San Francisco – Increased flexibility in how state housing agencies use tax credits and bonds, fair treatment of tax credit projects under state property tax systems and encouraging mixed-income housing are the three main themes of a policy proposal being put forth by industry leaders.

The Agenda for Housing Program Efficiency is being put forth in draft form by the Editorial Advisory Board of Affordable Housing Finance magazine. The goal is to help convince federal and state policymakers to implement policy changes that will allow for the production of more housing with existing resources, primarily tax credits and tax-exempt bonds. The proposals are premised on the fact that federal resources are not likely to increase in the next several years.

“We believe it is possible to use existing resources more efficiently if we all unite behind some common sense ideas for streamlining and simplification, and give housing agencies more power to customize assistance to varying situations and goals,” said Andre Shashaty, editor in chief of Affordable Housing Finance. “This is a very reasonable agenda designed to fine-tune programs to get more impact and eliminate some of the complexity and rigidity that adds costs and hurts feasibility. Our board has started the ball rolling, and now we want Affordable Housing Finance readers to help us gather the information needed to make persuasive arguments for change,” Shashaty said.

“Please get involved and react to our tentative list of policy proposals. Which would be most effective in helping you provide more housing more efficiently? Do you have any ideas we should add? We also need help to gather information to support the proposals,” Shashaty said.

In future issues and on our Web site (www.housingfinance.com), Affordable Housing Finance will present a more thorough analysis of each proposal. Please send comments to Senior Editor Donna Kimura at [email protected].

Tax credit flexibility

One of the biggest problems with the tax credit and bond programs is their limited flexibility. States are mandated to use the programs to respond to local needs, but while they can give less than the maximum amount of credits, they cannot go above the current maximum amount of assistance. Because the tax credit and bond programs only provide a shallow subsidy, this limitation is making it harder to finance projects as costs rise sharply and states continue to prioritize maximum targeting to the lowest-income households, thereby limiting project revenue.

Financiers are concerned that incentives for deeper income-targeting in qualified allocation plans are generally not matched with additional subsidies to make the targeting feasible. Housing finance agencies say that the greatest need in many markets is for housing to be affordable to persons earning substantially less than the maximum tax credit income level (60% of the area median).

Proposal: Change the tax credit authorizing statute that currently sets the same maximum tax credit amount for all eligible units at 9%, regardless of the income group they target. Deep income-targeting could be facilitated by allowing a higher credit amount for units targeted to very low income households. Who supports it: The National Council of State Housing Agencies (NCSHA) endorsed the idea of allowing higher credit amounts for properties that meet geographic or income-targeting goals in its 2005 legislative priorities. The Affordable Housing Tax Credit Coalition (AHTCC) also supported the idea. Since overall tax credit authority is capped (at $1.90 per capita in 2006), allowing states to give more credits to certain projects and less to others would not affect the overall federal budget.

Another problem is that private-activity tax-exempt bond authority is going unused in many states and cities, largely because the bonds and the 4% tax credits that go with them do not provide a deep enough subsidy to make projects feasible.

Proposal: Allow state agencies to swap unused private-activity tax-exempt bond authority for tax credit authority and remove the 4% cap on tax credits used with bonds. The details of how this might work have yet to be determined, and input is welcomed. A variation on this idea would be simply to eliminate the 4% cap on tax credits for bond deals (a proposal offered by the AHTCC).

If states were permitted to allocate higher levels of tax credits with a commensurate reduction in private-activity cap allocation (to make it budget-neutral), a more efficient affordable housing finance execution would be possible. There might also be a more balanced competition for the two types of tax credit financings.

“In Chicago, the city has plenty of bond cap that is not being used right now. So, for instance, let’s say that we were flexible. Instead of a 4% credit, we ended up with a 12% credit on a deal, and we had to give up three times the bond cap on that deal. We’d do that. We have plenty of bond cap to do that,” said John Markowski, commissioner of Chicago’s Department of Housing.

