Let’s go to the Land of Make Believe and imagine what might make for a more perfect affordable housing industry. I spoke with several seasoned professionals and received a range of terrific ideas that would significantly improve our ability to produce affordable housing.

R. Lee Harris
R. Lee Harris

1. Modify the 10-Year Hold Rule: Currently, to receive acquisition low-income housing tax credits (LIHTCs), a developer must purchase an existing property from a seller who has owned that property for at least 10 years. Presumably this is to prevent a sale to a developer-related party followed by a quick flip to the developer at an inflated price to generate more tax credits. The problem is that the 10-year hold requirement eliminates a large swath of housing stock that could be placed into service for affordable purposes. Shortening the holding period to two years could solve this concern.

2. Historic Tax Credits/Grants and Basis: Construction/renovation costs and interest rates have escalated to the point that even structuring a project with multiple layers of funding doesn’t make many financially feasible. Unless a developer uses a master lease (for historic credits) or a convoluted soft loan concept (for grants), eligible basis is reduced. Worse, if certificated state historic tax credits are used, the IRS deems proceeds from the sale of those credits to be taxable income. Eliminating the basis adjustment would make for a much cleaner capital stack and provide more proceeds that are badly needed for development. Certainly, making certificated state historic credits nontaxable is a no-brainer.

3. Reduce 50% Test: Four percent LIHTCs utilizing private-activity bonds (PABs) require what is known as the 50% test. Projects can receive the 4% LIHTC on 100% of the affordable units if the project is financed with at least 50% tax-exempt bonds. The problem is in today’s high-interest high-cost environment where it’s much easier for bond deals to fail this test. And some states have even limited the maximum percentage of a project’s financing derived from PABs. If a project is barely passing the 50% test, any unexpected increase in cost during development could push the number below 50%, creating a disaster for the developer. Reducing this test to 25% would provide a significant boost to the value of the PABs.

4. 100% Utilization of PABs: There should never be a case where PABs are unused in any state. If a state has PABs “left over,” there should be a mechanism to distribute them into a pool for use by other states.

5. Inflation Adjuster: When a developer receives a LIHTC award—4% or 9%—it can take another 18 to 24 months (or more) to complete the project. During this time, costs continue to increase creating even wider funding gaps than initially underwritten. Ideally, an inflation adjuster could be utilized. If the LIHTC award was for $1 million and the Consumer Price Index increased 10% from the award date until placed-in-service, the project would ultimately receive $1.1 million in LIHTCs. A timing cap would need to be part of this concept—maybe two years.

6. Include Land in Eligible Basis: I’ve been in this business a long time and have never understood why the cost of land is excluded from LIHTC basis. It certainly is a cost of building affordable housing. There may need to be safeguards similar to the 10-Year Hold Rule to prevent developers from purchasing land, inflating the price, and selling to the development partnership. But that’s doable and would help projects increase eligible basis and produce more tax credits.

7. Graduated Basis Boost: At present, the 30% basis boost is discretionary for the 9% LIHTC. Why not extend the discretionary boost to the 4% LIHTC as well? Legislation in Congress advocates for increasing the boost to 50% for certain projects that serve lower-income households. The outcome once again could make more LIHTCs available to a project.

8. Relax Cost Containment Caps: Many state qualified allocation plans have cost containment caps. In the current environment where construction costs are highly volatile, this makes development even more challenging. It’s understandable for states to want to spread LIHTCs across as many projects as possible. However, it may result in value engineering that is less desirable from a quality standpoint or for the resident experience. Instead, each project should be evaluated by the housing finance agency on its own merits rather than a one-size-fits-all approach.

9. Easier Compliance: Compliance requirements are inconsistent across the country, overly complicated, and downright byzantine. Rental prospects should be able to sign a permission form that allows income data to be pulled from tax records. Undoubtedly this presents all sorts of issues for the IRS—but we can always dream a little, right? Further, the entire compliance process needs to be overhauled to be less cumbersome for residents and property management staff alike.

The LIHTC program has come a long way since its enactment in 1986. A variety of improvements have been made along the way. The sunsetting of the program every three years is gone, and Section 42 is now permanent. We got rid of the floating credit factors for 4% and 9% credits so that those factors are now fixed. It’s time for some more fine-tuning of the program if we ever want to make a dent in the 7 million-unit shortage of affordable housing in this country.