[Senate Hearing 115-288]
[From the U.S. Government Publishing Office]
S. Hrg. 115-288
AMERICA'S AFFORDABLE HOUSING CRISIS: CHALLENGES AND SOLUTIONS
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
AUGUST 1, 2017
__________
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COMMITTEE ON FINANCE
ORRIN G. HATCH, Utah, Chairman
CHUCK GRASSLEY, Iowa RON WYDEN, Oregon
MIKE CRAPO, Idaho DEBBIE STABENOW, Michigan
PAT ROBERTS, Kansas MARIA CANTWELL, Washington
MICHAEL B. ENZI, Wyoming BILL NELSON, Florida
JOHN CORNYN, Texas ROBERT MENENDEZ, New Jersey
JOHN THUNE, South Dakota THOMAS R. CARPER, Delaware
RICHARD BURR, North Carolina BENJAMIN L. CARDIN, Maryland
JOHNNY ISAKSON, Georgia SHERROD BROWN, Ohio
ROB PORTMAN, Ohio MICHAEL F. BENNET, Colorado
PATRICK J. TOOMEY, Pennsylvania ROBERT P. CASEY, Jr., Pennsylvania
DEAN HELLER, Nevada MARK R. WARNER, Virginia
TIM SCOTT, South Carolina CLAIRE McCASKILL, Missouri
BILL CASSIDY, Louisiana
Chris Campbell, Staff Director
Joshua Sheinkman, Democratic Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Hatch, Hon. Orrin G., a U.S. Senator from Utah, chairman,
Committee on Finance........................................... 1
Wyden, Hon. Ron, a U.S. Senator from Oregon...................... 2
WITNESSES
Garcia-Diaz, Daniel, Director, Financial Markets and Community
Investment, Government Accountability Office, Washington, DC... 5
Whitaker, Grant, president, National Council of State Housing
Agencies, Washington, DC....................................... 7
O'Regan, Hon. Katherine M., Ph.D., professor of public policy and
planning, Robert F. Wagner Graduate School, and faculty
director, Furman Center for Real Estate and Urban Policy, New
York University, New York, NY.................................. 8
McClure, Kirk, Ph.D., professor, Urban Planning Program, School
of Public Affairs and Administration, University of Kansas,
Lawrence, KS................................................... 10
MacDonald, Granger, chairman, board of directors, National
Association of Home Builders, Washington, DC................... 12
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Garcia-Diaz, Daniel:
Testimony.................................................... 5
Prepared statement........................................... 37
Responses to questions from committee members................ 46
Hatch, Hon. Orrin G.:
Opening statement............................................ 1
Prepared statement........................................... 49
MacDonald, Granger:
Testimony.................................................... 12
Prepared statement........................................... 50
McClure, Kirk, Ph.D.:
Testimony.................................................... 10
Prepared statement........................................... 58
Responses to questions from committee members................ 62
O'Regan, Hon. Katherine M., Ph.D.:
Testimony.................................................... 8
Prepared statement........................................... 65
Responses to questions from committee members................ 69
Whitaker, Grant:
Testimony.................................................... 7
Prepared statement........................................... 78
Responses to questions from committee members................ 84
Wyden, Hon. Ron:
Opening statement............................................ 2
Prepared statement........................................... 88
Communications
A Call To Invest in Our Neighborhoods (ACTION) Campaign.......... 91
Affordable Housing Developers Council (AHDC)..................... 94
Capital One Financial Corporation................................ 96
Center for Fiscal Equity......................................... 100
Council for Affordable and Rural Housing (CARH).................. 101
Council of Large Public Housing Authorities (CLPHA).............. 106
Local Initiatives Support Corporation (LISC)..................... 108
LOCUS............................................................ 112
National Affordable Housing Management Association (NAHMA)....... 114
National Association of Housing and Redevelopment Officials
(NAHRO)........................................................ 117
National Housing Conference...................................... 119
National Low Income Housing Coalition............................ 120
National Multifamily Housing Council (NMHC) and National
Apartment Association (NAA).................................... 128
National Trust for Historic Preservation, National Trust
Community Investment Corporation, and Historic Tax Credit
Coalition...................................................... 137
New York City Department of Housing Preservation and Development
and New York City Housing Development Corporation.............. 140
Olsen, Edgar O................................................... 142
Winkler Development Corporation.................................. 147
.................................................................
AMERICA'S AFFORDABLE HOUSING CRISIS: CHALLENGES AND SOLUTIONS
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TUESDAY, AUGUST 1, 2017
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:10
a.m., in room SD-215, Dirksen Senate Office Building, Hon.
Orrin G. Hatch (chairman of the committee) presiding.
Present: Senators Grassley, Cornyn, Thune, Isakson,
Portman, Toomey, Cassidy, Heller, Scott, Wyden, Stabenow,
Cantwell, Nelson, Cardin, Brown, Bennet, Casey, and McCaskill.
Also present: Republican Staff: Mark Prater, Deputy Staff
Director and Chief Tax Counsel; Nicholas Wyatt, Tax and
Nominations Professional Staff Member; Jeff Wrase, Chief
Economist; and Martin Pippins, Detailee. Democratic Staff:
Michael Evans, General Counsel; Tiffany Smith, Chief Tax
Counsel; Adam Carasso, Senior Tax and Economic Advisor; and
Robert Andres, Tax Policy Analyst.
OPENING STATEMENT OF HON. ORRIN G. HATCH, A U.S. SENATOR FROM
UTAH, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. The committee will come to order.
I want to welcome everybody to today's hearing entitled
``America's Affordable Housing Crisis: Challenges and
Solutions.''
This is an important issue, and this hearing will allow the
committee to hear from experienced and well-educated witnesses
who can provide more context on our affordable housing policies
and the sections of the tax code that were written with the
intent of mitigating this long-time set of problems in our
society.
As many of you are aware, the last time we underwent a
national, comprehensive revision of the tax code was in 1986,
with the passage of the Tax Reform Act. At that time,
affordable housing tax incentives were baked into statute, with
the Low-Income Housing Tax Credit being chief among them.
Since then, this important section of the tax code has
enjoyed bipartisan support. Still, it is worth examining this
particular law as we continue to ramp up our work on tax
reform.
Throughout today's hearing, I want each member to keep in
mind some guiding principles for tax reform. I have repeated
these principles quite a bit in recent years. But for those in
the audience who may not have heard me mention them, the
principles are fairness, efficiency, simplicity, and American
competitiveness.
These principles are important within the context of
affordable housing tax policy, because they should be able to
help us improve upon what is currently in the code. I know the
prospect of more oversight can be seen as a challenge, but I
think we should all view this examination as an opportunity to
determine where we can improve.
While some sections of the tax code have undergone changes
over the past 3 decades, solutions on affordable housing remain
as elusive as ever. There seem to remain many households facing
cost burdens associated with renting, with perhaps as much as
26 percent of renter households having paid more than half of
their incomes in rent in 2015, for example.
And the burdens seem to fall heavily on lower-income
households. And this is not just simply a problem of
arithmetic. In 2015, 25 million children lived in households in
which rent comprised a fairly large share of household income.
This is a problem that should be ready for a bipartisan
solution. We have already introduced bipartisan legislation to
address some of these issues. And many are hopeful that
cooperation on these efforts will continue. I personally
believe they will.
With that, I would just like to thank everyone for
attending today, and I look forward to hearing from our
distinguished panel of witnesses. But before we get to that, I
would like to hand it over to the ranking member, Senator
Wyden, for his opening remarks at this time.*
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* For more information, see also, ``Present Law and Data Relating
to Tax Incentives for Rental Housing,'' Joint Committee on Taxation
staff report, July 28, 2017 (JCX-40-17), https://www.jct.gov/
publications.html?func=startdown&id=5019.
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[The prepared statement of Chairman Hatch appears in the
appendix.]
OPENING STATEMENT OF HON. RON WYDEN,
A U.S. SENATOR FROM OREGON
Senator Wyden. Thank you very much, Mr. Chairman. Mr.
Chairman, let me thank you for focusing today on the Low-Income
Housing Tax Credit, which is a key part of the tax reform
puzzle.
I also want to thank our colleague from Washington State,
Senator Cantwell, who has been for years now the go-to person
on this committee on this issue. I am going to talk a little
bit more about the history of it in a minute.
I would also like to note there was a lot of talk last week
about bipartisanship and bipartisanship on key issues. That is
what this committee is showing today, that we are serious about
tackling an important issue in a bipartisan way.
Colleagues, my bottom line is, America's housing policy
needs an urgent remodel. Today millions of Americans struggle
to pay the rent, and they cannot even dream of purchasing a
home.
To recall our old classes on Introduction to Economics, a
key housing challenge is increasing supply. When housing is
scarce in the communities where people want to live and work,
prices get bid up and working people get pushed out. Rent rises
faster than people's incomes, even among those who are earning
a pretty good salary. And there are few incentives to build
affordable housing near schools, public transit, and amenities
like parks and retail services.
Oftentimes, the only places where people can afford housing
are an hour or more from where they work or where they want
their kids to go to school every single day. And a lot of
Americans either spend a small fortune on train tickets and bus
fares, or they spend an eternity sitting behind a steering
wheel on a daily commute. And a lot of our folks wind up in
food deserts where it is almost impossible to get healthy fresh
food.
This crisis is a five-alarm fire across America. And it is
certainly true in my home State of Oregon--in Portland, Bend,
Hood River, Astoria, Medford, and a lot of other places. I see
it on the faces of families, children, vets, and folks who are
living on the streets.
Now Senator Cantwell and Senator Hatch have an important
bill, and I have cosponsored it. It is entitled the Affordable
Housing Credit Improvement Act of 2017.
In effect, it supercharges the Low-Income Housing Tax
Credit, and it also builds on what the three of us got into the
2015 tax bill which made the expanded Low-Income Housing Tax
Credit permanent.
In my view, this is a bipartisan, smart way to attack the
housing scarcity problem, and it is going to mean more housing
goes up in communities where folks want to work and plant
roots.
In the days ahead, I am going to have other ideas about the
housing challenge, particularly about helping the middle-class
and first-time homebuyers and doing a better job of linking
services--services like transportation--with low-income
housing.
Today we are going to talk to our witnesses about some of
the ideas that Senators Cantwell and Hatch have put forward. I
want to thank the two of them and particularly note that, after
the events of last week, colleagues, it is more important than
ever to be very concrete about this issue of bipartisanship and
not just make it a rhetorical talking point. That is what we
are doing today.
Thank you, Mr. Chairman.
The Chairman. Well, thank you, Senator.
[The prepared statement of Senator Wyden appears in the
appendix.]
The Chairman. I also would like to thank Senator Cantwell.
She was the one who suggested this hearing, and we have gone
out of our way to make sure that we have it. And I just want to
thank you for your efforts in this regard.
I would like to welcome each of our five witnesses today. I
am confident we have some of the Nation's greatest minds and
experts on housing and urban development matters.
First, we will hear from Mr. Daniel Garcia-Diaz, Director
of the Financial Markets and Community Investment group at the
U.S. Government Accountability Office.
