A North Carolina House committee is considering legislation to close a loophole allowing for-profit companies to take advantage of a tax exemption program intended for nonprofit organizations that provide affordable housing to low-income renters.
But Eric Stein, a senior vice president at Self-Help, a credit union and community development organization, predicts passing the legislation into law will be difficult despite its good intentions.
“There’s going to be a lot of money that private equity has invested in the state and these projects to try to defend it, and so it’s not going to be an easy legislative battle,” Stein said Tuesday during a N.C. Housing Coalition weekly call.
If lawmakers are unable to close the loophole, Stein said, the better course might be to repeal the affordable housing tax exemption program, “because there’s just too much money being lost for too little gain.”
The loophole in current law gives generous property tax cuts to for-profit apartment complex owners that partner with qualifying nonprofits, as NC Newsline previously reported. The program costs local governments tens of millions of dollars in tax revenue each year that would otherwise go to fund schools, libraries, public safety and health and human services.
NC House committee wants to close costly tax loophole for affordable housing
The scheme, described by critics as a “rent-a-nonprofit structure,” allows for-profit apartment complex owners to take advantage of the tax exemption by handing over a fraction of ownership to a willing nonprofit.
The House Select Committee on Property Tax Reduction and Reform is considering changes to the law to close the loophole. The committee was formed by House Speaker Destin Hall (R-Caldwell) to examine rising local property taxes in the wake of taxpayers’ complaints.
Under draft legislation unveiled in March, only properties 100% owned by nonprofits and nonprofits partnering with for-profits and supported by government funding would be eligible for the tax exemption program.
“This draft would update this statute to provide guardrails that would ensure the tax benefit is afforded to those who provide long-term affordable housing, consistent with similar standards” required for Low-Income Housing Tax Credit projects, said Trina Griffin, a staff attorney with the General Assembly’s Legislative Analysis Division.
Many of the properties taking advantage of the loophole are what Stein described as Naturally Occurring Affordable Housing (NOAH), which are usually older properties affordable to low- or moderate-income households without relying on public subsidies.
“There are thousands of these NOAH properties all across the state, any one of which could be susceptible to these partnerships, which we consider to be shams,” Stein said.
Over the past two years, local governments have seen a dramatic increase in the use of the exemption by for-profits that own or purchase existing, already affordable properties, resulting in lower tax revenues but no new affordable housing.
“You can’t really, as the state or the county, let private equity cherry-pick which projects meet the terms of the statute … and get the property tax exemption, where the private equity is doing exactly what they did before, which is putting a little bit of money in and raising the rent higher,” Stein said.
North Carolina lawmakers adopted legislation in 1975 providing tax exemptions for charitable housing for low- or moderate-income renters. The law went into effect Jan 1, 1976.
The loophole in that law was created in 2013, when the N.C. Court of Appeals ruled that Cane Creek Village, a low-income housing project in Mitchell County owned by a for-profit limited liability company but controlled by a nonprofit, was entitled to a property tax exemption under state law.
Northwestern Housing Enterprises, Inc., the nonprofit in that case, owned 0.1% of Blue Ridge Housing, which held the title to the property. A for-profit partnership, North Carolina Equity Fund III Limited Partnership, owned 99.9% of Blue Ridge Housing.
“Both of those things [the Court of Appeals Ruling and the 1975 law] went along fine, except for around two years ago, some big law firms started writing memos, telling private equity that they could mimic a structure of LIHTC, but for naturally occurring affordable housing,” Stein said.
The House committee could vote on the proposed legislation at its April 15 meeting. If approved, the proposal would be eligible for consideration in the upcoming short session.
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