Study Links Tax Reform, Higher Rents

Increased apartment construction has been touted as the solution to the continuing affordability crisis in housing. If this is true, and if tax reform becomes a reality, then the affordability crisis will get a lot worse before it gets any better.

This is the view of Lester Day, president of American Diversified Capital Corp., Costa Mesa, chairman of the Multifamily Housing Task Force of the National Assn. of Home Builders.

Obstacle Seen

“Anything that happens in tax legislation will diminish production of apartments,” he predicted in an interview.

The task force study says that the single most important issue raised by the task force is affordability: “Because of a number of factors, including high interest rates, rising costs, an uncertain tax environment, reduced federal government involvement and the lack of a secondary market for new rental construction, builders have found it virtually impossible to construct new rental housing for low-income families.”

The situation is critical, according to data in the report: In 1982, the number of unassisted rental units produced in the nation was 121,000, less than 25% of the 535,000 produced in 1972.

Much has been said about the increase in the prices of for-sale housing, but the situation is worse in rental housing which has had a 37% increase in rental rates since 1980. This compares with a 10% increase in median house prices for the same period.

“Without tax incentives for investors in syndications there would be very little multifamily construction,” Day said. His views about syndications and other forms of tax-shelter real estate investments are echoed by Michael J. Amenta, national real estate partner of the Philadelphia-based consulting and accounting firm of Laventhol & Horwath.

Speaking recently on Brian Banmiller’s San Francisco-based CBS radio program, Real Estate News, Amenta said that if the drastic tax reform proposals advanced by the Reagan Administration and Congress are enacted, owners will have two choices: “They could lower the value of their investments and agree to take substantially less when they sell, or they can raise rents sufficiently to offset the loss in tax benefits.”

He added that the most logical action would be for investors to raise rents “which would have the effect over the intermediate term of preserving their equity. Preservation of equity has been the primary consideration to investors throughout the world for thousands of years.”

Day said that the attempt to penalize all tax shelters, a major element of all the tax reform plans, is overkill that can be traced to “some abuses” in the syndication industry. Large public syndicators currently tend to concentrate on existing projects--a situation that will increase if the reform measures are passed, he believes.

Needless to say, the task force is opposed to rent control: “The end result of rent control has been a further reduction in the number of affordable rentals in areas of the country where they are most needed.”

An area that could stand drastic improvement is the establishment of a secondary mortgage market program for new rental projects, the report states. Currently, neither the Federal Home Loan Mortgage Corp. nor the Federal National Mortgage Corp. finances new projects. The Home Mortgage Access Corp. (HOMAC) has no current plans to establish programs for either new or existing multifamily rental projects. “There is a particular need for a secondary market program for small apartment projects,” the report states.

Day said that new multifamily housing production has been negatively affected by frequent changes in tax laws over the past decade. One particularly bad example, he cited, was the Economic Recovery Tax Act of 1981 that sought to encourage capital investment in real estate by allowing a depreciation schedule of 15 years. The effect of this act was to encourage syndicators to look at existing projects rather than at new, unproven real estate developments.

He emphasizes that he isn’t against existing projects, only in favor of increasing production of new rental projects; both are needed to meet the demands of the nation.

The report’s policy recommendations are divided into tax issues and housing-finance policy issues.

In the first category, the task force urges:

--Strong opposition to elimination of “at risk” rules that make the debt financing a non-recourse transaction in which the investors are not held personally liable for the mortgage. The current rules are key incentives to apartment investment.

--Continuance of revenue bonds for housing.

--Elimination of recently enacted original-issue discount rules rules to stimulate reinvestment in existing multifamily projects.

--Maintenance of the 15-year depreciation for low-income housing and the elimination of the alteration of depreciation rules.

--Opposition to flat tax proposals.

--Encouragement of increased favorable tax credits for rehabilitation.

In the housing finance policy sector, the task force urges:

--Establishment of a broad coalition to examine subsidies and alternatives necessary to produce low- and moderate-income units.

--Promotion of the expansion of the new Housing Development Action Grant (HoDAG) program.

--Establishment of public-private partnerships with federal, state and local governments, builder/developers, and private foundations.

--Active opposition to rent control.

--Encouragement of secondary market sources to establish a small apartment and forward commitment production programs.

--Maintenance of benefits of equity finance through syndication.

--Extension of eligibility of HUD Section 202 elderly housing for limited-profit entities.