Mr. Garcia-Diaz leads a range of reviews covering mortgage
finance, rental housing, economic development, and insurance.
Specifically, he led recent reviews of management issues in the
Department of Housing and Urban Development on Home Ownership
and Affordable Rental Housing, the Low-Income Housing Tax
Credit, and the Federal Terrorism Risk Insurance Programs. He
has also led reviews of programs and regulatory changes
authorized under the Emergency Economic Stabilization Act and
the Dodd Frank Wall Street Reform Act.
Mr. Garcia-Diaz joined GAO in 1998. He holds a bachelor's
degree from Dartmouth College and a master's degree in public
policy from Harvard University's Kennedy School of Government.
Then we will hear from Mr. Grant S. Whitaker, president of
the National Council of State Housing Agencies.
Mr. Whitaker hails from my home State of Utah and has been
extraordinarily helpful as we have prepared for this hearing.
He has dedicated his career to serving the financial needs of
low- and moderate-income families back in our home State of
Utah.
He currently serves as president and CEO of the Utah
Housing Cooperation, a self-supporting, State-sponsored public
corporation which has been funding and promoting affordable
housing in Utah since 1977. Mr. Whitaker was appointed to the
position of president and CEO in January 2009 and has served in
that capacity since that time. But Mr. Whitaker's experience at
UHC started back in 1979, before the last time we reformed the
tax code.
Mr. Whitaker earned a bachelor's degree in business
management from the University of Utah's David Eccles School of
Business. Subsequently, he worked on post-graduate studies at
the University of Utah and through the university's
professional education division.
Third will be the Honorable Dr. Katherine M. O'Regan,
professor of public policy and planning at NYU's Wagner
Graduate School of Public Service, where she is also the
faculty director of the Furman Center for Real Estate and Urban
Policy. Dr. O'Regan recently served from April 2014 to January
2017 as the Assistant Secretary for Policy Development and
Research at the Department of Housing and Urban Development.
Her primary research interests are at the intersection of
poverty and space. Among others, she has served on the board of
the Reinvestment Fund, the advisory board for NYU's McSilver
Institute for Poverty Policy and Research, and the editorial
board for the Journal of Policy Analysis and Management. She
has been a visiting scholar at the Federal Reserve Bank in
Boston and at the Economic Studies Group at the Brookings
Institution.
Dr. O'Regan holds a Ph.D. in economics from the University
of California at Berkley and spent 10 years teaching at the
Yale School of Management.
Then we will hear from Dr. Kirk McClure from the Urban
Planning Program at the University of Kansas. Dr. McClure has
won several awards for his research on housing and urban
planning.
His academic career has also included an appointment as
scholar and resident to the U.S. Department of Housing and
Urban Development. He serves on the board of editors of Housing
Studies and the Journal of Planning, Education, and Research.
He is associate editor of Housing Policy Debate.
Dr. McClure holds a master's of city planning degree from
the Massachusetts Institute of Technology and a Ph.D. degree
from the University of California at Berkeley.
And finally, Mr. Granger MacDonald is chairman of the board
of directors for the National Association of Home Builders and
president of the MacDonald Companies.
Mr. MacDonald is a Kerrville, TX-based builder and
developer with 40 years of experience in the home-building
industry. His company, MacDonald Companies, provides affordable
housing for communities in need in the State's rural and small
metro areas.
Mr. MacDonald also has extensive experience working in the
NAHB leadership, including more than 30 years on the NAHB board
of directors and chairing the Federal Government Affairs
Committee, the State and Local Government Affairs Committee,
the Housing Credit Group, and the Multifamily Council and Build
PAC.
Mr. MacDonald holds a BBA degree in real estate and finance
from the University of Texas School of Business.
We will start with you, Mr. Garcia-Diaz. You will kick this
off with your opening remarks, if you will.
STATEMENT OF DANIEL GARCIA-DIAZ, DIRECTOR, FINANCIAL MARKETS
AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY OFFICE,
WASHINGTON, DC
Mr. Garcia-Diaz. Thank you.
Mr. Chairman, Ranking Member Wyden, members of the
committee, thank you for the opportunity to be here today to
discuss the Low-Income Housing Tax Credit program, the Nation's
largest source of Federal assistance for developing affordable
rental housing.
Over the past 3 years, GAO has completed three reviews of
this program. We have a current effort underway looking at
development costs under the program. We have worked with a
total of 17 different allocating agencies in 14 States and in
the District in conducting these four reviews.
I want to recognize the cooperation of these agencies
during our site visits and in responding to requests for
information. We look forward to continuing a productive working
relationship with them.
As you know, the Internal Revenue Service is in charge of
administering the LIHTC program, while State and local
allocating agencies are responsible for day-to-day
implementation of the program. My statement today focuses on
allocating agencies' implementation of Federal requirements and
IRS's oversight of the program.
We found that allocating agencies have implemented varying
processes to address key Federal requirements, but we have some
concerns that I would like to highlight in my remarks, which
are discussed more fully in our prior reports.
Allocating agencies are responsible for alerting IRS about
any property noncompliance. Problems with property physical
condition are the most common form of noncompliance.
We found that agencies varied in when they submitted
noncompliance reports to IRS, what types of violations were
reportable, and the level of supporting details provided.
Because of these differences, it is not surprising that the
number of submitted noncompliance reports from nine agencies we
examined ranged from as little as one to more than 1,700 over a
1-year period, and, in fact, we are aware that some agencies
have submitted few or no compliance reports to IRS over a 3-
year period, and IRS has not followed up with them.
Furthermore, we also found that IRS does very little to
assess the noncompliance information it receives. IRS has no
method to determine if issues reported have been resolved or if
properties have recurring noncompliance issues.
In addition, we also found that critical data on allocation
amounts and certification were not complete and reliable. For
example, we could not tell how often LIHTC properties were
placed in service within required time frames. Across these
findings, a common problem has been that IRS oversight of this
program has been minimal.
Over the past 30 years, IRS has audited allocating agencies
7 times. Yet, even when these audits were conducted, they often
yielded multiple findings, including agency policies that
conflict with the code or Treasury regulation, incomplete or
outdated qualified allocation plans, annual reports to IRS with
errors, and so on.
We have some thoughts on how to strengthen oversight and
accountability in the LIHTC program. First, with respect to
noncompliance reporting, we made two recommendations that IRS
clarify when agencies should report noncompliance and evaluate
how it could improve noncompliance information by leveraging
HUD's physical inspection data systems. These recommendations
remain open.
Second, in response to our concern about data quality, we
recommended that IRS should address weaknesses in control to
ensure reliable data are collected on credit allocations. IRS
has not completed implementation of this recommendation but is
taking steps to improve it.
And finally and more significantly, we continue to believe
that the Department of Housing and Urban Development can be a
resource to augment IRS's oversight capabilities. Other tax
credit programs such as the New Markets Tax Credits and the
Historic Tax Credits have formal partnerships grounded in
statute with a relevant subject matter agency to assist in
oversight, data collection analysis and reporting, and
technical assistance.
HUD is well-positioned to assist allocating agencies'
efforts to monitor physical and financial condition of
properties, address Federal fair housing goals, and perform
other tasks that are common in managing affordable rental
housing programs--all areas in which IRS has no specific
expertise.
Over the past 30 years, LIHTC has matured to be the most
significant Federal policy tool for incentivizing the
production of affordable housing nationwide. We believe that
investing in oversight and accountability will help ensure that
agencies meet program requirements, use Federal resources
effectively, and ultimately achieve the Nation's goal of
providing poor and vulnerable families safe, decent, and
affordable housing which is so desperately needed today.
This concludes my opening remarks. Thank you again for the
opportunity to speak today. I would be glad to take any
questions you have.
[The prepared statement of Mr. Garcia-Diaz appears in the
appendix.]
STATEMENT OF GRANT WHITAKER, PRESIDENT, NATIONAL COUNCIL OF
STATE HOUSING AGENCIES, WASHINGTON, DC
Mr. Whitaker. Mr. Chairman, Senator Wyden, members of the
committee, thank you for this opportunity to testify on behalf
of the National Council of State Housing Agencies.
I am Grant Whitaker, president and chief executive officer
of the Utah Housing Corporation. I also serve as president of
NCSHA, a nonpartisan, national organization that represents
State housing finance agencies.
Thank you, Mr. Chairman and Senator Cantwell, for your
steadfast support for the Low-Income Housing Tax Credit and
tax-
exempt private activity housing bonds. And thank you for your
leadership in introducing the Affordable Housing Credit
Improvement Act, S. 548.
I also want to acknowledge Senator Wyden and the many other
members of the committee who have cosponsored this bill. We
urge all Senators to become cosponsors.
The Housing Credit and Housing Bonds program has long
enjoyed strong bipartisan support, and this bill is no
exception. Already, nearly one-third of Senators--Republicans
and Democrats--have cosponsored this legislation. The House
companion legislation also has significant bipartisan backing.
The need for affordable rental housing across the country
is great and growing. Nearly half of all renters pay an
excessive share of their income for housing. And the crisis is
most acute for the poorest households.
Simply put, we have a severe shortage of affordable rental
homes. Nationwide, there are more than 11 million extremely
low-income renter households, but only 4 million rental homes
are available and affordable to them. This shortage continues
to grow as hundreds of thousands of new renter households enter
the market each year while we lose countless affordable homes
to conversion and obsolescence.
The housing crisis impacts working families, seniors,
people with disabilities, and so many more: those living in
high-cost cities, suburban neighborhoods, and rural
communities. Coastal cities, like Seattle, are well-known to
have extreme housing costs.
Low-income households in Utah also struggle to find
affordable housing. Over 58,000 renter households in my State
pay more than half of their income for housing, and we have a
shortage of over 38,000 homes that are affordable and available
to the extremely low-income households.
We are not unique. Every State confronts this challenge.
This crisis will only get worse unless we act.
If current rent and income trends continue, the number of
severely cost-burdened renters, those paying 50 percent or more
of their income for rent, will reach nearly 15 million
nationwide by 2025. That is a 25-percent increase.
The Housing Credit and Housing Bonds are the most effective
response. These are highly successful, private-public
partnerships with a proven track record. They are administered
by publicly accountable HFAs that take seriously the
responsibility for their operation and oversight that you have
entrusted to us. States deploy these resources to respond to
the needs we determine to be most pressing.
The Housing Credit and Housing Bonds create affordable
homes for families, seniors, people with special needs,
veterans, and those experiencing homelessness. The stable
housing created improves lives by supporting better health,
education, and employment outcomes. These programs also
contribute to economic growth by creating jobs and generating
tax revenue.
In Utah, we have had great success using the Housing Credit
and Housing Bonds. We have made considerable progress, for
example, in reducing our chronically homeless population. In
fact, Utah Housing Corporation will devote 30 percent of our
2018 housing credit authority to supportive housing properties,
moving us closer to the goal of ending chronic homelessness.
But we still have significant work ahead as we continue to
tackle family homelessness and help the many low-income
households who pay more rent than they can afford.
