Senate Finance Committee Details LIHTC Legislative Priorities

Senator Ron Wyden of Oregon, the ranking member of the Senate Finance Committee, recently released a list of affordable housing priorities he will push for in the next round of COVID-19 relief legislation. His priorities are directed toward supporting LIHTC sites. Wyden’s focus on preserving and expanding affordable housing through the LIHTC program is particularly notable because he would become chairman of the committee should Democrats take the Senate in the fall.

“The pandemic and resulting economic crisis have laid bare the fact that millions of Americans are one or two missed paychecks away from not being able to pay their rent or mortgage. This country needs more affordable housing, not less, and Congress can’t allow this crisis to foster homelessness and further reduce the supply of affordable housing,” Senator Wyden said in a statement. “My priorities for the next COVID-19 relief bill include common sense policies that would help preserve existing affordable housing and create new affordable housing by ensuring projects in the pipeline are not abandoned.”

Summary of Policy Priorities

Senator Wyden’s legislative priorities would do the following:

Suspend “red tape” compliance for 12 months so LIHTC projects can continue. As a result of the pandemic, Wyden points out that social distancing recommendations to safeguard the health of LIHTC residents, property management staff, state and local inspectors, and builders have resulted in shortages of construction materials, delays in permitting and local approvals, and severe interruption of property managers’ ability to interact with residents and key partners to continue regular property operations. Moreover, state housing agencies have limited ability to complete development approvals and regular compliance monitoring while the crisis is ongoing. This provision would delay a number of compliance deadlines so that existing LIHTC housing can continue to function and new LIHTC housing can be developed with fewer obstacles.

Expand LIHTC incentives for new production of affordable housing. Wyden notes that current LIHTC deals are at risk of falling apart. He would like to set a minimum floor under the value of the 4 percent credit, which would expand subsidies for existing LIHTC properties, reducing the need for additional gap financing. These provisions would also expand incentives for new production of affordable housing, when state economies reopen for business:

• Set a floor under the value for the 4 percent credit;
• Increase the amount of 4 percent credits that can be paired with tax-exempt bonds;
• Allow 4 percent credit projects to receive the 30 percent difficult-to-develop basis boost;
• Allow LIHTC projects in rural areas to claim the 30 percent difficult-to-develop basis boost; and
• Allow LIHTC projects in Indian areas to claim 30 percent difficult-to-develop basis boost.

Close the LIHTC “Qualified Contracts” loophole. According to Wyden, the “Qualified Contracts” loophole allows LIHTC operators to sell their properties after 15 years to private developers who will rent units at market rate instead of LIHTC sites ordinarily remaining available to low-income residents for 30 years. Many states have rules to prevent LIHTC owners from starting this LIHTC program exit process. But for those states that don’t, Senators Wyden and Todd Young (R-IN) have introduced legislation to eliminate this provision. (For more on qualified contracts, see below.)

Provide emergency assistance to help LIHTC tenants stay housed. The Treasury would provide tens of billions in one-time, emergency LIHTC grants to state housing finance agencies. And these state agencies would grant these funds to LIHTC sites that have seen rent payments drop at least 10 percent below their 2019 monthly average. LIHTC owners will receive a grant worth 50 percent of the rent shortfall in exchange for agreeing not to evict current residents, except for good cause.

Keep new LIHTC sites open. LIHTC site owners can’t claim LIHTC credits until enough units are leased by low-income tenants. Due to the COVID-19 outbreak, lease-up has slowed or ceased, putting many new LIHTC sites in danger of not receiving the tax credits that financed their construction. If these LIHTC units remain unoccupied for too long, investors will walk away and developers will go underwater or even fail. This provision would allow LIHTC developers and investors to begin receiving LIHTC credits for those buildings that haven’t leased up due to the pandemic.

Provide additional support for LIHTC sites that house people experiencing homelessness. This provision would significantly enhance the generosity of the LIHTC credit for sites that house individuals below 30 percent of median income, including tenants who were formerly homeless. The enhanced credit would be based on not only the cost of construction but also the ongoing costs of supportive housing services necessary to provide a stable living environment for very low-income or formerly homeless tenants.

How Qualified Contract Provisions Are Used to Exit the LIHTC Program

Beginning in 1990, new LIHTC sites that come online have been required to preserve affordability for 30 years. During the first 15 years, called the initial compliance period, owners are required to maintain affordability. And the second 15 years are known as the extended use period.

Under current law, there are two exceptions to the requirement that LIHTC sites remain affordable for 30 years: (1) in the case of foreclosure; and (2) where a “qualified contract” is presented to the state housing credit agency.

Under current law, LIHTC owners who want to exit the LIHTC program may do so at any time after the 14th year of the 15-year compliance period using the Qualified Contract process. Specifically, Section 42(h)(6)(E)(i)(II) of the Internal Revenue Code created a provision that state housing credit agencies respond to the request for presentation of a qualified contract for tax credit developments with expiring compliance periods.

As a result, after Year 14, an owner can approach the agency to request a qualified contract. This request begins a one-year period during which the housing agency seeks a qualified buyer to purchase the property and maintain it as affordable for the duration of the extended use period.

The required purchase price for a qualified contract is based on a formula stipulated by IRS Code Section 42. The price as required by regulations was intended to prevent a windfall for owners and investors and limit them to an inflation-adjusted return on their investment.

However, in nearly all cases, the process generally plays out so that the qualified contract formula price significantly exceeds the market value of the property as affordable housing. As a result, it’s rare for the housing agency to find a buyer willing to pay the qualified contract price. After the one-year search period expires without a qualified buyer, the owner is free to either sell the site at market value without any deed restriction or continue to own and manage the property charging market rents.

According to an analysis from the National Council of State Housing Agencies, as a result of the Qualified Contracts provision, nearly 50,000 affordable housing units have been removed from the LIHTC program since 2002. And an estimated 18,000 units were removed in 2017 alone.

Some states have implemented policies to address the loss of low-income units associated with the Qualified Contracts process. These states either require LIHTC owner applicants to waive their right to use qualified contracts at the time the LIHTC allocation is made, or they’ve put scoring incentives in their qualified allocation plans for those owner applicants who agree to give up their rights to a qualified contract.

However, a number of states are silent on this issue, and there’s no legislation, so far, that has been signed into law at the federal level to alter the Qualified Contracts provision in IRS Code Section 42.