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Four Percent Floor Could Finance Nearly 66,000 Additional Affordable Rental Homes

Published by Dirk Wallace , Michael J. Novogradac , and Peter Lawrence on Wednesday, June 5, 2019 - 12:00AM

Novogradac projects nearly 66,000 additional rental homes could be financed from 2020 to 2029 if a provision is enacted to establish a minimum 4 percent floor for low-income housing tax credits (LIHTCs) generated by tax-exempt private activity bonds issued for multifamily housing. This would greatly enhance the LIHTC, an incentive that the National Council of State Housing Agencies’ 2017 Factbook reports is already responsible for the creation of more than 1 million affordable rental homes from 1987 through 2017.

When the Affordable Housing Credit Improvement Act (AHCIA) was first introduced in 2016, the proposal to establish a permanent 4 percent floor was overshadowed by the proposed 50 percent increase in LIHTC allocation authority. But the potential posed by a minimum 4 percent LIHTC floor, which would parallel the establishment of a 9 percent minimum rate that was enacted by the Protecting Americans from Tax Hikes (PATH) Act in Dec. 2015, should not be overlooked.

Under the AHCIA, LIHTC developments financed by tax-exempt private activity bonds will have additional capital as a result of the minimum 4 percent LIHTC rate. The monthly “4 percent” rate has hovered around 3.2-3.3 percent. If a permanent 4 percent rate is enacted, additional equity will be generated even if states do not increase the volume of private activity bond cap allocated to residential rental housing bonds because of the additional LIHTCs resulting from the 70-80 basis point increase in the annual LIHTC rate.

The example pro forma below shows that 19 percent more equity is available if a 4 percent floor is established and makes the potential development financially feasible.

 

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More importantly, there will likely be more debt and equity available to finance affordable rental housing.  The higher credit percentage will make more transactions financially feasible, leading to greater multifamily housing bond issuance and increased 4 percent LIHTC allocations, generating more affordable rental homes.

For this analysis Novogradac assumed that states would increase multifamily bond issuance in response to the additional equity and greater financial feasibility. Furthermore, this analysis assumed the absolute amount of soft subsidies going to tax-exempt bond properties would remain unchanged. To the extent that there is less deferred developer fee, that is offset with more taxable bond financing.

Finally, Novogradac assumed that the amount of eligible basis per unit is going up by the projected inflation rate provided by the Congressional Budget Office (CBO) in order to reflect an increase in the cost of development.

This analysis does not incorporate the impact of the AHCIA provision to broaden bond recycling.  Novogradac will estimate that impact in a subsequent post.

Using this model, Novogradac estimates the following annual increases in affordable rental housing production during 2020-2029:

 

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This increased affordable rental housing production would have significant economic impacts.

 

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The 12 states that would most benefit from the minimum 4 percent floor are:

 

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While it’s true that some of the additional equity generated by the enactment of a 4 percent floor could be used for rent reduction or property amenities rather than production, it is difficult to quantify what percentage of additional equity would go toward rent reduction or additional amenities. Therefore, Novogradac’s analysis assumes that all additional equity would be used solely for production.

As mentioned in an earlier blog post about the Affordable Housing Credit Improvement Act provisions affecting basis boosts, the additional equity produced by the enactment of the 4 percent floor could help bond-financed developments access high opportunity areas. As discussed in that post, high opportunity areas have higher land costs. Because the cost of land does not generate tax credits it is difficult for a property to become financially feasible in areas with higher land values. However, a portion of the additional equity generated by the 4 percent floor could go towards the cost of land in high opportunity areas.

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