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The Rent Roll with Jay Parsons
EP#48 Michael Novogradac | The 'Big Beautiful Bill' & Rental Housing
00:49:56
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Foreign welcome. It's episode number 48 of the Rent Roll, your podcast on all things rental housing, apartments, single family rentals, and build to rent. You know, we're nearing the end of summer. Hard to believe for most of us, our kids already back in school. And I know for some of you, your kids don't go back till after Labor Day if you have kids. And you know, that still disorients me for, for those coming into school after a Labor Day, our kids over here seem to be starting school earlier and earlier each year. But hope everyone had a wonderful summer. And for housing folks, and I really think, you know, people probably beyond that as well. One of the big news items of this summer was the passage of the One Big Beautiful Bill last month. We haven't spent much time on that pot on that topic in this podcast, but we should. And so I've got truly one of the most qualified actually probably forget one of. Let's just be real. We have probably the most qualified person in the world to talk about that topic with us. How the One Big Beautiful Bill impacts housing and rental housing in particular. He's Michael Novogradic. Yes, that Novogradic of Novogradic and Company. Many of you know that name. They've been a leading voice on housing tax policy and accounting since the early days of the LIHTC program following its creation in the 1986 Tax Reform Act. Michael Novogradac was a Big Eight accountant back when that bill passed and soon after left to launch his own firm that bearing his name. And today it's obviously a giant in this space. So you should know Mike was up on the Hill talking to both. Testifying more than talking. He's testifying to both the House and the Senate on housing tax policy in advance of the One Big Beautiful bill passing. So, you know, his, his insights and, and knowledge and data and research really contributed to some of the housing components of this bill. So who better to tell us what it can mean for rental housing? You know, a lot of the impact is going to be to affordable housing, LIHTC in particular, but also opportunity zones. And there's other also are some other implications as well as it relates to tax policy and construction incentives, etc. So I'll ask Mike to grade the One Big Beautiful bill's impact on housing supply and give you a quick little hint here. I think you might be a little surprised by his answer and then we'll get into the weeds a bit with him as well. So that's gonna be a good conversation. And then before my conversation with Mike, I'm going to share with you a brand new research study, hot off the presses, that dives into the impact of operational regulations on rents. So, so anybody in the industry, no matter what your role, you should know about this because it impacts your business, it impacts your cities, it impacts your residents. And so these policies include things like eviction protections, screening limitations, source of income requirements, some really interesting stuff. A first of its kind study with some hard data and hard facts that are really needed today to help better inform policymakers and to protect renters from unintended consequences of well intended but poorly designed policies. All right, before we jump in, let's give a big shout out to our sponsors, first and foremost to jpi, leading apartment developer with a stated purpose to transform building, enhance communities and improve lives. And of course jpi, active in Texas, Southern California and now in the Pacific Northwest as well as soon in the Southeast as well. And then also a big thanks to Waymaker, a multi family investment group focused on class A market rate apartments and attainable housing, partnering with best in class apartment builders across Texas and the Southeast. Okay, so as always, kick it off with Here's a Chart. And this week's Here's a Chart segment is going to focus on a study that just came out from a group called Metro Site. And the study is called Regulation and Rents. Housing laws might be hurting the very population they aim to help. Heck of a title there. Okay, so before we dive in, there's been a lot of focus of late on how regulations drive up the cost of building new housing. This is one of the focuses of the abundance movement you may have heard of, spurred by a book written by Ezra Klein and Derek Thompson that's been galvanizing progressives and libertarians alike with the focus on removing barriers to getting more. More things we need built, including housing. Even progressives like Senator Elizabeth Warren are now talking about removing regulatory roadblocks to new housing, which is fantastic. But this new study from Metrocyte takes the next step and researches the operational side of regulations and red tape and the associated impact on rents. So you've. We've. Let's just say we've got the housing built at this point, but your rents may still still be driven up by these well intended but poorly designed policies that are ostensibly designed to protect renters, but actually backfiring them, backfiring on them in the form of higher rent. Okay, so before we dive further, I want to note that these, this study was, it wasn't written by, you know, people from Some, you know, investment group somewhere. The authors were two PhDs from MetroCyte, which which does research analysis work focused on housing, real estate, urban and labor economics. Now for full disclosure. The project was indeed funded, at least in part by NMHC and naa. But don't let that jade you too much because these authors don't have the type of resumes to suggest they'd risk their careers writing things that aren't backed up by real data. One of them is a former associate professor at Harvard and formerly a visiting scholar at the Federal Reserve bank of Boston. The other has a PhD in economics from UC Berkeley and was formerly an adjunct professor at Berkeley as well. Okay, so let's dive into some of their findings. Again, the research studied how rental housing policies in cities and states can impact rents. So let's start