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A lower tax credit rate in 2014 will mean less money to go around for new construction and preservation of affordable housing.
By Breann Gala and MPC Research Assistant Charles Dabah - January 21, 2014
A new year has brought new challenges for the federal Low Income Housing Tax Credit (LIHTC) program, which makes up the nation’s largest portion of federal dollars for affordable housing development and preservation. Funded through the Internal Revenue Code, LIHTC provides selected developers with federal tax credits that they then sell to investors. The revenue from the tax credit sale generates capital for the project and allows the developer to keep a portion of the units affordable. Unfortunately, despite a modest congressional push to extend the LIHTC rate at a fixed minimum of 9 percent, which was a temporary tax provision that had existed since the passage of the 2008 Housing and Economic Recovery Act, legislators missed the end-of-year extension deadline. Now, projects that receive LIHTC funding after Jan. 1, 2014 will need to plan on using a floating rate to determine the amount of tax credits they can receive and put toward their financing resources. Forbes lists tax extenders as one policy trend to keep our eye on in 2014, and this one might be worth the investment; according to the Congressional Budget Office, an estimated $8 million over 10 years is all it would take to extend the fixed rate. In the case of the LIHTC program, the longer an extension is shelved for, the less tax credits there are to go around.
This has huge implications for affordable housing rehab and new construction efforts in 2014. Here is an example of a tax credit calculation that can easily be manipulated to illustrate the impact of a credit rate change. Recently, the floating rate has been hovering around 7.5 percent. With this rate reduction, developments will be awarded a lower dollar amount in tax credits, generate less equity over the 10-year life of these credits, and push developers into the difficult position of identifying additional layers of financing to keep housing units affordable. In the Corporation for Supportive Housing’s report on effective housing credit policies, it lauds the role tax credits have played in creating quality affordable housing. However, it also touches on how deep government cuts to gap financing sources continue to threaten the supply of affordable housing. HOME Investment Partnerships Program funds and housing trust fund dollars, often used in combination with tax credits, have suffered severe cuts at the federal level. Additionally, rental assistance programs—often operated through local housing authorities or in the Chicago region through MPC’s Regional Housing Initiative—typically support the operating income for affordable and mixed-income developments and are facing financial challenges with the federal budget crunch.
The Joint Center for Housing Studies’ report, America’s Rental Housing: Evolving Markets and Needs, not only addresses how the affordable housing stock is affected by tax credits, but who is affected. Based on a 2012 New York University study referenced in the report, 43 percent of LIHTC occupants had incomes at or below 30 percent of area median income, and with the benefits of capped rents and different forms of rental assistance, only 31 percent of renters in this income group—in comparison to the 63 percent of extremely low-income renters overall—were severely housing cost-burdened. However, with a drop in LIHTC-generated equity and no anticipated increases in other government funding sources to offset the blow, developers will find it challenging to consistently deliver affordable rents to households the program targets.
Sustainable growth for cities and regions hinges on the idea that all residents have access to safe and affordable housing. There is no doubt that there would be a greater divide between the demand and supply of affordable housing without the LIHTC program. As one of the Illinois Housing Council’s member organizations, Metropolitan Planning Council invests in collaborative efforts to ensure that programs like LIHTC are adequately funded moving forward. Congressional representatives are aware of all of the positive outcomes LIHTC has had on communities since its inception in 1986. It is up to them to take the small step of restoring the tax provision that strengthens the effectiveness of the program.