For the past twenty years, the Low Income Housing Tax Credit Program has been the most important affordable rental housing program in the nation—leading to the creation of more than 2 million apartments across the country and nearly 50,000 homes in Massachusetts. However, unless Congress acts quickly affordable rental housing may grind to a halt.
The program allocates federal tax credits to developers who create, rehabilitate, or preserve rental housing. The developers sell the credits to investors who want to reduce their tax bills, and the proceeds from the sale of the credits provide equity for housing developments. This reduces project debt and lowers the rents needed to cover costs. State agencies, such as the Department of Housing and Community Development, develop their own allocation plans and award credits to projects based on highly competitive proposals.
Massachusetts is now facing a crisis similar to the rest of the country. Affordable housing developers who have already received tax credit allocations have run into difficulties securing necessary investors because of the economic downturn. In many cases, corporations don’t have sufficient tax liability to utilize the housing tax credit and are wary of making long-term investments in the current economic environment. In other instances, affordable housing developers may have secured investors but with less-than-expected funding levels.
As a result, less than half of the tax credits awarded nationally in 2008 will be able to secure private equity, with the outlook for 2009 even more dire. In Massachusetts, there are approximately 30 projects that have been awarded housing credits but which cannot move forward to construction. Particularly hard-hit are proposed non-profit sponsored developments serving special needs populations or the homeless, housing preservation projects, those with high community development impacts, and projects in distressed areas.
Bigger Effect
A slowdown of housing production means unemployed construction workers and unsold materials, impacts that reverberate through the economy. And far too many of our citizens are left without a decent place to live that they can afford.
There is now strong national consensus that the pending American Recovery and Reinvestment Act can go a long way towards fixing this short-term problem by adopting four temporary measures:
Congress should adopt a low-cost proposal to permit Housing Credit Agencies to exchange 40 percent of their 2009 Housing Credits and 100 percent of their unused 2008 allocation for cash grants that could be used as a temporary measure to provide gap financing for pending tax credit deals.
Congress should appropriate $5 billion in dedicated funding to be allocated through State Housing Credit Allocating Agencies for the sole purpose of filling financing gaps in developments to which Credits are awarded but cannot raise any equity capital or have generated too little equity with their sale of Credits to make the development financially viable.
On a temporary basis, taxpayers should be permitted to elect to accelerate the Housing Credit by up to 200 percent per year for each of the first three years of the ten-year credit period (i.e., 20 percent of the total credit would be taken in each of the first three years). The remainder would be taken on a straight-line basis for the last seven years of the credit period. This proposal would significantly broaden the existing base of investors, which are almost exclusively financial institutions, by making the return to the investor much more attractive, while maintaining the pricing efficiency of the program.
Congress should adopt a proposal to permit taxpayers to carry-back the Housing Credit for up to five years and allow these Housing Credits to offset Alternative Minimum Tax liability during that period. This provision will allay concerns by potential new investors about their ability to use Housing Credits in the future if their tax liability changes dramatically and will help discourage wholesale selling of existing portfolios of Housing Credits.
These simple and temporary changes by Congress to the housing tax credit program will get construction started on thousands of affordable homes almost immediately, create tens of thousands of construction jobs, and infuse hundreds of millions in economic stimulus activity.
is executive director of Citizens’ Housing and Planning Association, based in Boston.
