Corporate tax cut squeezes funding for low-income housing

Hundreds lined up in June at Project Home’s offices on Fairmount Avenue for a shot at one of 89 affordable apartments in the Ruth Williams House at 2415 N. Broad St. Such projects are under funding pressure because of the tax overhaul late last year.

Thomas Capuano was caring for his 96-year-old mother at her house when it got him thinking about his own future.

Capuano, 67 and single, was concerned about what would happen to him long term. He didn’t want to be what he called “deadweight” to his siblings.

So he put his name on the waiting list for an apartment at St. John Neumann Place II in South Philadelphia, developed for low-income seniors by the Archdiocese of Philadelphia. There were more than 30 people ahead of him on the list for the 52 units in the apartment building, but he made the cut.

Since moving in last fall, Capuano pays $270 a month in rent, 30 percent of his income.

“I’m truly grateful I got the opportunity,” said Capuano, whose mother moved to Phoenixville to live with another family member.

Camera icon David Maialetti/Staff Photographer
Thomas Capuano secured an apartment at St. John Neumann Place II in South Philadelphia, an apartment building for low-income seniors that was built using tax credits whose value has been reduced by a cut in the corporate tax rate.

But that opportunity may not be available for others in coming years.

The recent drop in the federal corporate tax rate is squeezing a popular way to pay for the construction of low-income apartments. The reduction from 35 percent to 21 percent, the centerpiece of December’s tax overhaul, has diminished the value of tax credits. That means an even greater shortfall in the amount of affordable housing at a time of surging demand, though it is too soon to predict the magnitude of the downturn, developers and other experts said.

“With this new tax overhaul, I think, you can very safely say that the market, the pie, is going to shrink considerably,” said Vidhi Anderson, executive director of housing and land development at Presby’s Inspired Life, a tax-exempt organization that already has wait lists that run into the hundreds for some of its properties.

The lower corporate tax rate is expected to reduce the value of the tax credits by 6 percent to  15 percent, Anderson and other developers said. That means developers will have to find other sources of money to make up a difference of as much as $1 million or more in many cases — a difficult task at a time when other sources of money for affordable housing are also shrinking.

The tax credits were created by the Tax Reform Act of 1986 and have supported the creation of three million affordable housing units that are home to millions who earn no more than 60 percent of an area’s median income. In the Philadelphia region, that would be $49,920 for a family of four, as last year’s median income was estimated at $83,200.

State housing finance agencies receive an annual allotment of credits based on population. Pennsylvania gets about $30 million annually. The total for New Jersey is $20 million annually. Each year’s credits run for 10 years, which means a $1 million award amounts to $10 million in credits over a decade.

Chris Williams, 43, is among the millions for whom tax credits have made a huge difference.

Williams moved into Center City’s Connelly House, a development by Project Home and Bethesda Project, in 2011 after four years of homelessness, including 18 months at St. John’s Hospice. Williams had lost his job in human services because of an illness and then fell into depression.

Now, the Mount Airy native is working again, as a custodian at another Project Home facility, and hopes to return to college this year.

“Arriving here was a major blessing,” he said.

Williams’ apartment is one of thousands built in Philadelphia with the help of tax credits.

In the last three award cycles, Pennsylvania Housing Finance Agency awarded $41.7 million in tax credits to 38 projects with nearly 2,000 units in Southeastern Pennsylvania, and the New Jersey Housing and Mortgage Finance Agency approved $28.4 million in tax credits for 22 projects with 1,500 units in Burlington, Camden, and Gloucester Counties.

The credits are not worth much to most developers, so they raise equity for projects by selling the credits to banks and other firms that can use the credits to offset tax liabilities. Banks get the bonus of credit under the federal Community Reinvestment Act for investing in low- and moderate-income communities.

In recent years, banks and other investors in tax credits have been paying more than $1 for every $1 of tax credit. Presby’s got $1.10 per tax credit for two deals it closed in early fall. Project Home received $1.07 for its most recently completed project, the Ruth Williams House in North Philadelphia.

That is because the tax credits come with added benefits.

“In addition to the tax credits, they are getting the depreciation, which is worth a lot of money, and mortgage-interest deductions, which are with some money. The are also getting Community Reinvestment Act credit,” said Matthew McCarter, director of real estate development and asset management at Project Home, a Philadelphia nonprofit.

The lower corporate tax rate does not reduce the value of the tax credits themselves, but it makes the depreciation and the interest deduction worth less, McCarter said.

Financial advisers suggested that Project Home budget 95 cents per dollar of tax credits for its pending applications. Under that pricing, Project Home would have received $15.91 million for the Ruth Williams tax credits, $2 million less than the $17.92 million it actually received.

Speaking generally of the financial gap caused by the tax changes, McCarter said, “we’re going to have to fill that with some other source or cut back on the number of units.”

Brian A. Hudson Sr., executive director of the Pennsylvania Housing Finance Agency, had some suggestions for filling the gap: PHFA could increase the credits per project and support fewer projects; sponsors could use their 8 percent developer fee to close the gap; or local governments could increase their support.

“In any event, some of those gaps will have to be filled in one form or another,” Hudson said. “That’s what we’ll be looking at as we decide which projects we want to award to.”

There is no easy path forward, said Tim Henkel, principal and senior vice president at Pennrose Properties, a Philadelphia for-profit that is one of the nation’s largest affordable-housing developers.

Using the developer’s 8 percent fee would add risk to the projects because that money is already used to cover unexpected costs, and President Trump’s budget proposal for fiscal 2019 would completely eliminate major sources of money that flow through local governments to support affordable housing, Henkel said.

“It’s a double hit in that at the same time equity pricing has gone down because of tax reform, our other sources that would normally make up the difference are also being depleted and threatened,” he said.