Biden Administration Announces Housing Supply Action Plan
President Biden recently unveiled a sweeping plan that aims to create and preserve hundreds of thousands of affordable housing units in the next three years and help close the country’s critical housing supply shortfall within five years. The plan follows recent remarks by President Biden saying that tackling inflation is his top economic priority, noting that housing prices are a key driver of inflation. Administration officials said the plan will help "ease the burden of housing costs over time."
The plan features a combination of legislative, regulatory, and administrative steps to expand affordable housing and encourage the construction and rehabilitation of housing of all types and price points. Although the plan calls for numerous investments and reforms in various housing programs, we'll focus on the key provisions of the plan affecting the LIHTC program.
Legislative LIHTC Proposals
As part of the Housing Supply Action Plan, the President is encouraging Congress to pass investments in housing production and preservation. The plan calls on Congress to “bolster funding for successful housing subsidy programs that can pair with LIHTC to produce and preserve housing that’s affordable for very- and extremely-low-income renters." These programs include the Housing Trust Fund, the HOME Program, Housing Choice Vouchers, and the Project Based Rental Assistance program. The plan also highlights the House-passed reconciliation bill and the President's 2023 Budget, which includes LIHTC provisions and notes that these provisions have received bipartisan support.
The President’s 2023 Budget proposes $50 billion in mandatory funding to increase the supply of affordable housing, including $35 billion for a new Housing Supply Fund to be administered by HUD. The Housing Supply Fund would provide funding to state and local housing finance agencies and their partners for grants, revolving loans, and other streamlined financing tools to increase housing supply, as well as grants to advance state and local jurisdictions’ efforts to remove barriers to affordable housing.
The $50 billion also includes a $10 billion investment in the LIHTC program over 10 years, which would go toward basis boosts for certain bond-financed Housing Credit developments, and $5 billion for the U.S. Department of Treasury’s Community Development Financial Institutions Fund. This basis boost would mirror the basis boost already available for 9 percent Housing Credits, but would apply only to bond-financed new construction or substantial rehabilitation that nets additional units.
The House-passed reconciliation bill included a historic expansion of the LIHTC. According to estimates, the bill could finance nearly 812,000 additional affordable homes over the next decade by investing nearly $12 billion in the LIHTC program. The following are the LIHTC provisions included in the reconciliation bill:
Lowered bond-financing threshold. The Tax Code currently requires that multifamily housing bonds be used to finance at least 50 percent of the aggregate land and building costs in order for a property to generate 4 percent housing credits on the entire amount of its qualified basis. Originally, the financed-by threshold was 70 percent, but Congress reduced that amount in 1990 as properties were unable to support such high debt service with LIHTC reduced rents.
The bill contemplates lowering the bond-financing threshold from 50 percent to 25 percent for five years, from 2022 to 2026. According to a National Council of State Housing Agencies report, lowering the bond financing threshold for LIHTC sites to 25 percent could result in the production of nearly 1.5 million more 4 percent Housing Credit units than would otherwise be produced between 2022 to 2031.
Increased LIHTC allocation. The bill would increase the annual LIHTC allocation at a rate of 10 percent per year plus inflation from 2022 to 2024. This amounts to a roughly 41 percent increase over current levels in 2024 including the continuation of the current 12.5 percent cap increase, followed by inflation adjustments after 2025. According to cost and impact estimates, from 2022 to 2031, this provision would provide an investment of $2.1 billion and would finance 43,900 additional affordable homes than otherwise possible.
Basis boost for ELI household sites. The bill provides a permanent 50 percent basis boost for developments serving extremely low-income (ELI) households, as well as requiring an 8 percent set-aside for ELI sites, effective for buildings placed in service after Dec. 31, 2021.
Basis boost for sites in Indian areas. The bill provides for a permanent 30 percent basis boost for developments in Indian areas, effective for buildings placed in service after Dec. 31, 2021, by designating Indian areas as Difficult to Develop Areas. According to impact estimates, this provision would provide an investment of $117 million and would finance 2,000 additional affordable homes than otherwise possible from 2022 to 2031.
Regulatory LIHTC Proposals
Under the Biden administration's plan, the administration would implement regulatory actions to expand and improve existing forms of federal financing, including for affordable multifamily development and preservation. The Housing Supply Action Plan seeks to increase Fannie Mae and Freddie Mac multifamily financing, which would increase their LIHTC investments, improve alignment of federal funds to reduce inefficiencies, and finalize the proposed rules for the LIHTC average income test. These actions would be undertaken immediately.