with the source of income laws which require property managers count government vouchers as personal income in the resident screening process. The authors say that that one policy increases rent by on average 5.2 to 5.3%, depending on whether you use COSTAR data or Census ACS data. So a difference of just 10 basis points, not much at all. And that, and even with that either source, the either data source, I should say the source of income laws are driving up rents by more than 5%. So that's, that's not immaterial. Next up, eviction protection laws, specifically just cause eviction laws and right to counsel. The authors lumped these two together. Just cause eviction laws. You know, they can mean many things, but you know, in the case of like in New York, it's often just another flavor of rent control, just with better branding. In other words, it could prevent evictions for tenants who don't want to move out upon lease expiration without a renewal in place. I'm sorry, their lease is expired, they don't have a renewal in place, but they won't move out or they won't sign that renewal. That's oftentimes a loophole in these so called good cause or just cause eviction laws, and then also the right to counsel laws. They guarantee legal representation for renters facing eviction, usually no matter the reason, which can draw out the process extensively while the rent may still go unpaid. So places like New York, D.C. san Francisco, among others, have that. Okay, so the authors estimated that these laws increase rents by an average of 5.9% to 6.5%. Again, depending on which data source you're using, Census ACS data or COSTAR data. Either way, 5.965 let's call it 6%. 6% plus. That's still again, a sizable increase. So again, there is a real cost to regulation, even well intended ones, and that cost of regulation is being shouldered by renters. Another policy, one more policy that these authors looked at, criminal and resident screening. Okay, so you apply to live in an apartment, you go through screening. Some cities have adopted laws that restrict or limit the property manager's ability to use certain criteria in the application screen screening process, such as maybe limits on criminal history, credit scores, eviction records. And the authors note that, quote, while the intent is to level the playing field for renters, these restrictions could limit the ability of property owners to mitigate foreseeable risk. Okay, so when you can't properly measure risk, you take on more risk, and that results in higher rents. And in this case, it's an average resulting increase of 1.5% to 3.4%, again, depending on which data source that you're using. So again, that's not immaterial. And then another really interesting and unfortunate stat from this study is that the impact of these laws is not evenly distributed. In other words, it's actually most impactful for lower income renters. It's the lower income renters that are facing the biggest additional rent burden as a function or as a consequence of these well intended or poorly designed laws. Source of income laws, eviction protection laws, and screening limitations all showed the same result, all driving up rents for the lowest income renters the most. And that of course is especially concerning because lower income renters are already the most rent burdened, even, even at more affordable units, they tend to spend a higher share of income on rent. So they're more cash strapped in our cities and our states are passing laws that are intended to protect them, but they're actually backfiring and exacerbating those financial burdens. And I think in many cases, because unfortunately, our policymakers are oftentimes, you know, they see a real challenge and they kind of rush to solve it and make without really doing the homework. And studies like this do that homework. And so it's important to look at the data again. I tell people, tell people all the time, in the era of trust the science, you know, sometimes we want to trust the science of everything, except when it comes to housing policy. And the science is very clear on this topic as well, just like it is on other, just as it is on, on, on related issues as well, like rent control. And before we move on, there's one more law the authors examined that was preemption laws. And these are laws that, like state laws, that prevent individual cities from enacting rent control or eviction protections, et cetera. The author's research concluded that those state laws had, quote, no statistically significant impact on rents. Okay, so preemption laws are not driving up rents, but these other, other laws can and do drive up the cost of rent. All right, let me wrap this up by reading this conclusion from the authors of this study. I'll read their words here. They wrote, certain rental housing policies can raise the cost of providing rental housing, which we show leads to higher rents, especially for lower income households. While they offer critical safeguards for residents, they also raise the cost of providing rental housing, which we show leads to higher rents, especially for affordable units. A balanced approach is essential. I'll say it again, a balanced approach is essential. Policymakers should consider rental housing regulations in light of their adverse impact to affordability. Further research will explore how these laws affect the supply of rental housing over time. All right, so very well said. That's a great study and certainly recommend reading it if you've not seen it already. All right, next up, rental housing trivia. All right, so this week's question is the one big beautiful bill provides what level of increase or decrease in housing credit allocations used to fund affordable housing? Is it A, is it down 12%? Is it B, down 3%? C, is it flat to no change D, up 3% or E up 12%? Okay, so think about all we know about the one big and beautiful bill and all the talk around housing and cast your vote on what that might be next up in the news. All right, we'll come back to our trivia question in a moment. But first in the news, a few headlines for us this week. The first one comes from multifamily dive. It says multifamily starts jump, but some question the data's accuracy. New