An important provision of the law governing the federal low-income housing tax credit (LIHTC) expired at the end of 2013, which likely means many developers will lose substantial amounts of equity for their affordable housing projects.

The tax-writing committees in Congress have been negotiating for the past year over a massive potential reform of the U.S. tax code. While they argue about the big picture, they have set aside smaller tax bills. That’s terrible news for people who depend on tax programs that were set to expire at the end on 2013, including the fixed rate at which affordable housing developments generate LIHTCs over the 10-year life of the credit.

“The 9 percent fixed rate will not be available,” says Sean Thomas, chief of staff at the Ohio Housing Finance Agency.

The expiring law fixes the rate at which an affordable housing project generates competitive, “9 percent” LIHTCs at a minimum of 9 percent for projects receiving allocations before Jan. 1, 2014. After the expiration, affordable housing project that have already received their allocations will get to continue to use the fixed rate. But projects that receive LIHTC allocations after the expiration will have to plan on using a floating rate.

Without the “fixed-rate” provision, the rate at which LIHTC projects generate tax credits floats according to a present-value formula based on the federal cost of borrowing, which has been low since the credit crisis. As a result, the floating rate for LIHTCs is often more than a full percentage point below 9 percent. The rate has recently been about 7.6 percent. That works out to a significant loss of tax credits for the property—as high as 18 percent of a project’s total LIHTCs over 10 years, according to some experts. The difference in the amount of equity a project raises from the sale of its tax credits could easily top $1 million.

The fixed-rate provision was created as part of the Housing and Economic Recovery Act in 2008 and was renewed in the "fiscal cliff" deal passed at the beginning of 2013.

It wouldn’t cost Congress much to extend the fixed rate—just $8 million over 10 years, according to the Congressional Budget Office. Also, the legislative change would be relatively simple. The last renewal took just a few lines of legislative language.

Legislators have not been passing small changes or extensions to tax law while they attempt to craft a massive reform of the U.S. tax code. Committees in both the House of Representatives and the Senate worked on tax reform proposals for most of 2013. Rep. Paul Ryan (R-Wis.) recently said that Republicans are planning to introduce tax reform legislation in the first quarter of 2014. In the meantime, smaller bills to extend provisions of the tax code have been locked in limbo from wind energy tax credits to the fixed rate for LIHTCs. On Aug. 1, 2013, Sen. Maria Cantwell (D-Wash.) introduced a bill with 25 co-sponsors (S. 1442) to extend the LIHTC fixed rate, but it seems to have stalled in committee.

Coping strategies

State officials are ready if Congress does not renew the LIHTC fixed rate for an extended period of time. They will simply return to how they handled the floating rate before Congress fixed the rate in 2008. “If it’s not extended, we would require applications for the next cycle to utilize the floating rate,” says Cameron Dorsey, director of multifamily finance for the Texas Department of Housing and Community Affairs.

Many states are offering projects financing options that can help make up the difference. A few have soft-financing resources available—though the soft-financing programs in many states have been stressed by state and federal budget cuts. States can also still offer projects a boost to their eligible basis for generating LIHTCs. Qualifying projects can increase their eligible basis by up to 130 percent.

“We are going to use the boost to fill the gap,” says Mary Wright, director of multifamily housing for the Wisconsin Housing and Economic Development Authority.

State officials have discretion on how—and when—they use the basis boost. Since states have a fixed amount of LIHTCs to reserve each year, allowing more projects to claim more tax credits through the basis boost will cut into the total number of LIHTC projects the state can fund. So states are being choosy about what projects get the boost, even as they encourage affordable housing developers to apply. “We are encouraging people to really look at the basis boost and make the case for why they need it,” says Tasha Weaver, manager of tax credit allocations for the Colorado Housing and Finance Authority.