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H.R. 2 Housing Provisions Could Finance More Than One Million Additional Affordable Rental Homes from 2020 to 2030
A testament to the essential role housing plays in the nation’s public infrastructure, the Moving Forward Act (H.R. 2), a $1.5 trillion infrastructure plan passed in the House in July, includes among its numerous housing-related provisions proposals to expand and strengthen the low-income housing tax credit (LIHTC).
H.R. 2 incorporates and builds upon related housing legislation, most notably the Affordable Housing Credit Improvement Act (AHCIA) of 2019 (H.R. 3077/S. 1703), and has been lauded by housing advocates as a significant step towards addressing the severe affordable housing shortage this country has faced for years. The week after H.R. 2 was introduced, Sens. Ron Wyden, D-Ore.; Maria Cantwell, D-Wash.; Michael Bennet, D-Col., and Ben Cardin, D-Md. Introduced the Senate companion bill, S. 4078, the Emergency Affordable Housing Act, which contains the same LIHTC provisions as in H.R. 2, but without the private activity bond cap increase. The House’s passage of H.R. 2 comes as the affordable rental housing crisis is compounded by the COVID-19 pandemic and its related economic fallout.
Novogradac analyzed the rental home financing impact of the following LIHTC and tax-exempt private activity bond (PAB) provisions included in H.R. 2:
- Establishing a permanent 4 percent rate floor;
- Temporarily reducing the 50 percent test for PAB financed housing;
- Implementing three basis boost provisions if needed for financial feasibility primarily affecting the 4 percent LIHTC:
- an extension of the discretionary 30 percent basis boost for 9 percent LIHTC to PAB-financed properties,
- a 30 percent basis boost for properties in rural areas,
- a 30 percent basis boost for properties in Native American areas;
- Providing annual 25 percent plus inflation allocation increases in 2021 and 2022 for 9 percent LIHTC (assumes temporary 12.5 percent temporary allocation increase expiring at the end of 2021 is made permanent);
- A 50 percent basis boost for LIHTC developments serving extremely low-income (ELI) households (households earning at or below the greater of the federal poverty line or 30 percent of the area median income) and also provides a 10 percent increase in state 9 percent LIHTC allocations set aside specifically for these properties; and,
- Permanently increasing PAB per-capita amount and small state minimum by 10 percent.
Novogradac’s analysis estimates 1,014,000 additional affordable rental homes could be financed over 2020-2030 if these provisions were enacted. According to National Association of Home Builders research, those more than 1 million homes financed could house 2.4 million low-income people. Through the financing of these affordable homes, H.R. 2 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 (a breakdown of state estimates will follow in a subsequent post). In the case of each set of estimates, certain provisions provide the foundation upon which additional analysis is based. In the case of 4 percent LIHTCs, Novogradac assumes the 4 percent floor applies to all other estimates involving 4 percent LIHTC. For 9 percent estimates, the analysis assumes the temporary 12.5 percent allocation increase expiring at the end of 2021 is made permanent. Furthermore, the 9 percent ELI basis boost estimate was completed after the estimate of the annual 25 percent plus inflation increases in 9 percent allocations for 2021 and 2022 were calculated. Finally, all of the estimates, except for the Native American boost as described below, assume that gap financing is scalable with the increased availability of LIHTC equity and PAB debt. Given that H.R. 2 provides more than $100 billion in housing supplemental appropriations, this is very likely, but Novogradac did not base the estimates—aside from the Native American boost—on a specific amount of appropriations originating from H.R. 2. The scalability of gap financing applies more so to 4 percent LIHTC properties than to the 9 percent discussions that follow, because the 4 percent LIHTC is a shallower subsidy than the 9 percent LIHTC.
To better understand the potential impact of H.R. 2’s LIHTC provisions, the estimates of additional affordable rental homes that could be financed should be considered alongside the cost of each provision. In early July, the Joint Committee on Taxation (JCT) released its estimated tax revenue score for the revenue provisions of the Moving Forward Act, including the LIHTC and PAB provisions.
