Builders Urge Reforms To Spur Rental Housing Opportunities

Builders Urge Reforms To Spur Rental Housing Opportunities

May 24, 2007 – The National Association of Home Builders (NAHB) today called on Congress to enact several reforms to the Low Income Housing Tax Credit (LIHTC) program to enable more builders to invest in affordable rental housing.

Testifying on behalf of NAHB before the House Ways and Means Subcommittee on Select Revenue Measures, Steve Lawson, a home builder from Virginia Beach, Va., said that the LIHTC has facilitated the construction or preservation of nearly 1.4 million homes in the past 20 years, making it the foremost tool for the production and rehabilitation of affordable housing.

“However, the need for affordable housing greatly outpaces even this significant level of production and the existing supply of units,” Lawson told lawmakers.

The tax credit provides a critical incentive for the production of affordable rental apartments by supplying a dollar-for-dollar reduction in tax liability to investors in exchange for equity financing.

In the last few years, more State Housing Finance Agencies have been setting aside a portion of their LIHTC allocation for preserving existing affordable housing. The current restrictions on acquisition of the tax credits prevent LIHTC owners from rehabilitating dilapidated housing units. It also reduces the tax credit developers’ ability to receive an allocation of LIHTCs in areas of the country where the cost of land is prohibitive for providing affordable housing.

Two key priorities to improve the efficiency and effectiveness of the LIHTC revolve around the issues of determining annual rents and utility allowances for rental properties.

The financial viability of existing and new LIHTC properties are in jeopardy, Lawson said, because of recent changes in the data used to establish their rents. In order to create more consistency for owners and tenants, he called on lawmakers to index LIHTC rents to a reasonable inflation factor, such as the Consumer Price Index.

“In some areas, tax credit properties have seen little or no rent increase for the past five years while carrying costs continue to escalate,” said Lawson. “Left unchecked, this could ultimately lead to a loan default, at which point foreclosure occurs and the tenants lose their housing. Ultimately, a reasonable annual increase in rent for residents has to be considered against the outright loss of affordable housing units in the immediate term and decreased production of new affordable housing in the long-term.”

Noting that utility costs have increased significantly in the past few years, Lawson urged lawmakers to allow state Housing Finance Agencies to convert utility allowances into a percentage of maximum gross rent at the time of underwriting.

“This solution would allow an owner to better gauge their cash flow over the life of their project, which would improve their ability to cover unanticipated spikes in operating costs and attract private equity into the project,” he said.

To further stimulate private investment in the LIHTC program and spur increased construction of housing targeted to low- and moderate-income families, Lawson urged Congress to adopt legislation that would:

– Repeal the Internal Revenue Code Section 42(d) 10-year rule requirement on existing properties, which inhibits investments in these properties.

– Establish a level-playing field for allocations of LIHTC to tax-exempt and taxpaying sponsors.

– Exempt low-income housing tax credits from the Alternative Minimum Tax and study the impact of eliminating the individual AMT on the LIHTC.

– Remove the Low Income Housing Tax Credit caps on credit rates.

– Revise the statute for the LIHTC program to provide eligibility for enlisted military personnel, regardless of income.

– Allow separate ownership of housing credit units and market-rate units in mixed-income properties.

– Streamline the inspection process to help cut overall costs while allowing quicker move-ins by tenants.

– Change the name of the program because many communities react negatively to the term “low-income.” One option to address this would be to rename the program the “Affordable Housing Tax Credit.”