Strengthen financing for multifamily development and rehab. The plan notes that last September, Fannie Mae and Freddie Mac Enterprises increased their equity investment in LIHTC deals, resulting in investments in over 7,000 units. The Enterprises anticipate further growing their LIHTC equity investments in the year ahead. And to ensure a strong focus on affordable housing and traditionally underserved markets, the Federal Housing Finance Agency (FHFA) is requiring that at least 50 percent of the Enterprises’ 2022 financing for multifamily housing be targeted to mission-driven affordable housing.
Align housing program requirements. The plan says it will improve the alignment of federal funds to reduce transaction costs and duplications, and accelerate development. Affordable housing development projects often require more than one federal source of funding. The most common pairing is LIHTC and HUD funds, such as FHA Multifamily, the Housing Trust Fund, or HOME. But each funding source comes with its own set of requirements and procedures.
To reduce transaction costs and duplication, and to speed development, the plan states the administration will make changes to harmonize federal requirements across programs as much as possible–including through programs like HUD’s LIHTC Pilot Program, which streamlines FHA processing of mortgage insurance applications for projects with LIHTC equity. And to encourage alignment of affordable housing subsidies, the White House, HUD, Treasury, and USDA will convene state housing agencies to discuss best practices on the alignment of applications, reviews, and funding.
Finalize the LIHTC "Income Averaging" proposed rule. To qualify for LIHTC, developers must make commitments to create housing that’s affordable to households that meet specific income thresholds. Income averaging allows an owner to meet the same affordability goals by taking the average of the income for some households who are in the property as opposed to requiring all to meet the same threshold.
This “average-income test” for LIHTC qualification enables the creation of more financially stable, mixed-income developments and makes LIHTC-supported housing more feasible in sparsely populated rural areas. It will also facilitate the production of additional affordable and available units for extremely low-income tenants. The plan commits the Treasury Department to finalize regulations to provide the needed guidance for the average income test by the end of September.
The Housing Supply Action Plan represents comprehensive efforts to close the housing supply shortfall. Many of the regulatory proposals in the bold plan, such as the finalization of the LIHTC program's income averaging regulations, can be completed without the approval of Congress.
However, the call for new investments and resources to be provided through legislative action is dependent on Congress, and the window to pass any Democratic-only priorities through the reconciliation process is narrowing. The focus with the pending reconciliation bill is on the Senate and Senator Joe Manchin of West Virginia. Negotiations are ongoing, but it’s unclear if and when action on a revised reconciliation bill may advance. There may be few opportunities to pass bipartisan legislation before the midterm elections, but the most likely legislative method for LIHTC proposals to advance would be through a year-end tax bill, which typically has included extensions of expired and expiring provisions. This tax extenders legislation could include consideration of the 12.5 percent increase in the 9 percent LIHTC annual allocations that expired at the end of 2021 and other tax proposals such as lowering the bond-financing threshold.
What Is the Average Income Minimum Set-Aside Election?
All tax credit owners must formally notify the IRS of their minimum set-aside election for their building or site when they file IRS Form 8609. If an owner doesn’t elect a set-aside on this form, all the tax credits the owner was allocated for its site may be lost. A minimum set-aside is the federally required minimum level of tax credit units at a site. To meet the set-aside, you must rent a certain percentage of the units in your building or site to qualified low-income households.
Meeting your site’s minimum set-aside is the most important goal you have as a tax credit manager. If you meet the set-aside, the owner of your site will be entitled to claim its tax credits. If you don’t meet the set-aside, your site won’t qualify for the tax credit program, which means the owner won’t be able to claim any of the credits it was allocated.
The average income minimum set-aside was added to Section 42 in 2018 as part of the Consolidated Appropriations Act of 2018. This income-averaging minimum set-aside election option allows LIHTC-qualified units to serve households earning as much as 80 percent of the area median gross income (AMI) as long as the average income limit at the property is no more than 60 percent of the AMI.
Previously, tax credit units were restricted to households earning no more than 60 percent of the AMI. The prior minimum set-asides called for having 20 percent of the units targeted to no more than 50 percent of the AMI or 40 percent of the units at no more than 60 percent of the AMI, and these options remain part of the federal program.
The income-averaging option is intended to expand the program to serve more families. Before, families earning 80 percent of the AMI didn’t qualify for a LIHTC unit and were likely to be living in market-rate housing. Also, income averaging could help a site’s bottom line and allow for deeper income targeting. Higher rents that households at the upper range could pay would have the potential to offset the lower rents for extremely low- and very low-income households.