NCSHA urges you to seize the opportunity of tax reform, or
other legislation that may advance this year, to build on what
works. We ask you to increase housing credit authority and make
the other critical program changes you proposed in S. 548, such
as facilitating the development of mixed-income rural and
deeply income-targeted housing.
Current housing credit authority is oversubscribed by a
measure of nearly three to one nationally. Meanwhile, reliance
on the credit continues to grow as other Federal resources
shrink and new demands are placed on the credit.
Finally, we ask you to mitigate any unintentional negative
effects the changes you make to the tax code might have on the
housing credit and bond programs.
Thank you for your commendable efforts to address the
affordable housing crisis. I am honored to have had this
opportunity to testify. We stand ready to assist you in any way
that we can.
The Chairman. Well, thank you so much.
[The prepared statement of Mr. Whitaker appears in the
appendix.]
The Chairman. Dr. O'Regan?
STATEMENT OF HON. KATHERINE M. O'REGAN, Ph.D., PROFESSOR OF
PUBLIC POLICY AND PLANNING, ROBERT F. WAGNER GRADUATE SCHOOL,
AND FACULTY DIRECTOR, FURMAN CENTER FOR REAL ESTATE AND URBAN
POLICY, NEW YORK UNIVERSITY, NEW YORK, NY
Dr. O'Regan. Thank you. Chairman Hatch, Ranking Member
Wyden, and members of the committee, thank you for inviting me
to appear today.
I want to begin by reminding people of a few facts about
America's affordable housing crisis. As stated, the housing
cost burdens are extremely high, particularly for renters.
Nearly half of all renters were cost-burdened in 2015, and more
than a quarter face severe cost burdens.
So they were spending more than 50 percent of their income
on housing costs. These rates remain far above pre-recession
levels, and the challenges are widespread, extending beyond
high-cost cities and lowest-income households. At least 37
percent of renter households in each State across the Nation
were cost-burdened in 2014, and the sharpest growth in cost
burdens over the past 15 years has been among middle-income
households.
And finally, housing supply is simply not keeping up with
demand. Housing completions in the last 10 years were lower
than any other 10-year period since the late 1970s. The rental
vacancy rate is at its lowest level in 30 years.
So what to do about it? In terms of the Federal response
and tax policy, the main lever is the Low-Income Housing Tax
Credit, LIHTC. So I will focus my comments there.
With more than 30 years of LIHTC experience to build on, it
is an opportune time for reforming and streamlining LIHTC. I
want to highlight three critical areas for reform that are
greatly facilitated by Senate bill 548, the Affordable Housing
Credit Improvement Act of 2017.
First is working in a broader set of markets across a
broader set of incomes. While LIHTC's Federal income limits are
tied to 50 or 60 percent of area-median income, States are also
required to prioritize developments reaching lowest-income
tenants, and indeed, nearly half of LIHTC tenants have incomes
below 30 percent of area median income, AMI.
Serving such households with extremely low incomes requires
some form of additional rental assistance such as vouchers or
other development-level subsidies. Yet those additional
subsidies are in decreasing supply, may not be within the
control of the housing agency or developer, and even if
available, require coordination and layering across multiple
funding streams.
Income averaging can help address these challenges as well
as improve economic feasibility in different market settings.
It permits a development to employ an average income cap of 60
percent of AMI with no household's income exceeding 80 percent
of AMI.
Higher rents can be used to offset lower rents, and a
broader set of incomes can be served, where the additional
resources needed to reach low-income households come from
within the finances of the development itself. This cross-
subsidy will be useful in high-cost markets for developments
that are a part of a mixed-income community revitalization
plan, and in rural markets where it may be necessary to serve a
broader set of income ranges to be economically feasible. This
greater flexibility is one of the most important LIHTC reforms.
Permitting States to increase maximum basis boosts for
serving extremely low-income tenants has a similar flexibility,
providing resources from within the tax credit itself for
reaching lowest-
income tenants. And broadening the definition of difficult
development areas to automatically include Indian areas would
enable the credit to work in a high-need environment that has
been underserved.
The second area is achieving locational goals. Siting LIHTC
in higher opportunity neighborhoods or ensuring that LIHTC
investments contribute to neighborhood revitalization requires
two reforms contained in S. 548: prohibiting local approval and
contribution requirements which can act as local vetoes, and
clarifying the States' authority to determine the definition of
a community revitalization plan.
The third area is preservation of existing affordable
housing, which is a key and potentially cost-effective strategy
for narrowing the demand-supply gap. This would be greatly
aided by the establishment of a permanent minimum for the 4-
percent credit.
Finally, on LIHTC resources, expected declines in the
corporate tax rate are estimated to decrease LIHTC resources by
up to 17 percent in the future. Failure to increase the per-
capita allocation is equivalent to cutting LIHTC resources
relative to recent years. Given the breadth and depth of the
affordability issues across the country, now does not seem a
time to withdraw Federal resources for affordable housing.
Thank you.
The Chairman. Well, thank you very, very much.
[The prepared statement of Dr. O'Regan appears in the
appendix.]
The Chairman. We will now turn to Dr. McClure.
STATEMENT OF KIRK McCLURE, Ph.D., PROFESSOR, URBAN PLANNING
PROGRAM, SCHOOL OF PUBLIC AFFAIRS AND ADMINISTRATION,
UNIVERSITY OF KANSAS, LAWRENCE, KS
Dr. McClure. Chairman Hatch, Ranking Member Wyden, members
of the committee, thank you for the opportunity to address you
on this very important topic.
The Low-Income Housing Tax Credit program is the Nation's
primary affordable housing production program. It is a good
program, but it is one that is in need of improvements to make
it perform better. I would like to make three observations
about the performance of the program and use those observations
to support recommendations to help it be a better fit with
current housing market conditions.
The first issue answers the question, ``Does the Low-Income
Housing Tax Credit program produce units in the price range
where there is a shortage of units?'' And here, sadly, the
answer is ``no.''
Generally rents on tax credit units fall in the range of
$500 to $1,000 a month. If a household is to spend no more than
30 percent of income to afford these units, these incomes need
to be in the $20,000 to $40,000 per year range.
When we examine rental markets across the Nation, we find
that there is, in fact, no shortage of units in this price
range. Rather, the number of units is far in excess of the
number of households with these incomes.
When we shift to the lowest tier and we look at the rental
markets below this one, we see there is a significant mismatch.
The number of households with incomes below $20,000 is far in
excess of the number of apartments available for under $500.
What this means is that the Low-Income Housing Tax Credit
program is adding units to the market segment that already is
in surplus, but is unable to reach far enough down to the
households who suffer from a shortage.
So a first reform would be to ask State housing finance
agencies to exercise greater rigor in their market analysis and
to certify the need for each tax credit development supported
by independent, not developer-driven, market analysis.
A second reform would be to permit State housing finance
agencies to exchange tax credit authority for voucher
authority. The vouchers could be freestanding, where that is
appropriate to the marketplace, or they could be attached to
the project. The vouchers would permit a poorer population to
afford the unit, with the tenant contribution importantly set
at 30 percent of their income, not at the flat rent. This would
eliminate the cost-burden for these households.
The second issue seeks to answer the question, ``Does the
Low-Income Housing Tax Credit program add new units to tight
markets and rehabilitate existing units in soft markets?'' And
the answer here is ``not very well.''
Typically, the program should add new units where we have
tight markets, very low vacancy rates, and should rehabilitate
existing units in soft markets where we have very high vacancy
rates. Built into the tax credit program is an incentive that
favors new construction. Nine-percent credits are awarded
against new construction costs; 4-percent credits are offered
against rehabilitation costs independent of market conditions.
Developers have responded appropriately by developing 45
percent more new construction units than rehabilitation,
favoring new construction whether it is a tight, normal, or
soft market.
This problem can be rectified by reconfiguring the benefits
of the tax credit program to favor rehab in soft markets and to
permit new construction only where a market is very tight or is
eliminating severely dilapidated units for replacement.
The final point asks the question, ``Does the Low-Income
Housing Tax Credit program support mixed-income housing?'' And
sadly, again, the answer here is ``no.'' Research demonstrates
that projects wholly populated by the poor are not good for the
households, not good for the projects, and not good for the
surrounding neighborhoods. Mixed-income housing is a much more
beneficial format for all concerned.
The tax credit program provides no incentives for mixed-
income housing. As a result, 76 percent of all tax credit
developments are occupied entirely by subsidized low-income
households. Fewer than 3 percent are configured with more than
one-half of all units at market rates.
The program can be improved by reconfiguring the benefits
of the tax credit program to favor mixed-income developments
and prohibit wholly subsidized developments, except in very
distressed markets were mixed-income developments are not
feasible. The tax credit program remains an important tool for
resolving the Nation's affordability problems. With
improvements, it can be made better.
Thank you.
The Chairman. Well, thank you.
[The prepared statement of Dr. McClure appears in the
appendix.]
The Chairman. Mr. MacDonald, we will turn to you.
STATEMENT OF GRANGER MacDONALD, CHAIRMAN, BOARD OF DIRECTORS,
NATIONAL ASSOCIATION OF HOME BUILDERS, WASHINGTON, DC
Mr. MacDonald. Thank you. I appreciate the opportunity to
testify today.
My company specializes in construction and management of
affordable rental housing. We currently own and manage 4,700
units throughout Texas. For the past 20 years, I have built
affordable rental housing with the Low-Income Housing Tax
Credit.
We are here today because the housing affordability has
reached crisis proportions. The number of renter households who
are severely cost-burdened--meaning they pay more than half of
their monthly income on rent--is at an all-time high of 11.4
million people. This is one in four renters.
The first step to solving this crisis is to pass Senate
bill 548, the Affordable Housing Credit Improvement Act of
2017. I want to thank Senator Cantwell, Senator Hatch, and all
the bipartisan cosponsors. Bipartisanship seems to be rare
these days, and I hope we can all unite around this bill and
take action this year.
The challenge we face is inadequate supply to meet the
growing demand. S. 548 will increase the supply, most
noticeably by boosting the tax credit allocations by 50
percent; in addition, creating the 4-percent floor will allow
more units to be preserved and developed using housing bonds.
Our housing stock ages. The first tax credit projects are
now 30 years old. Preservation and rehabilitation is a cost-
effective tool, and fixing the 4-percent credit will really
help that.
Enacting this bill is expected to result in an additional
400,000 tax credit units over the next 10 years. That added
construction activity will increase the Federal tax revenue by
$11.4 billion.
To get to the root of the crisis, we need to look at the
challenges facing developers. There is no magic wand to erase
the basic development cost. Fees, regulatory compliance, modern
building and energy codes, building materials, land and labor
costs determine what rents are needed to make a project viable.
The bottom line is, if we want to increase the supply of
affordable rental housing for lower-income households, it is
financially impossible to do without the tax credit. The tax
credit is the most successful affordable housing production
program in our Nation's history.
Part of the success is the advantage of creating it in the
tax code. Investors have the confidence and the predictability
of the tax code, which ensures a fairly constant supply of
affordable housing. And tax credit communities outperform the
rest of the multifamily sector in the annualized foreclosure
rate. This rate is less than one-tenth of 1 percent, but it
lacks the resources to keep up with demand.
