Aiming to make the low-income housing tax credit (LIHTC) program more versatile, the Obama administration recently unveiled two proposals as part of its fiscal 2012 budget and tax package.

The measures, which include a new “income-averaging” option, grew from discussions held by the White House's Domestic Policy Council with representatives from the Treasury, Housing and Urban Development (HUD), and Agriculture departments.

“The Obama administration has been working to identify ways to make the LIHTC a more flexible and nimble tool for the creation and preservation of affordable housing,” says HUD Secretary Shaun Donovan. “To that end, the president's proposed fiscal 2012 budget includes measures to use the tax credit to preserve more affordable housing in both big cities and rural communities.”

The income-averaging proposal allows properties to serve households whose average income is no greater than 60 percent of the area median income (AMI) and with no individual household above 80 percent.

This is a change from the program's current cap, which restricts LIHTC apartments to households earning no more than 60 percent of the AMI.

It will be interesting to see if any objections are raised about using LIHTCs to serve higher-income families.

Early supporters of the income-averaging option point out that if a property does have apartments for households earning up to 80 percent of the AMI, other units would have to be set aside for much lower-income families to maintain a 60 percent average.

The second proposal aims to make the 4 percent tax credit and tax-exempt bond program more viable in financing the preservation of federally assisted housing developments. The plan would allow certain preservation projects financed with 4 percent credits to be eligible for a 30 percent basis boost.

Industry reaction

The measures have drawn positive response from several industry leaders, including Joe Hagan, president of the Affordable Housing Tax Credit Coalition, and Barbara Thompson, executive director of the National Council of State Housing Agencies (NCSHA).

“The Coalition is extremely pleased the administration has included a proposal dealing with the LIHTC program,” says Hagan. “That's something we haven't seen before. It's good to have an administration that cares about this program and includes improvements to the program in the budget.”

Hagan and others think the income-averaging proposal has potential to help a number of projects, especially in rural areas.

Small and rural markets would likely benefit because the change increases the band of people eligible for a LIHTC unit. Many families just miss out on qualifying for an apartment because they earn slightly above the current 60 percent cap. The change would allow these families to rent a tax credit apartment and give property owners a larger pool of renters to draw from. The change could also help those in high-cost housing markets, say observers.

Although response to the proposal has been favorable, one point may need clarification. That's whether the income-average calculations have to be done on a building-by-building or an overall project basis. If an owner had to meet the requirements for every building, it would make compliance extremely difficult, says Hagan, who is also president and CEO of the National Equity Fund, Inc.

The Coalition also supports the proposed basis boost for the preservation of federally assisted housing. Hagan says the overall numbers for the preservation program are limited due to budget restraints, but the program may provide enough of an equity boost to make some deals on the bubble feasible. 

“Everyone knows that the market is weaker for 4 percent ”˜as of right' LIHTCs associated with volume-cap bonds, in part because the aggregate credits are small and will cover only 25 to 30 percent of the total acquisition cost,” says David Smith, chairman of Recap Real Estate Advisors, a Boston-based financial services firm.

The basis boost would push this up to about a 5.25 percent credit, roughly three-quarters of the 9 percent credit, and would dramatically improve this market, according to Smith.

“However, unlike the income-averaging proposal, which should score as nearly costless, the basis boost will be a noticeable tax expenditure, which in this environment will be politically difficult,” notes Smith.

NCSHA representatives feel positive about both proposal changes. “As an organization, we've been working ourselves and with other groups for some time to figure out a way to better serve working families with the credit,” says Thompson.    

Now that these ideas have been proposed, the question is whether there is an opportunity to move on the changes, she says.

Thompson also emphasizes the strength of the LIHTC program.

“We think it is working well,” she says. “We're delighted to see it is rebounding in terms of pricing. We're seeing strong signs of recovery with this program. Because we're in this budget-deficit conscious era, our main priority is to communicate how well the program is working, how successful it is.”

At the same time, NCSHA will look for opportunities for changes that will allow the LIHTC to reach more people and places, she says.