Thought Leadership

Wealth Management Real Estate, June 2, 2021 What the New LIHTC Fixed Rate Floor Means for Affordable Housing (continued)

It includes, among other things, that Congress should do away with the requirement that at least 50 percent of 4 percent LIHTC projects be financed by tax-exempt private activity bonds (“PABs”). The Bill recommends a reduction to 25 percent. This requirement has proven to be an impediment to the development of more desperately needed affordable housing. States have limited bond cap allocated annually and as they are used up, it prevents receiving additional 4 percent credits that year. Research conducted by NHPF and Kingsley Associates bears out how impediments to development can impact investing. We interviewed a number of institutional investors and found that the number one reason they balked at affordable housing investment was “onerous government rules.” Also, we feel that developers should be incentivized to provide enriched resident services for low-income residents by allowing the LIHTC program to defray the costs of providing these services at affordable properties. Another important study conducted by NHPF in partnership with Enterprise demonstrates the impact that enriched services can have on residents of affordable housing. And finally, we look to the new administration to enhance affordable housing investment. The Infrastructure Bill advanced by the administration recognizes affordable housing is a key component of infrastructure.

the same 10-year period, a net increase of $170,000 in tax credits issued to the development.

The setting of the minimum applicable federal tax rate at 4 percent for the LIHTC program will have profound effects on the affordable housing industry. The important takeaways are: • In an industry where incredibly fine margins can make or break a development, the addition of extra tax credit equity is often the difference between a successful project (meaning more units of affordable housing) and an unsuccessful one. • The ability to increase LIHTCs means less debt and equity needed from other sources to finance a given project. Simplification of the capital stack has many benefits, including less staff time spent chasing additional funding sources. • Perhaps most importantly, the 4 percent LIHTC floor provides a guaranteed baseline of tax credits for any affordable housing project, giving the development team certainty on at least one crucial source of funding and solidifying underwriting for the project. As you can see, the 4 percent minimum floor on low-income housing tax credits is a great benefit to the affordable housing industry and rent-burdened families across the country. The accounting firm Novogradac estimates that fixing the 4 percent credit will create an additional 130,000 units over 10 years, helping to alleviate the housing crunch that continues to plague America. And while the minimum floor has improved the LIHTC program, we will continue to advocate for further changes, such as those contained in the Affordable Housing Credit Improvement Act, currently being sponsored in both the House and Senate. Novogradac estimates enactment of the Bill could finance 2 million additional units of affordable housing over 10 years.