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Major House Infrastructure Legislation Features Robust Affordable Housing, NMTC, HTC, Renewable Energy Proposals, Faces Uncertain Path in Senate
H.R. 2, the Moving Forward Act, sweeping infrastructure legislation released yesterday in the House of Representatives, includes a robust set of low-income housing tax credit (LIHTC) provisions, including a permanent minimum 4 percent rate, a significant increase the annual LIHTC allocation amount, temporarily reduce the 50 percent test for tax-exempt bond-financed housing to 25 percent. In addition to the LIHTC provisions, the bill includes more than $100 billion in supplemental U.S. Department of Housing and Urban Development (HUD) appropriations for a variety of programs detailed below. Furthermore, it would permanently extend the new markets tax credit (NMTC) at $5 billion (with additional allocations in 2020 and 2021), increase the historic tax credit (HTC) applicable percentage from 20 percent to 30 percent for five years and delay the phasedown of the renewable energy investment tax credit (ITC) until 2026. A section-by-section summary of the bill and summary fact sheet are available, and highlights of the community development tax credits provisions are detailed below.
The full House is expected to pass the bill the week before the Fourth of July recess. Senate Democrats are expected to introduce legislation containing these provisions soon. One of the key components of H.R. 2 is the INVEST Act, which reauthorizes the five-year surface transportation law. The current surface transportation law, the FAST Act of 2015, expires on Sept. 30. While the Senate is not expected to act on major infrastructure legislation or a robust five-year surface transportation reauthorization before this deadline, Congress is likely to extend the FAST Act to early next year, where it could likely serve as a prompt for Congress to pass major infrastructure legislation or a robust five-year surface transportation reauthorization. Having this support for these community development tax incentives and supplemental appropriations sets an important precedent as a first draft of such future infrastructure legislation. Furthermore, some of the H.R.2 proposals may be included in future COVID-19 response legislation that the Senate is expected to act on in July. House Ways and Means Committee Chairman Richard Neal has explicitly noted his intent to push to include H.R. 2 tax proposals in his negotiations with the Senate on COVID-19 legislation
See below for highlights of the community development tax incentives and supplemental appropriations.
LIHTC and Private Activity Bond (PAB) provisions
- Establishes a permanent minimum 4 percent rate for properties receiving LIHTC allocations and placed in service after December 31, 2019 (section 90604 of H.R. 2);
Novogradac estimates that this provision would finance nearly 126,000 additional affordable rental homes over 2020-29.
- Temporarily reduces the 50 percent test for bond-financed housing to 25 percent for buildings placed in service in 2020-21 (section 90603 of H.R. 2);
In a report commissioned by the National Council of State Housing Agencies, Novogradac estimated that up to 1.4 million additional affordable rental homes could be financed if the private activity bond financing threshold were lowered to 25 percent on an indefinite basis.
- Increases the annual LIHTC allocation amount from $2.81 per capita and $3,217,500 small state minimum in 2020 to:
- $3.58 per capita and $4,097,486 small state minimum in 2021,
- $4.56 per capita and $5,214,051 small state minimum in 2022, and
- Annual inflation adjustments in 2023 and thereafter;
(section 90605 of H.R. 2)
- Permanently expands PABs, increasing the state ceiling from $105 per capita and $321,757,983 small state minimum to $135 per capita and $402,220,000 small state minimum (section 90104 of H.R. 2);
- Provides several permanent basis boosts for LIHTC properties, including:
- A 50 percent basis boost for developments serving extremely low-income tenants, coupled with 10 percent LIHTC allocation increase in (beyond what is included in section 90605) to states on top of the existing allocation to be used specifically for these developments (section 90606 of H.R. 2),
- A 30 percent basis boost for properties in rural areas (section 90608 of H.R. 2),
- A 30 percent basis boost for properties in Native American areas (section 90607 of H.R. 2),
- The discretion for state housing agencies to provide a 30 percent basis boost as needed for 9 percent LIHTC is extended for properties financed by PABs (section 90609 of H.R. 2);
Basis boost proposals are effective for buildings placed in service after Dec. 31, 2019;
- Provides a 150 percent first-year LIHTC award to address issues related to COVID-19
This proposal applies only to buildings whose first year of the credit period ends on or after July 1, 2020 and before July 1, 2022 (section 90601 of H.R. 2);
- Permanently prohibit local approval and contribution requirements for allocations made after Dec. 31, 2020 (section 90611 of H.R. 2);
- Extends for one year the 10 percent test deadline and the rehabilitation expenditure deadline for buildings placed in service in 2020 to 2021 (sections 90601 and 90602 of H.R. 2);
- Creates a new 25 percent low-income housing supportive services credit to cover a portion of costs for providing certain resident services at LIHTC properties, which would apply to buildings placed in service on or after Jan. 1, 2020 (section 90613 of H.R. 2);
- Permanently limits the use of qualified contracts by repealing the option for future allocations received or credit allocations determined after Jan. 1, 2020, and changing the formula that determines purchase price on existing properties as included in the Save Affordable Housing Act of 2019 (S. 1956/H.R. 3479) for qualified contract requests made after date of enactment (section 90610 of H.R. 2);
Novogradac is in the process of estimating the impact of these LIHTC and PAB proposals on affordable rental housing production and preservation.