H.R. 2 Provisions Would Support Increased 4 percent, PAB Activity
Establishing a Permanent 4 Percent Floor
Novogradac analysis finds that establishing a permanent 4 percent floor for properties receiving LIHTC allocations would finance 137,000 additional affordable rental homes over 2020-30. In a previous post, Novogradac analysis had shown that establishing a 4 percent minimum could finance nearly 126,000 additional affordable rental homes over 2020-29. The H.R. 2 provision covers an additional year (2030). The estimated 137,000 homes that could be financed over 2020-2030 builds upon previous analysis that took into account a revised baseline estimate of PAB-financed rental homes. Novogradac analysis in April 2020 that found that the annual multifamily PAB issuance level of $15 billion plus, first seen during 2016-18 according to the Council of Development Finance Agencies (CDFA), appears to be sustainable over the next 10 years. CDFA is expected to release 2019 PAB data in a few weeks. Prior to 2015, annual multifamily PAB issuance was no more than $6.6 billion. This recent increase in the amount of rental homes financed with PABs would be eligible to receive additional capital as a result of the 4 percent floor. It should also be noted that while the minimum 4 percent rate would be retroactive to buildings placed in service after Jan. 20, 2020, it would take time for developers to take advantage of the new minimum rate to increase the number of affordable rental homes that could be financed. As such, the change would likely not result in a substantial increase in the financing of additional rental homes in 2020. However, as noted above, the effective date of the 4 percent floor in H.R. 2 would greatly assist properties in the pipeline suffering from COVID-19 challenges this year. The setting of a 4 percent minimum is the foundation upon which all the following PAB-related rental home financing estimates are built.
Temporarily Reducing the Financed-By Threshold
H.R. 2 includes a provision to temporarily reduce the PAB financed by threshold (more commonly known as the “50 percent test”) from 50 percent to 25 percent, which could finance an additional 194,000 affordable rental homes financed in 2020 and 2021. The 50 percent test refers to the requirement for PABs to finance at least 50 percent of aggregate basis of affordable housing properties to qualify for the maximum amount of 4 percent LIHTCs. H.R. 2 would temporarily reduce the 50 percent test for bond-financed housing to 25 percent for buildings placed in service after 2019 and receiving allocations of PAB issued before 2022.
The analysis presumes the “freed” bond cap that would result from the reduction in the financed-by threshold would be used for affordable rental housing (as opposed to other allowable uses) and that gap financing was scalable.
To estimate the number of rental homes that could be financed, Novogradac first assumed the 4 percent floor is enacted, as noted above, and then 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, 2017 and 2018 (the three 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 percent test to 25 percent starting in 2021: A reduction to 25 percent could yield 1.4 million additional homes over 2021 to 2030. That previous analysis did not assume the 4 percent floor was enacted. The temporary reduction proposed by H.R. 2 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 percent test, but also would free up bond cap and allow additional affordable rental homes to be financed in 2020 and 2021.
Providing Additional 30 Percent Basis Boosts
Enacting three H.R. 2 basis boost provisions primarily affecting 4 percent LIHTC could finance nearly 205,000 additional affordable rental homes over 2020-30. Four additional basis boost provisions have been included in H.R. 2 that would expand upon existing boosts already allowed under current law. Here, three provisions are discussed (the ELI basis boost provision affecting both 4 percent and 9 percent LIHTC is detailed in the next section):
- A discretionary boost allowing LIHTC allocating agencies to provide up to a 30 percent basis boost for PAB-financed properties,
- An up to 30 percent basis boost for properties in rural areas, and
- An up to 30 percent basis boost for properties in Native American areas.
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, 2019. 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.
- Discretionary Boost. Just as in AHCIA, H.R. 2 extends the discretion LIHTC allocating agencies have to provide a 30 percent basis boost to properties financed by 9 percent LIHTC to those financed by PABs using 4 percent LIHTC.
- Rural Boost. Under current law, a basis boost is allowable for properties financed by 4 percent LIHTC located in a difficult development area (DDA) or qualified census tract (QCT) if needed for financial feasibility. First, to expand upon these existing boosts, H.R. 2 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 up to 30 percent boost, as opposed to the 355 non-metro counties designated under current law 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. It should also be noted that this analysis is explicitly based on the $1 billion in supplemental Native American Housing Block Grant (NAHBG) appropriations provided under H.R. 2 as well as regular annual NAHBG appropriations in 2020-30.
