Episode 30: Insights on the Housing Affordability Bill

Transcript

IRIS LAWS

On this episode, we're focusing on the housing affordability bill currently with President Trump for signature. We welcome Derek Smith and Cecilia Farris to give us perspectives on what's in the bill and how to plan accordingly. From your one stop for tax updates and analysis, I'm Iris. It's Tuesday, July 14, and this is “Tackling Tax.”

Well, we are so excited to welcome our guests today. They're going to be focusing on the 21st Century Road to Housing Act, which is an affordability-focused bill that has passed Congress. Full disclosure for those listening on this episode: we are recording on June 30, therefore, the bill is sitting with President Trump for signature. There's some question as to the future of the bill, but we wanted to be sure to get these folks on the podcast to talk about what the proposals are, how you could plan for them, and really how they might impact you.

So, with us today, we have Derek Smith. He's a partner with the firm specializing real estate tax and opportunity zones. And then we have Cecilia Farris, who's a senior consultant in the grant managed services line with the firm. Both perfectly suited for our conversation today; sort of both sides of the coin when it comes to this act. So, with that, welcome to the podcast, you guys.

DEREK SMITH

Thanks for having us.

IRIS LAWS

Derek, I'll start with you. Could you give us some background and sort of how we got to where we are today, where the bill came from?

DEREK SMITH

Absolutely. I think in the media, we've heard a lot of discussion from the administration and from Congress about focusing on providing additional affordable housing options, more housing options, and looking at it from the lens of reducing, or some have discussed cracking down, on institutional investor or, quote unquote “corporate housing ownership” in our country. And this bill generated from that discussion primarily. It was a bipartisan bill supported by both the House and the Senate.

There was some back and forth and modifications. But ultimately, when you look at the bill, it didn't have any impact on institutional investors. There was no prohibition. There is some language that they included that states homes are for people, not corporations. But it did not change the landscape of true housing ownership. Corporations, institutional investors, and other investors can certainly own housing today.

And this bill didn't change that. Interestingly, it did change quite a few items within the funding sources that are available at the federal level. The intent in the bill was to provide additional incentives to revamp or retool some of the existing incentives in an effort to increase homeownership, building more homes by increasing the supply they hope that that will reduce the ever-increasing rental rates that tenants are paying, and it will attempt to provide more affordability through those, retooling of some of those provisions.

That's really what it's about. Then an attempt to build more housing stock, do it a little faster and do it a little cheaper.

IRIS LAWS

And so, there have been sort of precursors to the bill, right? We've been tracking sort of one-offs from different congressmen. And this sort of came together in a bigger package. Is that right?

DEREK SMITH

Yeah. That's accurate. Like many things, you get one-off and, you know, types of things within bills and they look to try to consolidate them into bigger legislation that's a little easier to manage, negotiate, and get across the finish line. And that's where we come up with the 21st Century Road to Housing Act that we have before us.

IRIS LAWS

And ultimately, it's seen as a bipartisan bill, right. So, despite the president's hesitancy, there has been Republican support. Correct?

DEREK SMITH

That's correct. It is bipartisan support. And it really doesn't fundamentally change many provisions. For instance, it changes some of the structure of a few of the housing funding mechanisms within the federal programs. But it doesn't fundamentally change many of those items. It just attempts to provide a little quicker turnaround on, say, approvals in environmental reviews. And, you know, the things in the process of building something that take a long time.

And when you can reduce those three-to-six months within a timeline, that saves a lot of money for the developer, for the investor. And the goal there is by doing that, that will help provide the incentive to build more.

IRIS LAWS

Sure. Okay. Well, that's a lot of great background; sort of how we got here, generally what the bill is. But Cecilia, I'd like to turn to you a little bit. You know, Derek touched on some of the provisions in there. But could you dig into that a little bit more? You know, what are the points that our listeners really should care about? Because there's a lot in this bill, and some of it might affect banks more than some of our listeners. So, could you dig into that a little bit more?

CECILIA FARRIS

For sure. Thank you for having me. And yes, to Derek’s point, that's exactly what I'm seeing as well. The act touches on about 60 separate housing-related legislation proposals in a single package. My overview of the act is, as Derek said, it touches on a lot of things. It doesn't quite; it's not quite an overhaul. But I do think that this act works to provide definitions and expand our understanding of housing.

There's a real bipartisan agreement that the nation's housing challenges stem from supply. You know, if we think about demand and supply, there's obviously a huge demand. This act is hoping to address the supply side. So, that's the headline. I want you to think about that for the impact of this act, how it impacts supply. So, how do you increase supply?

