Missoula housing experts fear new tax law will reduce corporate investments in housing
As City Council member Heidi West considered those who were evicted from a Missoula trailer park last year and have struggled to find alternative housing, she paused and collected her thoughts.
“It gets us to the complicated nature of income inequality in our community,” said West, who also works at the North Missoula Community Development Corporation. “And even in our system and tax laws.”
There’s little doubt that housing has emerged as one of Missoula’s most pressing challenges. It has prompted local economic studies, sparked debate on social media and, last year, it sent community leaders off to write a housing policy aimed at addressing the issue.
Buried in the deeper discussions this week surrounding the policy-in-progress came a second challenge that has local housing experts concerned. It’s rooted in the low-income housing tax credits used by developers to build affordable housing, and the tax reform bill passed by Congress.
“Part of what we should be talking about, these (tax credits) are the primary way we develop affordable housing in our communities across the country, and with our new tax reforms, that capacity to develop housing has been reduced,” said West. “It’s projected to diminish over the next couple of years – a 16 percent decline nationally in affordable housing coming onto the market.”
In recent years, housing tax credits have been offered to build a number of affordable housing units in Missoula, including Solstice, Equinox, Sweetgrass Commons and Aspen Place – an affordable housing option for seniors.
The credits also helped Homeword Inc. purchase Creekside Apartments last August, a move that kept the 161-unit development off the open market, reserving it as affordable housing. The deal was praised by housing experts as a major achievement, though it took place before Congress passed the tax reform bill.
“The essence of it is, low-income housing tax credits are an investment opportunity for corporations and other large investors, providing tax benefits or tax incentives,” said Eran Pehan. “We generally see less of a need for that with the corporate tax breaks that were put into place.”
Pehan, director of the city’s Office of Housing and Community Development, said the tax credits have provided hundreds of units of affordable housing in Missoula. But over the next 12 to 24 months, corporations may not need the incentive, resulting in fewer investment in housing tax credits.
Other options, such as “opportunity zones,” could help replace the loss in investment, though Pehan said those programs aren’t fully understood and the U.S Treasury has yet to offer details on how they work.
“Unfortunately, low-income housing tax credits are just at such a scale comparative to any other incentive,” Pehan said. “They bring millions of dollars to incentivize projects. It’s going to be incredibly difficult to backfill that funding as we see less investment in that.”
Jim Morton, with the Human Resource Council, said tax credits are highly competitive and not easy to win under normal circumstances. His organization, which has affordable housing units in Missoula, Mineral and Ravalli counties, sought tax credits for a Stevensville project but didn’t receive them.
Last round, 17 organizations in Montana applied for Housing tax credits. That competition could grow more intense if investment in the program dwindles.
“Tax credits are really targeted toward large corporations,” said Morton. “When the tax rate went down, the incentive for a large corporation to invest in tax credits diminished somewhat. The market right now is trying to figure out whether or not, given the effective tax rate now, what the tax credits are.”
Given the cost of land and construction in Missoula, building affordable housing is a challenge, Morton said. Developers must avoid taking on debt to make a project pencil out. Federal policies require tax credit projects to serve those making less than the area median income.
“The rents are low and you don’t have much money to do debt service, and that’s why we want privatized exemptions, because most of us don’t like to borrow the money,” Morton said. “The folks we serve, sometimes their incomes will fall and we might have to lower their rents, but you can’t do that if you borrowed too much money.”
Like other housing agencies, Morton said the Human Resource Council is waiting for the market to determine whether corporations will continue investing in the program.
“When your tax rate is a little higher, you might have an incentive to pay a bit more, because you’re getting something in return,” Morton said. “But when the tax rate goes down, are you as interested? The market is so new, we don’t know.”