In August I attended the Arizona Department of Housing Affordable Housing Forum. It was 2 days of discussion on affordable housing, initiatives at the state and federal level, cost concerns and more. Here is a quick overview of Senate Bill 1703 which dramatically impacts state and local affordable housing.
Senate Bill 1703 authored and introduced by Senator Maria Cantwell, is titled the Affordable Housing Credit Improvement Act of 2019.
This bill amends the IRS code of 1986 to reform low-income housing credits among other items. To start with the bill changes the per capita dollar amount states receive from the Federal government in stairstep fashion from a current $2.50 to $4.96 per capita over 5 years which means expanding local housing authority credit by 50%.
The estimated benefit would be an additional 384,500 additional affordable homes nationwide over 10 years.
According to the U.S. census, the 2017 median household income for Maricopa County was $58,580. 80% of this is an income of $46,864 and 60% is an income of $35,148. In June, The Arizona Department of Housing released the 2019 Income limits. Median income levels are modified for housing purposes, so visit www.weservgad.org to read about the 2019 income limits from the Arizona Department of Housing by county, state wide. Keep these number in mind as we discuss the provisions of this bill.
Bond financed developments: In 1986 the initial legislation allowed new housing project owners to serve renters with up to 80% of area median income so long as the average income was at 60% of median area income. Essentially, the tool used in income averaging. A property owner charges much less to tenants below 60% of median area income and charges much more to tenants with 80% of area median income. This provision is not available to multi-family bonded projects. This bill seeks to make this tool available to multi-family bonded projects.
Tenant Income Eligibility: Older properties coming back into the system for re-syndication of tax credits IRS allows existing tenants to be still occupy the residence even though their income has gone above the income limits. But non housing credit properties being rehabbed must certify each of the tenant’s incomes to qualify for the tax credits. This leads to property owners encouraging tenants to move out so they can qualify the project for the tax credits necessary to make the rehab pencil. The bill will allow existing tenants to qualify to stay if they qualified for low income housing at time of occupancy and their income has not risen above 120% of area median income.
Student Rule: In the 1986 law, students living in housing while going to college were not eligible for housing credit. It was assumed students going to college had family resources. The rule differed from HUD student housing rules, so facilities with housing credits and HUD financing have found it difficult to administer. The new bill simplifies the rules by aligning housing credits rules with HUD funding rules. Non-HUD financed properties will have the ability to apply some exclusions.
Housing Vouchers: Currently, the landlord may collect the full sum of the housing voucher even if the rent is lower. The housing voucher is not considered part of gross rent under existing rules. Typically, property owners use the excess funds to improve the property or provide maintenance. The new bill will limit the amount of rent a property owner can collect via voucher. Housing Authorities are in favor of this change since it will mean more funds available to provide housing vouchers to more people.
Protections to Domestic Violence Victims: The Violence Against Women Act (2013) made provisions for women who are victims of domestic violence or stalking living in housing credit properties, but those requirements are in conflict with IRS provisions. This bill requires housing credit properties to include the Violence Against Women Act provisions as part of the rental agreement and provides that a property owner does not re-certify a tenant who is a victim of domestic violence as a new tenant.
General Public Use rule for Bond Financed Properties: Properties financed by Housing credit or bonding must be accessible to the general public as long as the person or family is income eligible. There are exceptions to projects financed with housing credits, but not to general obligation bond projects. IRS had originally disallowed Veterans as an exception under general obligation bond funding, but recently reversed itself. This bill would codify a preference for Veterans as an allowable exception to general obligation bond funded projects.
Establishment of Minimum 4% Housing Credit Rate: There are two types of housing credits, 4% and 9%. The 4% credit is triggered by multi family housing bonds. The bonds are tied to federal bond rates which have been low, so many projects don’t end up with the investment money they need. The bill would establish a minimum 4% housing credit bond rate.
Claims to Housing Credits after Casualty Losses: A casualty loss for a property is large and unexpected. For instance, a fire that displaces residents. Currently, the IRS requires the property to be back in service by December 31 of the calendar year no matter when the loss occurs, in order to avoid the re-capture of housing tax credits. Obviously, if a loss occurs late in the year, the property owner may not have enough time to restore the property and thus will have to re-capture an entire year’s tax credits. This bill will allow states to decide a reasonable amount of time for repairs as long as it is within 25 months of the loss.
Rights Related to Building Purchase: When a nonprofit acts as the general partner in a tax credit housing project, the IRS allows the nonprofit to acquire full ownership of tax credit buildings after the end of the initial 15-year compliance period through the Right of First Refusal. In this process the transfer of operating funds and reserves can be a source of discord between the non profit partner and the investors because it does not address assets like cash reserves or operating funds. This bill provides a non profit partner the opportunity to execute an option to purchase. The option to purchase includes not only the building but the other assets, particularly cash assets, of the investor. The bill also provides that a nonprofit partner may sell the property without permission of the investor partner. In addition, the bill expands the Right of First Refusal to include all the assets of the project investor’s entity assets: the building, real estate, cash reserves and operating funds, etc.
Ten Year Rule and Related Party Rule: Acquisition tax credits are not available for properties placed in service in the last 10 years. The bill would modify the 10-year rule to mean the acquisition tax credits would be based on the lowest purchase price over the past 10-years.
The Related Party rule is an IRS rule that states tax credits cannot be accessed by entities or people whom the IRS considers “Related Parties”. The problem is that if an investor invested in a project several years ago through an investor fund, they cannot now invest in that same project even if they have not been involved in the project over the intervening years. This means that now that affordable housing stock is in need of rehab, and there are a limited number of investors for these projects, this rule prevents rehab of projects by investors. This bill modifies the Related Party Rule so that an investor may acquire a property and receive the tax credits so long as they do not directly purchase the property from a related party and the related party has not owned the building at any time in the previous 5 years.