There's three ways to go about it, you know; reduce, expand, update. To Derek's point he's talking about the reduction of the development and regulatory barriers. So, that impacts the construction and real estate industries. You'll be hearing, you know, in the future, the streamlining of environmental reviews, review processes. Something that I keep hearing about too is the act encourages cities to reform zoning and land use rules directly impacting my industry, creating grants and incentives to expand housing development. And then something else that's got people really excited about this act is manufactured and modular housing and how that will increase supply.

This is where I really want to get Derek's two cents, the expanding of financing and investment opportunities. So, Derek, could you tell us a little bit about PWI and the Public Welfare Investment cap and that increase?

DEREK SMITH

Well thanks, Cecilia. I think one of the things, as you mentioned, is the increase in the funding mechanisms and the changing of the funding mechanism. Nothing was altered at its core. But for example, one of the things they did was change the Community Development Block Grant program to allow for new affordable housing construction, not just rehab. That program was geared towards rehab, but they're now allowing a percentage of those grant funds to be used towards new construction.

And if the goal you discussed and we mentioned previously was additional housing stock, this is a great way to do that. They also provided for some new grants that could be used for planning and zoning and infrastructure type items tied to housing. As we know, when you have new, bigger, larger housing developments going in, they need infrastructure and this provides some of those incentives.

Interesting for me, as I deal with a lot of opportunity zones for clients and investors, this provided a carve out, or a percentage of those new program funds or allocations, if you will allow me that, to be utilized, or incentivizing development of housing in Opportunity Zones. Not something that we've seen a ton of in Opportunity Zones. Maybe not single-family homes, but we've seen a lot of multi-family home development in that new incentive.

We've also seen affordable housing going in opportunity zones. Those seem to mix well. The other thing I thought was very interesting was the bill provides incentives and specifically calls out for some adaptive reuse. That's not a new concept for listeners, you know, taking some sort of real estate, housing stock, whatever that might be.

In this case, it would be commercial properties, office, retail that is being underutilized or is vacant and adapting that to a housing utilization in incentivizing that, specifically removing some of the barriers that were in these programs like CDBG. Moreso on the home funding side, providing additional benefits, incentives to doing that adaptive reuse, to developing that adaptive reuse. I think that's a really interesting part of this bill.

I think multifamily development might be a big winner in this because it's going to provide a lot of gap financing and alternatives that they didn't have before that will help with the capital stack and putting these deals together.

CECILIA FARRIS

So, in speaking about the banking, lending and tax industries and this expansion of financing and investment opportunities, that's what I'm really interested in seeing the impacts of this, of expanding access to small-dollar mortgages under $100,000. Increasing, as Derek mentioned, the multifamily loan limits, the changes in the banking industry of raising the PW cap from 15 to 20% and how that will change and impact, you know, these Opportunity Zone communities.

And we'll just see, you know, the changes and the access to homeownership. And continuing with this vein of how do you increase housing supply, we have reduction, we have expansion, and then thirdly, we have updating the federal housing programs. Again, there's 60 separate housing related legislative proposals in this act. Off the top of my head, I can count 10 programs that are impacted by this act.

What we're going to see moving forward is updates to home, FHA, manufactured housing, HUD. And this act seeks to expand scope, revitalize, and again, with the overall point being of increasing the supply of housing. When we're updating, you know, when this act is updating, it's not just updating, it's also creating new programs. Again, off the top of my head, I can count about six programs that are being created. An interesting one is the Innovation Fund. Another, I'm in Texas, so another one that I think is interesting is the Temperature Sensor Pilot Program. Yeah, so.

IRIS LAWS

Important to you?

CECILIA FARRIS

Yes, yes. Important to me and the entire country, I'm sure. But yeah, we have a real drive to be innovative and, you know, be forward thinking in our endeavor to increase the housing supply in a way that’ll be, you know, just beneficial to residents for decades to come.

IRIS LAWS

Well, all great perspectives, Cecilia. Thank you for that overview. You know, shifting a little bit. This is a tax podcast, right? And I'm not hearing you say that there's anything in the IRC necessarily directly amended by this act. That being said, you know, why are we doing this on a tax podcast? Why are we talking about this?

And I think the answer to that is really that there are tax strategies that come along with some of these changes that our listeners, you know, could and should be leveraging. Derek, when we think about tax strategies, whether that be the Opportunity Zone play that you talked about, whether it's 1031 or some sort of restructuring LIHTC credits. What are you talking to your clients about? Thinking obviously this is not currently a law, but if it were to pass, what would be some of those conversations?