apartment construction is outperforming expectations, but permits are falling. Okay, I talked about this a lot in last week's episode, so I'm not going to get into those details again. But this, this article came out after we record that podcast. And so I do want to just bring this back again and say, hey, it's not just Jay Parsons questioning the accuracy of these census start numbers, which for those of you who don't remember, the July census start numbers showed multi family starts, the second highest July number since 1990. The June number was the fifth most active June since 1990. Both of those stats are very difficult to believe. So anyway, this article shows that it's not just me saying this. Three other multifamily economists are quoted, including Ryan Davis from Whitney Advisory. He called it laughable. Jay Liebig said the numbers don't make a lot of sense. And then Chris Nebenzol from John Burns Research and Consulting said, doesn't represent what we are seeing. All right, so there you go. Next up. This one comes from the Business Wire. It's a press release and picked up some, some, some, some trade press as well. It's another REIT taken private, but this one hasn't gotten as many headlines, maybe because it's coming from the Toronto Stock Exchange instead of the New York Stock Exchange. So the headline is Dream Residential REIT announces agreement to be acquired by Morgan Properties. Okay, so Canada based Dream Residential REIT announced this was last week. Now an agreement to be acquired by Pennsylvania based Morgan Properties for US$354 million. If you're not familiar with the name, Dream, they launched just three years ago. And while it's listed in Canada, it's focused on US Multifamily, which is similar to BSR reit. For those of you know, bsr, another multifamily REIT listed in Canada but operating in the U.S. and now again, Dream is being sold to one of the largest apartment owners in the U.S. according to CoStar, Dream Residential has a portfolio of 15 apartment properties, roughly 3,300 units consisting mostly of garden style apartment properties in Dallas, Fort Worth, Oklahoma City and Cincinnati, Ohio. All right, so continued growth from Morgan Properties and a continued expansion into the Midwest as well as Texas. All right, our third and final headline, another acquisition and evolving other reit. This was also last week, but but the announcement came after our podcast was recorded and that is avalon Bay selling 1,248 units across four apartment properties in D.C. proper for $447 million to Folger Pratt. Folger Pratt reported the cap rate at 5.94%. All four of these are newer vintage properties, only one older than 15 years old, that was 2013. 3. The rest of them are newer. That nearly 6% cap rate might be higher than some of us may have thought for newer mintage assets in a core market, but I think partly reflects the increased operational headwinds and regulatory environment in that city and maybe the associated reduced investor interest in the District itself. The buyers, in a press release, they called it a meaningful discount to recent trades and to replacement costs. I should note that Avalon Bay had previously disclosed this pending disposition, knowing the deal had been in the work since last year, but was delayed by DC's particularly challenging and hard to predict and unique. I'm reading a quote here, topa law, and for those of you kind of off quote here, the topa laws give tenants the right to try to purchase an apartment property before it's sold to an outside buyer. Now, in practice, these institutional equality assets, as many of you know, I mean, they're, they're valued at more than $100 million each. So the ability for the, the residents of these communities to raise that kind of money to buy these is obviously very tough. So it could be used as more of a stall tactic. So anyway, on the earnings call a few weeks ago, Avalon Bay said this. Matt Beerbaum, he said this increased trading activity further advances our long standing portfolio allocation goals as we reallocate capital within our portfolio urban assets in our established regions to younger suburban assets in our expansion regions, which of course, again off quote here, which for Avalon Bay expansion means Sun Belt. And they've got a target, about 25% allocation there versus 75% coastal. And remember, for Avalon Bay, coastal means primarily suburban. Coastal. They're more suburban than urban. And these DC assets were all urban inside the district itself. And Avalon Bay still has a little more than 1500 units in the district itself. All right, so that's a wrap on in the news. Let's come back to our rental housing trivia question of the week. The question is the One Big beautiful bill provides what level of increase or decrease in housing credit allocations used to fund affordable housing. Okay, we give you five choices. Is it down 12%, down 3%? Is it flat? Is it up 3% or up 12%? And the answer, maybe surprisingly, is it's up 12%. So it's E. And if you just weren't following the news, which actually this was barely even covered and which kind of. But if you. It's obviously very specific to affordable housing. But you know, what's interesting is that there's so much focus on, I think, you know, kind of pulling back or maybe being more efficient and pulling back some support programs, whatnot. But this was one thing that was increased in the One Big beautiful bill. So that is that. That really teases up for today's conversation. And we'll be talking about this and other aspects of the One Big Beautiful bill and the impact they can have on housing in today's interview. And again, as I mentioned earlier, we're going to be joined by the one and only Michael Novogradic, the namesake of Novogradac & Company. And, and so we're again, real quickly, Mike is a leading voice on housing tax policy. Again, he spent, he spent a lot of time on the Hill testifying to Senate, the Senate and the House on these topics prior to the one big beautiful bill passing. And so we've truly got one of the world's leading experts with us. Talk about its impact. I keep, I said one of. Again, he is the leading expert talking about the impact. So, so let's get into our conversation with Mike.
