Increasing Devastation Caused by Natural Disasters Calls for More LIHTC, NMTC and CDBG-DR Funding

Published by Peter Lawrence on Tuesday, November 15, 2022 - 12:00am

Efforts to make communities more resilient to climate change have taken on added urgency due to the increasing frequency and worsening destruction of natural disasters.

Evidence shows that climate disasters have a disproportionate impact on federally assisted housing. Federally assisted rental properties make up 10% of the nation’s rental stock, approximately 5 million homes, yet 30% of low-income housing tax credit (LIHTC) homes are in high-risk areas, compared with 27% of rental homes in the United States. Additionally, a National Low Income Housing Council (NLIHC) and Public and Affordable Housing Research Corporation (PAHRC) report demonstrated that 10% of federally assisted homes are located within 50 nautical miles of at least one hurricane per decade.

Furthermore, a recent Washington Post article stated that many localities in the Southeast region are faced with the reality that development and population growth trends have made them more susceptible to hurricanes, storms and tidal flooding. For example, Hurricane Ian, which hit Florida in October, was one of the strongest storms to hit Florida. Politico reported on the aftermath of Hurricane Ian, stating that the Internal Revenue Service (IRS) granted extensions to those located in disaster zones.

While the continuing resolution passed by Congress in October authorized millions in disaster recovery funding, Congress may be asked to provide additional assistance after the midterm elections, potentially in the form of targeted LIHTCs and Community Development Block Grants for Disaster Recovery (CDBG-DR) funds. There is a history of these tools being used to assist areas hard hit by natural disasters. With the increasing frequency and strength of storms and disasters, these tools may be used even more in the near future.

The Historical Legacy of LIHTCs, CDBG-DR and Other Tax Incentives Being Used for Disaster Recovery

After Hurricane Katrina wreaked havoc across the Gulf Coast states in 2005, funds were needed to reconstruct affordable housing in the region. Congress passed a recovery package to encourage developers to create and rehabilitate affordable rental housing, which resulted in millions of dollars in LIHTCs being made available for the creation and renovation of homes. Per capita tax credit allocations in affected areas increased to $18 per resident from the regular annual per-capita amounts. A total of about $1.7 billion in disaster LIHTCs were allocated in the Gulf Opportunity (GO) Zone. Additionally, the Community Reinvestment Act allowed banks to receive extra credit from federal regulators when they invested in areas with a federally declared natural disaster. The CDBG-LIHTC Piggyback Program provided relief and an opportunity for developers to combine the two programs. Additionally, the combination of CDBG and LIHTC funding created investment in mixed-income, workforce, permanent supportive and affordable housing. It took an unprecedented disaster to bring together these two programs to rebuild affected areas. Lessons can be learned from this tactic for dealing with future climate disasters.  Additionally, Congress authorized $1 billion in disaster new markets tax credits (NMTCs) over three years targeted to affected counties and temporarily increased the historic tax credit percentage of credit from 20% to 26% in disaster areas.

The allocation of LIHTC funds for disaster recovery began with Hurricane Katrina, and since has been used for other types of disasters. Additionally, disaster LIHTC allocations were employed after severe floods in the Midwest and after the impacts of Hurricane Ike.  Congress included nearly a $1 billion allocation of disaster LIHTC authority for the 2017-18 California wildfires in the fiscal year (FY) 2020 omnibus appropriations bill. In Dec. 2020, $1.25 billion in disaster LIHTC was allocated to 11 states and Puerto Rico for non-COVID-19 major disasters as part of the FY 2021 omnibus appropriations bill. Now, in 2022, the LIHTC is recognized as an important resource for community recovery and should be considered for assistance in the aftermath of Hurricane Ian and other major disasters.

Additionally, CDBG-DR funds have been used to mitigate disaster. The U.S. Department of Housing and Urban Development (HUD) reported that in 2021, there was an allocation of more than $2 billion in CDBG-DR and Community Development Block Grant Mitigation (CDBG-MIT) funds for 10 states that bolstered communities impacted by disasters in 2019 and 2020. Following Hurricanes Irma and Maria in Puerto Rico in 2017, Congress passed three appropriations acts that funded $35.4 billion in CDBG-DR assistance. Congress also issued $57.8 million in CDBG-DR funds to Texas after Hurricane Harvey in 2017.