Without a sizable investment in our housing stock,
particularly as older units reach obsolescence, we risk a
worsening problem. Rental housing demand remains solid and is
expected to grow even stronger. Absent new supply, this demand
will increase rents and worsen the affordability issues we now
have.
We also need to recognize the important role affordable
housing plays in our communities. I see how affordable housing
creates stability for my tenants and their families. My
properties also help revitalize neighborhoods and break the
cycle of poverty that starts with access to stable and
affordable housing.
The housing affordability crisis affects our economy as
well. Housing affordability is critical in areas experiencing
robust economic growth, but our fellow citizens cannot afford
to live where the jobs are, because we are just creating a
divide based on housing costs.
Some criticize the program for not directing more
affordable housing to higher-income areas. Let me shed some
light on these challenges that I face as a developer.
In Texas, unless you have the blessing of the local
community to put an affordable housing project there, the State
agency will never award me an allocation. In many higher-income
areas, as soon as you utter the word ``affordable,'' the
discussion often turns ugly and may take on racial overtones.
This is the reality affordable housing developers face
every day. Fortunately, some relief is possible. Senate bill
548 will prohibit States from requiring special local approval
of tax rate developments. This will ensure that if the zoning
allows it, an affordable project will be treated just like any
other development.
We have an opportunity to do something that not only makes
good economic sense, but will uplift the lives of millions of
Americans. I greatly appreciate the bipartisan support for 548
and urge the committee to pass it as soon as possible.
The Chairman. Well, thank you so much.
[The prepared statement of Mr. MacDonald appears in the
appendix.]
The Chairman. You have been an excellent panel, and I think
we have learned a lot from you.
Let me just ask this question of Mr. Whitaker and Mr.
MacDonald.
One reason I support the Low-Income Housing Tax Credit
program is that it keeps decision-making on affordable housing
away from a centralized bureaucratic agency in Washington, DC
and allows decisions to be made within the communities where
the housing is needed, while involving the private sector.
Can both of you discuss how that helps you decide what
projects to build and how the public-private partnership aspect
of the program promotes more spending in affordable housing
than would happen if only the government was involved?
Mr. Whitaker. In Utah, we offer up two different
opportunities for developers, syndicators, advocates, public
entities, private entities, and nonprofits to come in and talk
to us. There is a mandatory public hearing that we hold, and we
also hold another one earlier in the session to get input on
how we should run our program, specifically how we should
modify our qualified allocation plan.
So we get a lot of input from the industry partners through
this effort. Obviously, they do not agree with themselves all
the time, and so we have to ferret that out. But we also look
at needs that are happening.
So a moment ago I mentioned that we are going to set aside
30 percent of next year's allocation for supportive housing,
because we know there is a horrendous homeless issue that is
taking place right downtown in Salt Lake City right now, and
that is a problem that cannot be solved if there is not some
permanent place for them to be housed.
So we work diligently with governmental entities and the
private sector, try to find out how we can utilize these very
scarce resources the best that we can to meet the needs of our
population.
The Chairman. Well, thank you.
Mr. MacDonald. And I would just like to add to that, that
every State has its own qualified allocation process which
allows a decentralization of how the tax credits are allocated.
They are allocated more based on what the citizens of a
specific State need.
Every State's needs are slightly different than another,
and it allows them to be addressed based more on the economic
trends in the State, the housing trends in the State, and the
demographic changes that are always occurring across a State.
For example, my home State of Texas is a large State, and we go
from one very rural area to a very urban area, to the necessity
for family housing, to the necessity for senior housing. So it
lets everything stay in balance.
Our local State agency did a wonderful job this last year
of changing the balance between families and senior housing.
And it was very, very important, and it is an extremely well-
balanced process because of just what Mr. Whitaker said, that
we are able to address all of these issues on a local State
basis with lots of public and private input, public hearings,
so the citizens and everyone get to benefit from those
decisions.
The Chairman. Let me ask another question for Grant
Whitaker.
One of the series of reports that the GAO has published on
the Low-Income Housing Tax Credit recently notes that it does
not appear that the IRS is doing very much oversight of the
program. And while Federal oversight of this program is
important, I know that there is much oversight that takes place
at the State housing authority level.
As president of the National Council of State Housing
Agencies, and especially as president and CEO of the Utah
Housing Corporation, can you discuss how you ensure that your
credit allocation is wisely and prudently awarded and how you
monitor the use of these credits?
Mr. Whitaker. Starting with the allocation process, we have
a process that is outlined very clearly in our qualified
allocation plan. It is based on those projects that score the
highest in the pools that we set aside for them, how that is
allocated, so the best projects are the ones that are awarded
credits.
In terms of the compliance of the properties, we have a
team of compliance auditors who look at properties on a more
regular basis for those that have problems, that exhibit
problems in their properties, and less often at those that are
in full compliance as we go around.
But this team looks at their financial records, it looks at
the rent rolls, it looks at the physical conditions of the
properties. We do submit reports to the IRS, those that will
imply that if they do not fix these things, the tax benefit can
go away from the investors.
We make sure that the development company that is managing
the projects know that that is happening, and we think we get
some pretty darn good compliance from our projects in Utah.
The Chairman. Well, thank you so much.
Senator Wyden?
Senator Wyden. Thank you, Mr. Chairman.
Thank you all. It has been an excellent panel. I want to
ask first about some questions that relate to the overall tax
reform puzzle, because, as you know, these pieces are
interrelated.
Mr. Whitaker, for you--the Low-Income Housing Tax Credit is
a tax credit that is often claimed by corporate partners like
banks in qualifying for low-income housing tax projects.
Reducing the corporate tax rate could reduce the value of the
Low-Income Housing Tax Credit and thus investor demand.
We have heard some talk about the credit declining by up to
17 percent. So what do you think needs to be done to make sure
that, as we get into tax reform, the credit is kept whole?
Mr. Whitaker. Thank you, Senator.
Yes, we do see that. We have already seen that, though not
so much in Utah. I think we are a little bit blessed with the
CRA-
hungry industrial banks, so our credit pricing has not gone
down as much as it has in other areas, but we do recognize
through the National Council of State Housing Agencies that
this is very critical to some of the areas. Some of the HFAs
are handling their allocations in different ways to try to get
that out there so that the properties do work, so that they do
pencil out.
In going forward with S. 548, we recognize that there is
not a mechanism in their right now that would enable us to
increase the benefit of the tax code such that, as pricing
might go down on tax credits, as corporate rates go down--there
is not a mechanism built in there, but we think that there are
some opportunities for that to happen.
Senator Wyden. Why don't you, for the record, get us those
ideas, because I think one of the areas I am going to
concentrate on is trying to make sure that, as we look at these
critically important needs, like increasing the supply of low-
income housing, that we make sure that it fits into the tax
reform puzzle and we do not end up having an inadvertent
problem as a result of, say, a reduction in the corporate rate
lowering the value of the credit.
Dr. O'Regan, let us go to you.
In my town hall meetings at home--I go to every town every
year--I hear from folks at home who are just apoplectic about
having to live in one place and then drive hither and yon to
get to work, to take their kids to school, buy groceries, get
medical care, and so on. I am always struck by how people in
politics just preach morning, noon, and night about family
values. It is pretty hard to get family values when you spend 2
hours a day just commuting, driving family members to the
places they need to go.
What are your ideas about how we could do more in a
practical way to link low-income housing with transportation
and services and the like? I mean, you do not want to just do
some kind of one-size fits all national mandate from
Washington, DC, but you do want to say, let us really wring the
value out of this low-income credit. I mean, I think that is
really what Senator Cantwell and Chairman Hatch are trying to
do, to wring every bit of value out of this low-income credit.
Do you have any thoughts on what could be done to make sure
that, when you build this housing, it is more closely tied to
the services like transportation, and schools, and health, that
low-
income folks need?
Dr. O'Regan. Thank you, Senator.
Yes, this is a big issue. We talk about the cost of
housing, and we should be talking about the cost of housing and
transportation when we think about what it is that families pay
in order to make their life work.
There are some States that have been very aggressive in
this, in their qualified allocation plan, where they use their
ability to apply basis boosts and priority points in a way that
prioritizes not just low-poverty neighborhoods, but
neighborhoods that have good access to transit and good
schools. So I think there is a lot that could be learned from
what States have done in the last 5 to 10 years.
I also think you need to be getting a broader group of
stakeholders in some of these meetings, because employers
really care whether or not the workforce is within driving
distance. So they have a role to play in making sure that the
collection of resources, not just LIHTC, but local resources
are where the housing is located and the transit dollars to
make sure that they are being used in a way that works well for
the whole community.
Senator Wyden. Okay.
Thank you, Mr. Chairman.
The Chairman. Senator Grassley?
Senator Grassley. Yes.
Thank you, Mr. Garcia-Diaz, for GAO doing some studies I
have asked you to do. So I have some issues I would like to
have you comment on.
The organization has found that basic LIHTC data, including
credit allocations, certification information, building
dispositions, and program noncompliance, is either not
collected or rarely used. So could you describe what steps were
taken to gather the information on how this lack of data
impacted GAO's ability to analyze basic program information?
Mr. Garcia-Diaz. Thank you, Senator.
Essentially the LIHTC program, from our perspective, is a
very hard program to review. There is a lack of information at
the Federal level, such as basic information about allocations
awarded to projects and placed-in-service dates, which are
critical requirements in the program, making this program
difficult for us to review. What is more, when we asked the IRS
to provide us information on how many properties had a
recapture because of noncompliance, the IRS was not able to
provide us with that information.
So we are very concerned that, on these basic
accountability measures, the IRS and no one else in the Federal
Government really has an idea what is going on. The program
lacks basic accountability requirements that we would expect of
any program, and especially one as important as this one.
Senator Grassley. Okay.
GAO is currently examining development costs of LIHTC
properties. What are some of your preliminary observations
about this data that you are collecting and the types of
activity allocating agencies are doing to manage costs?
Mr. Garcia-Diaz. So, on the first part of your question, we
are developing a database on development costs of LIHTC
projects for 12 different allocating agencies representing the
period where properties were placed in service between 2011 and
2015. This information does not exist in a central location. So
we have had to go to individual allocating agencies to collect
it.
It has taken us well over a year and a half to build this
database, but we have amassed about 1,900 projects representing
122,000 units. And we hope, early next year, to be able to
report on our cost estimates. Our plan is to meet with the
individual allocating agencies and share what we have done with
the data, so that we can help these agencies build a capacity
to analyze cost data and assess the reasonableness of their
costs.
Right now, in our interviews with the 12 agencies, we are
seeing a range of practices regarding assessing the
reasonableness of project costs. Part of that is driven by the
availability of analyzable data at the agency level.
So we have identified certain agencies that may have some
cost limits that they impose on project applications, yet they
may not be assessing the reasonableness of the costs. Other
agencies are using the analysts' judgment on whether costs are
reasonable. Then finally, you have another group of agencies
that are actually doing pretty sophisticated analysis, using
statistical regressions for instance, to better understand
their data.
