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2021 Affordable Housing Credit Improvement Act Could Finance More Than 2 Million Additional Affordable Rental Homes Over 10 Years
Today Sens. Maria Cantwell, D-Washington; Todd Young, R-Indiana; Ron Wyden, D-Oregon; and Rob Portman, R-Ohio, introduced the Affordable Housing Credit Improvement Act (AHCIA) of 2021. As detailed below, Novogradac estimates the primary affordable rental home financing provisions of this bill would finance as much as 2 million additional affordable rental homes over 10 years. Reps. Suzan DelBene, D- Washington; Jackie Walorski, R-Indiana; Don Beyer, D-Virginia; and Brad Wenstrup, R-Ohio, introduced the House companion bill.
The legislation was first introduced in 2016 during the 114th Congress, and has been reintroduced in successive Congresses, including this 117th Congress.
In addition, AHCIA and other housing provisions were included in last year’s Moving Forward Act (H.R. 2/116th Congress), a $1.5 trillion infrastructure bill passed in the House in July 2020 that shares many elements with President Biden’s recently announced $2.25 trillion American Jobs Plan. Novogradac estimated that H.R. 2 would have financed more than 1 million affordable rental homes over 2020-30.
Overall Effect of Primary Provisions
Novogradac analyzed the primary rental home financing effect of the following LIHTC and tax-exempt private activity bond (PAB) provisions included in AHCIA:
- Lowering 50% Test to 25% (Section 313). Lowering the “financed by” threshold from 50% to 25% for PAB financed housing starting in 2022,
- This is a new provision for the 2021 AHCIA, but a temporary version was included in the Moving Forward Act;
- Increase in 9% allocations (Section 101). Increasing 9% LIHTC authority by 25% in 2021 and 2022 plus an inflation adjustment in 2022,
- This provision assumes temporary 12.5% temporary allocation increase expiring at the end of 2021 is made permanent and the new baseline, and,
- Implementing three 30% basis boost provisions primarily affecting the 4% LIHTC credit (all of which were included in the 2019 AHCIA), starting in 2022:
- an extension of the discretionary 30% basis boost for 9% LIHTC to PAB-financed properties (Section 308),
- a 30% basis boost for properties in rural areas (Section 501),
- a 30% basis boost for properties in Native American areas (Section 402);
If these provisions were enacted, Novogradac estimates 2,015,000 additional affordable rental homes could be financed over 10 years. According to National Association of Home Builders research, those more than 2 million homes could house more than 4.7 million low-income people. Through the financing of these affordable homes, AHCIA would go a long way in assisting the millions of low-income households who are cost burdened, cannot find affordable housing, or are at risk of homelessness.
About These Estimates
The estimates discussed below are part of Novogradac’s ongoing analysis of rental housing provisions included in proposed legislation to enhance and expand the LIHTC and PAB rental home financing. For each estimate detailed below, several steps were taken to arrive at the additional affordable rental homes projected to be financed. In the case of each set of estimates, certain provisions provide the foundation upon which additional analysis is based. For 9% estimates, the analysis assumes the temporary 12.5% allocation increase expiring at the end of 2021 is made permanent. Additionally, all of the estimates assume that gap financing is scalable with the increased availability of LIHTC equity and PAB debt. The scalability of gap financing applies more so to 4% LIHTC properties than to the 9% discussions that follow, because the 4% LIHTC is a shallower subsidy than the 9% LIHTC.
AHCIA Provisions Would Support Increased 4%, PAB Activity
Reducing the Financed-By Threshold from 50% to 25%
The AHCIA includes a provision to lower the PAB financed by threshold (more commonly known as the “50% test”) from 50% to 25%, The 50% test refers to the requirement for PABs to finance at least 50% of aggregate basis of land and building costs of affordable housing properties to qualify for the maximum amount of 4% LIHTCs. AHCIA would lower the 50% test for bond-financed housing to 25% for buildings first receiving bond allocations after 2021.This provision could finance an:
- additional 747,000 affordable rental homes over 2022-31 if all “freed” PAB cap were used for rental housing and the state has at least 50% of the gap financing needed to maximize unit production and preservation with the “freed” PAB cap and LIHTC equity,
- additional 1,494,000 affordable rental homes over 2022-31 if all “freed” PAB cap were used for rental housing and the state has 100% of the gap financing needed to maximize unit production and preservation with the “freed” PAB cap and LIHTC equity.
