Government leaders and local building officials are getting most of the blame for Utah County's housing shortage - when the 1986 Tax Reform Act may be the real culprit.
Many builders and developers say they are building fewer apartment complexes because of restrictive zoning and building regulations. They say it is getting much harder to find property zoned for multi-unit development.However, most city officials say zoning is not the problem. In fact, the Zoning and Building Regulations Committee of the Utah County Housing Task Force said the primary reason for the housing crunch is apartment complexes are no longer a profitable venture for investors.
Local bankers say city officials are right.Harder to get a loan
"For the developers who used to develop large tracts of land before,
financing has just tightened up dramatically," said Gary Robison, branch manager of Medallion Mortgage in Orem.
A few years ago, banks and mortgage companies began requiring a cash down payment of between 25 percent and 30 percent for non-owner occupied housing. Also, in 1989 the Federal Housing Administration quit issuing loans for non-owner-occupied housing.
Most loans on large rental proj-ects are short-term, and many require balloon payments at the end. Rental properties also are subject to higher commercial lending rates.
"It's become much more difficult to get a loan to build apartments," Robison said.
Caused by 1986 tax reform
Most financing experts are blaming the stringent financing guidelines on the 1986 Tax Reform Act, Robison said. Because the act removed many of the tax advantages of owning rental property, investors in real estate did not care if banks foreclosed on their loans. This was a major cause of what is now known as the savings and loan crisis.
"The people who were mailing in their keys were those with loans on non-owner-occupied housing," Robison said.
The strict regulations now used are there to protect banks and other lending institutions from experiencing another crisis, Robison said. And because financing regulations are established by national trends and needs, don't expect the financing restrictions to change because of local housing needs.
Can't deduct loss on taxes
Brent DeMille, president of the Utah County Board of Realtors, agrees that one of the main reasons for the decline in construction of rental units is restrictive financing and the loss of tax advantages. The passive-loss deduction done away with by the Tax Reform Act is mostly to blame, he said.
Those who invest in rental property can no longer deduct their losses from other income. For this reason, investors almost have to be guaranteed of making a profit before moving forward on a project.
"Many investors are saying `If I can't get what I want out of it, why have the headache?' " DeMille said.
Because the profit to be made from rental rates is the only incentive remaining for investors, it is unlikely high rental rates will decline.
Higher rent lead to more building
In fact, the higher the rates are the more attractive rental units are to investors, DeMille said. If rates drop, construction of apartments likely would come to a standstill.
"If you own a home you don't have to make a profit on it. If it's a business venture, then you have to make a profit. For most tenants that's hard to see," DeMille said.
Even though the tax breaks are gone, DeMille said owning rental property has its advantages. If a person has enough cash for a down payment, he likely can make between 6 percent and 10 percent on his initial investment. Also, the equity gained over the life of the loan provides a good retirement investment.
"If you don't expect a lot of immediate profit and do it for the long-term benefits, rentals are still a good investment," DeMille said.
Utah Valley: No vacancy
Tomorrow: Doubling up - sharing housing, sharing the cost.
Wednesday: Charitable efforts to build low-income housing.
Thursday: Shortage of housing for middle-income families may be a matter of taste. Also, young professionals also out in the cold, or still in student housing.
(Additional information)
Is a duplex a good investment?
Estimated finance data:
Price $100,000
Down payment 30,000
Amount financed 70,000
Rental income $12,000 (2 units times $500 times 12 months)
Less annual loan payments $6,760 (At 9 percent interest, $563 per month
for 30 years.)
Less operating expenses $3,600 (Insurance, sewer and water, accounting
and legal costs, advertising and permits, property management, taxes, repairs, services and miscellaneous supplies.)
Net cash flow $1,640 About a 5.5 percent annual return on $30,000 cash investment.
"If you don't expect a lot of immediate profit and do it for the long-term benefits, rentals are still a good investment." - Brent DeMille, Utah County Board of Realtors president. The equity gained over the life of the loan provides a good retirement investment.
(Additional information)
Apartment Construction: Utah County
1983: 478
1984: 629
1985: 342
1986: 544
1987: 353
1988: 139
1989: 86
1990: 323
Source: Bureau of Economic and Business Research, University of Utah, Utah Construction Report.