So we are seeing quite a bit of variety in the
sophistication of the agencies in analyzing costs and assuring
that credits are used as cost-effectively as possible.
Senator Grassley. Okay.
We often hear from LIHTC industry participants that
syndicators provide the necessary program oversight because
they have the vested interests in ensuring that programs run
effectively. So, Mr. Garcia-Diaz, do you believe that this is
sufficient oversight?
Mr. Garcia-Diaz. I would not say it is sufficient. It is an
important component of oversight. The syndicators are a very
important player in this program, and actually if you look
across past affordable housing programs, we have never had a
private entity like this that monitors projects and performs
audits and reviews and other kinds of asset management
services.
However, I do not think this relieves the Federal
Government of the responsibility of having basic performance
information about LIHTC and, particularly, understanding the
extent of noncompliance.
Senator Grassley. Yes.
For Mr. Whitaker and Dr. McClure: in his written statement,
Dr. McClure raised--this will be my last question--Dr. McClure
raised concern that State housing agencies fail to conduct
rigorous market analysis to build LIHTC units in areas with the
greatest need. As a result, he finds that most LIHTC projects
are not being built in areas that experience a housing
shortage.
So, Mr. Whitaker, could you first comment on whether or not
you agree with Dr. McClure's concerns, and two, what policies
are in place at State housing agencies to identify where
projects are most needed?
Mr. Whitaker. Thank you, Senator.
I think, first of all, I can speak mostly on behalf of my
own State. However, the Council of State Housing Agencies is
putting together, with participation by all allocating
entities, some best practices that would probably improve those
that are not doing quite as well.
But in terms of what we require, we mandate that we get a
market study with the application that is submitted for the tax
credits. Market studies have to be fairly new. I think they
cannot be more than 6 months old, or 90 days. I am not sure
which. But we do look at those very carefully.
We also have some of the market studies done independently
in some areas where we are concerned about what is happening.
So there are a couple of rural counties in Utah where we can
see the rent rolls, and some projects that we have funded with
tax credits a number of years ago are having high vacancy
rates. So we do not accept applications in those counties.
So we are very careful about that. We have not seen the
kind of problem that he described, at least in my State. So it
is a little hard for me to describe what might be happening in
other places.
Senator Grassley. Thank you.
The Chairman. Thank you, Senator.
Senator Stabenow?
Senator Stabenow. Well, thank you, Mr. Chairman, for this
very important hearing.
I first want to indicate my strong support for S. 548. I am
looking forward to being a cosponsor. I know we are doing this
in twos, a Republican and a Democrat coming on together. So I
am looking forward to that, but I want to commend Senator
Cantwell and yourself, Mr. Chairman, for this important
legislation. I hope we are going to be able to move it through
the process quickly.
I do have one issue that has come up, though, that, Mr.
Whitaker, I thought I might ask you about, and if anyone else
has any thoughts on it. But affordable housing is so critical,
whether it is rental or purchasing, building, and so on.
We have had a very concerning issue come up in Michigan
related to the Low-Income Housing Tax Credit. We have at least
one developer who has essentially foreclosed on their own
properties to try to avoid the affordability requirements under
the tax credit.
Obviously, this is not what was intended, and you cannot
just simply plan foreclosures so you can circumvent the
commitments to affordable housing. However, only the Secretary
of the Treasury has the authority to deem a foreclosure
illegitimate for LIHTC purposes.
And formal guidance has not been issued on this. So as a
result, we have Michigan families who are wrongfully losing
access to affordable housing which is absolutely critical to
them because developers want to charge more.
I wonder if this is something that you are seeing more
broadly with members. And if so, what can we do to fix this?
Mr. Whitaker. Thank you, Senator.
We have heard of it. It has not happened in Utah, and I
understand Michigan has that problem. It may be unique, but
possibly not either.
But we know that S. 548 may have some language in there
that will help to correct that so that the allocating entities
are the ones who can make that determination. We have had, I
think, very good compliance in the State of Utah with
maintaining those properties through the extended use periods
and beyond. We require that the properties have a 50-year
compliance period. So that is beyond what the Federal
Government requires.
But we have not had any who have threatened to do that. I
think it is possible that it could happen. So we welcome the
steps that were taken in S. 548 to enable us to handle that as
opposed to Treasury.
Senator Stabenow. Do you know if there have been
discussions with Treasury or how they have reacted? Is this, at
this point, isolated, do you think, to Michigan? Have you heard
from other people? I am wondering if there is any real
discussion going on about this.
Mr. Whitaker. I do not think there has been much
discussion, because I think it is fairly rare. We do know, and
I have heard, that Michigan has that problem. So that is why I
say, perhaps it is unique.
My understanding is that when Treasury has been notified of
the problem, they have chosen to take no action.
Senator Stabenow. Thank you.
Well, we need to fix that process.
Mr. MacDonald. If I may----
Senator Stabenow. Yes? Mr. MacDonald?
Mr. MacDonald. If I may--in Texas, the State, in their
qualified allocation process, detailed an identity of interests
who could and could not foreclose. And it boiled down to,
obviously, lenders need to have the preservation right to
foreclose or a syndicator if they have someone who is not
taking care of their asset like they should. But after that, it
is just not allowed.
I think it is very similar--I understand GAO's problem in
auditing the tax credit program. But what makes the tax credit
program so wonderful is that it has 50 Qualified Action Plans,
and it is very regionalized. It is not a one-size-fits-all
program.
So a best practices idea like this or like what is being
proposed in this bill could go forward and is maybe something
that should circulate more to the other 50 States, like we have
in Texas on this one. The decentralization has its negatives,
but it also has its positives in that the program is customized
for a region, for a State.
Senator Stabenow. Thank you.
And, Mr. MacDonald, on a different note, again, it is
rental housing, it is affordable housing, it is also affordable
purchasing and people being able to get into home ownership as
well. I wonder--we all know what happened with the financial
crisis, where we lost $7 trillion in home equity. I am sure it
has happened in other places, but home values in some locations
in Michigan--it was unbelievable, actually, how far they
dropped. And people are just now coming back a little bit.
Finally, with the recovery, they are starting to build up a
little bit of equity in their home again.
When we go into tax reform, one of my concerns is that
there are proposals that would limit the value of the mortgage
interest deduction for families. With a major increase in the
standard deduction, fewer taxpayers would itemize, as we know.
And that means home ownership would not be a benefit in terms
of the mortgage interest deduction unless you owned a very
large home.
So this is also a concern to me. I wonder if you might talk
about the different proposals and the impacts that they would
have on working families who are finally starting to regain
their equity after being under water for so long.
Mr. Whitaker. Yes, ma'am. It is very important that the
mortgage interest deduction be preserved. However, we also need
to keep the same amount of funds flowing into housing that are
generated under the existing tax code. There are several
alternatives for that.
A first buyer home assistance purchase program is very,
very important. And that is something that is administered on a
State-wide basis too, through the housing agencies.
Additionally, there has been a lot of discussion in
reference to a tax credit, a home buyer's tax credit and a home
owner's tax credit, and that could be a very efficient way to
augment the mortgage interest deduction as well.
Senator Stabenow. Thank you, Mr. Chairman.
The Chairman. Okay.
Senator Cantwell?
Senator Cantwell. Is my colleague from Georgia next, Mr.
Chairman? Are we going back and forth? Okay.
Well, thank you, Mr. Chairman. I so appreciate my colleague
from Georgia and his help on all of this, and, Mr. Chairman,
thank you for holding this hearing along with Ranking Member
Wyden, and thank you for your work on this legislation.
I so appreciate everything our witnesses have said. I
actually disagree with very little that has been discussed so
far.
I want to point out that the reason I went to Chairman
Hatch about this to begin with, Mr. Whitaker, was your great
work in Utah on the veterans' homelessness issue, and the fact
that you guys have driven that down to such a low rate or next
to zero is just so impressive. In the United States of America,
to take that population that we owe so much to and deliver for
them on affordable housing--I so appreciate that, and I have a
question on that.
But I did want to emphasize a couple of things in these
points that were made. The first fact is that we have 15
million people, as Dr. O'Regan was talking about, and that the
projections are getting worse. That 2025 number--if we do
nothing, this is just going to be exacerbated. Several people
mentioned the 25-percent increase in renters over the last 10
years, which is the largest on record. That is just
unbelievable to me, unless you stop and think about the
implosion of the economy during that time period, and then you
realize, yes, those who were on the last rung of the ladder
literally fell off the ladder. So there were no more rungs, and
this 10-percent reduction, the lack of supply, that is the
crazy thing. But I guess, Mr. MacDonald, you would say that is
not so unusual either, because if you had an implosion of the
economy, then you also had the lowest production of rental
housing in 40 years, because of this crisis.
So I guess, if anything, you have illuminated for many of
us things that we knew, that this is both an urban and a rural
problem, that there are places like Jackson, MS or Baton Rouge
that are just right up there with Miami and other places, and
that there are places like Clark, IA or Douglas, NV--that it is
everywhere.
So the one thing that I have not heard talked about is
that--I have heard this number: that 90 percent of the
affordable housing units are built with a tax credit. I do not
know if somebody can clarify that information, but the majority
of affordable units do use a tax credit. So when you look at
that chart and you see that the number of renters is
increasing, if we do not increase the tax credit, how are we
going to get out of this crisis?
Also for Mr. MacDonald, I have heard that the discussion of
tax reform has actually suppressed the amount of capital going
into this, so that we are actually going to see in 2017 and
2018 a decrease in the amount of affordable housing at the very
moment that we are at this crisis, and we know that the tax
credit is the dial to help create more supply, and we are
actually seeing a decrease just because people are waiting to
see, or just because of this uncertainty.
So I do not know if anybody--if, Mr. MacDonald, you can
address that or, Dr. O'Regan, if you can address that.
Mr. Whitaker, I do want to hear about the veterans success
in Utah.
Mr. MacDonald. Well, you are exactly right. After the
November elections and the first thoughts of tax reform came
out and the 15-percent tax bracket was announced, it had an
extreme impact on credit prices. And it was mainly the fear of
the unknown. People did not realize where it was going; the
syndicators were petrified.
And they went to a stop. There was a point where they fell
in price, and then they just would not purchase credits at all.
And it came to a grinding halt.
I think that now that there has been more discussion of tax
reform, the reality is that we are not going to have a 15-
percent rate, in all likelihood. You people know better than I,
but it is probably more in terms of a 25-percent rate. So it is
not going to be as dramatic. It has softened it some.
We have seen some recovery in prices. But I will tell you
that the fixing of the 4-percent rate, as this bill does, is
the perfect way to fix that problem, because it puts the money
back into the program even if the credit price does not
recover. And by fixing the 4-percent rate and getting the bond
prices back up, you pick up 25 percent more funds, so you more
than offset the loss of what the credit price is.
Senator Cantwell. Dr. O'Regan, is this the primary tool
that we have for fixing this crisis?
Dr. O'Regan. This absolutely is, on the affordable side of
the market. So I had heard the 90-percent number. I have not
checked it myself, so I will say it is in the range of that, in
terms of the role that LIHTC plays for the creation of
affordable housing at the low end of rent.
