Strengthen Low-Income Housing Tax Credit in tax extenders

Negotiations are underway among the House, Senate and White House to extend dozens of expired tax provisions by the end of the year. 

The central issue in negotiations is which tax extenders will be made permanent. If any are to be made permanent, minimum Low-Income Housing Tax Credit (Housing Credit) rates should be among them. Though the change is technical in nature, enacting permanent minimum 9 and 4 percent rates will have a major impact on the development of affordable housing, making it simpler and more financially feasible on a virtually cost-neutral basis.

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The housing credit is America’s primary tool for financing affordable housing. Since President Reagan signed it into law as part of the Tax Reform Act of 1986, the housing credit has created or preserved 2.8 million homes; provided 6.5 million families the stable foundation necessary to improve their own lives; supported 3 million jobs and generated $100 billion in private investment in communities nationwide.   

Lawmakers on both sides of the aisle should take every opportunity to strengthen the housing credit at a time when rising rents and stagnant wages have created an affordable housing crisis, forcing more than one in four renters to pay more than 50 percent of their income on housing. 

The housing credit represents the best of public-private partnerships, which is why it has always earned bipartisan support. Unlike in a direct spending program, the private sector – not the federal government – bears the financial risk. Investors claim credits after properties are built and occupied by income-eligible residents at affordable rents, which is part of the unique accountability built into the housing credit. And it is administered at the state level, which ensures that developments meet the needs of local communities. 

There are two types of housing credits: one is used for financing new construction and substantial rehabilitation, and the other for the acquisition of existing properties. Though Congress initially set the rates for these credits at 9 percent and 4 percent respectively, they are now determined by a “floating rate” formula which fluctuates with federal borrowing rates.  

Historically low federal borrowing rates have resulted in historically low housing credit rates. When credit rates decline, less equity is available for developments, creating financing gaps. Realizing this problem, Congress created a minimum housing credit rate in 2008, which has been extended twice. But the minimum rate has once again expired. As a result, an affordable housing development in 2015 has between 15 and 20 percent less housing credit equity available than when the minimum rate was in effect. 

There are few options to fill these gaps. Developers can look for more ‘soft’ financing sources like HUD’s HOME Investment Partnerships Program and Community Development Block Grants, but these sources are becoming scarcer each year. They can increase the amount of debt covered by rental income, but that means fewer or no apartments will be affordable to families with the lowest incomes. Some high-priority developments may simply become infeasible. The floating rate also changes monthly, making the underwriting of housing credit developments unnecessarily complicated.  

The Senate Finance Committee already approved a temporary extension of minimum 9 and 4 percent housing credit rates this summer in its tax extenders legislation. As congressional leaders consider how to combine the Senate’s bill with the House approach of extending some provisions permanently, they should keep in the mind the opportunity to strengthen a proven affordable housing and community development tool with a history of accountability, efficiency and success. Now is the time to make permanent 9 and 4 percent housing credit rates.

Solis is senior vice president and Public Policy & Corporate Affairs executive at Enterprise Community Partners, co-chair of ACTION (A Call to Invest in Our Neighborhoods), a national coalition of more than 1,000 businesses and organizations working to strengthen the Low-Income Housing Tax Credit.