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LIHTC, PAB Provisions of Newly Reintroduced AHCIA Could Result in Nearly 2 Million Additional Affordable Rental Homes Over a Decade

Published by Dirk Wallace and Peter Lawrence on Thursday, May 11, 2023 - 12:00AM

Reps. Darin LaHood, R-Illinois; Suzan DelBene, D-Washington; Brad Wenstrup, D-Ohio, and Don Beyer, D-Virginia, Claudia Tenney, R-New York, and Jimmy Panetta, D-California, today introduced the Affordable Housing Credit Improvement Act (AHCIA) of 2023 in the House (H.R 3238). Sens. Maria Cantwell, D-Washington; Todd Young, R-Indiana; Ron Wyden, D-Oregon, and Marsha Blackburn, R-Tennessee, introduced a nearly identical bill in the Senate (S. 1557). This comprehensive legislation is intended to expand and strengthen the low-income housing tax credit (LIHTC), the nation’s primary tool for financing the creation and rehabilitation of affordable rental housing. Additionally, this legislation includes provisions to provide additional resources and greater financial feasibility through private activity bond (PAB) financing. Novogradac estimates that through the major LIHTC and PAB provisions, this latest iteration of the AHCIA could finance more than 1.9 million additional affordable rental homes over 10 years.

While Major LIHTC, PAB Goals are Unchanged, there are Several Differences from Previous Bill

Since the 114th Congress, the AHCIA has been introduced by congressional members looking to enhance the LIHTC and address the nation’s need for affordable rental housing. The provisions included in the AHCIA are often included in other major housing bills introduced each session. During this first session of the 118th Congress, some 2023 AHCIA provisions were also included in the Decent, Affordable, Safe Housing for All Act (DASH Act, S. 680) and President Biden’s fiscal year 2024 budget proposal.

Overall, the 2023 bill seeks to achieve the same LIHTC goals as the 2021 version. Provisions increasing the 9% LIHTC allocation authority, both through the restoration of the 12.5% allocation increase that expired at the end of 2021 and phasing in a 50% allocation increase over two years, remain. Also carried over from previous versions of the AHCIA are the various basis boosts provided to incentivize development targeted to the neediest households and underserved areas. There is a notable addition, detailed below, that calls for examining data sharing opportunities between Congress and federal agencies. The Senate version of the AHCIA also includes a Sense of the Senate resolution addressing land use and zoning policy.

Below are the changes of note:

  • Calculation of 9% LIHTC allocation increase. As in the 2021 AHCIA, the reintroduced legislation proposes a 50% increase in the 9% LIHTC allocation over two years. There are slight technical changes between the two bills. For calendar year 2023, the per capita amount is $3.90 (with a similar increase to the small state minimum), which represents a restoration of the 12.5% allocation increase lost at the end of 2021 plus a further 25% increase, the first year of the phased in increase. For calendar year 2024, the per capita and small state minimum amounts from 2023 are increased by 25% and adjusted by inflation. For calendar years after 2024, the per capita and small state minimum amounts will be increased annual for inflation based off the 2024 amounts.
  • Extremely low-income (ELI) basis boost. The congressional intent of the ELI basis boost provision is clarified by restricting rents for units reserved for ELI households and to base the 20%-unit threshold on the unit fraction (rather than floor space fraction).
  • Elimination of basis reduction for low-income housing properties receiving energy efficiency and renewable energy tax incentives. Because they are already enacted in the inflation Reduction Act (IRA) of 2022, language eliminating the LIHTC basis reduction for the renewable energy Investment Tax Credit and the Internal Revenue Code (IRC) sect. 45L New Energy Efficient Home Credit (Sec. 309) was struck from the 2023 AHCIA. The elimination of the LIHTC basis reduction for the IRC sect. 179D Commercial Property Energy Efficient Deduction remains.
  • Data and Transparency. To increase LIHTC data transparency, a new section was added (Sec. 801, and 801(a) in the Senate bill) that would have the House and Senate work together with federal agencies to identify data sources that can be shared to promote greater oversight and accountability.
  • Land use and Zoning. In the Senate bill only, there is a Sense of the Senate resolution (sect. 801(b)) addressing land use and zoning policy.

