How the Neighborhood Homes Investment Act Compares with the LIHTC Program

Earlier this year, President Biden made headlines as he introduced a $2 trillion infrastructure plan, titled “The American Jobs Plan,” to rebuild America’s infrastructure and revitalize the economy. With the federal moratorium on housing eviction ending in July, the majorities in Congress are pushing to enact a broad infrastructure plan to address social and economic challenges the nation faces.

For some legislators, an infrastructure plan is only about systems of roads and bridges, electrical grids, or water delivery and disposal. Others, in the majority, have been advocating for a much broader view that includes the foundations of a functioning society, such as affordable housing, day care, and education.

Recently, California Congresswoman Maxine Waters, Chair of the House Financial Services Committee, announced that she secured a commitment from President Biden to include affordable housing investments in the infrastructure package enacted through a reconciliation process. “As Chairwoman of the Financial Services Committee and a longtime advocate for ending homelessness and promoting fair, affordable, and accessible housing, my number one priority has been to ensure that President Biden’s infrastructure plan recognizes that ‘Housing Is Infrastructure’ through robust funding,” stated Waters. “To say that the pandemic destabilized an already unstable housing market is an understatement,” continued Waters.

As the infrastructure plan makes its way through the legislative process, you may have heard about the Neighborhood Homes Investment Act (NHIA). President Biden’s American Jobs Plan has called upon Congress to pass it. The NHIA is based on the Low-Income Housing Tax Credit (LIHTC) and offers $20 billion worth of tax credits to developers and investors over the next five years. We’ll go over the details of the legislation and discuss how the program would function similarly to or differently from the LIHTC program.

Background

On June 25, Senators Rob Portman, R-Ohio, and Ben Cardin, D-Md., introduced the NHIA bill (S. 4073) bill. The bill is the Senate companion to a House bill, H.R. 3316, introduced last year by Representatives Brian Higgins, D-N.Y., and Mike Kelly, R-Pa.

The NHIA is a proposed federal tax credit targeted to the new construction or substantial rehabilitation of affordable, owner-occupied housing located in distressed urban, suburban, and rural neighborhoods. It intends to leverage private investment to build and substantially rehabilitate 500,000 affordable homes for moderate- and middle-income homeowners over the next 10 years.

Like the LIHTC program, state agencies would award the NHIA tax credits to project sponsors who would raise capital from investors to finance the home building and substantial rehabilitation. Once a home is sold to an income-qualified owner-occupant, the investor would receive the one-year tax credit.

Under the program, states are required to develop qualified allocation plans (QAP). According to the legislation, the QAP would include criteria pertaining to neighborhood revitalization strategy and impact, sponsor capability, likely long-term homeownership sustainability, and any additional state-determined criteria such as construction standards and developer fees. Additionally, 10 percent of each state’s allocations would be set aside for nonprofit sponsors. The QAPs are subject to review after a public hearing and comment process so that they would reflect state and local priorities.

After states allocate NHIA tax credits on a competitive basis and project sponsors raise capital from investors and use it to finance home construction and substantial rehabilitation, investors claim tax credits after homes are completed, inspected, and owner-occupied. Homeowners make down payments and obtain mortgages to cover the homes’ sale price. And the tax credit covers the gap between the development cost and the sale price. Sponsors may use allocated but unneeded tax credits for additional homes.

Neighborhood Eligibility

Whereas the LIHTC program targets affordable rental housing, the NHIA tax credit targets the development of owner-occupied single-family homes. Since the creation of the LIHTC in 1986, the affordable housing focus has been on multifamily, low-income rental housing. And since its inception, the LIHTC has become the most productive affordable housing finance tool in urban America.

To date, LIHTC has created 2.5 million affordable rental units, and the program accounts for the vast majority (approximately 90 percent) of all new affordable rental housing built in the U.S. today. Advocates of the NHIA seek to build on the successful LIHTC program with its ecosystem of lenders, investors, and builders that facilitate this program and consistently receives bipartisan support at the local, state, and national levels.

Because home values in the targeted neighborhoods and rural areas are such that developers can’t sell homes for what it costs to construct or substantially rehabilitate them, the NHIA tax credit would incentivize developers to construct new or substantially rehabilitate housing because it closes the value gap, up to 35 percent of eligible development costs. Eligible neighborhoods must meet all three of the following tests:

• Elevated poverty rates—not less than 130 percent of the metro rate (130 percent of the state rate in non-metro areas);
• Lower incomes—up to 80 percent of the metro median income (80 percent of the state median income in non-metro areas); and
• Modest home values—below the metro median home value (below the state median in non-metro areas).

In addition, states would be able to use up to 20 percent of their tax credits for non-metro tracts with median incomes below the state median income and to help longstanding homeowners substantially rehabilitate and remain in their homes.

NHIA Tax Credit Housing

Every state has neighborhoods where the homes are in poor condition and the property values are too low to support new construction or substantial renovation. The lack of move-in ready homes makes it difficult to attract or retain homebuyers, causing property values to decline.

The NHIA would break this downward spiral by creating a federal tax credit that covers the gap between the cost of building or renovating homes and the price at which they can be sold, thus making renovation and new home construction possible. The NHIA would apply to one- to four-unit single-family properties, condominium units, and co-op units. The program is flexible and can address the needs of older, existing housing in need of substantial rehab; vacant lots where in-fill homes can be built; or housing that needs to be torn down and rebuilt.

Also, sales prices are limited to four times the metro area or state median family income (MFI). For example, if MFI is $65,000, the sales price limit is $270,000. Higher limits apply to homes with two to four units.

Household Qualifications

The NHIA tax credit program would directly serve low- and moderate-income households earning 140 percent of area median income (AMI) or less who are seeking to purchase affordable, entry-level homes and live in them for at least five years.

If the homeowner sells or rents their home before they have lived in it for five years, the homeowner must pay a penalty back to the state agency, which would be calculated as declining percentage of the gain on the sale of the home. The penalty in year 1 is 50 percent of the gain and the penalty in year 5 is 10 percent.

Neighborhood Homes Investment Act vs. Low-Income Housing Tax Credit