Spending Bill Contains Two Important LIHTC Program Changes

On March 23, President Trump signed the Consolidated Appropriations Act, 2018 (H.R. 1625), a $1.3 trillion spending bill that funds the federal government through Sept. 30, 2018. In addition to preventing a government shutdown, this omnibus spending bill incorporated two key improvements adopted from the Cantwell-Hatch Affordable Housing Credit Improvement Act intended to strengthen and expand the LIHTC.

The adopted improvements came at a precarious time. When Congress voted last year to sharply reduce corporate income taxes, it undermined the nation’s largest subsidized housing program as the nation’s affordable housing crisis deepens. According to a 2017 report, more than 9 million new renters have joined the market since 2005—the largest increase on record. From 2000 to 2013, the total number of Americans facing extreme housing unaffordability has ballooned from 7 million to 11.2 million—a nearly 60 percent increase. In addition, there’s a nationwide shortage of 7.2 million affordable rental homes, a significant increase from the 4.4 million gap in 2000, according to the National Low Income Housing Coalition.

Senator Maria Cantwell, Democrat of Washington, negotiated a provision in the spending bill to increase the number of affordable-housing credits for the first time in a decade. In a news release, Cantwell stated, “This is the first increase in over a decade. Nearly $3 billion is a good start towards tackling the housing crisis in our cities and rural communities. The increase couldn’t come at a better time. This down payment will help us deal with the tremendous deficit we have in affordable housing.” The following is a summary of the LIHTC provisions:

Allocation cap increase. The bill provides a 12.5 percent increase in LIHTC allocations, every year for the next four years from 2018 to 2021. The new 2018 per-capita amount is $2.70 and the new small state minimum is $3,105,000. For 2019-2021, annual inflation adjustments will be applied to the new 2018 allocation amounts. Without a legislative extension for 2022, the LIHTC annual allocation will revert to current law, adjusted for inflation.

Income averaging. In addition to the allocation cap increase, the bill includes a new permanent option for income averaging in LIHTC sites. It comes from the Affordable Housing Credit Improvement Act (S. 548, H.R. 1661), which creates an income-averaging option in addition to the current low-income requirements. It’s important to note that the existing 40/60 and 20/50 minimum set-asides are not going away. Income averaging would be a new, third option.

Currently, household incomes in LIHTC sites cannot exceed 60 percent of the area median income (AMI) at move-in. This provision allows certain apartments in a LIHTC property to be available to residents earning up to 80 percent of AMI, so long as the development-wide average is 60 percent or less.

To help simplify the math and compliance, the AMI choices are limited to 20, 30, 40, 50, 60, 70, or 80 percent. The first four of these levels are not new. LIHTC allocating agencies have provided incentives to reach lower income households for many years. Now, however, this deeper targeting would become a federal requirement. Currently, enforcement and interpretation of these lower levels is handled by states.

The income averaging provision is not retroactive. It applies to allocations made after March 23 and won’t be available to owners who have already submitted their minimum set-aside election. Currently, the IRS hasn’t issued guidance or amended Form 8609, the Low-Income Housing Credit Allocation and Certification form on which owners make the minimum set-aside election.

Allowing income averaging permits a broader mix of incomes. The income averaging option allows projects to accept tenants with higher average median incomes as long as the overall average of tenants in the project doesn’t exceed 60 percent of AMI. In addition, it makes developing LIHTC sites in places where it now is difficult more attractive, such as high housing cost areas, sparsely populated low-income areas, where finding enough renters earning less than 60 percent of the AMI to justify construction of new property is difficult, low-income neighborhoods in need of revitalization, and existing developments in need of preservation, but where tenant incomes have risen over the years.

According to industry analysts, these measures won’t close the gap created by the tax cut, but it does represent the first expansion of the LIHTC in 10 years. And, if the temporary allocation increase is made permanent, they estimate it would bring affordable rental housing production from the 9 percent allocated LIHTC program to levels close to pre-tax reform.