To estimate the number of rental homes that could be financed, Novogradac developed a pro forma model that establishes national baseline percentages for the sources and uses of financing for PAB financed LIHTC developments. This model is based on National Council of State Housing Agencies (NCSHA) Annual Factbook data available for 2016-19 (the four most recent years available). The model is also informed by the review of final cost certification data from a national sample of PAB-financed developments. The pro forma model has distinct estimates for new construction, substantial rehabilitation and acquisition/rehabilitation developments.
Previous Novogradac analysis, commissioned by the NCSHA, examined the effect of permanently reducing the 50% test to 25% starting in 2021; a reduction to 25% could yield 1.4 million additional homes over 2021 to 2030. That previous analysis did not assume the 4% floor was enacted. The temporary reduction proposed by AHCIA could not only rescue currently at-risk developments, at a time when COVID-19-related cost increases may jeopardize the ability of developments to meet the 50% test, but also would free up bond cap and allow additional affordable rental homes to be financed. NCSHA and Novogradac will release analysis updated for 2021 soon.
Providing Additional Basis Boosts
Novogradac also found that enacting AHCIA 30% basis boost provisions primarily affecting 4% LIHTC could finance nearly 222,000 additional affordable rental homes over 2022-31. The additional basis boost provisions included in the AHCIA would expand upon existing boosts already allowed under current law. Basis boosts increase a property’s maximum LIHTC allocation, allowing a LIHTC property to generate more equity, thus making new construction or rehabilitation of an existing property more financially feasible. The proposed basis boosts would be effective for buildings placed in service after Dec. 31, 2021. A previous Notes from Novogradac post provides background details and highlights the importance of expanding the various basis boosts as the country deals with the coronavirus pandemic.
The three primary boost provisions are:
- Discretionary Boost. AHCIA extends the discretion LIHTC allocating agencies have to provide a 30% basis boost to properties financed by 9% LIHTC to those financed by PABs using 4% LIHTC.
- Rural Boost. Currently, a basis boost is provided for properties located in a difficult development area (DDA) or qualified census tract (QCT). First, to expand upon these existing boosts, AHCIA would cover all nonmetropolitan counties. This provision alone would result in all 1,973 non-metro counties in the U.S. being eligible for the 30% boost, as opposed to the 355 non-metro counties currently designated as DDAs. In addition to the inclusion of non-metro areas as DDAs, this designation would also be extended to all rural areas – non-metro counties and areas in metropolitan counties of a rural nature – as defined by section 520 of the Housing Act of 1949, which defines the eligibility of U.S. Department of Agriculture (USDA) rural housing programs.
- Native American Boost. The second geographical expansion would be to include Native American areas as DDAs. It has traditionally been difficult to obtain debt for properties in Native areas as land belonging to reservations cannot be used to collateralize a loan, and also cannot be sold, putting the lender at increased risk. Because of the difficulty in developing affordable housing in Native American areas, the additional LIHTCs that would result from this particular basis boost would help to address affordable housing needs on tribal lands by reducing the amount of debt a development would need to take on.
Increasing 9% allocation annually by 25% plus inflation
Increasing the 9% allocation annually by 25% plus inflation in both 2021 and 2022 could finance more than 299,000 additional affordable rental homes over 2021-30, according to Novogradac analysis. The AHCIA would increase the annual LIHTC allocation:
- From $2.81 per-capita with $3,245,625 small state minimum under current law, to
- $3.52 per capita with a $4,057,031 small state minimum in 2021, to
- $4.47 per-capita with a $5,154,965 small state minimum in 2022; and,
- Annual inflation adjustments to the new, higher baseline in 2023 and thereafter.
