Affordable Housing Institute : US

If tax credits are a good idea in the US, why aren’t they used more places?  And where they’re not used, shouldn’t they be introduced?

 

With a tax credit, nice coat of paint, make good, you could fix that up.

 

I’ve thought about this a great deal, and believe there are three main reasons:

 

1. As soft equity, tax credits are the most complex of the four kinds of money, so they require the most complex housing finance ecosystems, and these arise mostly in the world’s developed nations that already have the outer rings of housing finance.
2. Tax credits work best where there are multiple levels of government, so they can be allocated by states and localities, not just central government.
3. Convincing policy makers of the enormous benefit of soft equity’s risk transfer and low administrative costs takes a while, especially if those policy makers have little experience with market phenomena.

 

I’ve had four years to think about these issues, because that’s the period of time AHI and I have been working with UK stakeholders to introduce a tax credit into Britain.

 

The HART Credit system has been developed and promoted in the UK by the Affordable Housing Institute (US); Maritime Housing Association and supported by a professional team of advisors including Baker Tilly [George Bull — Ed.].  They are currently evaluating the market interest for such a scheme in the UK.

 

The UK desperately needs new affordable housing: with relatively immobile labor, tight greenfield development restrictions, and an economy centered on London, UK home prices have shot up.  Affordable housing is scarce as hen’s teeth. 

 

United Kingdom greenbelt development restrictions

 

Working with UK stakeholders including large housing association Maritime, a small group of us developed a version of tax credits, the Housing And Regeneration Tax (HART) Credit, modeled on the best practices of the US:

 

Low Income Housing Tax Credit

Historic tax credit

New Markets Tax Credit

 

The HART Credit is a variation on the Tax Credit system that has been operating for over 25 years in the United States.  The development of over 1 million affordable homes to a value of $US60 billion have been funded in the United States through the Tax Credit system.

 

If I say so myself, HART is nifty.  As we have said:

 

Above and beyond its direct production stimulus to affordable housing and urban regeneration, the HART Credit will deliver to government significant additional benefits, among them:

 

·         Will stimulate higher local values (captured later in rates).

·         Delivers ongoing affordability in schemes that otherwise would include such.

·         Required subsidy levels will taper off as markets improve.

·         Will lever other resources: in deprived areas, ±150%, in high-value areas, HART Credits will lever ±300% (and will buy affordability).

·         Levers up to 80% more private investment (and compatible with asset-based finance rather than entity-level finance).

·         Brings new participants into affordable housing and urban regeneration.

·         Geographically precise intervention in essentially brownfield areas.

·         Closed targeted to delivery of PSA targets (neighbourhood renewal strategy, balancing supply and demand, brownfield redevelopment).

·         Inexpensive for government to administer.

·         Efficient and effective compliance and enforcement

 

HART would make a big positive impact in Britain.

 

Some day, with tax credits, who knows?

 

Two years ago, the Housing Corporation (the UK’s HUD-equivalent regulator and grant administrator), and English Partnerships (its urban regeneration agency), jointly commissioned a study, by the independent consultancy Abros, to develop a thought-experiment comparison of whether HART provides Value For Money (VFM).  For UK (and much of Euroland) finance and Treasury folks, VFM is the holy grail of efficiency. 

 

“We are seven score maidens and ten, and we provide excellent VFM.”

 

As the report opens (link in .pdf):

 

ABROS were appointed by English Partnerships in May 2003 to undertake an independent review of the proposed Housing and Regeneration Tax (‘HART’) Credit.  The review was jointly funded by the Housing Corporation.

 

The ABROS review was to compare the value for money (‘VFM’) to the public sector of HART Credits as against traditional gap funding.  The review incorporated social housing, affordable housing and intermediate market housing.  The review was required to identify possible areas of weakness or actions that could improve the HART Credit arrangements.

 

To perform its thought experiments, Abros identified three case studies throughout the UK, then developed underwriting projections for each using three different funding options:

 

For each example project, the option of a traditional ‘gap funding’ grant awarded to a private-sector promoted scheme (Option 1) has been compared against the HART Credit (Option 2). As a third option, an output-based grant award system has also been tested (Option 3), on the basis that the grant would be awarded to a private-sector applicant.

 

Option 3, the performance-based grant, does not exist in the UK although it is being considered.  In other words, HART was compared against the horse and the unicorn.

 

Hony soit qui mal y pense

 

The HART Credit has also been compared to a Social housing grant (‘SHG’) payment structure to assess the potential for delivering social housing using a Tax Credit.  Under these options it has been assumed that the developer would be a not-for-profit organisation requiring a lower financial return than a private developer. 

 

The study, which is now public, all but endorses HART.  It starts by finding HART cost-effective:

 

The analysis indicates that, based on the input assumptions:

 

·         the HART Credit provides comparable or slightly better direct VFM against gap funded private sector promoted housing projects (which may include Housing Renewal Projects) and Affordable Housing Projects; and 

 

·         the HART Credit compares slightly less favourably in terms of a direct VFM comparison against Social Housing projects. 

 

The VFM magnitude of benefit is thus comparable. 

 

 

But that’s not the end of HART’s advantages.  If government pays after performance (as in tax credits), that is less risky for government than when it pays before performance (as in grants).  Abros agrees:

 

The administration savings and risk transfer are, in our opinion, material issues that should be taken into account in examining whether to implement a HART Credit arrangement.

 

The HART Credit offers the opportunity for significant risk transfer as compared to grant funding – whether SHG [Social Housing Grant — Ed.] or gap funding for privately promoted housing projects.  The above analysis does not take into account this further potential VFM benefit.

 

In finding equivalent VFM, Abros used a conservative yield rate — that is, a high yield for early movers, resulting in a lower price per pound of HART Credit:

 

The analysis is based on a prudent [British for ‘conservative’ — Ed.] discount of 9% on Tax Credits.  Based on experience in the United States, it is expected that as the HART Credit is accepted by the market the discount will further improve the VFM of the HART Credit against gap funding for privately-promoted projects. 

 

In other words, as the UK market becomes more familiar with HART, yields will drop (as they have in the US), prices will rise, and the government will get even better value for its money.

 

 

Like other tax credits, HART also lowers government risk:

 

The HART Credit is most effective on higher risk projects where the developer requires a higher return.

 

Sounds good, doesn’t it?

 

Unfortunately, we currently find ourselves in a position analogous to the aspiring author who received the following critique from Dr. Samuel Johnson:

 

Your manuscript is both good and original, but the part that is good is not original and the part that is original is not good.

 

“And your tax credit’s no great shakes, either.”

 

In the UK, we have met with many government officials and received substantial support, but at the moment, those who support HART are not government officials, and those in government have yet to become HART supporters.

 

But we will keep trying, inspired by my Massachusetts forebears …

 

“Tax credits are coming!  Tax credits are coming!”

 

“Maybe you ought to choose another metaphor, young man.”

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