U.S. Sen. Ron Wyden on Wednesday announced a bill he said would close a loophole that's allows large investors to seek outsized profits in taxpayer-funded affordable housing.
The measure is part of a larger housing bill authored by Wyden, an Oregon Democrat who is chair of the Senate Finance Committee. In an interview, Wyden said his goal is to protect low-income housing for the long term, and stop predatory investors from scooping up these properties in cities like Boston and Seattle, where real estate values have climbed.
"Without this change, the problem's just going to get worse," Wyden said. "More and more private equity firms are going to swoop in, gobble up profits at the expense of affordable housing and vulnerable tenants."
If successful, the change would apply to current and future housing deals that use the federal Low Income Housing Tax Credit for funding, he said. Under these arrangements, large banks and other financiers provide funding to build or renovate affordable housing, in exchange for 15 years of tax breaks. At the end of the 15 years, housing specialists say, the nonprofit is supposed to be able to take ownership of the property at a low cost.
That's how the multi-billion-dollar program worked for many years. But more recently, a handful of large investors have been buying the tax credits from banks before the 15 years are up. These new investors are often looking for more than tax breaks, as WBUR has reported; they are in some cases looking to extract large payments from the nonprofits — or to take ownership of the properties.
Wyden's fix is technical but goes to the heart of a dispute that has surfaced in Boston's South End and across the country. It would change a confusing "right of first refusal" for nonprofits to a simple option to acquire the property.
"What we're basically saying is nonprofit organizations don't need approval from private equity firms before buying the affordable units back," Wyden said. "It's a small change. It makes clear what Congress intended."
Such a change would, in theory, affect firms like Alden Torch Financial of Denver, which is locked in a legal battle with Tenants' Development Corp. in the South End, to stop TDC from acquiring 36 low-income brownstones it has managed for decades.
Alden Torch in court has argued that it's a fiduciary with a responsibility to protect its investment clients, and that TDC breached the tax-credit contract by moving to buy the properties without Alden Torch's permission.
Fights like this are playing out in many cities, due to the lack of clarity in the tax law. In Massachusetts alone, nearly 300 properties will see their tax credit deals expire over the next decade, and many could face the same kind of dispute as TDC.
Greg Voyentzie, chief executive of Boston Financial Investment Management, a large firm that manages tax-credit funds for investors, has said he'd welcome a move by Congress to head off these disputes.
Wyden's proposed changes "modifying and clarifying the nonprofit right of first refusal (ROFR) are necessary to address ambiguities under the existing statute, which would be beneficial to all LIHTC stakeholders," he said.
In one recent example of how housing groups have little control over what happens to their tax credit deals over time, American International Group Inc. in July agreed to sell a large portfolio of its affordable housing assets to a real estate unit of Blackstone Inc., a large private equity firm in New York, for $5.1 billion.
In a statement, Kathleen McCarthy, global co-head of Blackstone Real Estate, said, "Our intention as owners is to maintain affordability for these communities. We do not intend to convert any of them to market rate; we want to keep them affordable.”
Wyden said he will introduce his bill when the Senate returns from its August break.