Legislative Momentum Builds for LIHTC Program Improvements
Lawmakers recently reintroduced the latest reiteration of the Affordable Housing Credit Improvement Act (AHCIA) in the House and Senate with bipartisan support. The Senate and House versions of the AHCIA are identical companion bills. The AHCIA was first introduced in 2016, and its most recent version has earned the bipartisan support of more than one-third of the 116th Congress. This latest step to bolster affordable housing is coming as legislators are beginning to shift their focus from immediate COVID relief to infrastructure and economic recovery legislation.
Flurry of Activity
A few weeks before the bill’s introduction, President Biden released an outline of a $2 trillion plan to rebuild U.S. infrastructure. Called the American Jobs Plan, it seeks to boost federal investment in a range of infrastructure systems, including housing, transportation, schools, broadband, electric grid, and drinking water systems.
The fact sheet released by the White House states there is a “severe shortage of affordable housing options in America,” and the plan allocates $213 billion for investments in the housing infrastructure to produce, preserve, and retrofit more than two million affordable and sustainable homes. In addition, the Treasury Department released a report describing the president’s tax plan in the American Jobs Plan that made clear reference to a “a marked increase in the resources available through the low-income housing tax credit and other housing incentives.”
The Moving Forward Act, the infrastructure bill that passed the House last summer, included provisions to expand and strengthen the LIHTC. And the House Ways and Means Committee Chairman Richard Neal has already stated that he is working “with President Biden to get an infrastructure bill enacted, including a revived Build America Bonds program, a transformative expansion of the Low-Income Housing Tax Credit. . .”
Certain elements of the AHCIA since it was first introduced in 2016 have been enacted. Most recently, as part of the Consolidated Appropriations Act signed into law in December 2020, one provision regarding the LIHTC program established a minimum 4 percent LIHTC rate for sites financed through tax-exempt private-activity bonds.
This provision is important because the value of LIHTCs, the federal credits sold to investors to raise money for a site, depends on interest rates set by the Treasury Department. During a down market, when the federal government cuts borrowing rates to lessen financial fallout and stimulate the economy, the LIHTC program is negatively affected. With interest rates having reached just above 3 percent due to COVID-19 and cuts to federal borrowing rates, and state and local governments running low on cash, setting a floor of 4 percent allows LIHTCs to become more attractive to corporate investors, who receive a reduction on federal income taxes for 10 years based on the rate.
With an increasing number of bipartisan lawmakers supporting the LIHTC program in Congress, it seems as though the stage is set and progress toward combatting the nation’s affordable housing crisis is more within reach this year than in the recent past. We’ll take a look at the key provisions and changes made to the AHCIA this year intended to strengthen and improve the LIHTC program.
Accelerate LIHTC Volume Cap Increases
Each year the federal government allocates a set amount of 9 percent LIHTCs to each state on a per-capita basis. In 2021, the allocation is $2.8125 per resident (with a minimum state allocation of $3,245,625).
Currently, there’s a temporary 12.5 percent increase in the amount of LIHTCs available as a result of the 2018 Consolidated Appropriations Act. This increase expires at the end of 2021. The AHCIA proposes to increase the allocation by 50 percent phased in over two years—25 percent in 2021 and 25 percent with an inflation adjustment in 2022. Prior versions of the bill had the volume cap increase by phasing in the full increase over five years instead of two years.
Lower Bond-Financing Threshold
The current version of the AHCIA has a provision to lower the bond-financing threshold to 25 percent to receive the full amount of the 4 percent housing credits. Currently, for a bond-financed LIHTC site to receive the full amount of 4 percent housing credits it’s eligible to receive, at least 50 percent of development costs must be initially financed with tax-exempt multifamily bonds. In practice, most LIHTC sites don’t need that level of debt financing and wouldn’t be able to support it over the long term given the lower rents paid by qualified residents.
