Tax credit proposal could change multifamily lending game

Bipartisan legislation is targeted toward middle-income families whose income is too high to allow them to qualify for low-income housing.

The US multifamily sector could see positive tailwinds this year from the potential for new federal legislation introduced in late December that would provide tax credits for middle-income housing.

The bipartisan Workforce Housing Tax Credit Act is targeted toward middle-income families whose income is too high to allow them to qualify for low-income housing.

The legislation could finance as many as 340,000 affordable rental units and would be very similar to existing Low Income Housing Tax Credit legislation, according to a press release from the bill’s sponsors. It would be targeted toward families earning between 60 percent and 100 percent of area median income.

“If the new legislation does become a program, it would cater to middle-income households that are overqualified in income to live in a LIHTC development but are underqualified to be in a conventional market-rate building,” says Daron Tubian, managing director and head of affordable housing investments for debt and equity at Barings.

“A program would mirror LIHTC and to the extent that it does that and is successful, it will be an important game changer”

Daron Tubian
Barings

The program would be administered on a state basis, with each state’s housing finance agency allocating 15-year tax credits to developers. The legislation would include a 15-year compliance period and a 30-year extended commitment. The LIHTC program, established in 1986, has financed more than two million apartments and has been key for the creation of low-income housing.

“LIHTC has been the most successful program for the production of affordable housing units in US history,” Tubian says. “A [workforce housing tax credit] program would mirror LIHTC and to the extent that it does that and is successful, it will be an important game changer.”

The proposed legislation is likely to be a part of an upcoming tax package, and is expected to be voted on this year, according to commentary from Washington,
DC-based trade organization The Real Estate Roundtable.

Outlook

The legislation is not the only factor which will drive the multifamily market – the prospect of lower rates is also having an impact, Tubian says.

“There is now a level of optimism in terms of where interest rates are,” Tubian says. “If rates could stay in the high-3 percent or low-4 percent range, it could be accretive to helping additional projects get financing.”

While the past year has been very challenging for developers, lenders and investors, Tubian is starting to see an uptick in activity. But some of the key challenges have been around the amount of construction and permanent financing developers can secure.

“Construction lenders have had to go back and ask their developers to infuse more equity to be able to cover the gap between what they capitalized for construction interest payments going into a project 12-18 months ago and the rising rates this year,” Tubian says.

That said, Tubian anticipates a more active 2024: “I believe there will be more transaction volume and while there are other factors, both geopolitical and economic, which could affect the market, the forecasted pipeline right now seems strong.”