chetti, National Council for Multifamily Housing

“We support additional funds for existing grant programs, but more needs to be done to address the supply issue by focusing on incentive programs and on ways to streamline regulatory burdens,” said Cindy Chetti, vice -Senior chair of government affairs at the National Council for Multifamily Housing.

Sam Gilboard, head of public policy at the National Apartment Association, called the administration’s actions “a step in the right direction.” But he added that the administrative plans outlined on September 1 could produce 100,000 new housing units, only a fraction of what is needed. “While 100,000 is nothing to be ashamed of, we need 4.6 million new homes over the next 10 years to meet demand,” said Gilboard.

The need for affordable housing is at a critical point as pent-up housing demand and long-term under-supply have produced a cycle in which single-family and multi-family housing prices have increased at an all-time high. As per Yardi Matrix, asking rents for multi-family housing in the United States rose 10.3% year-on-year through August, while CoreLogic’s US house price index is up 18 , 2% year-on-year until July.

Meanwhile, the current legislative cycle offers a unique opportunity to “think big” to tackle the problem. The COVID-19 pandemic has reset attitudes towards the deficit and made possible spending proposals that would have been deemed outrageous not so long ago. The urgency stems from the fact that Democrats have a tenuous majority in the House and Senate that could disappear after the 2022 election, increasing the incentive to pass sweeping legislation while they can.

Administrative measure

Biden’s housing policy so far has two components. The first, a series of administrative measures, came into effect as soon as it was announced earlier this month. These measures increase funding for affordable housing and use the powers of the federal government to help remove barriers to construction:

  • Increase the amount of the Low Income Housing Tax Credit (LIHTC) that Fannie Mae and Freddie Mac are allowed to purchase by $ 700 million. Each GSE can now purchase up to $ 850 million in LIHTC loans, up from $ 500 million. LIHTC loans offer tax relief to developers who build housing reserved for low and moderate income families.
  • Use Fannie and Freddie’s fees to work with community development and non-profit groups to build affordable housing.
  • Expand the authority of GSEs to fund prefabricated housing and two- and four-unit apartments, real estate segments that traditionally serve low-income tenants and communities of color.
  • Reinstatement of a Federal Housing Administration program – which was not renewed in 2019 – that provides low-cost Ginnie Mae loans to finance new affordable apartments. The relaunched program has no funding limits and housing finance agencies have three years to make deals.
  • Request the Department of Housing and Urban Development (HUD) to employ block grants and work with communities to identify housing affordability solutions. Also ask GSEs to study the impact of their mortgage purchases on exclusion zoning.

Taken as a whole, the administrative actions represent a commitment to use federal resources to facilitate the development of affordable housing, particularly in low-income communities. While laudable and necessary, the normal development schedule and rights allocation process means it will be years before the plans produce much new housing. The administration’s announcement acknowledged that it will take time and commitment to address the problem: “Persistent imbalances in the US real estate market have formed over several decades and will require concerted effort and commitment. iterative development of policies to correct them, ”notes the announcement.

Share of infrastructure

Funding through the federal infrastructure package depends on the adoption of the will through budget reconciliation. Photo courtesy of the architect of the Capitol

The second part of the plan, the Infrastructure Bill, commits $ 312.5 billion for housing subsidies, though the details are to be negotiated in House and Senate committees and final adoption no. is not certain. The proposed amount overshadows any previous housing allowance. An executive of an industry trade group noted how difficult it has been over the past decades to “beg” Congress for a few billion dollars.

Since Senate Republicans would obstruct a stand-alone bill, the infrastructure package must go through a budget reconciliation process that requires revenue neutrality, so new spending must be paid from existing funds or increased income. Once the total package amount is determined, congressional committees will mark both expense details and income offsets.

The expenditure side of the infrastructure package contains a series of elements which would directly or indirectly have a positive impact on commercial real estate. For example, improving transport infrastructure stimulates demand for real estate development and creates jobs. Expanding access to high speed internet makes rural communities more attractive for development. Action on climate change could help mitigate the growing damage to commercial properties from environmental disasters such as hurricanes, floods and fires. Even proposals related to expanding childcare services and immigration reform could produce an indirect benefit by increasing the workforce.

The housing part of the package has direct advantages for multi-family families. For example, the administration is proposing $ 95 billion to extend rent subsidies to low-income tenants and to encourage local communities to increase zoning density. Other parts of the plan would allocate up to $ 80 billion to fund public housing renovations and new developments in low-income neighborhoods, and more than $ 30 billion for the Federal Housing Trust Fund, which provides grants to municipalities to build and maintain affordable housing.

Gilboard of the NAA said the administration’s plan to hold listening sessions with stakeholders to air grievances and develop solutions to issues like sky-high fees and zoning standards that hinder development is the most important. “We believe that the listening sessions will be very useful in increasing the supply of affordable housing,” he said.

Problems with payments for

Sam Gilboard, National Apartment Association

Despite all the potential benefits, it is too early to count the benefits of the industry. On the one hand, moderate Democrats balked at the size of the total package, which means the final bill is likely to be scaled back. Because the Democratic majority is so thin, and Republican opposition to the reconciliation bill should be universal, any Democratic defection could derail any part of the plan. A handful of Democrats in the House and Senate have raised objections and threatened to vote against the bill if it remains as proposed. It seems almost certain that a big infrastructure bill will be passed, but the size and scope of the final product remains uncertain.

Since reconciliation invoices are revenue neutral, the final package size will be affected by changes to the tax portion of the plan. In other words, more spending must come with more income. Professional groups in the real estate sector have rallied in solidarity against rumors of remuneration, such as increases in the rate of long-term capital gains; tax deferred interest as ordinary income; the taxation of unrealized capital gains on death; the elimination of similar exchanges that allow owners to defer taxes on real estate sales if the proceeds are reinvested in the property; and capping deductions used by flow-through entities involved in affordable housing.

A coalition of 16 professional real estate groups has called on Congress to avoid tax increases that impact real estate development.

“Tax reforms must be undertaken with caution, with a primary focus on supporting the economic recovery and nascent employment and capital investments that will boost our economic growth for years to come,” wrote the organizations to lawmakers in a letter dated August 16. “Several of the tax and other compensation proposals under consideration would reduce real estate investment and inhibit the flow of capital that is so essential to the development and preservation of critically needed housing. In doing so, they would make housing production and development more expensive and further exacerbate our housing affordability problems.

Delicate balance

At the end of the day, the affordable housing problem is about the money. To create housing that costs less, either the cost of construction must be reduced (unlikely, given the rising costs of land, materials and labor); developers must accept reduced profits (which would eliminate the incentive to build); or the government must provide subsidies (ie direct payments, rent subsidies, or tax breaks for developers) paid by taxpayers’ money.

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