Booster Shot: Qualified Opportunity Zones and Affordable Housing
Affordable housing is edging back to the center of the policy debate. To offer but one example, last month National Public Radio aired a segment on the shortage of housing in rural areas (“Rural America Faces a Crisis in Adequate Housing,” August 11, 2018). According to statistics provided by the National Low Income Housing Coalition,
for every 100 households classified as extremely low income, the number of affordable and available homes averages only 35 nationwide, ranging from 59 in Maine all the way down to 15 in Nevada.
For decades affordable housing policy has rested on two key pillars. First, the Low Income Housing Tax Credit (LIHTC) has been a prominent feature of the nation’s affordable housing landscape since its enactment as part of the Tax Reform Act of 1986. LIHTCs provide substantial subsidies to developers for providing and maintaining targeted numbers of affordable housing units.
Second, federal loan and credit guarantee programs offered by arms of the federal government, including the Department of Housing and Urban Development (HUD) and the Department of Agriculture (USDA). Developers can combine the benefits of these programs to contribute to the nation’s affordable housing goals while earning a robust return on their investments.
Last year’s passage of the Tax Cuts and Jobs Act (TCJA) added a potential booster to this longstanding combination in the form of Qualified Opportunity Zones (QOZs). As discussed in our earlier note, the TCJA’s QOZ provisions offer capital gains tax relief to equity investors in designated QOZs, economically disadvantaged Census tracts identified by each state. Eligible QOZ businesses include multifamily housing developments and other types of commercial real estate.
A Booster Shot for Affordable Housing
According to Signet Partners’ initial analysis, investors in affordable housing developments located in QOZs can boost their internal rate of return for equity investments by five or more percentage points compared to similar non-QOZ projects, potentially making possible new housing investments specifically targeted toward the economically disadvantaged areas identified as QOZs.
In the ongoing effort to address the nation’s shortage of affordable housing, therefore, the TCJA’s QOZ provisions stand to become, alongside the LIHTC and federal credit programs, a third pillar incentivizing equity investors to participate in this important effort.
How Signet Partners Can Help
With over thirty years of experience in the financial services and federal credit worlds, Signet Partners can help federal agencies, community development organizations, and investment firms navigate their compliance, business process development, underwriting and structuring needs in multifamily affordable housing. Our seasoned professionals offer decades of direct, proven experience working with federal lending and economic development initiatives, including:
Federal tax credit programs, such as New Markets, Low-Income Housing, and Historic Tax Credits
Federal investment support efforts, such as the Troubled Asset Relief Program (TARP) subprograms for Term ABS Lending Facilities (TALF) and Public-Private Investment Partnerships (PPIP), USDA’s Advanced Biofuels credit programs, and HUD’s FHA loan portfolio
Federal financial agencies and government-sponsored enterprises, such as the Federal Deposit Insurance Corporation, Treasury Department, Small Business Administration, US Department of Agriculture, Ginnie Mae, Fannie Mae, and Freddie Mac
Signet Partners is a small business that has served public- and private-sector clients in the financial services industry since 1988. With offices in metropolitan Denver, Colorado and Washington, DC, we provide a focused suite of advisory services that include:
Review and oversight of underwriting and compliance for financial asset portfolios, real estate (commercial, multifamily, and residential), and federal financing programs;
Analysis, design and implementation of business processes;
Investment property feasibility and turnaround strategies;
Financial and transaction advisory and structuring services.
We have been institutional investors, project managers, consultants, quantitative analysts, and federal regulatory officials. In these roles, our experience spans a wide range of relevant activities, including structuring and marketing of investment funds; oversight and review of federal initiatives; and valuation and compliance oversight of hard asset and tax credit portfolios.
Signet Partners offers focused, relevant expertise at the intersection of public- and private-sector investment from the perspective of every seat at the table.
- The interactive source data can be found at http://nlihc.org/gap
- Full parameter sets, available on request, reflect Signet Partners’ estimate of current market conditions for loan to cost ratio, interest rates, LIHTC and other parameters for each loan program in a characteristic US multifamily real estate market.