by Don Keelan
Senator Bernie Sanders repeatedly lambasts corporations and wealthy people for having huge incomes and paying little in taxes. If he looked out his Burlington office window, he would see how this is so.
The income tax avoidance is evident in the many affordable housing projects developed in Burlington and throughout Vermont. However, before I proceed, let me note that Bis/Now gets credit for coining the phrase, “Affordable Housing Is An Oxymoron,” and rightfully so, as you will soon see.
When real estate developers, individually or in concert with Vermont nonprofits and or municipalities, take on the development of what is described as ‘affordable housing unit projects,’ they do so by entering a quagmire of costly, time-consuming regulations to obtain a substantial portion of the project’s funding.
This is why affordable housing projects completed or under development in places such as Putney, Bennington, Burlington, and other Vermont cities and towns are costing up to or exceeding $600,000 per unit. In California, the cost is closer to $1 million.
Why is this the case? First, take the developer’s side; it needs funding to complete the project. Traditionally, such funding came from lending institutions in the form of a construction loan or mortgage. Upon project completion, it would be converted into permanent financing with predetermined interest rates and amortization terms.
However, if there is no interest and amortization to be paid to a lender, the developer can assess lower rents to the residents (who must qualify by having household incomes below 50% of the area’s median income) of said project. This can be accomplished by having the project approved for Low-Income Housing Tax Credits (LIHTC). This is what corporations and high-income investors are looking for. Syndications have even packaged projects to spread the risk.
Instead of having the project mortgaged, the developer engages the same mortgage institution to make an equity investment in the project.
Why would a lending institution do this? Because the amount invested can be carried over ten years as credits against any federal income tax the institution, generally banks, owes from its other sources of taxable income. The credits eliminate some, if not all, of their taxes.
For example, if a banking corporation has $1 millon in taxes due this year and decides to finance a $15 million affordable housing project with $10 million as an equity investor, under the LIHTC program the bank will be able to obtain in year one and for the next nine years, $900,000 in tax credits, thereby reducing what is owed to the IRS from $1 million to $100,000 in one year alone.
The LIHTC has been around since the adoption of the 1986 Tax Code and is credited with the development of over three million housing units. Each year, the number of housing units started by the private sector is approximately one and 1/2 million.
The quagmire involves the time and money required to qualify a project by the federal government, the state, and investors. It has become so complicated that a cottage industry of brokers, lawyers, and accountants has emerged, corralling a substantial source of fees for themselves.
The Cato Institute noted that “the Novogradac accounting firm’s annual guide to the credit (LIHTC) spans more than 1,400 pages.” The Institute also stated, “the agency’s (IRS) guide for examiners of LIHTC projects is 350 pages long.”
The LIHTC’s dollars are allocated to each state government (about $2 per capita) and then assigned to selected developments. This policy, together with the regulations and specifications a developer must adhere to, is the basis of another column. One thing is sure: the cost of ‘affordable housing’ is significantly greater than what it would take to develop market-rate housing, from 10% upwards to 25%.
What exactly is being accomplished? Housing units are being provided for low-income families; developers can build projects almost debt-free; a cadre of professionals have a massive source of fee income; and lending corporations can avoid substantial taxes.
Who then is paying for this housing? The taxpayer is by having the government issue LIHTC, which reduces the amount of taxes collected.
Senator Sanders should not be surprised. It is just one more example of how Congress has allowed the Tax Code to fund social programs.
The author is a U.S. Marine (retired), CPA, and columnist living in Arlington, VT.