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Report Examines LIHTC Market Disruption

By Donna Kimura

The Tax Credit Assistance Program (TCAP) and the exchange program should be sufficient to deal with 2007 and 2008 projects and 2009 allocations in large metropolitan areas, but they may not be enough to fund the backlog and new 2009 projects in other areas, according to a new study by the Joint Center for Housing Studies of Harvard University.

“The TCAP and exchange programs were critical stopgaps that, while taking time to get up and running, will likely succeed in funding a substantial portion of the backlog,” said The Disruption of the Low-Income Housing Tax Credit (LIHTC) Program: Causes, Consequences, Responses, and Proposed Correctives.

The report further finds that investor demand for the LIHTC program is unlikely to catch up with supply without a legislative change or a private-market solution that has yet to emerge.

“To both revive demand and reduce its volatility in the future, the 10-year use period must effectively be shortened and/or limitations on the deduction of passive losses must be relaxed,” said the report. “Otherwise, LIHTCs will not be competitive with other investments, including business tax credits with shorter use and recapture provisions.”

Some combination of three consensus proposals to bolster the LIHTC program will likely be needed to sustain affordable housing production. The proposals are extending the carryback of LIHTCs from one to five years, relaxing passive-loss restrictions to allow certain existing corporations to pass through losses to individual taxpayers, and extending the exchange program.

The report also includes an interesting assessment of industry experts’ perceptions, including:

• Exchange pricing may be inhibiting the return of tax credit demand in places were market price are significantly lower. Even so, exchange funds are critical to plugging funding gaps in places with low LIHTC demand and may still prove insufficient to meet the need.
• The failure to extend the exchange program to 4 percent credits makes it especially challenging to recapitalize affordable housing.
• Opportunities to buy distressed unsubsidized housing at discounts are being lost because of the weak demand for credits. Several people noted that with the market in disarray, the nation may miss an opportunity to buy high-quality, older market-rate housing in good locations at a discount and add those units to the affordable rental inventory.