Community Development Tax Incentives Poised to Help Spur COVID-19 Recovery

Published by Michael Novogradac on Friday, May 1, 2020
Journal Cover Thumb May 2020

The COVID-19 pandemic is wreaking havoc across the nation and has brought an unprecedented shuttering of the United States economy as the entire American population has been under some form of social distancing, quarantine or isolation.

The affordable housing, community development, historic renovation and renewable energy communities have been damaged directly and indirectly by the coronavirus, yet are also uniquely poised to be play a key role in a COVID-19 recovery. This issue of the Novogradac Journal of Tax Credits addresses some of the impact of the coronavirus on the communities we cover and the role they can play to help spur a COVID-19 recovery.

The health and economic wreckage from the COVID-19 pandemic has provoked a variety of government policy reactions, with more most certainly to come.

Initial legislation to address the impact of COVID-19 was quick, with the passage of the Coronavirus Preparedness and Response Supplemental Appropriations Act (H.R. 6074), the Families First Coronavirus Response Act (H.R. 6201) and the Coronavirus Aid, Relief and Economic Security (CARES) Act (H.R. 748)–all coming in a 21-day period in March. As this issue went to press, legislators were finishing up an interim piece of COVID-19 legislation that would replenish funding of Small Business Administration programs created or modified by the CARES Act and were working on a potential fourth phase of legislation that could include a variety of community development and affordable housing incentives. Legislation beyond the fourth phase is also possible.

Bigger Pinch in Low-Income Communities

The COVID-19 pandemic has had disproportionately devastating adverse health and financial consequences for low-income residents and communities. Tenants in low-income housing tax credit (LIHTC) and U.S. Department of Housing and Urban Development (HUD) financed properties are more likely to work in jobs hit hardest by COVID-19: either those fields first hit by layoffs or in many service jobs considered “essential,” putting those workers at greater risk of illness.

Owners of LIHTC property (and other rental property) also face financial struggles. One provision of the CARES Act was a moratorium on eviction of tenants in many multifamily properties, including LIHTC developments. It was feared that the no-eviction provision, in combination with job losses, would lead to a significant decrease in rent collected beginning in April–a decrease that might continue until the moratorium is lifted. While the no-eviction provision was widely hailed, the CARES Act lacked sufficient provisions to help property owners address declines in rental income.

The CARES Act included a provision mandating debt payment forbearance for multifamily property owners with federally backed multifamily loans who experienced hardships due to COVID-19. That includes many LIHTC properties.  However, forbearance isn’t forgiveness, it’s just a delay. Property owners will be required to make up the payments missed during the pandemic. Furthermore, there are many other expenses associated with operating rental housing–such as property taxes, insurance, utility costs and maintenance–for which there was no relief provided.

There’s another major difficulty facing affordable housing: the effects the pandemic has had on the construction industry and related shutdowns. Even in areas where affordable housing construction continued, builders faced problems in getting materials, completing inspections and more. That is delaying construction and rehabilitation, which further extends the time before these properties will be available for low-income renters.  Moreover, once constructed or renovated, it can be challenging to lease up apartments in the midst of shelter-in-place orders. Construction and lease-up delays can lead to unexpected shortfalls in equity financing, adding further financial stress to properties undergoing development. The pending recession will also likely adversely affect LIHTC equity pricing, which is the major source of financing for affordable rental housing.

Similarly, the construction of many properties financed by new markets tax credit (NMTC), historic tax credit (HTC) or renewable energy tax credit (RETC) equity, or opportunity zones (OZ) investment, has stalled or struggled with supply-chain and deadline issues in the early weeks of the COVID-19 shutdown. Those properties similarly face the additional burden of impending deadlines that may be difficult to meet and the possibility of a reduction in equity financing for tax credits or in the amounts invested in OZs.

There are two principal ways the federal government can address damage caused by the COVID-19 pandemic and effects of the shutdown on community development tax incentives, and help spur an economic recovery. One is administrative, the other is legislative.

Administrative Action

To address the consequences of missed deadlines and other COVID-19-related delays, the Internal Revenue Service (IRS) must act. It has, to a degree. The IRS has the ability to extend various deadlines for up to 12 months, based on the federal government’s March 13 declaration of a national emergency. The IRS has done that, to a certain extent.

The OZ community received good news April 10 when the IRS ruled that any taxpayer whose 180-day period to invest in a qualified opportunity fund after a capital gains event ended on or after April 1 and before July 15 could use July 15 as the deadline. That was helpful, but many stakeholders sought a more flexible rule. Meanwhile, there are other OZ deadlines for which extensions are needed: the 30-month substantial improvement period for property, the 12-month cure period for qualified OZ businesses that cause a qualified opportunity fund to fail the 90 percent investment standard and more.