Phasing in a substantial increase in LIHTC allocations over two years—as opposed to the five-year phase-in period proposed by the 2019 AHCIA—would likely accelerate the financing of affordable rental homes in the initial years to address the pre-existing affordable housing shortage and the additional hardships brought on by the COVID-19 pandemic. However, this approach would represent less overall allocation and federal cost than the five-year phase-in the 2019 AHCIA proposal over 10 years because of the effects of compounding. The estimated additional rental homes financed assumes the temporary 12.5 percent increase in LIHTC allocation authority enacted in 2018 and expiring at the end of 2021 would be made permanent.
To estimate the proposed increase in 9% LIHTC allocations, Novogradac developed a baseline by calculating the impact of making the temporary 12.5% allocation increase, which is set to expire at the end of 2021, permanent for the years 2022 through 2030. To this baseline, Novogradac applied a 25% increase for 2021 and 2022, an inflation adjustment and annual inflation adjustments thereafter, based on February 2021 Congressional Budget Office (CBO) projections. Novogradac assumed that the amount of eligible basis per unit increases by 3.6% for new construction and 3.0% for acquisition and rehabilitation, using NCSHA historical data on allocations per home, CBO inflation data, and rental housing industry data. The eligible basis inflation factor is designed to estimate the increased cost of development over time. The estimate also incorporates Census projections of state population growth and the impact of inflation projections on annual per-capita and small state minimum allocations.
Here is how the estimates of affordable rental homes, jobs and economic impact break down by state:
Based on these estimates, Novogradac projects these states that could gain the largest number of affordable rental homes:
Changes from 2019 AHCIA
While this analysis focuses on a select number of LIHTC and PAB provisions – including the newly added provision to temporarily lower the 50% test, discussed within – the AHCIA contains another 21 provisions that would provide more resources for affordable rental housing development, increase the financial feasibility of developments, or otherwise streamline and simplify the LIHTC.
In addition to the provision to lower the financed by threshold for PABs from 50% to 25% and changing the phase-in period of the 9% allocation increase, there are the following other substantive differences between the 2019 and 2021 AHCIA bills:
- Removed provisions.
- As it was enacted by the Consolidated Appropriations Act of 2021, the 2019 AHCIA provision to establish a minimum 4% for PAB-financed properties is removed,
- The provision to modify and clarify rights related to building purchase and the right of first refusal (ROFR) was removed from the bill but a version of this proposal could be introduced in separate legislation,
- Student rule (Section 204). The 2021 AHCIA provision to streamline the student occupancy rule includes two small changes from the 2019 AHCIA to add victims of human trafficking to the exceptions and ensures homeless youth are not disqualified regardless of whether they were homeless prior to becoming an adult,
- Casualty loss (Section 301). The 2021 AHCIA builds upon the previous legislation by granting further discretion to state agencies to extend the reconstruction and replacement time period beyond 25 months for federally or state declared disasters where the damage is such that more time is needed to restore the property. States could provide up to an additional 12 months for a total of 37 months. If such additional time beyond 25 months is necessary, such time will be added to the compliance period, and
- Native American provisions (Sections 401 and 402). The definition of Native American tribes in the proposal to treat such communities as difficult development areas and the proposal to include Native Americans as qualified allocation plan (QAP) criterion is clarified to include Native Hawaiians.
The AHCIA contains other provisions introduced previously that would provide more resources for affordable rental housing development; increase the financial feasibility of developments; or otherwise streamline and simplify the LIHTC.
