The low-income housing tax credit (LIHTC) has been saved as a program in the much-anticipated tax reform proposal unveiled today by Rep. Dave Camp.

That’s good news when scores of other tax expenditures, including the historic rehabilitation tax credit and energy credit, would be repealed under the draft, says Bobby Rozen, principal at Washington Council Ernst & Young. An extension of the New Markets Tax Credit was also left out.

For the housing credit, significant changes have been proposed–many coming as a complete surprise.

One troubling proposal calls for the repeal of the 4 percent credit. This would be a major blow to preservation deals, which often rely on the 4 percent credit for financing. The plan would also end the tax exemption for private-activity bonds.

"There are several damaging provisions in this bill, most notably the repeal of the 4 percent credit and the elimination of tax-exempt private-activity bonds," says Rick Lazio, a partner at the Jones Walker law firm and a former congressman. "Between the bonds and the 4 percent credit, it is going to be very hard to get many new deals done."

While noting that they are still analyzing the impact of the draft proposal, leaders at the National Council of State Housing Agencies (NCSHA) expressed initial disappointment that the draft eliminates the ability of states and localities to issue tax-exempt bonds to finance affordable housing by terminating private-activity bond authority.

Approximately 40 percent of the annual LIHTC production is through 4 percent tax credits and tax-exempt bonds, says Barbara Thompson, executive director of NCSHA.

The bond authority allows states and localities to issue bonds for affordable housing, student loans, energy projects, water facilities, transportation developments, and other vital uses, says NCSHA.

Overall, industry leaders were quick to stress the importance of the LIHTC program being included in the tax reform draft.

“All the hard work that the industry has put in over the years has paid off with inclusion in this initial tax reform proposal,” says David Gasson, executive director of the Housing Advisory Group and vice president at Boston Capital. “Legislators see the value of the credit. In regards to specific changes to the LIHTC program, the industry is going to have to take time and figure out what these changes mean and how they translate to how we do business.”

Camp (R-Mich.) is chairman of the powerful House Ways and Means Committee.

“While we are intact, and perhaps improved, we should recognize that we met the litmus test that was first put forth by Chairman Camp—that ‘expenditures that can prove they provide for an activity that would not otherwise occur in the marketplace’ and that serve as a clear ‘safety net’ will be considered,” says Bob Moss, principal and national director of governmental affairs at CohnReznick. “There is much to analyze in the discussion draft, as the proposal outlines great changes in the LIHTC, and the modifications are yet to be vetted by the industry.”

The proposed changes include:

ALLOCATION: The plan proposes that state housing finance agencies allocate qualified basis rather than credit amounts. The annual amount of allocable basis for each state would be equal to $31.20 multiplied by the state’s population, with a minimum annual amount of $36.3 million. The annual amount would continue to include unused basis allocations from the prior year plus basis allocations returned to the state during the calendar year from previous allocations. The national pool of unused credits, however, would be eliminated.

CREDIT PERIOD: Under the provision, the credit period would be extended from 10 years to 15 years to match the current 15-year compliance period. Because the credit period would be aligned with the compliance period, the recapture rules also would be repealed as no longer necessary to ensure that the building continues to be a low-income housing project for the duration of the tax benefit.

The industry will have to study what it will mean to extend the credit period, Gasson says. Does it mean developments will receive more credits over time? And, what kind of effect will it have on yields, IRR, and the general perception of the credit by the investor community?

DDAs: The increased basis rule for high-cost and difficult development areas would be repealed under the plan.

OCCUPANCY PREFERENCE: The general public-use requirement would be revised to eliminate the special-occupancy preference for members of specific groups under certain federal or state programs and the special preference for individuals involved in artistic and literary activities. Instead, occupancy preferences would only be permitted for individuals with special needs and for veterans.

This is another provision that the industry needs to examine to understand what lawmakers are thinking and what the impact would be.

ENERGY EFFICIENCY: Another change proposes to repeal the requirement that states include in their low-income housing selection criteria the energy efficiency of the project and the historic nature of the project.

“No one should panic at this time,” Gasson says. “We’re in the proposal, which demonstrates that Chairman Camp and his colleagues on the committee appreciate the value of the LIHTC.”

The next step will involve the industry preparing a point-by-point analysis of the proposal so affordable housing leaders can work with tax writers to address concerns and ensure the LIHTC remains an effective catalyst for affordable housing production.

Other tax credits didn't fare as well in the plan, including the historic credit, which would be repealed.

The loss of the historic credit would be a blow to affordable housing development. Developers have often used the credit along with the LIHTC to convert historic schools, hotels, or other buildings into affordable housing.

"The historic tax credit is a mere blip in the overall budget—I don't think it even accounts for $1 billion a year," says R. Lee  Harris, president and CEO of Cohen-Esrey Real Estate Services in Overland Park, Kan. "But its economic impact on communities is significant. I strongly believe that elimination of the federal historic tax credit would be a huge mistake.

"We have converted a number of historic buildings in smaller communities across the Midwest into vibrant affordable housing utilizing federal LIHTCs, federal historic tax credits, and state historic tax credits. These buildings would never have been converted to any sort of use if not for the federal historic credit as well as the other tax credit programs."

Like others, Harris praises affordable housing leaders who worked to make sure the LIHTC was retained as a program.

While the gridlock in Congress raises doubts about the passage of a comprehensive tax reform bill, this draft is important because it is a starting point.

“Rest assured there will be a whole lot of discussion over these proposed modifications, we know the devil is in the details, but we passed the test today,” Moss says. “We have a template from which to move forward and further the cause of creating more affordable housing in our communities.”