So what we know is that when markets are responding, they
are responding and producing at the very high end. The bulk of
units that come into the low-rent market are what economists
call ``filtered down.'' They are units that exist, that as they
age, their value goes down, and they are lower rent.
The tighter the housing market, the less likely that units
filter down. In fact, in very tight markets, you see them
filtering up. So units that were affordable are no longer
affordable, and the production that comes in is at the top of
the market.
So what you need to do is have a mechanism for producing
along a range of price points, and it is only with these types
of subsidies that you are going to relieve any of the pressure
at the low end of the market.
Senator Cantwell. So you are saying, basically, the only
thing we have to do is to turn this dial if we think we are
going to make a dent?
Dr. O'Regan. We need to turn this dial. And I think a point
that Professor McClure was making is, to the extent that we
want the dial to go as deep as 30 percent of income, we want
some of the other reforms that are in your proposal and in S.
548 to be able to have a little bit of the ability to reach
deeper in the income level.
Senator Cantwell. Well, I cannot emphasize enough how this
is a crisis across many parts of our country. I can tell you,
from Seattle to Walla Walla, the housing crisis is real.
Many times it is trying to help either the senior
population or the veteran population. So, Mr. Whitaker, how did
you address the veteran population in your State?
Mr. Whitaker. It was in conjunction with a housing
authority. The Salt Lake County Housing Authority,
specifically, put an application into us for 9-percent credits.
And one of the things that they proposed is that a portion of
those units be set aside for the homeless.
So they got points for that, and they have rents at levels
such that people coming out of a homeless situation could
afford them, or they would have set aside vouchers for them. As
it turns out, this property was such a unique property because,
initially, it was not even welcome in the neighborhood. Since
it has been built, it is a real jewel, and it is appreciated
very much.
Many of the residents who are residing there are those who
have been veterans who were formally homeless. And they have a
good comradery going there. Also, the service providers who
need to be there for issues related to addictions and mental
health cases and so forth, they have a single place to go where
they can help a lot of people in one spot.
That has made this project, in particular, successful. But
we have quite a number of other projects that are doing
something similar.
Senator Cantwell. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Isakson?
Senator Isakson. Thank you, Mr. Chairman.
Mr. MacDonald, of the 4,700 units--I believe you said you
had built 4,700 units, low-income housing units. How many of
those do you own as an owner with tenants?
Mr. MacDonald. Forty-seven hundred.
Senator Isakson. All 4,700?
Mr. MacDonald. Yes, sir.
Senator Isakson. Were the tax credit program not available,
would you have had that big an investment?
Mr. MacDonald. No, sir. We would have never had the ability
to raise capital and offer a portfolio with affordable rent. It
would just not have been a viable alternative at all.
Senator Isakson. The reason I make that point is, Senator
Cantwell is exactly right. The only way you meet the future
shortage, the existing shortage today, is to have the program
that attracts the money into it. If you do not do what you need
to do, the money will go somewhere else, and then you will have
a bigger problem than you had before. I think that program is
great.
So all 4,700 were rental units in multi-family buildings?
Mr. MacDonald. Some are multi-family buildings. We also
have some single-family. We did a neighborhood revitalization
program in San Angelo, TX where the city gave us the lots for
$1,000 and we built 36 scattered single-family homes there, for
example. And it jump-started a community revitalization in the
whole area. People started fixing up the entire area because of
it. We do both multi-family and single-family.
Senator Isakson. Mr. Chairman, there is one point I want to
make. There are two tax credit programs created by Congress.
One is the Conservation Easement Tax Credit program and the
other is the Low-Income Housing Tax Credit program, both of
which have caused a lot of land to go into conservation, and a
lot to go into low-income housing.
There have been some attacks on both of those programs in
terms of the syndicators and others--questioning their
validity. So one of the things we have to be sure we do not
do--we want to make sure the integrity of the programs that
raise the money by the syndicators is intact. We want to make
sure there is no misrepresentation or other mishandling of the
funds.
But we have to realize that it is such an attractive
program. It is the only way we are going to have money flowing
into two things that meet the test of what we want to give a
tax credit for, and instead of the government taking tax money
and investing it into land to buy for conservation easements,
or the government getting into the business of building housing
projects, we are incentivizing the private sector to build
projects, utilizing the capital that is invested by individual
investors who recover their capital investment by tax credits
earned over time. Am I not correct?
So it has a multiplier effect in terms of what it does for
generating more moderate-income housing, and it is a solid
program. It also has about as many motivations as you can have
in a program to incentivize the developer and the owner to take
care of the property to make sure it does not become a blighted
property and to make sure it is a great property. Is that not
correct?
Mr. MacDonald. Absolutely, sir. We have what seems to be a
continual audit. We are being examined by our lenders, by our
syndicators. If we have section 8 vouchers, we are being
reviewed on those.
And then, of course, our State agency is out every year,
goes through our books and records, notices what we are doing
with our rents, makes sure it does a property evaluation, does
a complete needs assessment for our property, gives us 90 days
to fix it. If it does not get fixed, they give you an 8609 and
we lose our tax credits.
We take it very, very seriously. I realize that is hard to
track from a GAO standpoint, but on a local basis there is a
lot, a lot of oversight to make sure that the compliance in
this program is being carefully, carefully monitored.
Senator Isakson. In terms of cost of your units, what
percentage of the cost of the average unit that you build goes
to regulatory costs like impact fees and things like that?
Mr. MacDonald. Approximately 25 percent.
Senator Isakson. Senator Wyden asked a question a little
bit ago--he is gone now. I will try to remember to tell him
this, but when we talk about what local governments can do to
help make it easier to bring the project to fruition and bring
housing programs in, they can look at the regulatory burden of
costs on the developer to build the project in and of itself.
Mr. Whitaker, I think, was talking about the homeless
veterans program. I chair the Veterans' Affairs Committee. We
had a family, a veteran in 1906 who gave 300 acres in West Los
Angeles to the VA. That zip code is now 90210. So it is a
pretty good location, if you know what that means, Beverly
Hills.
They are going to use a lot of that land to build housing
for veterans who have been homeless. And it is going to be
because the local government is going to exercise some
authority it has in zoning and land use restrictions to
motivate and incentivize the private sector to build housing so
the veterans will have the housing on that project.
So, it is a great way to provide housing. I am a big
supporter of Ms. Cantwell's program. It is a good program. It
has passed the test of time. And if we do not do it, I cannot
think of any other way to get private capital flowing to
generate the housing necessary to house the American people.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman.
I think this is an incredibly important hearing. I
appreciate my colleague from Washington driving the opportunity
for the hearing, and I want to make the case for her specific
legislation by speaking about some of the other issues that we
have in housing that only strengthen the need for her
legislation.
In New Jersey and across the Nation, low-income households,
including seniors living on fixed incomes, people with
disabilities, and families with children, are struggling to
find affordable places to call home. For the lowest-income
families, New Jersey faces a shortage of more than 212,000
homes that are affordable and available.
That problem is exacerbated by the fact that only one out
of every four eligible low-income households receives Federal
rental assistance. So I cannot help but point out that the
President's fiscal year 2018 budget request slashes HUD's
funding by more than $7 billion. Now that would turn this
crisis into an epidemic.
By eliminating programs like CDBG and HOME, cutting public
housing funds to the bone, eliminating a quarter-million
housing choice vouchers, failing to provide sufficient funding
for project-based assistance renewals, and requiring low-income
families, seniors, and people with disabilities to pay more in
rent, the President is clearly not in tune with the housing
crisis that we have in this country.
So, Mr. Whitaker, could you comment on how the elimination
of the Community Development Block Grant program and the HOME
Investment Partnership would impact the affordable housing
crisis?
Mr. Whitaker. I can surely talk about the HOME program,
because that is what funds a fund in Utah that we call the
Olene Walker Housing Loan Fund. Olene Walker was a former
Lieutenant Governor, and ultimately Governor of the State of
Utah, who had a very ideal outlook for affordable housing.
This funds this program, and this provides the gap funding.
So when we have a project that is submitted to us, in order to
score points, one of the things that they will do is to offer
up some of the units for the very, very low-income, extremely
low-income--below 35 percent AMI, typically at 25 percent AMI.
Those units receive rents that are very low, and that does
not contribute a lot of revenue to the project. So they are
funded with their mortgage, and they are funded with tax
credits. But those units at that very low level have a very
difficult time supporting themselves. So they go to this other
funding source and use that for gap funding. They get soft
seconds--sometimes grants, but usually soft seconds. And that
HOME money is what keeps that program going in Utah.
I think that is the same as it is for other areas. CDBG, I
am not so familiar with.
Senator Menendez. I appreciate your answer on HOME.
Professor O'Regan, how would you view affordable housing
efforts? Would they be hampered if Congress were to enact
large-scale cuts in the housing voucher program and create
greater income payments by low-income households?
Dr. O'Regan. Thank you, Senator; yes. There is an
incredible overlap between the units that HUD funds and
developments that also use the tax credit. About 47 percent of
LIHTC units receive some type of rental assistance, and most of
that is project-based or voucher-based.
LIHTC owners are not allowed to discriminate on source of
income. So the LIHTC stock itself is critically important for
voucher households as they go around and try to find units that
they can rent.
The HOME funding is one form of the gap funding. CDBG is
also paired with broader community redevelopment. And LIHTC is
usually the big infusion of capital into those plans.
So the streams on the ground--up here at the Federal level,
these are very separate. On the ground, these are tools that
you are using in your communities to be able to address the
issues. And the flexible tools, such as HOME and CDBG, those
going away would make it even more difficult, because you are
looking for things that can work well with the plans that you
are putting together.
Senator Menendez. Let me follow up on that. The Low-Income
Housing Tax Credit program sets income limits at 50 percent, 60
percent of area median income; however, extremely low-income
households have incomes that are less than 30 percent of area
median income. For those households, the vast majority of which
face severe cost burdens--paying more than 50 percent of their
incomes on rent--the Low-Income Housing Tax Credit alone is not
enough to make a home affordable.
You highlight this issue in your testimony. Can you explain
why additional subsidies, be they project-based, tenant-based,
rental assistance, are critical to ensuring the lowest-income
families are served by the Low-Income Housing Tax Credit?
Dr. O'Regan. Yes. So I think the point that Mr. Whitaker
made is, there is a gap. There is a penciling gap; right? So if
the rents work out financially at 50 or 60 percent of AMI, to
go all the way to 30, you are going to need something else.
But I will point out, 59 percent of tenants in LIHTC units
have incomes below $20,000 a year. So right now, State HFAs are
piecing together a collection of things--a lot of it is HUD
funding--to be able to reach deep. So as the HUD budget
changes, you are not going to see these units able to reach
down. So we are going to see an increase in rent burdens among
that group purely outside of the LIHTC allocation, because of
other parts of what is happening in the budget.
State and local jurisdictions put their own money in. As
other money goes away, their budget is going to shift. They may
not have the ability to put their resources in. And it is this
kind of patchwork that makes the system work as well as it does
currently.
Senator Menendez. Thank you, Mr. Chairman.
