Time is counting down on the fixed 9 percent rate for low-income housing tax credits (LIHTCs). Created as a temporary measure under the Housing and Economic Recovery Act of 2008, the flat rate has been vital, providing affordable housing developments with additional credits during the economic downturn.
Unless legislation is passed to extend or make the fixed rate permanent, the industry will have to go back to using a “current rate” that has been about 7.4 percent in recent months.
The fixed rate has been very important, providing roughly an 18 percent increase in credits to affordable housing developments, said Sean Thomas, director of planning, preservation, and development at the Ohio Housing Finance Agency (OHFA).
For some projects, the expiration of the flat rate could mean a loss of $1 million in equity.
A set rate also provided certainty for developers, investors, and housing finance agencies “during a time when many project financing variables were in a state of flux,” said Joe DeAnda, spokesman for state Treasurer Bill Lockyer, who chairs the California Tax Credit Allocation Committee.
Going into this year, LIHTC allocating agencies knew it would be tough for new construction projects to meet the placed-in-service deadline. New developments and rehabilitation projects using the 9 percent fixed rate must be placed in service by Dec. 30, 2013.
However, the placed-in-service test for rehab projects offers some flexibility in meeting that deadline because developers may treat rehab expenditures as placed in service at the close of the 24-month or shorter aggregation period as long as they meet a minimum expenditures test of the greater of 20 percent of the adjusted basis of the building or $6,200 per unit by Dec. 30, 2013, said Susan Reaman, counsel at the Nixon Peabody law firm in Washington, D.C.
The $6,200 figure is for 2012. The amount is adjusted each year by the Internal Revenue Service.
“California permitted acquisition/rehabilitation applicants (in the 2012 first round) to assume the 9 percent credit factor in their application’s credit calculation,” said DeAnda. “Rehabilitation projects are frequently able to designate an earlier placed-in-service date once they have met the $6,200 per unit expenditure deadline.”
Applicants proposing new construction projects this year were required to use a 7.5 percent credit factor assumption consistent with the conservative underwriting assumption that such a project would place in service after Dec. 30, 2013, according to DeAnda.
In Ohio, 37 developments received LIHTC reservations from OHFA in April. The majority used the 9 percent rate, said Thomas, noting that roughly half of the awardees were rehab projects.
OHFA has been drafting its 2013 qualified allocation plan this month. Thomas said the agency will likely include a caveat that notes that developers would be able to use the 9 percent rate if it is extended. If it is not, it’s back to using the current rate next year.
Whether Congress will make the flat rate permanent is the big question.
The single biggest development has been on the advocacy and grassroots front. The effort to get the industry involved in their congressional districts has grown by leaps and bounds, and it is entirely necessary not only for the fixed-rate issue but when it comes time for tax reform, said David Gasson, executive director of the Housing Advisory Group and vice president of Boston Capital.
“When the LIHTC program is raised in hearings and in conversations in Washington, legislators need to know what the program is and be able to relate to a development in their district or state,” Gasson said. “Otherwise, we’ve lost that vote and will potentially lose the program.”
Despite efforts to build overall support for the program, there’s building pessimism that S. 1989 and H.R. 3661, the legislation that would establish a fixed 9 percent credit rate, will come to a vote anytime soon. Supporters are also looking to create a floor for the 4 percent acquisition credit.
“Every day I become less and less optimistic about seeing action on a tax extenders bill before the election,” Gasson said.
There’s still an outside shot that an extenders bill with the fixed LIHTC rate proposal attached will go to a vote before November, but it is looking unlikely against the current inertia of Congress.