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Foreign.
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Now we enter the interview portion of today's podcast and I am honored to be joined by Michael Novogradic. So, Mike, thank you so much for making time today. Glad to have you on the show.
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Thanks for the invitation. I'm excited to participate.
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All right, so you know your name is synonymous with affordable housing because of all the great work that you and your team have done over the years. So I want you just to, I think people, you know, they know your name, but outside of the affordable housing space may not know some of kind of your history. So take us back to when you started the company just to set the stage for our listeners. We just had the major tax reform act back in the late 1980s, including the creation of LIHTC. So what were you doing at the time and what drew you to the opportunities in tax credit housing?
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Great. Thank you for that question. I always like going back in time because I have worked with the low housing tax credit since its creation back in 1986. And before that I was actually working at a, at the time I was working at a then Big Eight accounting firm. And before the Tax Reform act of 86 which created the housing tax credit, I was working on tax syndications of losses to individuals that generated equity to build residential rental housing. And as you know, and that would be back in the early 80s through 1986 when the tax reform act came in. And I will note that at that time we were building over 500,000 or roughly 500,000 apartment units a year. And then the tax reformat came in, shut down the concept of tax shelters and I think shut down all tax shelters and should have allowed resident rental to continue to get the benefits. But the 86 act created these passive activity rules, limited the ability to syndicate tax losses to individuals to create resident rental housing, but did consolidate and create the low income housing tax credit to target tax shelters, that type of investing into affordable rental housing. And I then shifted gears to work with the loan compounding tax credit. And that's when we wrote the low income housing Tax credit handbook because There obviously there wasn't a treatise out there on the long closing tax credit. And then in 1989 I left the Big Eight accounting firm and started Novogradac Company.
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Great. So you mentioned something I want to go back to a little bit. You know, some people we know, we had this huge number of starts back in the, you know, before this happened, early mid-1980s. So can you explain just real high level, like what was the tax shelter program that allowed such massive construction numbers and then shut it off? Like what did that.
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You know, there was some more targeted program for affordable housing, but more broadly, individuals could invest in an apartment building that was going to be built and they would get tax losses from depreciation, the like. And back then the top marginal tax rate was 50%. So they basically could be deducting these losses and get a 50% benefit from deducting the losses. And then at the end of the day when they did exit, the gain itself that they'd recognize from taking losses and excess of their investment would be at a tax rate of 20%. So there would be this 30% net benefit. And that created the incentive to go out and build these residential rental properties.
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Wow. So it's a heck of an incentive, I guess if we really want supply, that's one way to do it, right? To get built. Yes. Yeah, I'm sure some folks would like to go back to that. So we obviously now that was 1986, a few years after that, start getting more light tech construction. We obviously have a lot now that's reaching the expiration of that 30 year window. And there's understandably a lot of concern about preservation. And whenever I see articles on this topic, I get a little irritated because it's often portrayed like there's these predatorial investors and want to screw up these assets, check up the rents to market rate. But I know you probably think the same way. There's this nuance to me that doesn't get talked about enough and that's that the age of these properties, the condition, there's a lot of deferred maintenance, modernization, upgrades, getting back to safe quality housing. So my question is how do we expand the conversation to not only about preserving affordability requirements, which obviously important, but also preserving the integrity of these buildings. How do we do both? Particularly when a lot of the priority seems to be around new construction or affordable as opposed to rehabilitation of the existing affordable.
