By Todd Cohen
RALEIGH, N.C. — In 1986, as part of an overhaul of federal tax law, Congress created a low-income tax credit designed to stimulate financing and development of affordable housing.
A key goal was to shift responsibility for affordable housing to the private sector from the federal government, which was not keeping pace with growing need among low-income Americans for low-cost housing, says Dana Boole, president and CEO of the Raleigh-based Community Affordable Housing Equity Corporation, or CAHEC.
Since taking effect, the tax-credit program has helped produce 3.2 million units of affordable housing in the U.S., including more than 24,900 units developed with financing assembled by CAHEC.
The nonprofit operates with a staff of 40 people and an annual budget of $10 million generated entirely from fees from investors. It syndicates equity from banks and corporate investors to finance affordable housing in 10 states in the Southeast and Mid-Atlantic region in exchange for tax credits to offset federal taxable income.
It also uses taxes credits to syndicate equity for projects to stimulate economic development in distressed communities, preserve historic properties, and develop sustainable energy.
CAHEC raised $4 million to transform the former SunTrust tower in downtown Durham into the 21c Museum Hotel, for example, and raised another $4 million to develop a Rooms to Go furniture distribution center in Dunn.
And it raised $50 million for development of four solar-panel projects in Martin and Bertie counties in northeastern North Carolina that generate a total of 26 megawatts of electric power.
Affordable housing is the main focus of CAHEC, which has raised a total of $2.1 billion since it was created, nearly all of it for housing. It raised $5.8 million, for example, for development of the 55-unit Carousel Place community in downtown Raleigh.
The U.S Department of the Treasury allocates tax credits each year to the states at a rate of $2.35 per resident. In 2017, North Carolina received $23.5 million of tax credits.
The North Carolina Housing Finance Agency, in turn, distributes the credits each year to developers of roughly 30 projects, based on a competitive process that considers factors such as the share of the development that will serve low-income residents, its proximity to basic services such as grocery stores and health care, and its location, such as in a rural county or economically-distressed community.
But now, Boole says, the production of affordable housing is projected to decline by 15 percent as a result of a tax bill, approved by Congress in December, that lowered the corporate tax rate to 21 percent from 35 percent.
The lower rate will reduce the return — and the incentive to invest — for equity investors already squeezed by escalating construction costs from rising expenses for labor, land and materials, and by a sharp drop in development grants from local, state and federal government, Boole says.
While equity typically accounts for only about 20 percent of the cost to developers of market-rate housing, with mortgage payments accounting for the remaining 80 percent, he says, developers of affordable housing use tax credits to lower their mortgage debt to as little as 30 percent of their overall costs.
Key incentives for investors are the opportunity to use tax credits and the write-off of tax losses to lower their taxes. But the lower corporate tax rate reduces that incentive.
That lower tax rate will make it even more challenging to develop affordable housing to try to help address the needs of the 11 million U.S. households that pay more than half their monthly income on rent, Boole says.
So CAHEC, along with other equity syndicators throughout the U.S., has been working to raise awareness among members of Congress about the need for affordable housing. The House and Senate both are considering bills to revise the tax credit, including a proposal to increase the availability of the credit by 50 percent over five years.
CAHEC also is working with its partners — investors and developers — to “value-engineer” its projects, Boole says.
“How do you control construction costs from rising — building projects more efficiently, trying to streamline projects, not cutting corners?” he says. “How can we tackle this in a better, smarter way, with the credits we have, to build safe and affordable housing?”