Analysis of Primary LIHTC and PAB Provisions

With each iteration of the AHCIA, Novogradac analyzes the major LIHTC and PAB provisions to determine how many additional affordable rental homes can be financed, updated with the latest inflation and other key variables affecting LIHTC unit financing. These primary AHCIA rental home financing provisions include:

  • Lowering the 50% Test down to 25% (Section 313). Lowering the “financed by” threshold from 50% to 25% for PAB financed housing starting in 2024,
  • Increasing 9% allocations (Section 101). Restoring and making permanent the 12.5% allocation increase that expired in 2021, increasing 9% LIHTC authority by 25% in 2023 and in 2024 plus an inflation adjustment in 2024,
  • Implementing three 30% basis boost provisions primarily affecting the 4% LIHTC credit (all of which were included in the 2021 AHCIA), starting in 2023, unless otherwise noted:
    • an extension of the discretionary 30% basis boost for 9% LIHTC to PAB-financed properties (Section 308), starting in 2024,
    • a 30% basis boost for properties in Native American areas (Section 402),
    • a 30% basis boost for properties in rural areas (Section 501);
  • Implementing 50% ELI basis boost (Section 307). Giving states discretion to provide a 50% basis boost for apartments reserved for ELI renters, as long as at least 20% of the apartments are reserved for ELI households, making more deeply income targeted developments more financially feasible.

Novogradac estimates that more than 1.9 million additional affordable rental homes could be financed over the next 10 years following enactment of these LIHTC and PAB provisions. The housing crisis facing the nation is well documented–at last count, nearly 11 million renters are severely cost burdened, the lowest income households cannot find affordable housing, and more than 1 million people were found to have experienced homelessness at some point in 2020. The addition of millions of affordable rental homes to the country’s housing stock would have profound effects–according to research conducted by the National Association of Home Builders, more than 4.5 million low-income people could be housed by an additional 1.94 million homes.

About These Estimates

Novogradac’s unit estimate analysis is part of an ongoing effort to determine the effect of LIHTC and PAB housing proposals included in proposed legislation. Each of the estimates below build upon certain provisions that provide the foundation upon which additional analysis is based. Further, the methodology used several steps to determine the estimate detailed below to arrive at the additional affordable rental homes projected to be financed.

The analysis assumes the temporary 12.5% allocation increase that expired at the end of 2021 is reinstated and made permanent for the 9% LIHTC. Further, all 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, designed to fund approximately 25% to 35% of a development’s costs, compared to the 9% LIHTC which funds approximately 60% to 80% of a development’s cost.

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4% LIHTC and PABs AHCIA Provisions

Though there are numerous provisions in the AHCIA, two major 4% LIHTC and PAB proposals were included in Novogradac’s units estimate analysis:

Reducing the Financed-By Threshold from 50% to 25%

Like the 2021 AHCIA, the new legislation would lower the “50% test,” the PAB financed by threshold, 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. Lowering the financed by threshold, which would apply to buildings financed by bonds issued after 2023, could finance nearly 1.4 million additional affordable rental homes over 10 years.

  • Additional 695,100 affordable rental homes over 2024-2033 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 nearly 1.4 million affordable rental homes over 2024-2033 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.

Providing Additional Basis Boosts

By enacting the three 30% basis boost provisions that primarily affect the 4% LIHTC, more than 210,100 additional affordable rental homes could be financed over 10 years. A 50% extremely low-income basis boost affecting both the 4% LIHTC and 9% LIHTC could finance 110,300 additional affordable rental homes over 10 years.

The four primary boost provisions are:

  1. Discretionary Boost. The AHCIA extends the discretion LIHTC allocating agencies must provide a 30% basis boost to properties financed by 9% LIHTC to those financed by PABs using 4% LIHTC.
  2. Rural Boost. The AHCIA would extend current basis boost provided for properties located in a difficult development area (DDA) or qualified census tract (QCT) to rural areas, which are defined as all nonmetropolitan counties and areas meeting the definition of rural under section 520 of the Housing Act of 1949.
  3. Native American Boost. Native American areas would be included as DDAs under this provision.
  4. Extremely Low-Income Boost. The AHCIA would give states discretion to provide a 50% basis boost for apartments reserved for ELI renters, provided at least 20% of the apartments are reserved for ELI households.

The proposed basis boosts would be effective for buildings financed by bonds issued after 2023 and buildings receiving LIHTC allocations after enactment of the AHCIA.

2023 AHCIA Continues Proposal to Increase 9% LIHTC Allocation by 50%

The latest AHCIA reprises the proposal to increase 9% allocation annually by 25% plus inflation in both 2023 and 2024 could finance more than 232,500 additional affordable rental homes over 2023-32, according to Novogradac analysis. The AHCIA would increase the annual LIHTC allocation along the following scale:

  • From $2.75 per-capita with $3,185,000 small state minimum under current law, to
  • $3.90 per capita with a $4,495,000 small state minimum in 2023, to
  • An estimated $5.05 per-capita with a $5,865,000 small state minimum in 2024; and,
  • Annual inflation adjustments to the new, higher baseline in 2025 and thereafter.
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As noted above, the analysis used to estimate additional homes that can be financed assumes the temporary 12.5% increase in LIHTC allocation authority enacted in 2018 and expiring at the end of 2021 would be made permanent for years 2024 through 2032. To this baseline, Novogradac applied a 25% increase for 2023 and 2024, an inflation adjustment and annual inflation adjustments, thereafter, based on February 2023 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.

