The COVID-19 pandemic has made space for many of us to reconsider the “old ways of doing things.” From how densely we schedule our time to how robustly our government supports its citizens, our goals and the paths to achieve them have become clearer amid a global crisis. For example, our country has made massive investment in rental relief, unemployment benefits, and a new child tax credit.
For affordable housing, the congressional appropriations process presents a tremendous opportunity for federal changes that can trickle down to states and boost housing production. At the end of 2020, Congress used the year-end appropriations process to create a 4% minimum rate for low income housing tax credit (LIHTC) developments. Establishing this minimum rate should make thousands of new LIHTC affordable housing developments financially feasible and is estimated to allow for 130,000 new affordable rental homes over ten years. With such a gap between the need and availability of low-income housing, this is a windfall.
At latest count, Texas has 838,414 extremely low-income renter households, and offers less than a third of the affordable housing needed to allow them all a place to live. The lack of housing that an extremely low-income family can afford is clearly a major driver of homelessness, eviction, and housing instability in our state. There simply are not enough housing units available.
However, Congress is now poised to continue the momentum from 2020 by improving and expanding the nationwide LIHTC program. Congressional committees are currently marking up sections of the budget reconciliation bill that will only need a simple majority to pass the Senate. Text released on September 10 by the House Ways and Means Committee shows they may include the following provisions in the bill:
- Increase the annual LIHTC allocation by 60%, with built-in adjustment for inflation until 2028.
- A 10% set-aside for projects that reserve at least 20% of the housing units for extremely low-income households, with rents that match that income level.
- Provide up to 50% basis boost (i.e., more tax credits) for projects that reserve at least 20% of the housing units for extremely low-income households, until 2031. This includes a restriction that states cannot use more than 15% of their total allocated credits toward such projects.
- Allow state agencies the discretion to provide up to 30% basis boost if needed for financial feasibility for projects using 4% credits, until 2028.
- Eliminate the “qualified contract” option for new LIHTC projects. Currently the “qualified contract” option allows some properties to leave the LIHTC program, i.e. cash out and go up to market rate, after only 15 years. This provision would also modify “qualified contract” price to reflect a fair market value.
- Replace the Right of First Refusal, which theoretically allows nonprofit buyers to purchase and preserve LIHTC housing at the end of the program period, with a purchase option.
Source: ACTION Campaign
The provision above for overall increase in LIHTC funding can help spur even more growth of LIHTC housing of the type we are already seeing: with 40% of units affordable to those making 60% of area median income, or with 20% of units affordable to those making 50% of area median income, or with average income throughout the development serving people at or below 60% of area median income. Likewise, the optional basis boost for financial feasibility will give states leeway to use more tax credits for developments that follow current guidelines but need extra funds to get off the ground.
Using federal legislation is also the best way to get at issues with the current “qualified contract” system and Right of First Refusal, which are notoriously difficult to use in a way that preserves our national investment in LIHTC affordable housing over the long term. After a property is developed using LIHTC, which is indirectly a colossal infusion of public funds, the property may only provide affordable housing for 15 to 30 years before leaving the program and going up to market rate. These fixes proposed in the appropriations bill can close loopholes and make our collective investment more meaningful over the long haul.
As a caveat to this praise, however, legislators must ensure that no unnecessary limitations restrict states from using even more of their LIHTC allocation for extremely low-income households. We need to see these changes extend into the future indefinitely, rather than facing cutoffs in 2028 or 2031. LIHTC provides tax breaks that result in millions of dollars of funding for affordable housing projects; award of LIHTC can make or break a project, so these rules will have an incredible impact on new housing that we see built for the foreseeable future.
The focus on extremely low-income renters is a dream for advocates seeking to make our neighborhoods affordable for all, and we hope to see Congress continue to go bigger and more deeply affordable going forward.
These are strong steps forward to targeting the vast resources of the LIHTC program toward people who most need housing assistance and are least served in the current market. While other changes may occur before the final bill or legislation, we hope to see these powerful updates to the LIHTC program remain.