HUD Supplemental Appropriations and Other Housing Tax Proposals
In addition to the LIHTC and PAB provisions listed above, the bill provides more than $100 billion in supplemental appropriations as outlined in the Housing is Infrastructure Act (H.R. 5187/ S. 2951), including:
- $70 billion for the Public Housing Capital Fund;
- $10 billion for regular Community Development Block Grant (CDBG) funding;
- $10 billion for a new competitive allocation of CDBG funding for Affordable Housing and Infrastructure;
- $5 billion for HOME;
- $5 billion for the Housing Trust Fund;
- $2.5 billion for the Capital Magnet Fund;
- $2.5 billion for Section 202 Supportive Housing for the Elderly;
- $2.5 billion for Section 811 Supportive Housing for People with Disabilities;
- $1 billion for Native American Housing Block Grants;
- $1 billion for USDA Rural Multifamily Preservation and Revitalization Demonstration Program; and,
Furthermore, the bill would enact the Neighborhood Homes Investment Act (H.R. 3316, the Senate companion bill will be introduced this week by Sens. Portman and Cardin) to create a new tax credit to encourage the rehabilitation of deteriorated homes in distressed neighborhoods.
- Makes the NMTC a permanent part of the Internal Revenue Service code as originally introduced in the New Markets Tax Credit Extension Act (H.R. 1680/S. 750). Provides $5 billion in annual allocation baseline authority, adjusted annually for inflation (section 90201 in H.R. 2).
- Provides NMTC investors with relief from the alternative minimum tax for NMTC investments made after December 31, 2020 (section 90201 in H.R. 2).
- Provides a total of $3.5 billion in supplemental allocation authority increases in 2019-21 to aid in recovery from the economic downturn, including $500 million toward the pending 2019 allocation round (for a total of $4 billion), an additional $2 billion available in 2020 (for a total of $7 billion), and an additional $1 billion in 2021 (for a total of $6 billion).
- The extra $500 million for the 2019 round would be awarded to community development entities (CDEs) that were either (a) not going to receive an award otherwise or (b) were going to receive an award that is smaller than their request (section 90201 in H.R. 2).
- Encourages the use of NMTC in Indian Country, by defining certain Tribal Statistical Areas as low-income communities, authorizing the use of the NMTC for community facilities or infrastructure projects benefiting Native American populations, and establishing a proportionality goal for Tribal communities that is similar to current law for nonmetro areas (section 90703 in H.R. 2).
Proposals designed to respond to COVID-19 and aid the recovery:
- Provides temporary increases in the historic tax credit percentage according the following schedule:
- 2020-2024: 30 percent
- 2025: 26 percent
- 2026: 23 percent
- 2027 and thereafter: 20 percent
(section 90301 in H.R. 2)
- Provides temporary 12-month extension of the 24- and 60-month substantial rehabilitation period as applicable to ensure those projects impacted by COVD-19 do not fail to qualify for the HTC (section 90304 in H.R. 2).
- Includes the Rehabilitation of Historic Schools Act (H.R. 158) as originally introduced by Rep. Dwight Evans, D-Pa., with the limitation that the building must have been used as a school within the last 5 years (section 90307 in H.R. 2).
Similar proposals as included in the Historic Tax Credit Growth and Opportunity Act (H.R. 2825/S. 2615):
- Increases the HTC for certain small projects (§ 47). This provision permanently increases the HTC percentage from 20 percent to 30 percent for certain smaller projects to ensure rural and small towns can more effectively utilize the credit. The increased small project credit would cap Qualified Rehabilitation Expenses (QREs) at $2.5 million, or approximately $750,000 in credits, while ensuring there is not a cliff as between the small project credit and the HTC for all projects. The provision is at the election of the taxpayer to allow them to choose between the HTC and the small project credit (section 90302 in H.R. 2).
- Lowers substantial rehabilitation test threshold from 100 percent to 50 percent of adjusted basis (section 90303 in H.R. 2).
- Eliminates HTC basis adjustment. This provision changes the amount of the depreciable basis adjustment from 100 percent to zero, eliminating the requirement that the HTC be deducted from a building’s basis at the time of transfer. This change would provide the HTC parity with LIHTC on depreciable basis and facilitate using both credits on comprehensive adaptive reuse and renovation developments (section 90305 in H.R. 2).
