Support Multifamily Affordable Housing Development: Senate Bill 344 Sign-On Letter
On February 1, 2012, the Indiana Senate adopted Engrossed Senate Bill 344 including SEC. 3 that requires county assessors to include the value of federal low-income housing tax credits awarded after December 31, 2012 in determining the assessed value of the low-income housing tax credit property. Read this previous IACED action alert on the topic for background.
A number of partner organizations have come together to author the letter below. This letter advocates for leaving Indiana law as it stands today for valuing Section 42 Low Income Housing Tax Credits for multifamily properties. Please lend your organization’s name to list of partners opposed to this change in state law. Sign your organization’s name in the comment field below or email afraizer @ iaced.org.
INDIANA SENATE BILL 344 WILL CREATE FINANCING IMBALANCES AND UNCERTAINTY FOR AFFORDABLE HOUSING IN INDIANA – DEPRIVING AFFORDABLE HOUSING TO THOUSANDS OF INDIANA FAMILIES AND JOBS TO THOUSANDS OF INDIANA WORKERS
On February 1, 2012, the Indiana Senate adopted Engrossed Senate Bill 344 (“ESB 344”). SECTION 3 of ESB 344 requires county assessors to include the value of Federal low-income housing tax credits (“LIHTC”) in the assessed value of LIHTC property.
Generally, assessors are required to assess the value of LIHTC property using the income approach to valuation. To further clarify this methodology, the General Assembly in 2004 enacted Indiana Code § 6-1.1-4-40, which prohibits assessors from considering the value LIHTCs in the assessed value of LIHTC property. In 2006, the General Assembly set a floor for the assessed value of LIHTC property, imposing a minimum property tax liability on LIHTC properties of no less than 5% of the annual total gross rents for those properties.
The requirement imposed under SECTION 3 of ESB 344 to include the value of LIHTCs in the assessed value of LIHTC properties will result in an imbalance and uncertainty in financing for future affordable housing development, making Indiana less competitive for such financing and depriving affordable housing to thousands of Indiana families and construction and management jobs to thousands of Indiana workers.
The change from “may not” to “shall” will have a direct impact on future affordable housing production in Indiana
Most LIHTC properties in Indiana have fewer than 90 units. Project size as well as affordability restrictions, amenities (including green building requirements) and scope of services provided at LIHTC properties in Indiana is generally directed by the “qualified allocation plan” adopted and administered by the Indiana Housing and Community Development Authority (“IHCDA”). Financing for LIHTC properties generally includes some level of conventional debt financing, combined with equity generated by the availability of LIHTCs to project partners. Due to the affordability restrictions imposed at LIHTC properties, the amount of conventional debt financing supportable by property operations is limited, and much lower than the per unit debt carried by market rate properties or by properties with operating subsidies. Even with minimal debt, most LIHTC properties do not generate significant cash flow due to their affordability restrictions, and owners have almost no ability to pass operating cost increases to their low-income tenants.
The increase in the assessed value required under SECTION 3 of ESB 344 will increase annual property taxes substantially. A review of numerous LIHTC property portfolios in Indiana demonstrates significant financial stress created by increasing properties taxes by as little as $100 per unit per year. The resulting decrease or complete elimination of positive net operating income for LIHTC properties will prevent owners from securing even the historically minimal amount of conventional debt financing which is necessary to fund project development. An increase in property taxes on rental units that provide safe, decent and affordable housing to low-income Indiana families, at a time of growing need for affordable rental housing, would deprive those families of a basic human need.
The proposed change will result in fewer construction and management jobs for Indiana workers.
The LIHTC program is a proven job producer. Since 2006, IHCDA has awarded LIHTC allocations for 12,568 affordable rental housing units. In 2011, those awards created 1,620 units. According to a 2010 study by the National Association of Home Builders, the one-year local impact of building 100 units of LIHTC-financed housing results in 122 jobs related to the construction of the property. Moreover, every 100 units of LIHTC property produces $7.9 million in local income tax revenue and $827,000 in property tax revenue for local governments. It also results in an additional 30 jobs on an ongoing basis. In Indiana this is an annual impact of 15,322 construction jobs.
The current legislation regarding the assessment of LIHTC properties provides consistency needed for equity partners and lenders to finance thousands of affordable housing units for Hoosiers. With the financial collapse in 2008 and 2009, LIHTC equity and debt financing nearly vanished, leaving most LIHTC owners struggling to find necessary financing for their projects. Since 2009, the supply of LIHTC equity and debt financing has been concentrated almost exclusively in the coastal regions of the country. In true Hoosier fashion, LIHTC developers, IHCDA, Midwest-based LIHTC syndicators and Midwest-based lenders have worked collaboratively and diligently to ensure that Indiana has continued to compete for the scarce equity and debt financing needed to create the construction jobs that LIHTC projects bring. The proposed legislation will create not only an immediate imbalance in development budgets, but will also result in more stringent underwriting for such projects by LIHTC equity investors and lenders. At a time when equity and debt financing remains scarce and concentrated outside of the Midwest, and with unemployment continuing to be unacceptably high, it would be a mistake for Indiana to create such an imbalance and uncertainty and to make itself less attractive and competitive with other states for such scare resources.
The vagueness of the wording of SECTION 3 of ESB 344 will lead to confusion among county assessors and investors. SECTION 3 of ESB 344 states that the assessor shall include the value of the LIHTCs in the assessed value. Under generally accepted appraising principles, assessors must use the income approach to determine the assessed value of LIHTC property. The monetization of the LIHTCs provides equity to finance the development of the property. The equity generated by the LIHTCs is not income of the property and does not finance the operation the property. The amount of equity required to finance a development project has no relevancy to the project’s market value. The LIHTC equity is generally paid in during the development of the project and within a year thereafter, while the LIHTCs are claimed over a 10-year period following lease up. Combining income valuation based on project operations with an equity valuation that decreases over time is counterintuitive.
As written, SECTION 3 of ESB 344 will result in years of costly litigation to determine how it is to be applied. Following the enactment of the current legislation, it took several years of appeals and litigation before the current legislation was applied with relative consistency throughout the State. To once again create years of uncertainty and inconsistency, causing LIHTC equity providers and lenders to place their limited financial resources in other states, would cost Indiana families thousands of affordable housing units and thousands of construction and management jobs – a significant mistake when Indiana must compete for its economic recovery.
The changes proscribed in SB 344 SECTION 3 are harmful to the creation of affordable housing for low and moderate income families, complicates the financing of Section 42 properties in the future, and at a minimum, risk the stability of the more than 46,000 units of housing developed across Indiana with the Section 42 program during the last 15 years.
We thank you for your attention to this matter and respectfully urge you to remove SECTION 3 from ESB 344.
City Real Estate Advisors
Englewood Development Company, Inc.
Great Lakes Capital Fund
Indiana Affordable Housing Association
Kuhl & Grant LLP
Pedcor Investments, LLC
The Sterling Group
The Woda Group
Vasil Management Company, Inc.
Include your organization name in the comments below or email afraizer @ iaced.org.