The AHCIA proposes to lower the threshold to 25 percent of eligible land and building costs. According to research commissioned by the National Council of State Housing Agencies (NCSHA), permanently lowering the threshold from 50 percent to 25 percent could produce or preserve as many as 1.49 million additional affordable rental homes over the 2022 to 2031 time period.
Increase Basis for Indian Areas
Currently, sites are eligible for an up to 30 percent basis boost if they’re located in a Difficult Development Area (DDA), meaning areas with high construction, land, and utility costs relative to area median gross income. Boosting the eligible basis increases the site’s maximum LIHTC allocation, allowing an LIHTC site to generate more equity.
Along with a proposal in the AHCIA to increase the population cap for DDAs, it includes modifying the definition of DDAs to automatically include sites located in an Indian area, making these sites eligible for the 30 percent basis boost if needed to make them financially feasible.
Increase Ability to Claim LIHTCs After Casualty Loss
Currently, if an LIHTC site experiences a casualty loss such as a flood or fire that causes residents to temporarily vacate the property, the owner is required to have the property back in service by Dec. 31 of the calendar year, regardless of when during the year the loss occurred, to avoid the recapture of LIHTCs.
This is a much bigger problem if the flood or fire happens near the end of the calendar year, because the owner risks losing LIHTCs for the entire year, even though the site was in service for most of that time. The IRS makes an exception to this rule only for casualty losses resulting from federally declared disasters. In these instances, the state housing agency may set a reasonable time period, not to exceed 25 months from the date of the casualty, by which the owner must have the site back in service.
The AHCIA proposes that there is no recapture and no loss of the ability to claim LIHTCs during a restoration period that results from any casualty loss (regardless of whether it results from a federally declared disaster), provided that the building is restored within a reasonable period as determined by the state housing agency, but generally not to exceed 25 months from the date of the casualty.
It further allows the state housing agency to extend the 25-month period by up to 12 months (for a total of 37 months maximum) if the casualty occurred due to a federally declared disaster making reconstruction within 25 months impractical. In such instances, the additional restoration time beyond 25 months will be added to the site’s required program compliance period.
Align LIHTC Program with VAWA Compliance
The 2013 reauthorization of the Violence Against Women Act (VAWA) provided protections for victims of domestic violence, dating violence, sexual assault, and stalking living in LIHTC sites. VAWA required each “appropriate agency” to adopt policies and procedures through additional guidance and rule-making to implement the VAWA protections.
The Department of Treasury is the Executive Department for the LIHTC program and is noted as the “appropriate agency.” The IRS has taken the stance that since VAWA isn’t a requirement of the LIHTC program, noncompliance with VAWA doesn’t trigger credit recapture of previously claimed credits, nor does it prevent the owner from continuing to claim credits. Per the VAWA statute, further guidance and rulemaking is needed by the appropriate agency as it relates to appropriate agency-approved VAWA certification, model transfer plan, and reasonable time for requalification or to find new housing as it relates to lease bifurcation.
The AHCIA would align the LIHTC program with VAWA by:
- Requiring all Housing Credit long-term use agreements to include VAWA protections;
- Clarifying that an owner should treat a tenant who has her lease bifurcated due to violence covered under VAWA as an existing tenant and shouldn’t recertify the tenant’s income as if she were a new tenant at initial occupancy; and
- Clarify that victims under VAWA qualify under the special-needs exemption to the LIHTC general public use requirement.
Align Student Rule with HUD Housing Program’s Rule
The AHCIA seeks to align the LIHTC program’s student rule with the student rule applicable to HUD housing programs (see "HUD vs. LIHTC: Comparing Student Rule Restrictions in Detail," below) and provide an exception to the rule for student residents over the age of 24 so that they may pursue educational opportunities and a path to greater self-sufficiency. The bill provides exceptions to households under the age of 24, consistent with the exceptions provided under the HUD student rule.
For example, individuals of any age would be exempt from the student prohibition if they had been a homeless youth immediately before attaining the age of majority, a veteran of the armed forces, or a parent, among other exceptions. It also provides an exception to the student rule for victims or threatened victims of domestic violence or sexual assault.