The LIHTC community also received good news April 10 when the IRS similarly ruled that certain LIHTC deadlines were extended to July 15. That was moderately helpful, but stakeholders needed more expansive and comprehensive extensions. Also in April, based on existing IRS administrative guidance, many states began extending the LIHTC placed-in-service deadlines and the 10 percent test deadlines. That is a good start, but other deadlines (the 24-month period for minimum rehabilitation expenditures, the year-end deadline for restoration for buildings that suffer a casualty, etc.) could also be extended by the IRS, as could many of the property management regulation deadlines: those for physical inspections, tenant file reviews, tenant income recertifications and more.

For NMTC properties, the most important action the IRS could take involves extending deadlines that many community development entities–and their borrowers and investees–will struggle to meet due to COVID-19-related issues. Particularly helpful would be an extension to such requirements as the 12-month reasonable working capital safe harbor and the 12-month period for community development entities to deploy qualified equity investments.

HTC properties face either a 24- or 60-month deadline to meet substantial rehabilitation standards, deadlines that will be difficult to meet for some properties due to the pandemic. To be eligible to claim the HTCs in one year (under transition rule made after tax reform legislation required the HTC to be taken ratably over five years), non-phased HTC properties face a June 20 deadline for substantial rehabilitation, with the property being placed in service by the end of 2020. An IRS extension for those deadlines is needed.

Both wind and solar projects need IRS guidance declaring that if they miss current deadlines due to the pandemic, they don’t lose tax credits. The solar investment tax credit (ITC) drops from 26 percent to 22 percent, while the wind production tax credit (PTC) goes from 60 percent to zero for properties that begin construction after Dec. 31, 2020. Pandemic-related construction delays could be devastating unless the IRS provides relief.

The IRS and state agencies should aggressively provide administrative relief.

Legislative Action

Congress worked quickly on the first three COVID-19 bills. The first two focused on the immediate impact of the emergency and providing sick leave. The third–the $2.2 billion CARES Act–included provisions to mitigate the immediate impact of the outbreak.

More relief bills could be coming, starting with a so-called Phase 4 bill.

There was early talk from House Speaker Nancy Pelosi and President Donald Trump about an infrastructure focus on the Phase 4 legislation, talk that could lead to the inclusion of extra NMTC or LIHTC funding or an infrastructure tax credit. The infrastructure-as-focus talk faded, but could come back.

A Phase 4, Phase 5 or even Phase 6 bill could include such items as a 4 percent floor for the LIHTC, a lowering of the 50 percent test for bond-financed affordable housing, emergency rental or operating assistance for LIHTC or other rental properties, an increase in annual LIHTC and NMTC allocations, extensions of ITC and PTC, and even an expansion of the OZ incentive.

An obvious boost would be an increase in LIHTC allocation authority–perhaps a two-year 25 percent boost–to jump-start the production of more affordable housing. More LIHTCs would mean more construction to help stimulate the economy and would create more affordable housing–something in even greater after the pandemic economic fallout.

A permanent minimum 4 percent LIHTC is the top ask of affordable housing advocates in COVID-19 relief and recovery legislation. The April rate was 3.12 percent, followed by this month’s historic low of 3.08 percent, adding even greater urgency for Congress to act on a provision that already has bipartisan support from more than half of the House and nearly 40 percent of the Senate. A minimum 4 percent rate is a simple way to put more dollars into affordable housing and make more affordable rental housing financially feasible.

Another option is to lower the financed-by threshold for tax-exempt private activity bonds–which are paired with 4 percent LIHTCs–from the current 50 percent of the aggregate basis to 25 percent. That change would increase the amount of affordable housing that could be built within the limits of existing bond volume authority.

An NMTC provision could be in recovery legislation. It’s possible that the 2019 round–due out this summer–could see an increase in allocation authority. The 2020 round, authorized for $5 billion in allocations, could see an increase. A multiyear or permanent extension of the NMTC isn’t off the table.

Provisions of the Historic Tax Credit Growth and Opportunity (HTC-GO) Act could be part of recovery legislation, including the elimination of the HTC basis adjustment requirement and a boost in the HTC percentage for smaller properties. Again, those legislative changes would encourage more development.

The PTC and ITC both are in their phasedowns, but legislation could extend or renew them to give those job-creating incentives a boost during a time of recovery–and as mentioned earlier, provide relief for properties that face a Dec. 31, 2020, deadline.

Congress has historically included community development and affordable housing incentives in recovery legislation. That should happen again.

What’s Next?

As the nation–and world–emerges from the unprecedented pandemic and collateral economic damage, there’s no template. Presidential election years are historically difficult times to pass tax legislation, but, as noted in a previous Washington Wire, tax bills have passed in 10 of the past 11 presidential election years.

Community development and affordable housing stakeholders are poised to play a significant role in helping the nation recover. The use of tax incentives to encourage development in hard-hit areas has proven successful over the years and should be called upon again as we slowly emerge from the COVID-19 pandemic.

In a period of previously unimaginable difficulty, the LIHTC, NMTC, HTC, RETCs and OZ incentives are reliable contributors to recovery.