The House Ways and Means Committee approved Sept. 15 its portion of the $3.5 trillion Build Back Better reconciliation legislation, which includes infrastructure financing, housing, community development and green energy proposals, inspired by several previous pieces of tax credit legislation, including the Affordable Housing Credit Improvement Act (AHCIA, H.R. 2573/S. 1136). Novogradac analyzed several primary low-income housing tax credit (LIHTC) unit financing provisions in the reconciliation bill and found that an estimated 1,380,500 additional affordable rental homes could be financed over 10 years if the bill were enacted.

More than 3.2 Million People Could be Affordably Housed as a Result of the Primary LIHTC Unit Financing Provisions of the Reconciliation Bill

Based on research conducted by the National Association of Home Builders, Novogradac estimates those more than 1.38 million homes could house more than 3.2 million low-income people. The financing of these homes would also support more than 2 million jobs, nearly $235 billion in wages and business income, and $81 billion in tax revenue over a decade, more than the estimated nearly $30 billion in federal cost according to the Joint Committee on Taxation. Through the financing of these additional affordable homes, the reconciliation bill would go a long way in assisting the millions of low-income households who are cost burdened, cannot find affordable housing, or are experiencing homelessness. 

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About these Estimates

The estimates presented in this discussion are part of Novogradac’s ongoing analysis of rental housing provisions included in proposed legislation to enhance and expand the LIHTC and private activity bond (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. In the case of each set of estimates, certain provisions provide the foundation upon which additional analysis is based. For 9% estimates, the analysis assumes the 2021 amounts, as adjusted by the temporary 12.5% allocation increase enacted in 2018 and expiring at the end of 2021 is the baseline from which the four years of allocation increases are applied as well as the annual inflation adjustments in 2026-28. Additionally, all of the estimates assume that gap financing is scalable with the increased availability of LIHTC equity and PAB debt, which seems a reasonable proposition, given the U.S. Department of Housing and Urban Development, Community Development Financial Institutions Fund, and U.S. Department of Agriculture (USDA) rural housing supplemental funding available in the House Financial Services Committee portion of the reconciliation bill. The scalability of gap financing applies more so to 4% LIHTC properties than to the 9% properties in the analysis that follows, because the 4% LIHTC is a shallower subsidy than the 9% LIHTC.

Reconciliation Provisions Would Support Increased LIHTC, PAB Activity

Temporarily Reduce the PAB Financed-By Threshold

The reconciliation bill would temporarily reduce the tax-exempt private activity bond (PAB) financed-by threshold from 50% to 25% for buildings financed by obligations issued in calendar years (CY) 2022-28, but not obligations issued in CY 2019-21 or after CY 2028, and placed in service in taxable years beginning after Dec. 31, 2021. Novogradac estimates lowering the threshold from 50% to 25% could generate an additional 996,200 affordable rental homes financed by 2022-2028 multifamily PAB issuances. (It is unclear how this effective date may affect acquisition and rehabilitation properties where the acquisition is placed in service before Jan. 1, 2022, but the rehabilitation is placed in service after Dec. 31, 2021.)

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 PAB uses) and that gap financing was scalable. The AHCIA proposed a permanent reduction of the financed-by threshold to 25%, thereby facilitating the financing of an estimated nearly 1.5 million affordable rental homes over a decade.

Previous Novogradac analysis commissioned by the National Council of State Housing Agencies (NCSHA), in both a 2020 report and a 2021 update, analyzed the effects of lowering the threshold test. To estimate the number of rental homes that could be financed, Novogradac 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 NCSHA Annual Factbook data available for 2016, 2017, 2018 and 2019 (the four most recent years available at the time of writing). 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.

Provide Additional 30% Basis Boosts

The reconciliation bill would provide several up-to-30%-basis-boosts for various LIHTC properties.  Novogradac estimates that nearly 179,300 additional affordable rental homes could be financed over 2022-31 by enacting these provisions that primarily affect the 4% LIHTC. As with the AHCIA, the additional basis boost provisions included in the reconciliation bill would expand upon existing boosts already allowed under current law. Basis boosts increase a property’s maximum LIHTC allocation, thus allow that property to generate more LIHTC equity. This increase in equity makes new construction or rehabilitation of an existing property more financially feasible.