More resources and greater financial feasibility
The AHCIA would:
- Increase population cap on DDAs from 20 to 30 percent of the nation’s population, enabling more properties to automatically receive a 30 percent basis boost and become more financially feasible (section 311),
- Repeal the qualified census tract (QCT) population cap, enabling affordable rental properties in a greater number of areas to receive a 30 percent basis boost and become more financially feasible (section 304),
- Include relocation expenses in eligible basis, consistent with the treatment of other indirect costs, in order to avoid adding unnecessary costs or sacrificing resident safety during rehabilitation, which would facilitate preservation of existing housing (section 303), and
- Eliminate basis reduction for LIHTC properties receiving energy efficiency and renewable energy tax incentives, enabling those properties to become more energy efficient and more easily access renewable energy (section 309).
Increase financial feasibility
The AHCIA would also:
- Give states discretion to provide a 50 percent basis boost for apartments targeting extremely low-income renters, making more deeply income targeted developments more financially feasible (section 307),
- Provide flexibility around existing tenant income eligibility to eliminate tension between allowing existing tenants to stay in their homes and recapitalizing LIHTC properties (section 202),
- Simplify the “10-year rule” and “related party rule” by replacing the general prohibition on acquiring properties placed in service in the past 10 years with a limitation the acquisition basis of properties and preventing related parties from acquiring properties in the past five years, thus supporting the preservation of properties in need of rehabilitation (section 302), and
- Standardize rural income limit rules by conforming the income limit rule for tax-exempt bond-financed developments to that of allocated LIHTC to facilitate more rural LIHTC development (section 502).
Streamline, simplify, modernize or otherwise alter the LIHTC
In addition, the bill would:
- Encourage the development of affordable rental housing in Native American communities by creating a selection criterion (but not a required preference) for Indian housing (section 401),
- Modify the rent-setting rule for LIHTC properties using the average income option or 50 percent boost as provided in section 309 of the bill so that rents for apartments with tenant-based vouchers are set at no higher than the LIHTC rent (section 204),
- Clarify the community revitalization plan, as included in one of the three LIHTC preferences, is determined by the relevant LIHTC allocating agency (section 305),
- Direct the U.S. Treasury Department to issue regulations to prohibit local approval or contribution requirements, either as a threshold or through competitive points (section 306),
- Ensure that affordability use restrictions endure illegitimate foreclosures by providing states rather than the Treasury Secretary the authority to determine whether foreclosures were merely to extinguish the use restriction (section 310), and
- Change the official name of LIHTC to the Affordable Housing Tax Credit (section 701).
In the face of the ongoing COVID-19 pandemic and related economic hardship, affordable housing advocates have been calling on Congress to enact provisions that would strengthen and expand existing affordable rental housing incentives. All combined, the three major unit-financing provisions in AHCIA could finance more than 2 million additional rental homes. These affordable rental homes would be a substantial contribution towards addressing the affordable housing crisis in both the short-term and, more importantly, would set the stage for long-term recovery.
Advocacy efforts are now more important than ever. Now that the AHCIA has been reintroduced, it is imperative that as many sponsors in the House and Senate are secured for the bills. Previous iterations of AHCIA enjoyed bipartisan support. During the 116th Congress, H.R. 3077 counted among its 233 cosponsors 154 Democrats and 79 Republicans. In the Senate, S. 1703 had 30 Democratic senators who were joined by 11 Republicans in sponsoring the bill.
While it is unlikely that AHCIA as a whole will be taken up by Congress, housing advocates will push the inclusion of as much of the bill’s LIHTC and PAB provisions in moving tax legislation later this year. One of the most likely targets is the American Jobs Plan, the Biden administration's infrastructure bill, which is likely to be considered under budget reconciliation. The $2.25 trillion infrastructure and jobs plan includes $213 billion for housing infrastructure, which is expected to include a LIHTC expansion as a key component the plan’s goal to increase the nation’s affordable housing supply. The inclusion of funding for low-income housing within a larger infrastructure package shows the interconnectedness of all these priorities and just how important it is to address the country’s affordable housing crisis. Congress has the opportunity to not only address the housing needs of America’s lower-income households by financing millions of additional affordable rental homes, but could also positively impact the nation’s economic well-being and help counteract the economic damage done by the pandemic.