Relocation Expenses in Rehab Expenditures: When a building is rehabbed, frequently it is more cost efficient and safer to relocate tenants during the rehab, but the IRS has decided that when an investor relocates the tenants the costs are a deductible expense and cannot be paid for with housing tax credit dollars.
This means that if the investor does not have financial resources to pay for the tenant relocation expenses, then tenants must remain in the units during rehab. As we can all imagine, this makes rehabbing a project more expensive and time consuming as well as not much fun and potentially unsafe for the tenants. Because of the IRS rules, we see an increasing number of affordable and low-income projects not being rehabbed. This bill would allow tenant relocation costs to be considered part of the project rehab costs so that tax credit funds can be allocated for that purpose.
Basis Boosts: There are 6 qualifications to a project’s basis boost
1-Qualifying census track
2-Difficult to develop areas
3-State determined 4% areas
4-Rural areas
5-Native American Lands
6-Extremely low-income households
Some projects that are needed cannot be built because the amount of housing tax credits is not enough to allow the project to pencil out, particularly projects serving extremely low-income populations like homeless needing support services, drug addition housing and services and those whose income is 30% or less of the median area income.
Depressed income levels or have high construction costs can also imperil affordable housing product viability because the housing credits do not offset the actual costs. Particular HUD designated census tracks may receive up to a 30% basis boost. This bill would expand these census track areas so that the basis boost would be applicable to more projects in more areas.
In addition, states have the ability to identify areas for a 30% to 50% basis boost. This will hopefully help bonded projects cash flow better, providing more units to these populations.
Clarifying States’ Authority to Determine Community Revitalization Plans: Currently, state agencies must give preference to projects located in the HUD designated census tracks and that contribute to the Community Revitalization Plan. This was part of Congress’ attempt to revitalize neighborhoods, but no designation was provided for the entity who creates the acceptable revitalization plan and neglects to provide criteria for a community revitalization plan.
This bill states that each state’s affordable housing credit agency may define an acceptable community revitalization plan with specific criteria addressed.
Prohibit Local Approval and Contribution Requirements: Currently, state agencies must inform local towns, municipalities or other local authority when a building project will be located in their jurisdiction. Some states require project providers to show local support as part of the state approval process. Without local support, a project cannot be approved.
This bill removes the notification and support of local jurisdictions making it impossible for local jurisdictions to have any say over these projects or where they are located. It also states that local support or nonsupport of a project location cannot be considered in the approval process.
Restriction of Planned Foreclosures: By law affordable housing credit properties must remain affordable for 30 years. The first 15 years is regulated through the IRS code with the threat of recapture of the tax credit. The second 15-year period is regulated through a use agreement with the state affordable housing agency.
Currently, if a property was obtained through foreclosure in the second 15-year period, the affordable housing requirement is extinguished unless the Treasury Department decides it was through a planned foreclosure action to eliminate the affordable housing restrictions. As you can imagine, this is a difficult if not impossible determination.
This bill transfers the ability to determine an arranged foreclosure action to the state affordable housing agency. The new owner of a foreclosed property would need to inform the state agency at least 60 days in advance of the intent to terminate the affordability period. The state will then determine the legitimacy of the foreclosure.
Strengthen Cost Oversight through Selection Criteria: Like it or not, low income and affordable housing costs money to develop. These costs come in a myriad of ways: local fees and permitting, labor costs, materials costs, etc. These costs cannot be controlled by government mandate and developers and investors must be able to provide a project and break even or make a small profit. State agencies attempt to control costs with various methods.
This bill would codify some of the cost containment tools used by state agencies. It requires agencies to consider cost reasonableness when considering which projects to provide tax credits to.
Criteria for Housing that Serves the Needs of Native Americans: It has been difficult for Native American Tribes to obtain tax credit approval for some of their affordable housing projects because of the current scoring process. This bill would require states to provide a specific set of criteria in their project scoring for Native American projects that takes in consideration Native American affordable housing needs.
Standardized Income Eligibility for Rural Properties: Currently, there is a difference in tenant income limits in rural areas depending on whether or not the project is financed with housing bonds. Depending on the project, it may fall under the 9% rule with tenant income being determined by either the either the area median income or the national non metropolitan average median income. Projects that fall under the 4% rule determine tenant income based on the area median income.
This bill would standardize rules for both 9% and 4% properties. Both types of projects could determine tenant income based on the greater of the non-metropolitan average median income or the area median income. This is an attempt to make bond financed projects more feasible in rural areas.
Expand Multifamily Housing Bond Recycling: Currently, state agencies are limited on the amount of private activity funding, including bonds, to be accessed to build affordable housing projects each year. In order to build projects (multi family and single family), a combination of long term and short-term debt is commonly used. But the repayment of the short-term debt after construction meant the state cap limited the number of projects. So, Congress allowed states to recycle this short-term debt into new projects at payoff, but these properties do not get the tax credit. There are timing issues as well, so recycling is just not a usable strategy.
This bill would reduce some of these rules and increase flexibility. It would allow recycling for multi family projects and add some homeownership projects for specific populations like veterans. The goal here is to allow more new multifamily bonded projects and to provide access to the 4% credit.
Change Official Name of Program: Low Income Housing has become a negative term to some communities.
To combat local opposition, this bill would change the name of the program to “the Affordable Housing Tax Credit”.
There are several implications to tax payers, low income tenants and buyers, state and local governments, residents and businesses, so read SB 1703 and think about the long term affects.