Obama Proposes FY 2015 Budget, LIHTC Changes

On March 4, President Obama introduced his fiscal year (FY) 2015 budget, requesting a total of $46.7 billion for HUD programs, as well as significant policy proposals aimed at improving the Low-Income Housing Tax Credit (LIHTC) program. The "Green Book," which is used to provide general explanations of the administration’s budget and revenue proposals, provides significant detail into different policy recommendations having to do with the LIHTC and other programs within the tax code. Here are the LIHTC-related proposals:

• Private activity bond conversion. The proposal would allow states to convert their private activity bond (PAB) volume cap into LIHTC allocations. The conversion ratio would be reset each calendar year to respond to changing interest rates.
• Modified LIHTC rate formula. Rather than extend the minimum 9 percent LIHTC rate, this proposal would use revised formulas, effective Dec. 31, 2014, to produce annual allocated credit rates. The administration’s goal in developing a new formula was to create a more “accurate” discount rate that more closely reflects an investors cost of borrowing rather than the government’s cost of borrowing. The revised rate would also be more responsive to changes in market interest rates. While the proposed formula would be less generous than the minimum 9 percent rate in today’s low-interest rate environment, the formula would provide a higher credit rate in higher interest rate environments.
• Income averaging proposal. There would be a third income election criteria of reserving at least 40 percent of units at an average of 60 percent of area median income (AMI), with a maximum of 80 percent AMI on initial certification. Average is determined over the entire property, not on a building-by-building basis. The administration’s goal is to encourage income mixing, which will be especially helpful in low-income neighborhood revitalization, and rural areas where sparse populations make it difficult to maintain an appropriate income mix in properties.
• Added selection criteria in qualified allocation plans. States would be required to add a "preservation of federally assisted affordable housing" selection criteria that housing authorities must include in qualified allocation plans.
• Expansion of LIHTC benefits to REITs. Under current law, real estate investment trusts (REITs) have no incentive to invest in LIHTCs. This proposal would essentially provide an incentive for REITs to invest in LIHTCs by allowing them to designate a portion of their dividends as tax-free, equivalent to the value of the LIHTC.
• Additional domestic violence protections. This proposal would extend the rules under the Violence Against Women Act for most federal housing programs to LIHTC projects. The proposal clarifies the general public use rule to allow developers to create housing for domestic violence victims.