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I think that's a great question and I'm glad that you framed it that way because there does. There's a lot of discussion about, you know, the end of year 15 qualified contract exit, end of year 30, and, you know, someone coming in and potentially raising the rents on the existing tenants. I will note that there are on the 15 year, you know, certain rules to how quickly that could happen. And I also would note that a number of states have extended use agreements beyond the 30 years. So there is a lot of overlapping programs here. So that whatever those properties are that come to the end, it's not as if they automatically will be sort of going to market. And as you know, there's also questions for how many of those properties by the time you get to the end of year 30, are you already at market in terms of how the markets have evolved in supply demand situations in a given sort of community? So, so that's, you know, definitely a question. But I think the, the notion of preservation and renovation dollars. In the past, the loan funding tax credit through the private activity bond opportunity was a ready source to get tax credit dollars to do preservation, to do acquisition renovations of any type of residential rental housing. But also you could take an existing tax credit property at the end of year 30 and then renovate it and get tax credits so that you could extend the use and renovate the property. And that was something that played pretty well until 2020. And you might say, well, what happened in 2020? Such that these private activity bond dollars weren't quite as readily available. And that was that 4% floor came in. And for the listeners who aren't familiar with the loan fixing tax credit, the 9%, there's a 9% allocated credit. And that credit is a lot more valuable in terms of subsidizing construction costs. And then if You Finance with 4% with private activity bonds, you get a lower credit. Right now it's a fixed rate of 4%, but it used to float. So that rate was less than 3, was 3% plus. And at a 3% plus rate, you really couldn't do new construction. And then in 2020, the, the 4% rate came in for private activity bonds. And a lot of states saw the private activity bond program as a way of getting new units, not just renovating. So a lot of states started creating additional funding subsidies to fill the gap. And suddenly the private activity bond concept went and was being used more and more for new construction. So we've seen a number of states where now the productivity bonds where they used to be used for residential rental renovation, are now being used for new construction. And California, for example, created a $500 million state tax credit to help fill the gap so productivity bonds in California can be used for new construction. So that's what sort of led to, I think, this issue right now of what has historically been a shortage of dollars to support the preservation and renovation of affordable housing. And I will note that, you know, we've been working on a number of other tax incentives. One would be a tax incentive for nonprofits to be able to raise capital through marketing tax incentives, individuals to renovate existing affordable housing. But the, you know, what we're going to talk about later, the one big beautiful bill, the fact that it's going to expand the capacity of existing bond volume means we expect there to be more resources thanks to the one big beautiful bill to renovate existing affordable housing.
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Yeah, that's great. I want to talk more about that before we do. One more question going the time machine here. You know, now in the benefit of hindsight, if you go back in time, 1986 or 85, whenever that's first being discussed, the Reagan era Congress, and you get a chance to tweak the initial designs for LI Tech or even more broadly rental housing at large, what would you do?
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Yeah, that's a great question. And as you know, I've testified in front of Congress, both the Senate Finance Committee and the House Ways and Means Committee. So I've had a chance to share many of my thoughts. But if you take me back to 1986, I guess I would say the good news is a number of the changes I would have made then have already been made.
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Good.
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So the so there was originally you had to finance 70% of your project costs with productivity bonds to be eligible for the tax credits, which was then lowered to 50%. So that change has already been made. Then obviously the one big beautiful bill lowered it to 25%, which we'll talk about in a moment. But Initially also the 9% and 4% tax credits were floating rates. And initially the 9% was higher than 9 and the 4 was lower than 4 after the first year. And both of those we've created floors so they don't float as much as they used to. And that's been a big enhancement. And there's a number of other ones. But in terms of what I would do, that hasn't happened yet. I probably and it's not related to section 42, but I probably would have changed the way in which the passive activity rules came into effect and allowed more individuals to invest in the loan compounding tax credit. Right now an individual is very limited in their ability to invest in low income housing tax credits such that it's essentially a corporate market. And I think the time now is to expand the investor base to make the credit even more efficient by increasing the demand for the credits. And I recently wrote a Washington wire for our Journal of Tax Credits talking about the benefits of expanding the investor base to include individuals.