Adding a 50 Percent ELI Basis Boost
A 50 percent basis boost for rental homes serving ELI households could finance an additional 114,000 affordable rental homes for 4 percent and 9 percent LIHTC properties financed over 2020-2030. ELI households are those earning at or below the greater of 30 percent of the area median or the federal poverty line. To qualify for the proposed 50 percent basis boost, at least 20 percent of the units in the property must be set aside for ELI households, and the increased boost is available only for the units set aside for ELI households. Both 4 percent and 9 percent developments could qualify for this basis boost. H.R. 2 also provides a 10 percent increase in state LIHTC allocations set aside for 9 percent properties eligible for the ELI boost; the 9 percent analysis stacks this 10 percent increase on top of the proposed increase in the per capita allocation and small state minimum starting in 2021, detailed below.
The purpose of the basis boost is to reduce hard debt as much as possible to offset for the reduction in income generated by the lower rents charged to the ELI rental homes. Novogradac estimated the number of rental homes that could be financed with the increased equity and lower debt service. Given the deep subsidies required to make rental homes affordable to ELI households, it is expected that this basis boost will be used with either 9 percent properties or 4 percent properties with significant soft subsidies. For example, in the case of 4 percent properties, the ELI basis boost would likely be used in properties financed under the Rental Assistance Demonstration (RAD) program, with its focus on preserving public housing properties by leveraging private investment, or other properties with federal rental assistance contracts. The combined 4 percent and 9 percent basis boost, on top of the 9 percent allocation to be used specifically for ELI developments, would certainly make developing housing affordable to ELI households much more feasible.
Increasing 9 percent allocation annually by 25 percent plus inflation
Increasing 9 percent allocation annually by 25 percent plus inflation in both 2021 and 2022 could finance close to 320,000 additional affordable rental homes over 2021-30. The Moving Forward Act would increase the annual 9 percent LIHTC allocation:
- From $2.81 per-capita with $3,217,500 small state minimum in 2020, to
- $3.58 per capita with a $4,097,486 small state minimum in 2021, to
- $4.56 per-capita with a $5,214,051 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 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 than the five-year phase-in the related 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 percent LIHTC allocations, Novogradac developed a baseline by calculating the impact of making the temporary 12.5 percent allocation increase, which is set to expire at the end of 2021, permanent for the years 2022 through 2030. To this baseline, Novogradac added the annual 25 percent plus inflation increase for 2021 and 2022, and annual inflation adjustments thereafter, based on January 2020 Congressional Budget Office (CBO) projections. Novogradac assumed that the amount of eligible basis per unit increases by 3.6 percent for new construction and 3.0 percent 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.
Increasing the PAB Cap by 10 Percent
Over 2020-2030, the 10 percent increase in PAB cap allocation could finance 44,000 additional affordable rental homes. H.R. 2 proposes increasing the PAB volume cap, which states would likely use a portion of this increase to issue more multifamily housing bonds. The current PAB cap of $105 per capita and small state minimum of $321,757,983 would be increased to $115 and $353,775,000, respectively in 2020, with annual inflation adjustments based on these higher amounts in 2021 and thereafter. Novogradac estimates this increase in PAB cap will translate into an additional $29.3 billion in PAB authority available to states overall, based on increased PAB data reported by the CDFA. Novogradac anticipates a significant portion of this increased PAB authority would be used for multifamily housing. When estimating the additional affordable rental homes financed by a 10 percent PAB cap increase, it was first assumed all other LIHTC provisions of H.R. 2 were enacted. To date, more than one third of the of the nearly 3.5 million affordable rental homes financed by LIHTC equity since 1987—about 1.2 million affordable rental homes—generated 4 percent LIHTCs through PAB debt financing, according to the NCSHA Annual Factbook. However, this percentage has been increasing in recent years– in 2018, 53 percent of affordable rental homes financed by LIHTC were also financed by PABs, according to NCSHA.
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 rental housing provisions in H.R. 2 could provide the support needed to finance more than 1 million additional rental units. 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. While it is unlikely that H.R. 2 as a whole will be taken up by the Senate this year, housing advocates, and recently a bipartisan group of 103 House members, have been pushing for the inclusion of the bill’s LIHTC and PAB provisions in the next COVID-19 relief bill. Congress has the opportunity to not only address the housing needs of America’s lower-income households by financing hundreds of thousands 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.
This H.R. 2 analysis was supported by RBC Community Investments and CREA, both long-term participants in the LIHTC marketplace. These sponsors had no editorial control over Novogradac’s findings nor the content of this blog post.