In a Nutshell: Multifamily and the President’s Budget Proposal

Budget 2017 Copyright Underverse — Copyright: Underverse

President Obama released his final budget proposal for the 2017 fiscal year on February 9. The budget is traditionally used to lay out the Administration’s priorities in the coming year. Although the President’s budget as a whole has little chance of being enacted, it’s not unusual for the budget’s individual provisions to be enacted as part of other legislative proposals. For this reason, NMHC/NAA pay close attention to the budget process and, once again, a number of critical issues that would impact the multifamily industry are addressed in this year’s proposal.

Housing and Affordability

The HUD budget proposal includes an increase in funding for both the Section 8 Housing Choice Voucher and Project-Based Rental Assistance Programs. It also provides for additional money for the preservation of affordable housing through the Rental Assistance Demonstration (RAD).

In addition, HUD is seeking programmatic changes similar to those found in NMHC/NAA supported legislation entitled the “Housing Opportunity Through Modernization Act of 2015.” This legislation unanimously passed the House in January with a vote of 427-0. The bill includes simplified income calculations for rental assistance, but we are encouraging a more ambitious review of regulatory burdens imposed on owners and managers. We are also supporting enhanced transparency related to the calculation and publication of fair market rents, elements of which are included in the President’s budget proposal.

HUD has requested $300 million for a newly proposed Local Housing Policy Grant program aimed at reducing barriers to housing development and increasing housing affordability. We look forward to working with HUD to identify land use regulations, permit, and code and process challenges that encourage, not inhibit, the development and preservation of affordable housing.

Sustaining the allocation for FHA multifamily lending activity, when paired with a recent decision to modify insurance premiums for certain FHA multifamily loans, will also benefit rental housing markets across the country.

Tax Policy

On the tax front, the President’s budget proposal would significantly inhibit the construction and development of multifamily housing. Specifically, the President proposes to:

Limit the amount of capital gain that a taxpayer may defer as part of a like-kind exchange to $1 million per year;

Increase the maximum capital gains rate from 20 percent to 24.2 percent;

Tax carried interest generated through real estate activities at ordinary income rates instead of current-law capital gains rates; and

Impose a 3.8 percent surtax on pass-through income, including ordinary income and capital gains that is not currently subject to the self-employed contributions tax. The surtax would apply to individuals earning over $200,000 and joint filers earning over $250,000.

More positively, the President is proposing constructive steps to bolster the successful Low-Income Housing Tax Credit (LIHTC) that has financed nearly 2.8 million apartments and served 13.3 million residents since its inception in 1986. In particular, the budget proposal would enable states to convert unused private activity bonds into low-income housing tax credits. Finally, housing affordability would be bolstered by enabling the LIHTC to serve families earning up to 80 percent of area median income (AMI) so long as 40 percent of the units in a given development are reserved for people whose average income is below 60 percent of AMI.

Operations and Risk Management

Increasingly, apartments are confronted with growing numbers of flooding events nationwide each year. The President’s budget proposal has the potential to impact aspects of business operations and property management for multifamily firms in this area. The proposal includes:

A $3111 million request for the National Flood Insurance Program’s mapping efforts, which impact the rate multifamily property owners pay for flood coverage; and

Prioritizes pre-disaster mitigation efforts to lessen taxpayer liability after a flood disaster by investing $54 million in the Federal Emergency Management Agency’s (FEMA) Pre-Disaster Mitigation Grant Program.

Technology and Risk Management

Technology is rapidly changing the multifamily industry. Operators of apartments rely on web-based connectivity for property operations, as well as corporate functions. Apartment residents increasingly want more, better and faster telecommunications services. With the increased reliance on telecommunications services at apartment communities comes the heightened risk for data breaches and the theft of highly sensitive information.

The President’s budget addresses several important cybersecurity and broadband access priorities for the industry:

Provides continued funding for the ConnectHome Program to expand access to broadband to children and families living in HUD-assisted housing across the nation;

Bolsters our nation’s cyber defenses with a historic 35 percent increase in funding allocated to cybersecurity; and

Implements the President’s “Cybersecurity National Action Plan (CNAP),” which provides near-term and long-term strategies to address the growing challenges of cybersecurity faced by government, businesses and consumers.