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Good. Yeah. So you've teased this, Al. Let's fast forward to where we are today with the one big beautiful bill. And for those who are listening haven't seen this, your company has put out some really good research and data estimating the impact of the bill on housing. And I'm just going to high level state what I think it is, you tell me. If I get wrong here, it looks like it's a 12% permanent increase in allocations, some adjustment to the bond financing thresholds that could create additional 1.22 million affordable apartments over the next decade. So is that, am I, am I interpreting that right? And if so, can you contextualize for us how big of a deal this is for affordable housing? Yeah.
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Well, first of all, in terms of our estimate estimate is that with, and you said it correctly, there's the 12% increase in the allocated credits, if you will, the 9% credits and then there's the lowering of the finance by test from 50% down to 25%. And that in essence means that the existing amount of bond volume that states are using, that they're dedicated residential rental. And I should note that states don't, they can use their bond volume cap for a variety of uses. It could be single family, there's industrial, there's a number of other uses. You know, a state like California directs a large portion of it to residential rental. And a large number of states do. Other states only allocate a portion of it. But what this bill does, it says if you take the existing bond volume that states have and if they keep that same bond volume dedicated to residential rental, then the ability to finance more units is over the next 10 years is 1.2 plus million more units. And in terms of the significance of that, if you think there's roughly what, 45 million rental housing units in the U.S. there's roughly over 3 million are rent and income restricted under the long tax credit incentive. So this would be an extra 1.2 million over the next 10 years. So that's a lot of homes, that's a lot of families that would end up being served. And in order to get those numbers though, we are going to have to make sure that we're working with the state agencies to a make sure they don't reduce the amount of bond volume going to affordable rental housing. They don't look at it and say, well, now you don't need as much on a given project, so I want to redirect it to some other stores, so we have to keep it there. And obviously if we could get them to allocate even more, then you'll get even more than that. 1.2. And then I also think that you'll see more acc rehabs. So a number of those 1.2 additional units will be preservation financings of existing affordable rental housing.
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So, Mike, for us, you mentioned this briefly, but just if you expand this a little more detailed for us. LIHTC layman, what does it mean to lower the bond financing thresholds from 50% of land and building costs to 25%? What's that significance?
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Yeah, it's a bit arcane. And one of the reasons why we focused on this approach because one of the thoughts was, do you get more residential how do you go about getting more residential rental housing from the existing private activity bond volume? The decision among a lot of the advocates was right now you need to finance at least 50% of the land and building costs to be eligible for tax credits at the 4% rate. So if you take a $10 million project, it means you'd have to have private activity bonds of at least $5 million. And if you have at least $5 million, the project itself is eligible for these 4% credits. And since a state's limited in how many private activity bonds they have, they're limited in the amount of projects they can finance if they have to finance at least 50% of the landed building costs. And now the rule is on a $10 million project, you don't have to finance $5 million now. You only have to finance $2.5 million of the land and building costs to be eligible for these 4% credits. So now a state can take their existing bond cap and basically, theoretically, they could finance twice as many projects. So that's the simple math and that's the approach that was taken because it was the easiest way to. And I guess the other thing I would say about the lowering of the bond finance test is there were a number of projects where they were going out and borrowing private activity bonds at the 50% level, but then repaying a portion of them because the project couldn't support that level of debt. They had to issue the 5 million of bonds, but then they'd maybe repay 2.5 million after they finished construction, all the rest. So it also was a way of being more efficient from the standpoint of why issue the bonds if you're going to pay them down in a couple of years?
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Yeah. Hey, we like being more efficient. Right. So let's talk about another win from the housing, from the, I'm sorry, the one big beautiful bill that's making Opportunity Zones permanent. There's been a lot of great research on, on, on opportunity zones and I've talked about this in our podcast. The EIG put out a good paper talking about just how impactful the legislation's been, particularly getting more housing built in areas that wouldn't otherwise have seen much built. But there's a lot of details in here that I'm sure we won't really get into. But I just want to ask you a high level question. Did Congress do enough, in your opinion to incentivize broader use of the OZ provisions and getting more housing built?
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Well, I guess my first question would be how good an advocate would I be if I said yes?
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True.
