Trump tax law's affordable housing boost hits snag

Rachel Wisniewski/Bloomberg

The US government's largest affordable housing program was supposed to be supercharged by President Donald Trump's signature tax law. So far, that jolt hasn't arrived. 

That's because, investors and developers say, their efforts to take advantage of the dramatic expansion of the Low-Income Housing Tax Credit have bumped up against some unintended consequences.  

In particular, the law increased the potential size of any given affordable housing development deal eligible for the credit — but that, in turn, means few banks are able to finance them under the complex rules of the program. 

"The market has slowed pretty dramatically," said Jeff Jaeger, co-founder of Standard Communities, which invests in affordable housing. 

Construction at an affordable housing development in Coatesville, Pennsylvania. Photographer: Rachel Wisniewski/Bloomberg The lack of momentum underscores the challenge GOP lawmakers face in showing progress on addressing the US housing shortage ahead of midterm elections expected to center on cost-of-living issues. It also raises the stakes for housing legislation that is currently stalled on Capitol Hill and includes fixes that would lift the constraints on new LIHTC deals. 

Those changes could be "an important part of helping stabilize demand," said Peter Lawrence, the chief public policy officer at Top 100 Firm Novogradac. 

More capacity

Last summer, Congress tweaked the LIHTC program — which provides tax credits to developers who create new, low-cost homes — by expanding the number of credits available to developers in a single year and lowering the required amount of public funding for each deal. Experts said the changes could add the capacity to build 1.2 million more units of affordable housing in the next decade than was possible under the old rules. 

That led housing advocates to hail it as the most effective update to the program in a generation. Yet it's come with some hurdles. 

The expansion has eroded the value of the tax credits, which developers and other LIHTC participants like to sell to companies looking to reduce their tax bills — now that there are more credits available for sale, they cost less.

And even more crucially, it's led to challenges in securing financing for deals involving the credits. Banks face a cap on so-called "public welfare investments" as a percentage of their regulatory capital. That means the lenders large enough to finance major projects are limited in how many such housing developments they can back. 

While the biggest banks likely haven't hit their limits, some regional banks are approaching theirs, making it nearly impossible for them to make the investments needed for large new affordable housing deals, Lawrence said. 

New housing legislation aims to raise the cap from 15% to 20%, along with a host of other measures such as limits on institutional investors buying single-family homes. But that bill is hardly a sure thing to pass — leaving the industry mired in uncertainty.

Emily Cadik, chief executive officer of the Affordable Housing Tax Credit Coalition, said changes to rules governing banks would remove a choke-point for LIHTC deals. Without the changes, "we're leaving on the table potentially billions of dollars in private-sector investment," she said.

Cadik, whose group represents banks, developers and investors who participate in LIHTC deals, said last year's expansion has helped increase the number of new affordable housing projects underway; it just hasn't done as much as it could do. 

The public welfare investment cap is not the only factor limiting affordable housing developments, to be sure. This month, Enterprise Community Partners, a nationwide affordable housing nonprofit, released a study that found the development of nearly 40,000 new units in California was stalled because of a lack of public funding.

Unlocking investor appetite

A 2024 survey of 22 banks found that more than 42% of the $14 billion they contributed in LIHTC investments that year came from institutions approaching the 15% cap. The survey was conducted by the AHTCC, the Affordable Housing Investors Council and the National Association of Affordable Housing Lenders.  

"There are a few banks coming close to their PWI cap who are very eager to see it raised," said NAAHL president Sarah Brundage. "We do view this as unlocking more investor appetite."

Cadik said developers are also hoping the changes would make more companies willing to dip a toe into the program. 

Companies can participate in a variety of ways, including buying tax credits, offering construction loans and other kinds of gap financing for LIHTC deals, or even providing long-term, below-market-rate land leases. They can say they are contributing to efforts to increase affordable housing supply — and potentially burnish their public image.

Tech giants like Microsoft Corp. and Amazon.com Inc., as well as retailers like Urban Outfitters Inc., have already participated in LIHTC deals. Amazon has provided low-cost, long-term loans to LIHTC projects as part of its strategy to support affordable housing in areas where it has a large presence. Urban Outfitters recently bought LIHTC credits, according to regulatory filings, in a move that likely reduced its overall tax bill. 

Senthil Sankaran, managing principal of the office inside Amazon that funds affordable housing in places like Seattle and Washington, said he has already noticed a change in activity related to the program. 

"If anything, there are larger gaps in these projects, so there's a greater demand for the type of funding that Amazon does provide," he said. 

An Urban Outfitters spokeswoman did not respond to requests for comment. A Microsoft spokeswoman declined to comment. 

The bills on Capitol Hill that would modify LIHTC face obstacles to passage — including that Trump has vowed he won't sign any legislation until a voter identification bill has passed. Still, Lawrence of Novogradac sees reason for optimism. 

"I've been in Washington for 25 years working on things related to affordable housing policy and I've never seen Congress so interested and engaged," he said.