Policy-based Solutions for Disaster Mitigation with an Emphasis on Affordable Housing

Climate resiliency strategies pertaining to affordable housing were discussed at a recent HUD Office of Policy Development Research (PD&R) Quarterly Update event. In light of the destruction caused by Hurricane Ian, one policy solution discussed was the use of LIHTCs to incentivize development and reconstruction, as well as resources for survivors. The 2021 HUD Climate Action Plan can still provide solutions to the climate crisis pertaining to housing. Previous solutions included creating new standards to make it easier for Federal Housing Administration (FHA) borrowers to refinance a home that meets minimum efficiency standards and creating a community development toolkit to assess disaster vulnerability of communities.

The PD&R webinar convened a panel of experts to discuss their solutions to the climate crisis and disaster mitigation, with a focus on housing. Experts stated that the existing housing stock must be adapted to the current climate. One panelist, Steven Stansky, shared how CDBG-DR funds were used as a tool to manage disaster risk in Iowa. The Iowa Economic Development Authority used CDBG-DR funds to buy out 250 homes located in a flood plain, and then reconstructed low- and moderate-income homes that followed green energy standards.

Another potential solution is financial assistance from the Federal Housing Finance Authority. The authority recently released their annual report on Federal Home Loan Bank (FHLBank) activities, focusing on their Disaster Reconstruction Program. Beginning in 2021, FHLBank disbursed $1.2 million under the program to 97 households affected by natural disasters. By the end of 2021, FHLBank had awarded more than $6.2 million to 495 households who had homes damaged or destroyed by state or federally declared natural disasters.

During an Oct. 4 NLIHC webinar, a variety of experts discussed recovery solutions used in Puerto Rico after Hurricane Fiona that can be applied to areas hit by Hurricane Ian. Jenn Jones of HUD provided information on reconstruction efforts in Puerto Rico, where $18 million in CDBG-DR funds were made available and recovery efforts center around climate resiliency and equity. CDBG-DR funds have proven to be a valuable tool–overall, more than $2 billion in CDBG-DR funds have gone to 10 states for 15 disasters in 2020.

A recent NLIHC and PAHRC report details past legislation and policy solutions for national hazards affecting federally assisted housing. Enacted legislation included the Disaster Recovery Act of 2018, and the Disaster Learning and Life Saving Act of 2020. Most notably, the Disaster Recovery Act permanently authorizes the CDBG-DR program and provides dollar for dollar repair and replacement of federally assisted housing. The Disaster Learning and Life Saving Act of 2020 establishes a National Disaster Safety Board under the executive branch to study causes of disaster fatalities and property damage. The Board will also make policy recommendations and authorize appropriations regarding the above. Through the LIHTC, state housing finance agencies could use their qualified action plans (QAPs) to incentivize the use of tools to mitigate the effects of disasters in census tracts prone to natural hazards. For example, Alabama included points in their QAP for properties with a storm shelter onsite.

The Time is Now to Address Climate Risks

Promoting climate resiliency in communities is needed as natural disasters increase in frequency and impact. The above solutions can be applied to areas impacted by Hurricane Ian and used to mitigate the damage caused by future natural disasters. The LIHTC and CDBG-DR funds have proven to be valuable tools for the reconstruction of the affordable housing stock in states like Florida and other affected areas. As communities rebuild after the damage caused during this year’s hurricane season, a potential vehicle for legislation to increase CDBG funding and expand the LIHTC for disaster recovery could be year-end spending and tax legislation. The chart below shows potential disaster LIHTC allocations by state if Congress chooses to adopt the same policy as it did for disaster LIHTC authority in the Dec. 2020 disaster tax relief legislation.

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Similarly, the NMTC Coalition is calling for $2 billion in disaster NMTC authority ($1 billion for 2023 and $1 billion for 2024) to address disaster recovery needs, as Congress authorized with the GO Zone Act. The disaster NMTC authority led to an estimated $2 billion in additional economic activity, the creation of some 23,000 jobs and financing for a range of housing, business and community facilities.