- [37:22]
B
So I want to first compliment Congress because they did a lot. And the fact that we got the, the LI tick provisions permanent, the fact that we got Opportunity Zones extended on a permanent basis, you know, that was a lot. And you know, I'm kind of extremely grateful for what was done. But as a policy person, I definitely can always look at ways in which what was done could have been better and things that were left out that I wish were in. And I will note that, you know, one of the things that the bill did in making Opportunity Zones permanent is it did lower the income levels of eligible zones from 80% of every median income to 70%. And the net effect means there will be fewer zones, the zones will be at a separate income level, but there will be fewer overall zones. And we had wished that if Congress, we had actually, our Opportunity Zones working group had advised Congress to lower the 80 to 70, but then increase the number of eligible zones so you didn't lose, so you didn't end up with fewer zones. So that part, you know, I wish Congress had increased the number of zones, but they made a number of other changes, rolling five year deferrals, a lot of those other changes that are going to be super impactful. But from a housing perspective, our Opportunity Zones working group also had recommended an increase basis step up. So basically there'd be more benefits, more deferral or exclusion of the deferred gain if you invested in affordable housing. We thought that would drive more Investment in affordable housing through opportunity zones. We wanted to lower the renovation test. Right now under opportunity zones, you have to spend more than 100% of your purchase price renovating a building for that building to be eligible. We wanted that to be lower for purposes of if you're going to do affordable housing. We also wanted your ability to acquire any building, be it rental housing or not. And if you converted it to affordable rental housing, then you could get the opportunity loans benefits and the asset would qualify. And then lastly, we recommended modifying the rule on how you determine your gain recognition after five years. That's a little more of a technical one, but we had these four requests and unfortunately none of those made their way into the bill. And I appreciate that Congress had a lot of requests and all the rest, so I'm not being critical of Congress, but those are four changes that if I was able to make some adjustments, I would put those in.
- [39:58]
A
Yeah, those all make sense. Okay, so we talked about lihtc, talked about opportunity zones. Are there other provisions of the one big beautiful bill that apartment developers, housing providers, investors should be aware of?
- [40:12]
B
I definitely think they need to be aware of bonus depreciation. Bonus depreciation allows an investor to deduct personal property and land improvements when they place the property in service. And it's both for new construction and acquisition of existing properties. So it definitely turbocharges the tax benefits of investing in residential rental property, which increases the demand or the supply of equity, which then means within the long term credit, for instance, now the investments will be slightly more valuable, which means the same dollar tax credits should generate slightly more equity. And so I think the 100% bonus depreciation is pretty relevant. There also was an add back, and I don't want to get into all the details here, but there was limitation on deducting interest expense. So Congress did extend the ability to calculate the limitation in a way that means a given property's limitation isn't as great. And that was something that otherwise wouldn't have been available. So that right there is helpful, but that's definitely something more minor. And then I would also mention the New Market Tax Credit. It's a community development tax credit and it technically cannot be used to finance residential rental housing, but it can be used to finance mixed use housing. So if you have a mixed use property that has both commercial and residential, the New Market Tax credit can be used there. And those are the sort of big ones. And then there are obviously on the energy side, there's a number of phase outs like the 45 capital residential credit. So there's a number of phase outs of renewable energy credits that folks need to be aware of. They're not positive for housing, but there are issues that if you're out there developing resident rental housing and you have an energy savings or a clean energy, a solar energy aspect to it that you need to be monitoring pretty closely.
- [42:17]
A
Great. No, I appreciate that detail. So if you take a step back and look at the one big beautiful bill from kind of a macro bird's eye view, its impact on housing supply, you mentioned you had testified in front of the Senate and the House committees on these topics. So giving your expertise, I recognize there's obviously a lot of other components of this, a lot of other stuff. It's not just about housing. But of course what we care about right now is housing and the need to support more housing construction. And so in this day and age, everything being political, it's obviously very hard to do that. But if we can just focus on the housing component of this, how would you grade the legislation in terms of its potential impact on housing supply? And then second part of the question would be what's the biggest miss in your view?