The Chairman. Senator Scott?
Senator Scott. Thank you, Mr. Chairman, and thank you to
you all for being here this morning.
Mr. MacDonald, affordability and accessibility go hand-in-
hand when it comes to housing. Fannie and Freddie use an old
credit-scoring model that does not take into account rent,
utility payments, your cell phone bill payments, things that
actually show a broader swath of the credit history of the
borrower.
Why is it so important for the GSEs to start considering
this data? Who stands to benefit? And I will note that Senator
Warner and myself have legislation that we introduced today to
hopefully help the GSEs update their credit scoring model.
Mr. MacDonald. Senator, I want to thank you for the
legislation you filed, and we really look forward to studying
it. It is an issue that has been at the forefront for home
builders for quite some time, probably since 2008, when the
downturn of the economy came. And we were trying to find out
why all of a sudden we were having so many perspective home
buyers who were losing the opportunity to purchase homes.
We sat down with our economics department--and we have four
or five of the smartest Ph.D.s I have ever met in my life--and
we said, ``Tell us how FICO works.'' Sir, after about 30 days,
they came back, and they could not figure it out.
We need a system that is transparent so that you know, and
you know, and you know exactly how that score that controls
your life and what kind of housing you are going to be able to
provide your family is made up, so you know what to do and how
to improve it, how to work with it, how to work toward having
good credit.
Good credit should not be an accident. It should be
something that you work at as a goal. And if you understand the
rules that you are playing by, it is a lot easier to play the
game.
Senator Scott. Absolutely. Thank you so much, sir.
Mr. MacDonald. Yes, sir.
Senator Scott. I appreciate your passion as well.
Mr. Garcia-Diaz, I have a question for you on a different
topic.
So often in the discussion about home ownership and
affordability, manufactured housing just goes unnoticed. In
South Carolina, one out of every five homes is, indeed, a
prefabricated home, the highest percentage in the Nation.
At the same time, the average household income for a
manufactured homeowner is around $30,000, versus about $52,000
nationwide. Folks who buy manufactured housing are the least
equipped to deal with rising costs.
A 2014 GAO study found that high financing costs often keep
these homes from being even more affordable. What conclusions
did the GAO reach on improving manufactured homes'
affordability?
Mr. Garcia-Diaz. I am aware of the report that you are
referring to. I do not have an exact answer, but I will be more
than happy to reach out to your staff and provide that
information related to our work on financing manufactured
homes.
Senator Scott. Thank you, very much.
Back to you, Mr. MacDonald--I liked your passion, so I am
going to ask you another question here.
You testified that many home builders struggle to fill
vacancies because the workforce lacks the skills necessary,
whether it is welding, carpentry, plumbing. This shortage of
qualified workers prevents housing inventories from keeping
pace and ultimately leads to higher costs. I have worked on
legislation around apprenticeship programs. I think that one of
the ways we improve the housing inventory is to help folks earn
and learn at the exact same time on the job sites.
How can we ensure more Americans are ready for the skilled
labor jobs that are high-paying?
Mr. MacDonald. The National Association of Home Builders
this year is sponsoring 8,400 people in the apprenticeship
programs. These programs are exceptionally important.
The average age of a master plumber in Texas is 61 years
old. The average age of a master electrician in Texas is 59
years old. That is a recipe for disaster.
We are not having the skilled people come into our
workforce. Part of it is, we have to go back to moms and dads
and school counselors who will tell young people that it is not
a bad thing if you do not go to college, if you go to a trade
or technical school.
We also have to start offering more trade and technical
school education in our high schools for people to use so that
they can develop the job skills where they can make a wonderful
living and have a wonderful career, possibly own their own
business, and then not be burdened by student debt.
Senator Scott. Absolutely.
I know I am running out of time, Mr. Chairman, but I will
close by saying that there is dignity in all work. I recall
back in my days in high school, just about a few years ago--Mr.
Brown was there with me in a different State--the reality of it
was, we had shop when I was in high school.
We need to restore dignity in all work and encourage every
facet of this society to participate and encourage the fact
that there is strong income as a welder. I understand in Texas
you can make over $125,000 a year as a welder.
Mr. MacDonald. I am a licensed welder. Thank you.
[Laughter.]
Senator Scott. Exactly. It works. So we have problems that
we can solve if we work together towards those solutions.
Thank you very much to all of you guys for being here
today.
The Chairman. Well, thank you, Senator.
Senator Brown?
Senator Brown. Thank you, Mr. Chairman.
I am flattered that Senator Scott thinks we were in high
school at the same time, but thank you for that.
Senator Scott. I need your cosponsorship on the
legislation. There is that. [Laughter.]
Senator Brown. Nice try.
Thank you, Mr. MacDonald, for your comments about the
importance of the trades, and thank you for your passion about
that and in reminding people how important it is that young
people become carpenters and machinists and sheet metal workers
and plumbers and electricians.
A couple of comments, and then I have questions for Dr.
O'Regan and for Mr. Whitaker, if I could.
As we know, families burdened by high housing costs have
fewer resources, obviously, to meet other needs like food,
transportation to work, medicines, and may face homelessness
and eviction. As a sociologist, Matthew Desmond says, ``The
rent eats first.''
A person with a full-time job would need to earn an hourly
wage of $21 to afford a modest two-bedroom rental at HUD's
national average fair market rate. This housing wage, for want
of a better term, varies, along with housing costs, across the
country. The fact remains there are only 12 counties in the
U.S. where a full-time worker earning Federal minimum wage can
afford a modest one-bedroom rental home.
In my home State of Ohio, a more affordable State than many
others, the average housing wage is still $15. The State's
minimum wage is $8.15. The mean renter wage is $12.87.
My wife and I live in Cleveland in zip code 44105. Ten
years ago that zip code had more foreclosures than any zip code
in the United States of America. So we see every day the blight
that comes from people not being able to afford decent places
to live.
The Low-Income Housing Tax Credit is a critical tool--as
you know from your service in the administration--and
developing affordable housing certainly should be protected and
expanded, regardless of whether tax reform develops into a real
bipartisan process or remains the partisan fantasy that people
here talk about.
Yet all of you here today as witnesses say the mismatch
between housing costs and wages goes far beyond the cost of
building and operating affordable units.
I am the ranking member of the Banking, Housing, and Urban
Affairs Committee. We have had a lot of discussion of the
President's proposed 15-percent cut in HUD funding. Senator
Menendez asked you a moment ago about that.
This proposal goes in the wrong direction. How can you
provide more affordable rental and home purchases when you make
such savage cuts to affordable housing? So my question to
Professor O'Regan, first for you, is, can you discuss
additional steps that Congress and HUD should take to address
the needs of rent-
burdened working families?
And then the question for both you and Mr. Whitaker:
pediatrician Megan Sandel likens affordable housing to a
vaccine due to its ability to improve or not improve children's
health and other outcomes. So, could the two of you talk about
what we know about the effect that the lack of safe, healthy,
affordable housing has on children's health?
Dr. O'Regan, if you would answer both questions, and, Mr.
Whitaker, if you would take the second question.
Thank you.
Dr. O'Regan. Okay.
So I will start with the need for resources. The need for
resources on affordable housing is broad. The hit on the HUD
budget is going to be felt severely around the country. So I am
not in a position--I am no longer at HUD, and I am not in a
position to affect the Federal budget. But it is hard--you want
to find ways in which the resources do not get cut for those
most at need.
I know there are a number of other proposals being
considered, things like renter tax credits, things that can be
used that would actually focus on the greatest need at a time
when other types of resources are becoming less available.
Additional flexibility within the tax credit so resources can
be used in more than one way is a way to help fill those gaps
as the home funding goes away, which is the gap and fungible
funding. You are going to need to look for other places where
it can come in.
On the vaccine part, I would like to highlight one piece of
work that came out from HUD called the ``Family Option Study.''
I think it is the most rigorous and best evidence to date on
the effect of stable, affordable housing on outcomes for
children and on non-housing outcomes, radiating benefits that
came from homeless families who were provided with long-term
housing subsidies.
Within 3 years, a whole collection of additional impacts
were seen. Domestic violence went down in these families.
Family separations were significantly lower. Kids were less
mobile across school and across day-care.
By the third year follow-up, you were seeing prosocial
behavior and a collection of all of those outcomes that the
longer-term health studies show are directly connected to adult
health and mental well-being. And I think that researchers will
be following that study for the next 5 years and be using it to
show exactly the direct correspondence between stable
affordable housing and good outcomes for kids.
The Chairman. Thank you.
Senator Cassidy?
Senator Brown. I did not get an answer, but thank you, Mr.
Chairman.
The Chairman. Oh, I am sorry.
Mr. Whitaker. Well, mine will be short, because I am not
much of a health expert, actually. But we do know for a fact
that for households that are on the cusp of just being able to
afford their daily lives, paying the rent and the necessary
food and so forth for their families, anything such as a
significant car repair is something that can throw them into
homelessness. And a homeless family, those with children--there
is nothing more pathetic than to go to the areas of Salt Lake
City where we see that on a daily basis.
We see a shopping cart with mom and dad with kids in tow
with all of their goods in that shopping basket walking down
the street. That is all they have. And we know that is an
unhealthy situation for those families.
The Chairman. Well, thank you.
Senator Cassidy?
Senator Cassidy. Mr. MacDonald, good to see you.
Mr. MacDonald. Good to see you, sir.
Senator Cassidy. I love your industry. Folks start off
swinging the hammer, they end up being quite an entrepreneur.
It is really tremendous. So just to compliment you, and we have
met before, so just to mention that.
Now when I read you all's testimony, it seems as if it is
pointing in different directions--nothing against your
testimony; very provocative. But let me toss this out.
Dr. McClure, you quote some of Dr. O'Regan's research. So
on the one hand, there is data showing that if you
``ghettoize'' low-
income people, that is negative. So, Dr. McClure, you suggest
that we should have more policy forcing integration, if you
will, of the lower-income into richer neighborhoods. It sounds
great, except Mr. MacDonald's testimony points out that
wealthier people tend to live near transit centers, probably
live near better schools, better restaurants, better et cetera.
That increases your development costs.
So we have kind of a push-back there, because it is going
to increase your cost to the program. And then, similarly, when
you speak about those being underserved--I think you quoted Dr.
O'Regan's research--most of these programs are for those who
are kind of at $40,000 to $60,000, not less than $20,000.
But when you are down in that level of poverty, there tends
to be more economic segregation. Folks do not live near transit
centers. They do not live near nice Whole Foods as a rule,
although there is a nice place in New Orleans where there is a
Whole Foods near such a neighborhood.
So I just toss that out, because it seems like the
recommendations and the reality kind of go against each other.
Yes, we need more housing for those who have reportable incomes
of less than $20,000. But that is going to increase your
housing development costs. Yes, you want to integrate those
folks into the broader social fabric, but the social indicators
may make it more difficult to do so.
How do we reconcile that?
Dr. McClure. Thank you, Senator. You are correct. It is an
enormously tricky process.