- Modifies rules regarding certain tax-exempt use property. This provision would amend the disqualified lease rules, making the HTC easier to access by nonprofits and other tax-exempt entities. Leases disqualified under current law that inhibit the rehabilitation of these buildings, like those with purchase options, leases in excess of 20 years, and leases in buildings that use tax-exempt financing, would be permitted. These changes would make projects like health care centers, arts organizations, community services, workforce training providers, and others better able to use the HTC (section 90306 in H.R. 2).
RETC and Energy Efficiency Proposals
- Extends PTC phasedown for wind at the 60 percent of 2017 level and PTC for other technologies through 2025 (section 90401 in H.R. 2)
- Extends and reinstates 30 percent ITC for projects that begin construction through end of 2025 and then for solar projects phases down according to the following schedule:
- 26 percent in 2026,
- 22 percent in 2027,
- 10 percent in 2028 and thereafter.
(section 90402 in H.R. 2)
- Allows taxpayers to receive “direct payment” in lieu of a tax credit for certain renewable projects. The provision allows taxpayers to elect to be treated as having made a payment of tax equal to 85 percent of the value of the credit they would otherwise be eligible for under the ITC or the PTC. Rather than opting to carry forward credits to years when their credits exceed their tax liability, taxpayers can take a reduced credit and request a refund of any resulting overpayment of tax. Tribal governments are treated as making a payment equal to the full value of the credit, instead of 85 percent (section 90404 in H.R. 2).
- Extends ITC for offshore wind facilities. The provision exempts offshore wind facilities that elect into the ITC (rather than the PTC) from reductions in the credit from the onshore wind facility phaseout. The credit expires for facilities that begin construction after the later of 1) the end of 2025 or 2) the end of the year that national offshore wind capacity is 3,000 MW above the capacity at the start of 2021. The provision directs the Secretary of the Treasury to issue an annual report starting in January 2024 of the status of the increase in offshore wind capacity (section 90405 in H.R. 2).
- Expands eligibility of publicly traded partnerships to green energy. The provision expands the definition of qualified income for publicly traded partnerships from certain income derived from minerals and natural resources to include income derived from green and renewable energy. These additions include income from certain activities related to energy production eligible for the PTC, property eligible for the ITC, renewable fuels, and energy and fuel from certain carbon sequestration or gasification projects eligible for credits under sections 48B or 45Q (section 90406 in H.R. 2).
- Extends, increases and modifies Section 25C nonbusiness energy property credit. The provision extends the section 25C nonbusiness energy property credit to property placed in service by the end of 2025. For expenditures and property placed in service starting in 2021, the provision modifies and expands the credit, including by:
- increasing the percentage of the credit for installing qualified energy efficiency improvements from 10 percent of the cost to 15 percent,
- increasing the lifetime cap on credits allowed under this provision from $500 to $1,200 and restarting the lifetime limit beginning in 2021,
- updating various standards and associated limits to reflect advances in energy efficiency and removing eligibility of roofs and advanced main air circulating fans, and
- expanding the credit to cover the costs of home energy audits, allowing a credit of 30 percent of such costs up to a maximum credit of $150.
(section 90421 in H.R. 2)
- Extends Section 25D residential energy efficient property credit. The provision extends the credit for the cost of qualified residential energy efficient property expenditures, including solar electric, solar water heating, fuel cell, small wind energy, and geothermal heat pumps. The provision extends the full 30 percent credit for eligible expenditures through the end of 2025. Like ITC, the credit then phases down to 26 percent in 2026 and 22 percent in 2027. The credit expires after the end of 2027. The provision also expands the definition of eligible property to include battery storage technology and energy efficient biomass fuel property (section 90422 in H.R. 2).
- Extends and increases Section 179D energy efficient commercial buildings deduction. The provision extends the 179D energy efficient commercial building deduction through 2025. Starting in 2021, the provision also updates and expands the deduction by increasing the maximum deduction from $1.80 per square foot to $3.00 per square foot (with corresponding increases for the partial deduction). It also changes this maximum from a lifetime cap to a three- year cap. The provision updates the eligibility requirements so that property must reduce associated energy costs by 30 percent or more in comparison to a building that meets the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) standards as of two years prior to the date of construction. Under present law, property must reduce energy costs by 50 percent in comparison to the 2007 ASHRAE standard. (section 90423 in H.R. 2).
- Extends, increases and modifies Section 45L new energy efficient home credit. The provision extends the § 45L new energy efficient home credit through 2025. The provision expands the maximum credit for eligible new energy efficient homes from $2,000 to $2,500 and makes eligible units with energy expenditures at least 15 percent below the expenditures of a comparable unit based on the 2018 International Energy Conservation Code standards. It also replaces the eligibility requirements for units eligible for the $1,000 credit to correspond with the Energy Star Labeled Homes program (section 90424 in H.R. 2).