What’s At stake for the apartment industry With the november election soon upon us and the 113th Congress getting to work in January? Given the paucity of even lip service President Obama and Republican Mitt Romney have paid to the housing crisis, it’s a tough prognostication. But industry advocates targeting key players in both parties are offering insight—ranging from sobering to encouraging.
A variety of issues will face Congress, among them government-sponsored enterprise (GSE) reform; tax reform, including the low-income housing tax credit (LIHTC); and capital-markets regulations affecting commercial mortgage-backed securities (CMBS).
While it’s doubtful either party will have a sufficient majority to ramrod through truly controversial legislation, wide-ranging tax-related reforms will no doubt “all be on the table,” observes Michael Berman, immediate past chairman of the Mortgage Bankers Association.
All of which creates quite a diplomacy challenge for the industry’s chief lobbying body, the Joint Legislative Program of the National Multi Housing Council (NMHC) and the National Apartment Association (NAA). NMHC president Doug Bibby must garner support for industry positions from one party aiming to cut subsidies that help the sector, and from the other party likely to tax more of its profits.
If Romney wins and the GOP retains control of at least one congressional body, the industry’s job will become tougher. After all, public-sector participation benefits the apartment sector but runs counter to prevailing Republican philosophy. “If they’re willing to go after Medicare and Medicaid,” says Berman, “it’s hard to believe they’d support Sec. 8 and LIHTC.”
Then again, greater Republican control would reduce the likelihood that apartment moguls would get soaked by higher taxes. Romney earned his fortune in private equity and hence seems far less likely to push for treatment of carried interest as ordinary income rather than capital gains. A switch to ordinary-income rates for what real estate investors refer to as “promoted interest” could essentially double an investor’s tax obligations, as Jerry Fink, managing partner of Irvine, Calif.–based Bascom Group, is quick to point out.
But if free-marketers reduce Sec. 8 rental-assistance allocations, the impact could be disastrous for low- and moderate-income residents, and their landlords. The same follows for developers in secondary and tertiary markets if Sec. 221(d)(4) and related Federal Housing Administration (FHA) insurance programs are diminished, Fink warns.
The next congressional term will likely witness contentious debates over the long-term fates of Fannie Mae and Freddie Mac. Industry insiders anticipate a spinning out of the GSEs’ multifamily operations into private businesses—hopefully with some public credit enhancement of securities.
Experts generally agree that Democrats are more likely than the GOP to support a spin-off of the GSEs’ highly profitable multifamily programs, but they don’t expect swift action. When the GSEs are addressed, Berman expects the single-family sector, rather than the multifamily operations, to dominate the focus. “So as desirable as a multifamily spin-off of some sort may be, it seems unlikely in the near term,” Berman says.
The NMHC/NAA Joint Legislative Program (JLP) continues to lobby for a “separate solution” from single-family activities. Berman, meanwhile, supports the notion that credit and interest-rate risk ultimately needs to be transferred to the private sector. He recommends that at least the senior-most mortgage securities classes be credit-enhanced by a federal guarantee, to maintain liquidity throughout economic cycles.
The industry consensus appears to be that a Republican leadership would be less likely to pursue higher rates for high-income investors and operators than would a Democratic leadership, particularly where carried interest is concerned.
The 113th Congress seems certain to take up tax-related issues. And this will almost certainly include tax-related proposals with meaningful implications for the multifamily sector, perhaps including interest deductibility and the LIHTC program.
While Bibby acknowledges that many would welcome a simpler federal tax code, the JLP’s general position is “stand pat.” The lobby opposes any increases in current federal income-tax rates for carried interest or partnership income and, of course, any changes to business-interest deductibility.
Under a turn to the right, key programs supporting the multifamily sector—FHA mortgage insurance, Sec. 8 rental assistance, and even the LIHTC—could potentially see allocations reined in as Republicans look to cut spending and streamline revenues by targeting entitlements and tax expenditures.
The industry will likewise continue to educate legislators about just how important key federal programs are to apartment sector interests—and to low- and moderate-income Americans.
The fiscal year 2013 budget passed by the House entails less funding for project-based assistance than the counterpart measure currently winding through the Senate and, in fact, represents a funding cut from the current fiscal year’s budget. “That’s cause for immediate alarm,” Bibby relates.
Late 2013 should see more serious efforts to return liquidity to the semi-stalled CMBS arena, as lobbyists push regulators and legislators to at least temporarily ease risk-retention and other rules proposed as part of the Wall Street Reform and Consumer Protection Act. As NMHC vice president of capital markets David Cardwell stresses, the industry is pushing for rules that don’t unduly boost securitization costs and promote, rather than impede, liquidity via conduit lenders.
Berman believes a longer-term structural revision including built-in risk-retention mechanisms would create a more stable CMBS market. He’s willing to consider a Republican push to “dilute” risk-retention rules for a couple of years, which would help attract more capital back to the arena.
“But for long-term stability, we really need a better [structural] model,” Berman concludes.
Brad Berton is a freelance writer based in Portland, Ore.