On July 14, 2016, the “Affordable Housing Credit Improvement Act of 2016” was introduced in the Senate by Senators Cantwell, Hatch, and Wyden. It would make a number of changes to the Low-Income Housing Tax Credit (LIHTC) program, including (1) increases in the amount of available credit, (2) reforms relating to tenant eligibility, (3) locking in of the 4% rate, (4) permitting relocation costs to be included in eligible basis, (5) reforms relating to Native American Assistance, and (6) changing the name of the program to the “Affordable Housing Tax Credit.”
Amendments to this bill have been offered to the 115th Congress, as follows:
- New provision addressing planned foreclosures: current law permits an extended use agreement for a LIHTC property to be terminated if the property is foreclosed on. A loophole in the law has allowed owners to get out of the long-term use commitments by devising an arrangement where a related party holds a note on the property, and then takes the property through foreclosure in connection with the note. The related party then converts the property to market rate, raising rents and reducing affordability. While such an action is prohibited if it is part of an arrangement to terminate the extended use agreement, since the IRS is no longer involved with the property after year-15, there is concern that enforcement in this area is lacking.
>Proposed Change: §42(h)(6) would be amended to give authority to state housing finance agencies (HFAs) to make the determination that the foreclosure was an “arrangement” to terminate extended use. HFAs would have 60-days to review these transactions.
- New Provision Raising the Cap on Difficult to Develop Areas (DDAs): the bill introduced in July 2016 would repeal the 20 percent cap on qualified census tracts (QCTs), allowing all census tracts that meet the HUD guidelines to qualify for a 30% basis boost for projects located in those areas. HUD also maintains a similar 20% cap on DDAs, which are areas with high construction, land, and utility costs relative to area incomes.
>Proposed Change: Raise the 20% cap on DDAs to 30%, allowing more affordable housing projects to be built in higher-cost, high-opportunity neighborhoods.
- Additional Criteria for Community Revitalization Plans: under current law, state qualified allocation plans (QAPs) must give preference to projects that contribute to a concerted community revitalization plan (CCRP). The July draft bill gives HFAs the responsibility for making this determination, but provides no definition for a CCRP.
>Proposed Change: the new law would include criteria that states should consider when determining if projects contribute to a CCRP, including whether the plan is geographically specific, has a plan for implementation and goals for progress, includes a strategy for obtaining public and private commitments in other, non-housing infrastructure or other improvements beyond LIHTC developments, and demonstrates the need for revitalization.
- Local Approval: the draft bill from July requires the Treasury Department to issue guidance prohibiting any state QAP from including local approval or local contribution requirements.
>Proposed Change: simplifies the provision by writing the prohibitions in the statute rather than requiring Treasury guidance. The law would permit HFAs to consider local contributions, but only to the extent that they contribute to an overall measure of a projects ability to leverage outside investment and are considered on a level playing field with all other funding sources.
- Technical Corrections: current draft bill refers to “state housing credit agencies.”
>Proposed Change: since some states have multiple allocating agencies, the term will be changed to “housing credit agencies.”
These proposals, along with other draft legislation relating to the LIHTC program may or may not be part of any final tax reform. We will have a better idea once proposed tax reform legislation comes out of the House Ways & Means Committee, which could occur this summer. Any final tax reform legislation is not likely before late summer or early fall, if at all.