- [43:01]
B
Well, my knee jerk reaction is to say it's a home run, but I feel like a home run means there's not another base to get. So I almost have to feel like it's got to be, can never be more than a triple. So it is. I mean when you think about the 1.2 million additional units that could be financed over the next 10 years, I mean that is pretty significant. And I'm not aware of any change that was as significant as that maybe in 2000. So it's at least 25 years since something as significant as that. So I just think it's, it's pretty monumental in terms of its success. And when I think about there's a number of other sort of initiatives out there, you know, certainly within the Affordable Credit Proven act, which is the, the bill that's that, you know, we have, you know, hundreds of co sponsors in the House and the Senate for, and that's the bill that had the, the 12% increase in it. Really it was 12 and a half, but Congress took 12. It had DeLorean at the 50% test in it. It has a number of other production and other provisions in it. So there's a number of provisions within the Affordable Credit Proven act that I'd love to see sort of enacted. And I'd also like to see workforce housing get more attention and that's the gap between the long term tax credit is 60% of area mean income or less rent restricted at 30%. I'd like to see an incentive for that in between that missing middle, if you will, to go from 60 to 100% or 120. And there are some bills out there. The workforce housing tax credit is out there, the middle income housing tax credits. There's a number of incentives out there to try to address that sort of missing metal. And I mentioned earlier we're working on something that is we call it the HOPE act to create additional incentives for nonprofits that renovate existing affordable rental housing that they own. And there's a number of other bills that are on a wish list. I'd also throw in the Neighborhood Homes Investment act which would create an incentive to renovate and build single family homes in distressed communities. And I could go, I could go on in terms of the sort of the wish list. But the one big beautiful bill was definitely a huge success and we do look forward to in future tax bills adding to that success.
- [45:34]
A
So let me go back. You mentioned the middle income housing tax credit bill. I think Senator Wyden from Oregon had been proposing this for a while. I've never quite understood why this one hasn't already pushed out. Because these workforce housing programs seem to be very fragmented by states and cities. They're out there. But what are we missing? Why isn't this a no brainer? It seems like something that should be getting bipartisan support. Is there any chance this gets passed?
- [46:00]
B
You know, I do think that there is a chance that it gets passed. And you know, I do think that it has wide bipartisan sort of support. I do think it becomes a question of priorities. And so I think it's a prioritization question and some will look at it and say until we deal with all the needs at the lower income level, we shouldn't be supporting those at the workforce housing level. And I'm all of the above Houser. So I'm all of the above. So I think it's a combination of how do you prioritize the various pieces of legislation and then what's the vehicle to get it done? And I do think it's going to continue to make its way up. I mean Senator Wyden, he's the ranking member of the Senate Finance Committee. So he's a fairly influential US Senator and he's been proposing this for years. And I'm quite hopeful that sometime over the next couple of years we'll see it enacted.
- [47:11]
A
Yeah, I Want to run this value? Because my thinking on this, tell me if I'm off base on this, is like if, if you have low income housing tax credits, you can build new affordable housing. And then if someone, if someone, you know, hopefully they could get on the upward ladder of grow financially, economically, their next step up is likely in an older property that's maybe not as nice as the low income housing tax credit property they're at. And so in terms of upward mobility, if there's a mitech, couldn't that be a win and ultimately opens up, you know, gives a natural progression, but also open up availability at the affordable housing level for those who need that?
- [47:48]
B
No, I definitely think that it does. And I definitely think that, you know, workforce housing is a huge need and that is something that I think the Opportunity zones has done a good job of creating a lot of workforce housing. And you had mentioned the EIG report. Eigth showed, you know, there, I think the most recent report showed over 600,000 units of rental housing, half of which would not have been built, but for or according to data would not have been built. So there's definitely a net increase in supply, which is pretty substantial in our data. We do an opportunity survey on a quarterly basis and our Opportunity Fund survey is roughly a third of the market and we show well over 200,000 units. So it's 200,000 units that if we're a third, then it's roughly similar to the EIG data. So I do think Opportunity Zones are turning out to be quite a robust incentive for the construction of new residential rental housing.
- [48:54]
A
That's great. I 100% agree. Well, Mike, thanks so much for being on the program. Enjoy picking your brain and thanks for being part of the solution on getting more housing built in our country.
- [49:06]
B
Well, thank you and thanks for your podcast. I enjoy listening to it. So I, I probably won't listen to this episode.
- [49:14]
A
I don't blame you. I don't like listening to myself either. Well, thank you again. Great.
- [49:18]
B
Thank you J.
- [49:33]
A
And that's a wrap on episode number 48 of the rent Roll. Big thanks to Michael Novogradac for being our guest today. Thank you also to JPI and Waymaker for sponsoring today's episode. And thank you to all of you for spending part of your day with us. We'll see you next week.