Strong job and population growth over the last decade have steadily elevated demand for affordable housing throughout Texas, and the incoming Biden administration is likely to enact policies that will help developers expand the supply needed to meet that demand, according to a panel of industry experts.
The combination of no state income tax and a pro-business climate has driven scads of major companies to relocate to Texas, in many cases from California. At least before the COVID-19 pandemic, the arrival of these high-paying jobs — and the housing to support them — tended to fuel demand for retail, restaurant and hospitality development.
It’s within the operations of these properties that many renters who qualify for affordable or workforce housing make their living. Immigrants from Mexico and Central America further add to demand in Texas.
But from an economic standpoint, development of affordable housing is rarely feasible without some sort of aid from the state or federal government (or both). In terms of the latter, some professionals in Texas believe that the incoming Biden administration intends to prioritize affordable housing growth through a variety of mechanisms.
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A panel of these individuals spoke to the specific means by which this will be accomplished during a webinar on Tuesday, entitled “What is the Outlook for the Affordable Housing Sector in Texas?” Texas Real Estate Business, a publication of Atlanta-based France Media, hosted the event.
“The Biden administration has an emphasis on housing policy and a position of spending $650 billion over the next 10 years, including a $100 billion affordable housing fund,” said panelist Jeff Rodman, program manager of affordable housing M&T Realty Capital. “His administration plans to boost subsidies for Section 8 housing and to incentivize local governments to address zoning laws that would encourage more affordable housing.”
The possibility of the Biden administration raising the corporate tax rate is another political factor to watch. Increasing that tax rate would boost demand for tax credits — perhaps the most common form of government subsidy for affordable housing projects — as more developers would need credits to offset the rise in taxes.
“Tax credits are directly tied to demographics, so as more companies — including those that are fleeing the high-tax environment of California — move to Texas, the value of tax credits available to developers will increase,” explained panelist Coni Hennersdorf, founder of Dallas-based engineering firm CODA Consulting Group.
“The quantity of tax credits follows population, but the value follows the corporate tax rate, so an increase in the corporate tax rate will allow tax credits to be spread out among more transactions,” added Rodman.
In 2020, state housing finance agencies (HFAs) will receive $2.81 per capita in Low-Income Housing Tax Credits (LIHTCs) or the minimum small population state allocation, which is approximately $3.1 million, according to taxfoundation.org.
Since population growth increases the total allocation of LIHTCs for a given year, developers in a state like Texas that has seen strong population growth can include tax credits as a higher percentage of total development costs. This saves developers money in an environment in which land and construction prices continue to rise.
The Trump administration cut the federal tax rate from 35 percent to 21 percent as part of the Tax Cuts & Jobs Act, passed in late 2017. The Biden administration’s plan currently calls for the rate to be raised from 21 percent to 28 percent. Such a move would cause pricing of federal tax credits to decline, making them more attractive to developers.
“When the new legislation came out a couple years ago with the lower corporate tax rate, we had three or four deals that were based on higher credit pricing that just died on the vine,” said panelist Cliff McDaniel, executive managing director at Newmark.
Panelists also discussed how the administration could push to abolish 1031 exchanges, which allow real estate investors to defer capital gains taxes on a purchase by reinvesting those proceeds in a similar asset within 180 days.
Doing away with 1031 exchanges would, in theory, force investors to refinance some properties rather than sell them. But the additional tax revenue accrued from no longer deferring capital gains taxes on these investments could be allocated toward affordable housing. Raising the capital gains tax — another idea the Biden administration has floated — would have a similar effect.
Lastly, while the new administration is looking to overhaul changes to the tax code passed under the Trump administration, the new plan would preserve incentives for developers who build in Opportunity Zones. Legislation that allows tax breaks for projects that are built in Opportunity Zones was also a cornerstone of the Tax Cuts & Jobs Act.
Developers have historically shied away from these areas, despite the fact that their income levels are conducive to affordable housing, often due to lack of subsidies to fund land acquisition, entitlement, permitting and construction.
“In Houston, 90 percent of the ‘zones’ are true Opportunity Zones where you wouldn’t see market-rate development,” said panelist Ray Landry, senior vice president at Houston-based Davis-Penn Mortgage. “The lobbyists in D.C. say that there’s broad support for Opportunity Zones on both sides of the aisle, so while the Biden administration has said it’s going to do away with the Trump tax cuts, the Opportunity Zones should be exempt from that.”
To listen to the complimentary webinar and learn more about how changes in the executive branch could impact the affordable housing space, click here.
— Taylor Williams