DEREK SMITH

Yeah, I think one of the strategies is a discussion around the adaptive reuse concept and the incentives under this new act; if it becomes law, what does that mean? For a developer, they can begin looking at alternative sources of funds that can be used to fill a gap. And those funds, they may direct them to a specific type of asset that they want to purchase and then adapt it to, you know, home ownership or adapt it to rental housing from that standpoint.

So, I think that's one of the things we're talking about. As with anything where we look at it through the structuring lens or the incentive lens, you know, it looks at it from what benefits both the investor and the developer, but ultimately, what is the market going to bear? And I think what our clients are also looking at is if there's a large increase through this, the provisions in this act, of housing stock, that means there's going to be pressure on rents.

There's going to be a need to shift from maybe new construction to rehab or for a different type of asset, like the modular as Cecilia mentioned, the modular housing that people are talking about. Okay, how do we implement that into our development process or how will that begin to benefit us? You know, modular construction has been out there for a long period of time.

And this complements that idea of modular construction. Take for instance, our low-income housing tax credit program and affordable housing tax credit program. They've been looking at ways to implement modular construction or modular housing development and construction into the affordable housing stock. And this helps complement that, right? And I think you'll see investors or developers maybe move to more affordable housing models if they have the availability of more funding sources like we've talked about.

I think that's another discussion point that is out there. Opportunity zones are more and more a part of the discussions when we look at development, and I think having these one or two additional discussion points are helpful. I think finally, one of the things that isn't talked about a lot so far in the bill is the goal, at a federal level, to try to incentivize reform on the development side.

And by that, I mean providing and, you know, sort of funding sources, incentives, grants to local, state, governmental entities and locations in order to provide a quicker time for permitting, a shorter timeline for environmental review, looking at it as an opportunity to consolidate some of those things. If you have three different funding sources and they all have a separate environmental review, providing in the act for a way to consolidate that, not remove it, not remove the environmental review, but consolidated so you don't have three different people or organizations involved in that.

So, I think that a lot of what will come out of this bill is the idea of trying to, not only as we've mentioned previously, like Cecilia said, provided for more for an increase in the housing stock, but also provide for ways to shorten the timeline on the development side, which will mean, you know, faster production, cheaper production, and ultimately a benefit for everybody.

IRIS LAWS

Derek, I did want to ask you because you mentioned right at the beginning there was no fundamental change into what kind of entity can own single-family housing, but there was an act, or a piece of this bill, that limits the number of single-family homes that an entity can own. Can you speak to that? Because I think that's potentially one of the most impactful, because some of our real estate funds and that kind of thing that we're looking at.

DEREK SMITH

Iris, it's a great question about ownership versus acquisition in the bill. I think the bill speaks to large institutional investors and defines them as owning greater than 350 or more single family homes. And what it doesn't do, it doesn't require that large institutional investors divest or sell those assets.

What it does say, if you're over that, we're going to prohibit, under various provisions of this law, you from acquiring any more of those single-family homes. Not that you can't own multifamily home projects or you can't own five or 10,000 units, just that if you're at this level, we believe it's the best interest of the country and our citizens for that to be capped, you can't acquire any additional units.

And it does have some related-party rules and there's various exceptions we don't have time to go into, but there are some exceptions to this. It doesn't prevent those investors from selling those units at any point in time. And if you're not at 350, you can continue to acquire until you get over that.

The one thing that we want to differentiate in that commentary is acquisition versus ownership. So, previously we discussed it doesn't prohibit large institutional investors from owning. And that's correct. It does then put some handcuffs on their ability to continue to grow that portfolio.

CECILIA FARRIS

Restrictions.

DEREK SMITH

Yes, great. Thank you, Cecilia. Restrictions on that. And so, that's a little bit of a nuance there worth discussing with folks.

IRIS LAWS

Well, great clarifications and insights there, Derek, on the tax front. But I think what we're saying, right, is that most directly in the legislation itself really is grants and funding. And that's the space that you play, Cecilia. So, wanted to talk to you a little bit about, you know, there's a lot in here. What's the lowest hanging fruit when it comes to the grants and other sort of incentives in the act?

CECILIA FARRIS

Sure. So, I mean this is all really interesting and really exciting and, you know, breath of fresh air, but we won't know the exact funding levels. We won't know implementation details and timelines for a while, right? We'll have to see how this plays out in Congress, HUD guidance. So, I think my big takeaway or you know, is it's coming, but I don't think it's coming tomorrow.

IRIS LAWS

Oh, wow. So, while we have general overviews, it's not a reality yet, right? Like we're still trying to figure out how it would manifest itself?

