Tax Reform Scorecard

7 min read

The good, the bad and the uncertain   

It’s clear from adding up the pros and cons of last year’s tax reform that the tax credit industry could have fared a lot worse than it did. It’s also apparent that while the industry did take a few knocks, it wasn’t knocked for a loop.

Andrew Tripp, partner of the community development financial group of Nixon Peabody LLP, Chicago, sees a “smaller, leaner” tax credit industry as a result of the reform. “There will still be room for all players to succeed,” he concluded, “but I think there is a definite, permanent structural change in the market.”

Notwithstanding some negative provisions, last year’s tax bill won’t turn out to be a disaster for the tax credit industry, according to Nancy Morton, an accountant with many years of experience in the sector.

And she said there may even be a hidden gem in the legislation that will benefit the industry for a long time to come.

Investors are likely to benefit more than syndicators or developers, according to Morton, tax member, Dauby O’Connor & Zaleski LLC, which is based in Carmel, IN. While Tripp said syndicators, dealing with both investors and developers as they do, may be the most affected by the changes.

Overall, are the changes good or bad? “I think that it’s a combination of both,” said Morton. “The reduction in the corporate rate has definitely reduced the value of the losses, as well as the credits. That wasn’t very positive.”

But in her opinion, “overall the affordable housing industry did okay, considering  how substantial the tax reform was when it was all said and done. The industry will be able to adapt.”

Tripp said the industry could see as much as 20 to 25 percent hit with a diminished number of units being built. The worst markets to be hit will be the non-major metros, the areas outside the traditional Community Reinvestment Act markets, he felt.

Not everything is doom and gloom, though. Tripp said, “The good news is, the market can get back to doing deals with certainty.”

Unintended Consequences
Both Morton and Tripp felt the survival of the industry, when there originally was uncertainty about the continuation of the Low Income Housing Tax Credit (LIHTC) and private activity bond programs, was a major good in and of itself.

“We were preparing for the worst,” he said. “What we got was something in the middle.”

Other good things happened, even if the legislators didn’t mean them to happen. For instance, Morton said, “They did do some things that were unintended consequences that ended up being beneficial, one of which was the bonus depreciation.”

Used property now qualifies for the bonus depreciation, she told the National Housing & Rehabilitation Association’s recent Asset Management conference in Bethesda, MD (she amplified her remarks in a subsequent interview, as did Tripp, who also presented to the group). And the reform allows 100 percent expensing of certain assets, retroactive to Sept. 27, 2017.

Looking at the big picture, the accountant said it was positive that the LIHTC survived, especially the four percent private activity bonds.

“And the Historic Tax Credit survived, though it’s over five years instead of one. It all shows the importance of the affordable housing community and how much good it has done, that these cornerstones have survived. Especially the private activity bonds.”

Morton pointed to the new Opportunity Zones, where investors can defer taxes on gains, as long as they invest them in economically distressed areas, as something that might turn out to have a big benefit for the industry.

“The managing partner at our firm said Opportunity Zones are like 1987 again,” Morton said, referring to when the LIHTC started. “Once people really understand it they’ll embrace it just like they did the LIHTC, where initially that wasn’t overly embraced.”

The new zones are not without their uncertainties. “The problem with Opportunity Zones is there are a lot of questions. And the industry is looking for additional guidance,” she noted.

The O-Zone provision “was put in to benefit low-income communities. We asked people if the Opportunity Zone is an unintended consequence and they said ‘no.’ One of the beneficiaries was intended to be the tax credit business.”

In Morton’s analysis, the LIHTC is housing oriented, the New Markets Tax Credit is business oriented, and the Opportunity Zone “is trying to bridge the gap between both.”

Some benefits
Another benefit to the industry came not in the tax reform bill, but in the omnibus bill that followed it.

The omnibus bill “increased the amount of tax credits for the next four years by 12.5 percent,” she noted.

“I think that was in essence a way to fund the LIHTC community. As the value of the credit went down you’d get less capital. The omnibus increased the amount of credit that could be allocated.”

Tripp said that while this was a positive, it would not prevent all of the drop in volume he foresees.

The Historic Tax Credit proved to be a mixed bag, Morton said. Although the ten percent credit was eliminated, the 20 percent credit most of the industry uses was kept, but with the change from taking it all in one year to taking it over five years. “That reduces the value of it because you’re not getting all the credit in year one,” she said.

As far as the value of tax credits, Morton agreed with analysts at a recent National Council of Housing Markets Analysts meeting, who pegged the damage at ten to 15 percent.

“That’s what we’ve been hearing,” she said. “Which is a significant drop.”

Morton said she thought the industry sector that would be hurt the least is investors. “They’ll just switch what they pay for the credits to get the yield they want. The syndicators and developers will have to find new ways to get yield, and if there’s a reduction in capital, other ways to fund these deals. For instance, soft debt, increases in deferred developer fees, or general partner contributions.”

Some negatives
Looking at other provisions, Morton said the excess business loss limitation “is bad. But that’s more for individuals, not for syndicators or corporations. That affects the developer side of it. The wages, income, you could shelter it with real estate losses. Under the new law you can only shelter up to $500,000 of those losses. And the remaining losses become a net operating loss the following year.”

New net operating loss (NOL) limitations won’t help the industry, either. Morton said, “It used to be you could have a carryback and a carryforward. Now you can only have a carryforward. And with the new NOLs you can only offset 80 percent of your current year income. Old NOLs you can still offset 100 percent. You’re not going to be able to shelter as much income as you could in the past.”

There’s another unknown as well, not from the bill but from the macroeconomy. “As interest rates go up, there will be less ability for these projects to have debt on their books, and then you’ll have to find other sources for that too. As interest rates increase, that will affect the affordable housing industry,” she predicted.

Story Contacts:
Nancy M. Morton                       
Tax Member, Dauby O’Connor & Zaleski, LLC
Carmel, IN
Direct in Dial: (317) 819-6141
Office Email:

Andrew H. Tripp                         
Partner, Community Development Financial Group
Nixon Peabody, Chicago
(312) 977-4374

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.