The three 30% boost provisions primarily affecting private activity bond-financed properties are:

1. Discretionary boost. The reconciliation bill would temporarily extend the discretion LIHTC allocating agencies have to provide up to a 30% basis boost to properties financed by 9% LIHTC to those financed by PABs using 4% LIHTC after date of enactment and before Jan. 1, 2029.
2. Rural boost. Current law allows for an up-to-30% basis boost for properties located in a DDA. The reconciliation bill would expand upon this by including all nonmetropolitan counties and rural areas, as defined by section 520 of the Housing Act of 1949, which defines the eligibility of USDA rural housing programs, as DDAs. Including all nonmetropolitan areas would result in all 1,971 non-metro counties in the U.S. being eligible for the 30% boost, as opposed to the 355 non-metro counties currently designated as DDAs. Extending the boost eligibility to all rural areas – non-metro counties and areas in metropolitan counties of a rural nature – further increases the number of properties eligible for up to a 30% basis boost. This provision is effective for properties placed in service after Dec. 31, 2021.
3. Native American boost. Including Native American areas as DDAs, as proposed by the reconciliation bill, would help to alleviate one of the difficulties specifically related to development in these areas. Because land belonging to reservations cannot be used to collateralize a loan, and also cannot be sold, it is difficult to obtain conventional debt for properties in Native 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, thus also reducing the risk to the lender. Native American LIHTC properties also tend to have lower LIHTC equity pricing, thereby reducing the amount of equity available. The additional LIHTCs would help address that issue as well. This provision is effective for properties placed in service after Dec. 31, 2021.

Temporarily Increase 9% Allocations

The reconciliation bill would increase 9% allocation annually by 12.5% plus inflation in 2022-25 and adjust the 2025 amounts by inflation annually during 2026-28. These allocation increases would be based on the 2021 population-based amounts, which represents the last year of the temporary 12.5% increase originally enacted in the fiscal year (FY) 2018 appropriations law and scheduled to expire at the end of this year. After 2028, the allocation increase in the reconciliation bill would expire, and the 2029 amounts would be based on 2017 amounts as adjusted by inflation from 2017-28. Specifically, the reconciliation bill would increase the annual 9% LIHTC allocation from $2.81 per-capita with $3,245,625 small state minimum in 2021 under current law, to:

• $3.22 per capita and $3,711,525 small state minimum in 2022,
• $3.70 per capita and $4,269,471 small state minimum in 2023,
• $4.25 per capita and $4,901,620 small state minimum in 2024,
• $4.88 per capita and $5,632,880 small state minimum in 2025, and
• Annual inflation adjustments in 2026-28 based off the 2025 amounts.

Novogradac estimates these increases could finance 136,500 additional affordable rental homes over 2022-31. This estimate excludes units in 9% LIHTC properties receiving the 50% extremely low-income (ELI) basis boost described below. The reconciliation bill proposal is similar to the 9% allocation increase provision in the 2019 AHCIA, except that the LIHTC allocation increase would be phased in over four years, compared to five years in the 2019 AHCIA.

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Temporarily Provide a 50% Boost for ELI units and Set Aside At Least 10% of 9% LIHTC Allocations for Buildings with At Least 20% ELI Units

The reconciliation bill would temporarily provide a 50% basis boost for units serving extremely low-income (ELI) tenants that Novogradac estimates could finance an additional 68,400 affordable rental homes in 4% and 9% LIHTC properties over 2022-2031. This estimate includes ELI units in 9% properties not accounted for under the 9% allocation increase estimate above. The reconciliation bill states that not more than 90% of 9% LIHTC allocations can be for buildings that reserve less than 20% of their units underwritten for ELI households. ELI households are those earning at or below the greater of 30% of the area median income or the federal poverty line. To qualify for the proposed 50% basis boost, at least 20% of the units in the property would have to be underwritten and set aside for ELI households and the increased boost is available only for those units set aside for ELI households. The reconciliation bill further limits the availability of the 50% ELI basis boost to no more than 15% of 9% LIHTC allocations or 10% of PAB volume cap.

