Protecting and improving the Low Income Housing Tax Credit is critical to the future of affordable housing.
The Low-Income Housing Tax Credit (LIHTC) remains the most important resource for producing affordable housing in the U.S. Created by the Tax Reform Act of 1986, the LIHTC program, which is administered through state and local allocating agencies, has helped finance more than 3 million affordable housing units across the country. Congress authorizes approximately $8 billion in budget authority annually to allocating agencies for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households.
Still, demand outpaces supply.
Every year, more applications are submitted than tax credits available. With the cost of construction and land increasing and sources of soft funding becoming ever more elusive, producing quality affordable housing is increasingly difficult.
Yet, there is good news.
Affordable housing developers were jubilant at the end of last year when President Obama signed into law a bill passed by the House and Senate that made the nine percent tax credit rate fixed and permanent. This legislation, the culmination of a multi-year effort by housing advocates, established a floor of nine percent for the tax credit rate awarded to developers in competitive tax credit rounds that occur annually in every state in the country.
Prior to this fix, the nine percent rate was a maximum rate and it could “float” based on variables such as long- and short-term interest rates. During some periods in the not too distant past rates dipped under eight percent causing significant shortfalls. Housing advocates are applauding the certainty that tax credit awardees now enjoy in accumulating sources of funding for their developments, since the nine percent rate will no longer fluctuate.
With the establishment of the new nine percent minimum rate the equity raised through the syndication of low-income housing tax credits has increased by 20 percent, enhancing the financial feasibility of new affordable housing developments in an environment where other state and local subsidies have decreased.
The passing of this legislation last year also heartened housing advocates because it signaled that the success of the low-income housing tax credit program has been established. In this era where the cries for comprehensive tax reform are ubiquitous, this tax preference has survived scrutiny.
Robust market for credits
Equity pricing has remained strong, recovering after the 2008 recession. In the strongest markets, investors are bringing capital contributions to projects with tax credit benefits well over one dollar allowing more affordable housing developments to achieve feasibility with tax credit equity, permanent financing and not a lot of soft funding. This is especially true in qualified census tracts and difficult development areas where tax credit basis is increased by 30 percent.
The success in 2015, combined with concerns of continuing income stagnation and households who are overburdened by housing costs, are setting the stage for the future. Senator Maria Cantwell (D-WA) is spearheading an effort to increase state credit authority by 50 percent. Under the proposed legislation, this expansion would be phased in over five years at a rate of 10 percent per year.
Housing advocates are encouraging other progressive reform of the tax credit program in the proposed bill including a provision promoting the development of housing for families at a range of income levels. Under this scenario, rather than limiting tax credit projects to households at or below 60 percent of the applicable county median, provision would be made for income averaging allowing households to qualify as high as 80 percent of median if other units were set-aside for low income and very low income families including households that have experienced a period of homelessness.
As important is a provision that would allow the non-competitive four percent LIHTC to also benefit from a fixed rate. The floor on this credit would be four percent. Presently, housing financed with tax-exempt bond and automatic allocations of four percent LIHTCs face challenges because the four percent credit is the maximum rate. As with the nine percent credit prior to last year’s legislative victory, affordable housing developers will welcome the day when four percent bond deals are not subject to a floating rate that averages less than 3.5 percent.
The Cantwell bill has yet to be written and among the challenges to overcome is finding Republican co-sponsor in the Senate. The estimated cost of the increase in Credit Authority is $4 billion dollars. This loss of tax revenue would have to be offset by either spending cuts or other revenue enhancement.
During this election year there is a very limited time that Congress will be in session for the remainder of the year. If support for the LIHTC program continues, advocates anticipate that the Cantwell bill will continue to move forward after the election and that it could be incorporated into future comprehensive tax reform or like, in 2015, be part of significant piece of tax legislation after the election.