State-Level Analysis

Below is how the estimates of affordable rental homes, jobs and economic impact break down by state:

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Based on these estimates, Novogradac projects these states that could gain the largest number of affordable rental homes:

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Additional Provisions

There are several provisions in the 2023 AHCIA designed to provide more resources for affordable rental housing development, increase the financial feasibility of developments, or otherwise streamline and simplify the LIHTC. The most notable LIHTC and PAB provisions have been discussed above as they could, if enacted, result in the financing of more than 1.9 million additional affordable rental homes. The major differences between the 2021 AHCIA and today’s bill have been noted above as well. Below are additional provisions included in the AHCIA:

Provide more resources and greater financial feasibility

The AHCIA would:

  • Include relocation expenses in eligible basis, consistent with the treatment of other indirect costs, to avoid adding unnecessary costs or sacrificing resident safety during rehabilitation, which would facilitate preservation of existing housing (Section 303),
  • Repeal the qualified census tract (QCT) population cap, enabling affordable rental properties in a greater number of areas to receive a 30% basis boost and become more financially feasible (Section 304),
  • Increase population cap on DDAs from 20% to 30% of the nation’s population, enabling more properties to automatically receive a 30% basis boost and become more financially feasible (Section 311),

Increase financial feasibility

The AHCIA would also:

  • 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 improve the LIHTC

In addition, the bill would:

  • Modify the rent-setting rule for LIHTC properties using the average income option or 50% 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. Department of the Treasury 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 the authority to determine whether foreclosures were merely to extinguish the use restriction (Section 310),
  • Strengthen state oversight capacity related to development costs by requiring states to consider cost reasonableness as part of their selection criteria in determining which developments will receive housing credit allocations each year (Section 312),
  • 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), and
  • Allow recycled PAB proceeds to finance single family mortgage revenue bonds and provide more flexibility on using recycled proceeds by revising and clarifying the treatment of PAB refunding issues (Section 601).
  • Change the official name of LIHTC to the Affordable Housing Tax Credit (Section 701).

Outlook

Though down from recent historic highs, stubbornly high inflation and rental rates have left many renters struggling to cover housing costs. This, coupled with questions about the immediate future of the United States economy in face of the debt ceiling crisis, means all households are feeling anxious. The LIHTC is the leading tool for expanding the supply of affordable rental housing, having financed more than 3.7 million affordable rental homes since the program’s inception. As such, affordable housing advocates have worked to ensure the LIHTC continues to provide housing for low-income renters by supporting provisions to strengthen the tax credit. The estimated 1.9 million additional affordable rental homes that could be financed over the next 10 years if the AHCIA is enacted would provide a substantial increase in the country’s housing stock. 

While the nation’s housing crisis has been a longstanding issue, Congress is currently focused on tense negotiations around raising the debt limit. With the so called “X date,” the day the country is expected to run out of money to fund federal government obligations, of June 1 quickly approaching and neither side seeming willing to move from their entrenched positions on how to resolve the situation, with House Republicans continuing to pair an increase to the debt limit with spending cuts and other priorities while the White House and Senate Democrats continuing to argue for no conditions on raising the debt limit and moving discussion on spending cuts to the annual budget and appropriations process.

Still, finding a way to address the nation’s housing issues is something both the House and Senate seem willing to take up if recent committee hearings are any indication. The recently reintroduced DASH Act included provisions to strengthen the LIHTC illustrating Senate Finance Committee Chair Ron Wyden’s housing priorities as did President Biden’s fiscal year 2024 budget request, which shows the Administration’s priorities. Further, previous iterations of the AHCIA enjoyed bipartisan support and it is reasonable to assume the reintroduced legislation will see similar levels of support. During the 117th Congress, in the AHCIA (H.R. 2573/S.1136) counted among its 208 House cosponsors: 137 Democrats and 71 Republicans. In the Senate, the bill had 44 cosponsors: 33 Democratic senators who were joined by 11 Republicans in sponsoring the bill. As we wait for Congress to turn its attention to other important matters, housing advocates will push for the inclusion of the AHCIA’s LIHTC and PAB provisions in upcoming tax legislation that can act as a legislative vehicle. One piece of legislation that can serve as a vehicle for housing provisions is a year-end tax bill. There is also the reauthorization of the farm bill; this bill is reauthorized about every five years and while it isn’t required to include tax or housing provisions, advocates see an opportunity to add them. Finally, there is the reauthorization of the Federal Aviation Administration, which is set to expire September 30 and includes a tax section extending aviation taxes that could include other tax provisions, like those proposed in the AHCIA.

The AHCIA is landmark legislation that will be extremely significant in moving the needle on the total number of affordable homes created to address housing instability in the wake of the current housing supply crisis.

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