FINANCE

TAX CREDIT EQUITY

LIHTC Modernization Bill Anticipated

BY DONNA KIMURA

AFFORDABLE HOUSING FINANCE • FEBRUARY 2008

By most accounts, 2008 is going to be a tough year for low-income housing tax credit (LIHTC) developers, with equity prices for credits projected to be lower than they have been in recent years. The one silver lining that might be on the horizon is a proposal to update the LIHTC program and make it more efficient.

A bill had yet to be unveiled as of late December, but one was expected to be introduced in early 2008.

Early program modifications being weighed include allowing corporate taxpayers to use the LIHTC to reduce their alternative minimum tax liability, fixing the tax credit percentages at 9 percent and 4 percent, and allowing states to award additional credits to certain projects.

Possible proposals are being scored by the Joint Tax Committee to determine which ones would be revenue neutral and which would have a cost associated with them, said Bob Moss, chairman of the Housing Advisory Group (HAG), an industry education and advocacy group, and senior vice president and director of origination at Boston Capital.

Moss is optimistic that Congress will act to update the LIHTC program. “The environment is such that there’s going to be pressure to move forward,” he said, adding that the market faces a number of challenges.

Many investors are uncertain about their tax credit needs for the year, he said. At the same time, developers need every penny they can get for their deals.

Rep. Charles Rangel (D-N.Y.), chairman of the Ways and Means Committee, and his staff have reached out to the industry groups to get their input.

The LIHTC program has done well to build support over the years, said Boston Capital’s David Gasson, executive director of HAG.

“If we can do a stand-alone bill, I think it’s one of the few tax measures that can go through in an election year because of bipartisan support,” he said.

As long as proposals are revenue neutral or follow the “pay as you go” philosophy, the bill has a good chance of passing, according to observers.

Big issues

The environment is very tough for LIHTC developers as 2008 begins, said Steve Lawson, president of the Lawson Cos. in Virginia Beach, Va. He is the 2007 chairman of the Housing Credit Group of the National Association of Home Builders (NAHB).

He said one of his LIHTC deals was priced in the mid-90 cents range a few months ago. Now, it would likely be in the mid- to high-80s, estimated Lawson in December.

In addition to reduced equity prices, mortgage applications are being scrutinized more closely, and underwriting is more stringent.

NAHB has been working on a tax credit bill along with other industry groups. Lawson recently cited two key issues—stagnant income limits and rising utility costs.

The Department of Housing and Urban Development (HUD) recently changed the way income limits are calculated, which has resulted in a downward adjustment in the area median income (AMI) in communities across the country. This is important because the income limits determine eligibility and allowable rents for the LIHTC and other housing programs. (For more information, see The AMI Effect.)

To help affected property owners, HUD established a “hold harmless” clause, which freezes LIHTC income and rent levels instead. That means many tax credit properties will not see any rent increases.

This comes at a time when insurance and other costs are rising, Lawson said. Another big issue involves utility costs. Property owners calculate a utility allowance and subtract that amount from the gross rent to come up with an amount that is charged to tenants.

One way that the utility allowance is calculated is by using a schedule determined by the local public housing authority (PHA). LIHTC property owners have argued that the PHA figures reflect buildings that are older and not as energy efficient as LIHTC communities, resulting in higher utility allowances than necessary.

Current practices do not give owners credit for investing in energy-efficient building systems, according to Lawson. Utility costs should accurately reflect the impact of building systems, insulation, and other energy-saving measures, he said.