The most recent version of the AHCIA includes two small changes to the previous student rule provision by adding victims of human trafficking to the list of exceptions to the student rule and ensuring that any individual who had been homeless as a youth wouldn’t be disqualified from living at a LIHTC site if he is a student, regardless of whether he was homeless immediately before reaching the age of majority.
HUD vs. LIHTC:
Comparing Student Rule Restrictions in Detail
It’s important for LIHTC sites to confirm an applicant’s student status when determining eligibility. Generally speaking, households composed entirely of full-time students aren’t eligible to occupy low-income units at any time during the compliance period. But there are exceptions, and applying student rules can be confusing, especially when sites have multiple funding sources and applicants may need to meet different student rules to qualify for a low-income unit.
When the LIHTC program was created, lawmakers were concerned about recipients using the funds for dormitory or transient housing. This resulted in the LIHTC’s version of the student rule. For HUD Multifamily housing, student restrictions were primarily implemented to address incidents of children of wealthy parents receiving federal housing assistance and incidents of college students obtaining federal housing assistance without their educational financial assistance counted as income for purposes of income eligibility for the federal housing assistance.
The Affordable Housing Credit Improvement Act is seeking to align the separate student rules imposed by the LIHTC program and HUD housing. Until the bill is passed, however, here are how the student restrictions differ between the two programs.
Student Restrictions for the LIHTC Program
A household cannot be comprised of all full-time students (Kindergarten through 12th grade and institutions of higher education) unless they meet one of the following exceptions:
- A student receiving assistance under Title IV of the Social Security Act (TANF); or
- A student who was previously in the foster care program; or
- A student enrolled in a job training program receiving assistance under the Job Training Partnership Act or under other federal, state, or local laws; or
- The household is comprised of single parents and their children and such parents are not dependents of another individual and such children are not dependents of another individual other than a parent of such children. In the case of a single parent with children, the legislative history explains that none of the tenants (parent or children) can be a dependent of a third party; or
- The household contains a married couple entitled to file joint tax returns.
For the LIHTC program, a student who is a full-time student for five months out of the current calendar year is considered a full-time student for the entire calendar year. The months don’t need to be consecutive.
Student Restrictions for HUD Housing Programs
A household is not eligible for occupancy if the household contains a full- or part-time student at an institution of higher education and all of the following statements are true for the student:
- Is under the age of 24;
- Is not a veteran of the U.S. military;
- Is unmarried (if married, the couple can’t live apart from each other);
- Does not have a dependent child who resides with the household member at least 50 percent of the time;
- Is not a person with disabilities receiving Section 8 assistance as of Nov. 30, 2005;
- Is not residing with parents who are receiving or applying for Section 8 assistance;
- Is not otherwise individually eligible or has parents who (individually or jointly) are not income-eligible to receive Section 8 assistance, unless the student can demonstrate his or her independence from his or her parents.
To determine a student’s independence from his or her parents, the owner should use the following criteria:
- The individual must be of legal contract age under state law.
- The individual must have established a household separate from parents or legal guardians for at least one year prior to application for occupancy, or the individual must meet the U.S. Department of Education’s definition of an independent student. Per definition, an independent student is:
- At least 24;
- A graduate or professional student;
- A veteran;
- A member of the armed forces;
- An orphan;
- A ward of the court;
- Someone with legal dependents other than a spouse;
- An emancipated minor; or
- Someone who is homeless or at risk of being homeless.
- The individual must not be claimed as a dependent by parents or legal guardians pursuant to IRS regulations.
- The individual must obtain a certification of the amount of financial assistance that will be provided by parents, signed by the individual providing the support. This certification is required even if no assistance will be provided.
For HUD programs, the current student status is determinative. The five-month rule from the LIHTC program doesn’t apply.
To help you understand when a student rule is triggered for a particular program, click on our Model Table, below.