Targeted Tandem, Builder Profits and Rents: A Simulation Study

摘要

This paper makes estimates of after - tax rates of return on equity invested in Government National Mortgage Association (GNMA) Targeted Tandem and Section 8 Tandem projects under the following assumptions: (1) that program project characteristics are typical of Tandem experience, and financing is done through 7.5 percent subsidized mortgage interest rate loans made during 1978 - 1979; (2) that projects characterized by (1) are coupled with special tax treatment afforded investors in low - income projects (Section 8); and (3) that projects characterized by (1) and (2) are financed at market interest rates for otherwise equivalent rental units. A model simulates the impact of tandem on builder - developer profits, using data based on 22 Targeted Tandem and Section 8 Tandem projects in Philadelphia, Pa., New York City, N.Y., and Sacramento, Calif. A baseline case is established from sample mean project characteristics against which the simulations are compared. The principal conclusion from the simulations is that Tandem financing results in rates of return to builders much higher in after - tax terms than would be available under conditions of market rate financing. Secondly, profitable projects, after tax, may generate negative cash flows and may thus be rejected on an a priori basis. It is contended that either flexible rate financing or an auction process would be more efficient in subsidizing Section 8 Tandem construction than is the current before - tax underwriting and mortgage subsidy scheme. Furthermore, if excess builder profits are fully passed on to renters in Section 8 Tandem projects, rents would be about 25 percent lower than in market - rated financed projects. But since the supply of subsidized projects is low relative to all rental units, all benefits of the Tandem subsidy are capitalized into prices and captured by builder - developers. The Tandem program, although not significantly affecting the housing stock, may have a significant counter - cyclical effect, but the evidence on this is not definitive. Tabular data, footnotes, and nine references are given.