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One thing most people can agree on when it comes to affordable housing is that there’s not enough of it.

“The sobering news is that supply continues to shrink for very low and low income renters,” says Bob Simpson, vice president of Borrower Relationships and Special Asset Classes for Fannie Mae. Since 2011, the number of units that are affordable to very low income renters has declined by 200,000 units. The current size of the existing subsidized rental housing market in the United States is estimated at 4.8 million units, according to the National Low Income Housing Preservation Database.

There is no question that the shrinking supply of affordable housing is at odds against what continues to be overwhelming demand. Industry estimates show an affordable housing market that is significantly under-supplied by 10 million to 20 million units nationally, notes Michael J. Novogradac, a managing partner at Novogradac & Co., a San Francisco–based accounting and consulting firm that specializes in affordable housing. Both Simpson and Novogradac addressed the “Future of Affordable Housing” at a presentation in Minneapolis on May 14.

One of the big hurdles impeding the development of new subsidized rental housing is securing capital. A key tool to finance new projects is the Low Income Housing Tax Credit (LIHTC) program. “The tax credit program, for all practical purposes, is the only way in which we can build new subsidized units today,” says Simpson.

There are a lot of reasons for that decline. Number one, there is still about the same amount of equity coming into the affordable housing market that existed 20 years ago. The difference is that it now costs more to build those units. In addition, there is much less gap financing available today. Sources such as the HOME Investment Partnerships (HOME) and the Community Development Block Grant (CBDG) programs took a hit during the recession. “You just see less money coming into the space as a result,” says Simpson.

Given the current climate, it’s understandable that proposals regarding new tax reform make the affordable housing industry very nervous. There has been a lot of talk about tax reform over the past several years and tax reform is still on the table. In all likelihood, there will not be any significant tax reform until after the next presidential election, says Novogradac. However, it is important for the industry to remain active and engaged in tax reform discussion, he adds.

The annual equity raise from LIHTCs amounts to about $9 billion. Two provisions that are likely to be in any tax reform would be a lower rate and longer depreciation. Both factors could have a big impact on pricing and yields, which, in turn, can influence the sector’s ability to attract equity investors.

For example, if a corporation with a corporate tax rate of 35 percent invests or pays $1 per tax credit, that corporation would save $1.35. If that top corporate rate is lowered to 25 percent, then a corporation would only save $1.25 on a tax credit investment with their net effective return dropping from 35 cents to 25 cents on the dollar, which represents a decline of 29 percent. “I don’t know of too many investors that will keep investing at the same rate even though their return went down by 29 percent,” says Novogradac.

Novogradac & Co. estimates that the bottom line impact of such a change across the industry would result in 8 percent to 12 percent less equity raised, or an industry loss of equity of between $700 million and $1 billion each year. Ultimately, the industry could face a significant loss in the face of tax reform even if the tax credit itself remains intact, notes Novogradac. “We do have reasons to be concerned, and we actually have been trying to push back against this tax reform,” he says.

One bright spot for the industry is that while new construction remains challenging, more attention and more tax credits are focusing on the preservation of existing subsidized properties. Developers and investors are looking at opportunities to acquire or renovate existing apartments. For example, Fannie Mae has financed about $10 billion in preservation over the last four years, the majority of which has been focused on expiring Section 8 contracts. “We see that as a tremendous opportunity from the debt space and there is ample liquidity in the secondary market to support that need,” adds Simpson.

This article was republished with permission from National Real Estate Investor.