Who supports it: During the recent International Builders’ Show in Orlando, Fla., the National Association of Home Builders (NAHB) adopted a resolution proposed by the Housing Credit Group and Multifamily Finance Subcommittee urging Congress to amend the Internal Revenue Code to allow states to convert unused private-activity bond cap into low-income housing tax credits (LIHTCs).

“The premise is let’s not return [unused] housing money that’s been authorized [by Congress]. Let’s figure out how to use those dollars. Let’s unlock the unused subsidy,” said Dan Markson, vice president of The NRP Group and a leader in the NAHB group.

“We need to build industry consensus and work out the details,” he added.

NCSHA has discussed the idea of swapping bond authority for tax credits, but is not actively lobbying for Congress to allow it.

The idea is more complicated than it sounds, said Barbara Thompson, executive director. First, she said, bond authority is used by states for various activities, not just housing. She also said that Congress might object because the proposal could increase tax expenditures beyond the current level for the two programs. “I don’t think we should assume that Congress would see the idea as cost-free or revenue-neutral when we know that they make certain assumptions about bond usage. They assume a certain level of non-usage and take that into account.

“We are not saying this concept isn’t worth exploring and we are happy to join in the exploration,” said Thompson. However, she added, NCSHA is putting its focus on enactment of H.R. 4873 (for a description of the bill, see page 14).

Another idea for changing the tax credit statute to allow greater flexibility would be to allow inclusion of land in eligible basis. Currently, credits are only allowed on buildings. This would make it possible to do deals in areas with high land costs, which describes an increasing number of markets.

Other proposals include:

Change utility allowance rules to more accurately reflect a project’s actual experience with utility costs. AHTCC and NCSHA have both endorsed allowing state allocating agencies to set utility allowances.

Make rules for bond-financed projects consistent with those for projects using tax credits alone. This has been advocated by AHTCC and NCSHA.

Property tax fairness

Reduce the uncertainty involved in property tax appraisals.

Local tax assessors have different methods of valuing property, which can mean unpredictable and expensive tax assessments for affordable housing owners. The Affordable Housing Finance Editorial Advisory Board suggests that the efforts of New York, Maryland and other states to provide a fair and consistent method for valuing tax credit projects be used as a model for other states.

New York Gov. George Pataki signed a law in 2005 that will help ensure uniformity, predictability and fairness in assessments, said Judy Calogero, commissioner of the New York State Division of Housing and Community Renewal. The legislation requires local assessors to establish the assessed value of an affordable housing project based upon the actual net operating income of the project. This income approach, compared to a traditional market approach, is expected to lead to more consistent, and possibly somewhat lower, assessments for affordable housing properties.

This also allows developers to plan what their property tax liability is going to be in advance, while applying for tax credits. The board suggested that the same idea could be implemented in other states.

Encouraging mixed-income projects

The board came out in favor of encouraging more development of mixed-income projects. The proposal is premised on the belief that the inclusion of market-rate units in a project can help improve feasibility. This is especially relevant today, as market-rate rents for apartments begin to rise, a trend that observers expect to continue for two years or more. The board also believes that mixed-income projects offer social benefits as well, helping tenants become self-sufficient and attracting services to their communities.

Proposal: To encourage investment in mixed-income projects, lift the cap on active-income tax liability that may be offset by LIHTCs, to allow developers to take more tax credits themselves rather than to have to rely on syndicators, which don’t like mixed-income deals. To the extent that general partners could directly use the credit, transaction costs would be lessened and the amount of available investment capital would be increased.

Another proposal is to repeal the current legal requirement that every unit in a scattered-site development be rent-restricted (This is supported by the AHTCC).

Another important proposal is to modify or replace the next-available-unit rule, which as applied today, makes the compliance process for mixed-income deals complex, expensive and risky.

In conclusion, Shashaty noted, the proposals outlined above are just a starting point for discussion. This is not a comprehensive list of worthwhile ideas for policy changes, and the absence of an idea proposed by other organizations does not imply that the board does not support it.