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4% Housing Credit and Tax-Exempt Housing Bonds are Key Tools to Preserve Affordability

November 3, 2017

By Andrew Spofford, POAH Chief of Staff

The “tax reform” bill released by the House Ways and Means Committee would cripple the Low-Income Housing Tax Credit (the “Housing Credit”) by eliminating the 4% Housing Credit, which is responsible for about 40% of all housing funded by the Housing Credit, and would end the tax exemption for private activity bonds for affordable housing (“Housing Bonds”), eliminating a crucial resource for affordable homeownership and rental housing.  As Congress refines the tax reform legislation, it must restore the 4% Housing Credit and Housing Bonds.

The “tax reform” bill released by the House Ways and Means Committee would cripple the Low-Income Housing Tax Credit by eliminating the 4% Housing Credit

The 4% Housing Credit is a critical resource for the preservation and renovation of affordable rental housing in the US, and has funded more than 1 million rental housing units affordable to low and moderate-income households since the creation of the Housing Credit program in 1986. It is an essential complement to the better-known “9% Housing Credit”, which is generally targeted to the construction of new affordable rental housing.  In 2014, 4% Housing Credits secured roughly $3 billion in equity investment in affordable and workforce housing in the US.

The 4% Housing Credit’s equity is available to qualifying buildings with loan financing from Housing Bonds, which are issued by state or local agencies to support low-cost lending to affordable rental communities as well as homeowners.  Housing Bond financing supports affordability by reducing borrowing costs -- bond investors demand lower rates because the interest paid on the bonds is exempt from federal income tax. The lower rate is then passed on by the state or local bond issuer to lower the interest rate paid by the housing property (or homeowner), enabling the property to charge lower rents.  The Housing Credit and Housing Bonds are complementary strategies, with the Housing Credit addressing up-front costs and Housing Bonds supporting ongoing affordability.  As written, the tax bill explicitly eliminates Housing Bonds, which would also end access to 4% Housing Credits. 

The 4% Housing Credit has proven to be efficient and flexible.  It requires less than half as much tax subsidy per dollar of development costs than the 9% Housing Credit – which means it’s an efficient tool to assist renovation projects, allowing states to reserve the very limited 9% Housing Credit primarily for new construction, which needs a stronger capital subsidy. Unlike the 9% Housing Credit, which is typically allocated in extremely competitive annual funding rounds, the 4% Housing Credit is issued to qualifying projects on a rolling basis – making it a nimble tool that allows developers to quickly execute time-sensitive transactions and compete effectively with market-conversion threats to existing affordable properties.

The 4% Housing Credit is also the single most critical tool for saving existing affordable housing which is at risk of loss as (1) the expiration of affordability restrictions exposes residents to market rent pressures or (2) owners can’t afford necessary repairs.  Preserving and renovating a property nearly always costs less in public subsidies than building new replacement units. Preserving existing affordable housing has other benefits, too:  It protects existing residents; it is more environmentally sustainable; and because a higher ratio of preservation projects’ construction costs goes to labor than to materials, they usually create more jobs per dollar than new construction projects.

The 4% Housing Credit is the single most critical tool for saving existing affordable housing.

Like the 9% Housing Credit, the 4% Housing Credit and Housing Bonds bring private-sector accountability to affordable housing developments.  The Housing Credit is typically sold to an investor limited partner, who provides equity to support a project, and who retains a long-term interest in property performance and compliance. This private-sector oversight structure has contributed to very strong performance, with foreclosure rates for LIHTC properties well below 1%, which compares very favorably with foreclosure rates for market-rate multifamily property and other real estate asset classes.  Similarly, bondholders’ interest in long-term property performance ensures both strong initial loan underwriting and effective ongoing asset management and compliance monitoring.

Another reason for the effectiveness of both the Housing Credit and Housing Bonds are that they are entrusted to states for allocation according to local housing market conditions and public policy priorities – ensuring that these programs are responsive to local needs, not federal mandates. 

As Congress seeks to streamline the federal tax code, it must ensure that these proven, locally controlled housing resources are protected.

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House GOP Tax Reform Bill Retains Housing Credit, But Repeals Housing Bonds - The Action Campaign