CECILIA FARRIS

Yes. For sure. For, you know, anybody listening that’s interested in these grants, I think, you know, preparation is key. I think we have, you know, we're at the starting line. Lace up your shoes, start preparing, looking at these housing planning implementation grants. Look at your community. Look at your projects that would benefit your housing needs assessments. Identify maybe development-ready opportunities and then start forming partnerships I think would be the lowest-hanging fruit, what you could do now to prepare.

So, again we're talking about 60 separate, I keep repeating myself, 60 separate housing-related legislative proposals in this package. It’s 140 pages but 60 separate.

I mean, so, you have 10, at least 10 federal agencies that are impacted. There's at least six new agencies/opportunities created. So, do your homework, you know, read the act and provisions, read about the programs, what applies to you, what applies to your community, what applies to your organization, and have an idea of where you want to go because you have to streamline a little bit because this act is so comprehensive and far reaching.

Pitfalls are something that I would like to steer people to pay attention to is, I think this administration and this act and the bipartisan, you know, support of this act. They're going to want to see outcomes. So, expect outcome-focused oversight. You know, there's a lot of capital behind this, right? They're really wanting to increase. So, you have to show that you are increasing. You have to hold up your end of the deal.

And then something that I do see in my day-to-day is a lot of people underestimate the federal compliance requirements and reporting. And, you know, a lot of people will wait until the last minute and then, you know, what do we do? How do we do it? So, this is a great time to start researching what is going to be directly relevant to you, the requirements around it, and then start preparing yourself, having staff, you know, that's also something I see often enough.

People underestimate, you know, they think, oh, you know, so-and-so can do it because, you know, they do everything. You know, they do the accounting, they do, you know, and they'll be able to do that as well. And then that poor person is just buried.

IRIS LAWS

Right, right. So, you need not only the staff to take care of this, but also, you know, control of your data and enough documentation to support something like this.

DEREK SMITH

May I ask you a question, Cecilia?

CECILIA FARRIS

Yeah, for sure.

DEREK SMITH

In your consulting role, how do you help clients with this type of program and financing sources and grants to help them with this type of thing?

CECILIA FARRIS

Yeah. So, I mean, from cradle to grave, you know? So, we help them look for funding opportunities. We help them apply, complete the application, to have the supporting documentation for the applications. The applications sometimes ask for pre-planning. They want to see the stuff I kind of talked about in the application. So, we help the client think about that.

You know if we're fortunate enough to receive that grant, implementing it, having processes, implementing that grant into the community, tracking. And then, if you have like single-audit requirements, you know, we're helping you document that through the lifecycle of the grant so that when we get to that, you know, we have everything, we have everything documented and we can complete reporting, complete your audit requirements. And, you know, keep the tax man happy as well.

IRIS LAWS

Well, to round us out, Derek, I just, you know, I think a lot of people hear this discussion around real estate, construction, and banking and think, well, if I'm not a bank or a real estate developer, what do I care? So, why should our listeners who aren't necessarily in those industries care about this?

DEREK SMITH

Great question, Iris, and housing impacts us all. If you're a manufacturer or if you're a business owner or you're running a, you know, a health system, you know, all of our team members, our employees.

CECILIA FARRIS

We all live in housing.

DEREK SMITH

That's right. That's exactly right. So, this matters for everybody. And more housing stock, more affordable housing stock helps our workforce, helps our teams, helps our visitors to our communities.

And so, it's important for everybody. And it also is important because these funding mechanisms, it’s a fight for resources, a fight for financing, and that impacts others as they're going to, you know, do a plant expansion or they're doing an addition onto their business, or they're adding a new location.

These all impact us in various ways. And I think that's why it matters to everybody, even if you're not in the development game or in the real estate business or you're not an investor; they are in competition for some more financing sources. And ultimately, you know, having a larger supply of housing helps benefit all of our people.

IRIS LAWS

Perfect. Well, thank you both so much for being here. This is really helpful. And hey, if this thing gets passed, maybe we'll have you back on for some quick thoughts depending on what happens. So, thank you all for your time and we'll see you soon.

CECILIA FARRIS

Thank you.

DEREK SMITH

Thank you.

IRIS LAWS

Each episode will bring you what we call a “Focused FORsight of the Week,” an article or webinar that might be of interest to you. We've got a short alert posted about the Housing Act currently titled “Housing Bill Passes; With President Trump for Signature.” So, you can expect a lengthier thoughtware piece from our real estate team when and if this legislation becomes law. So, definitely keep an eye out for that.

And that's our show. Thanks for joining. Remember to subscribe and listen in for the next episode of the podcast. Until next time.

ANNOUNCER

The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.

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