Given the deep subsidies required to make rental homes affordable to ELI households, additional tools—such as the targeted 50% basis boost proposed—are needed to make properties financially feasible. The purpose of the 50% ELI 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. In the case of 4% LIHTC properties, the ELI basis boost would likely be used in properties financed under the Rental Assistance Demonstration program, with its focus on preserving public housing properties by leveraging private investment.

Impact for States

Below are the states that Novogradac projects could gain the largest number of affordable rental homes over a decade if these provisions were enacted:

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This table lists Novogradac’s estimates of affordable rental homes, jobs and economic impact by state if these provisions were enacted:

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Other Important Provisions

In addition to these major unit-financing provisions analyzed above, the reconciliation bill would also:

• Allow section 48 renewable energy investment tax credit (ITC) not to reduce LIHTC basis, which would facilitate the financing of solar panels on LIHTC properties. This provision would be effective for facilities placed into service after Dec. 31, 2021.
  A similar provision in AHCIA, which would allow the section 45L new energy efficient home tax credit and the section 179D commercial property energy efficiency deduction not to reduce LIHTC basis, may be added to the reconciliation bill later.
• Provide an additional 20% credit for the solar ITC if the solar facility is placed in service in connection with a qualifying low-income residential building, or an additional 10% credit if the facility is located in a low-income community, as defined by the NMTC statute (section 45D). The score for this proposal is incorporated in the score for the ITC extension and modification. The annual capacity limitation would be 1.8 gigawatts for each calendar year 2022 through 2031 and zero for calendar years thereafter. The annual capacity limitation would be increased by the amount of any unused allocations from the preceding calendar year, but not beyond 2033
• Limit the use of qualified contracts by repealing the option for future allocations or allocations determined after Jan. 1, 2022, and changing the formula that determines the qualified contact purchase price on existing properties to fair market value, taking into consideration the rent restriction on the qualified low-income portion of the property, effective for qualified contract requests made to the allocating agency after date of enactment; and
• Modify the existing statutory right of first refusal (ROFR) and clarify of rights relating to building purchase by changing the ROFR safe harbor into a purchase option safe harbor. For existing agreements, the provision would clarify, for purposes of the safe harbor, that the right to acquire the building includes the right to acquire all of the partnership interests relating to the building. It would also clarify that the right to acquire the building includes the right to acquire assets held for the development, operation or maintenance of the building. For existing agreements, the provision would also clarify that the ROFR safe harbor may be satisfied by the grant of a purchase option. A ROFR may be exercised in response to an offer by a related party; a bona fide third-party offer is not needed. A ROFR may be exercised without the approval of any owner of a credit project. Finally, the provision would amend the minimum purchase price to exclude exit taxes. For new properties, the purchase option provision would be effective for agreements entered into or amended after date of enactment, and for existing properties, the clarification on the ROFR safe harbor would be effective retroactively.

Next steps

The House Budget Committee is expected to combine the Ways and Means Committee reported reconciliation bill with reconciliation bills reported from the other committees, such as the Financial Services Committee bill, into one reconciliation bill next week. If reported by the Budget Committee, House leadership is currently planning to bring up the reconciliation bill to the Rules Committee and the House floor shortly thereafter.

However, some moderate House Democrats want to reduce the gross amount of spending and may also want to remove some of the revenue raising provisions in the reconciliation bill before agreeing to vote for it. Given that no Republicans are expected to vote for the reconciliation bill and there is only a three-vote majority in the House, it appears likely that House leadership will need to make changes to the reconciliation bill before it is considered on the House floor. It is unclear whether the affordable rental housing proposals would be affected by these potential reductions. Regardless, the reconciliation bill will still likely represent the largest expansion of housing tax incentives and spending in a single piece of legislation ever. Stay tuned.