What we have now is a one-size-fits-all tax credit program
with very few flexibilities built into it. We have built an
entire industry of developers, underwriters, nonprofits, that
have found ways to layer subsidy on top of subsidy to come up
with some very impressive results.
If we could make the Low-Income Housing Tax Credit program
more flexible, if we would reward the type of developments that
better serve those households truly in need, our outcomes would
improve in the program.
Dr. O'Regan. I would like to join in on that. I think that
making it work by having the ability within the program to be
flexible is quite useful. But you did point out something that
is kind of inherent: locational goals may be in conflict.
Senator Cassidy. Totally.
Dr. O'Regan. And so I think this is where the benefit of it
being a decentralized program for localities that have the
housing market and the needs in front of them getting to be
flexible there is important.
But I want to point out one thing on the research that is
important for thinking about them potentially not being in such
conflict. There is very good work by Rebecca Diamond and
Timothy McQuade, who look at the effect of creating low-income
housing, LIHTC housing in higher poverty neighborhoods, and
find robust findings that those investments, themselves, pay
off in the neighborhood.
And if you look at the properties nearby, the housing
values go up by more than 6 percent, crime rates go down, and
you see larger benefits----
Senator Cassidy. Now, that is just that good money drives
out bad people.
Dr. O'Regan. No. You will see composition coming in
differently. You will see higher-income households coming in,
so the economic and racial composition of the neighborhood
changes over time. So it is a community reinvestment strategy.
So, if you think about the place-based side of this, where
the LIHTC development goes in now, 5 years in the future looks
different. So that is one way to think about some of the
benefits you get on that location side.
Senator Cassidy. Okay. I get that.
Now, also it is interesting--I was also just in North Baton
Rouge, an area of low socio-economic class in Louisiana. After
the flooding, they have lost a lot of their rental stock. So
the local pastor was saying, ``They are not rebuilding our
rental homes, which means that I am losing my congregation. We
are losing the fabric of our community.''
So your point, sir, that perhaps we need to award
rehabilitation a little bit more than new construction would
maybe solve some of that. I will concede that.
If you go to New Orleans, sometimes older neighborhoods are
closer to transit sites, hubs, if you will--they are just older
neighborhoods. It did seem like rehabilitation would be part of
the answer. I will just kind of commend your testimony on that.
Mr. MacDonald. And I also think that the 4-percent side of
this bill will aid that rehabilitation. It will heighten it. We
have to realize that rehabilitation is really, really a strong
position, because we are starting to get older and older units
that need the work, and we have to do something to revitalize
some of these neighborhoods. The taxpayer program does a
wonderful job of that.
I agree that in a perfect world, we would try to build in
more affluent areas. But the problem is that the real estate
costs in the more affluent areas, everything else, then would
reduce the amount of units we are able to get on the ground to
assist families.
So, if we are going to get the most bang for our buck, we
need to let that stay as a State's issue. When they write their
QAPs, those people back home, we need to trust that the people
back home know exactly where they need to develop and what is
best for their community.
In Texas, we will see the need for revitalization, and you
will see an entire set-aside for revitalization. And that is
very, very important. We would not want to do anything to swipe
that.
They know exactly how to monitor this at home. They know
what is good in Baton Rouge for what needs to happen in the
rest of North Baton Rouge.
Senator Cassidy. Thank you all very much.
The Chairman. Senator Cardin?
Senator Cardin. Thank you very much, Mr. Chairman. I just
really wanted to sort of summarize and thank all of the
witnesses for being here.
I particularly thank the chairman and Senator Cantwell for
your leadership on this issue. We need your leadership.
Affordable housing is more challenging today than ever
before. The statistics that were brought out today indicate
that we need to have stronger tools available in order to meet
the needs of the people of this country. I think the
legislation the two of you have authored gives us a way to move
forward in the best traditions of this committee and the
Senate. So I first want to thank you all.
I also just want to make an acknowledgment. As I see the
work that is done in Maryland, whenever we can get a program
started to provide additional affordable housing for people in
need, there is not usually one tool available that will make
that happen. You sort of have to rely on a lot of different
opportunities.
No question, the Low-Income Housing Tax Credit is the major
tool that is available, and strengthening that tool will be the
most important thing I believe we can do for affordable
housing. But the historic tax credits are a major part. We had
over 5,000 units, I think, of residential housing that was
created under the tax credits.
That is another important tool that is available that has
combined many times with Low-Income Housing Tax Credits. We
have the New Markets Tax Credits that can be a helpful part of
getting this done.
We have incentives for energy efficiency, which can be
coupled with these projects, that accomplish additional savings
for the people who live there and their energy costs, but also
help us in regards to our energy policies in this country. That
can also help us deal with those issues.
So, as we look at improving the Low-Income Housing Tax
Credit, which I think we definitely strongly support, I think
we should be also mindful of the other tools that are available
and look at ways that they can be strengthened and in some
cases more targeted to the objective of affordable housing.
I am not squeamish about looking at ways we can make these
programs more effective. We need to do that, but at the same
time, we need to expand them and provide greater resources in
order to deal with the tremendous needs that we have in our
community.
I should mention also, we could not do this without the
private sector. The private sector takes incredible risks at
times in order to carry out a public function of affordable
housing. They are committed to that.
So it is all of that coming together that has allowed us to
move forward in Maryland on the affordable housing issues.
I look forward to working with all of the stakeholders to
find ways that we can improve the programs.
Thank you, Mr. Chairman.
The Chairman. Thanks, Senator.
Senator Thune?
Senator Thune. Last person here, Mr. Chairman?
The Chairman. As far as I know. [Laughter.]
Senator Thune. Okay.
Well, thank you. And thank you to all of you for being with
us today. We appreciate you taking time away from your jobs and
families to testify this morning.
Affordable housing is an important issue for each of us in
our States across the country, and we are fortunate in my State
of South Dakota to have one of the lowest unemployment rates in
the Nation. But we still have a need for housing that lower-
income individuals--especially those just getting started--are
able to afford.
Now there are a number of Federal programs and provisions
in the tax code that are intended to help provide affordable
housing in this country, both in urban areas and rural parts of
the Nation as well.
As we turn to tax reform as our top priority, we have an
opportunity to look at a lot of these tax provisions to make
sure that they are working effectively and efficiently. Your
insights this morning are an important contribution to that
effort. So, thank you again for being here.
As part of tax reform, many of us on the committee have
been looking at the important role that cost recovery can play
in helping ensure long-term economic growth. And while much of
the testimony this morning has focused on the Low-Income
Housing Tax Credit, I understand that depreciation is also a
significant component of the financing of affordable housing
projects.
However, the current recovery period of 27.5 years can
create a significant lock-in effect for residential housing
investment. So the question is, if tax reform were to include a
shorter recovery period for residential real estate or
acceleration of the depreciation deductions, how would you see
that affecting affordable housing projects? And I will just
throw that open to the panel.
Mr. MacDonald?
Mr. MacDonald. It would obviously bring down the price.
Twenty-six years is better than 27. Twenty-five would be better
than 26. So, however you come down the scale, what you will do
is help reduce the cost of producing affordable housing. And I
do not think there is anyone is this room who will not say that
is a great idea.
Senator Thune. Okay.
Anybody else?
Everybody is for that. All right.
The focus on affordable housing is often centered on our
larger cities and the surrounding suburbs, but there is also a
need for affordable housing in States like South Dakota, which
are largely rural. In these areas we often need housing
properties that are smaller, since low-income individuals are
more dispersed than in larger cities.
Due to their smaller scale, these housing projects may not
be as financially feasible as those being developed in urban
communities. Some have suggested enhancing the Low-Income
Housing Tax Credit to encourage financing for affordable
housing in rural areas.
So the question is, do you agree that the low-income
housing in rural areas presents challenges for using the
current Low-Income Housing Tax Credit, and what do you think
might be the most effective enhancement to the credit that we
could come up with that would address this issue?
Yes, sir?
Mr. MacDonald. Well, Senator Cantwell has got it right
here, and that is the ability to adjust DDAs, difficult to
develop areas, and give the economic boosts and to allow the
States to do that when they write their QAPs on a local area
basis, so that in South Dakota or in Texas, they can reach deep
and give that boost to the rural areas, which in Texas they do.
And that is what allows the development of affordable housing
in rural Texas.
Senator Thune. Okay.
Anybody else?
Dr. O'Regan. I think this is correct. The bill actually has
several things in it that would help with rural communities,
including making a change on the income definitions. I think
income averaging gives you a broader market so that you would
be able to actually support this in rural areas.
I am going to just second the DDA designations so that
Indian areas are automatically designated as difficult to
develop, which comes with the basis boosts.
Senator Thune. Okay.
All right. Well, those are my questions, Mr. Chairman.
Thank you.
The Chairman. Well, thank you, Senator.
Senator Thune. Thank you all for being here.
The Chairman. Senator Cantwell really deserves the credit
for this hearing. And she is a very integral and important
member of this committee.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman. I would say you
are a very integral part of this committee as well. [Laughter.]
The Chairman. That is good to know.
Senator Cantwell. And Utah has been a very integral leader
in this issue. And so I thank them, again, for pioneering and
piloting. I do not know all of the ways in which Utah has been
able to muster that, but I admire it. So thank you.
I just want to bring up one last point, and that is, does
doing nothing save us any money? Because one of the things that
I have heard is that dealing with this population--I know there
are some studies, but dealing with this population is costing
us $3 billion more because everything is more expensive. If you
are dealing with the same population without a roof over their
head--or as my colleague, Senator Scott, was talking about,
apprenticeship--well I guarantee you, you cannot deliver job
training to a tent. It just does not work.
So how do we communicate about the fact that doing nothing
is not really saving us any money here?
Dr. O'Regan. I would say that the language that is used on
this frequently is the ``wrong pocket'' issue. There is an
incredibly increasing body of evidence on the role of
affordable and stable housing for non-housing outcomes, for
improvements in health, mental well-being, for economic
mobility for children.
So the lack of affordable housing shows up in the budgets
outside of the housing budgets. And so how do you get the
attention of those who care about that range of outcomes to
realize that investing in housing now decreases all of those
other costs over time?
Senator Cantwell. Do we know of a specific analysis of that
now, or could you help us with CBO in scoring that some way,
because the----
Dr. O'Regan. The bane of my existence, when I had my
previous job, was trying to get to this, but I think the best
evidence is on supportive housing, on all of the immediate cost
savings from emergency room visits, and actually from
implications in the criminal justice system.
So we have very robust evidence there. And then with more
recent evidence with homeless families, what we are seeing is
outcomes that--down the pike--would hit the budget.
But certainly, on the ones that are most robust on
supportive housing, we could get that to you.
Senator Cantwell. Well, somebody mentioned to me they
thought the number was 25 percent per person. It cost 25
percent more to deal with someone who is in this homeless
situation than if they had a roof over their head, because of
all those health care costs and expenses.
I do not know, Mr. Whitaker, if you have seen or could
comment on that?
Mr. Whitaker. I cannot comment on statistics, but one of
the things that we are beginning to see in our State is the
health insurers who are becoming very involved in investing in
the tax credit projects.
The supportive housing project that we just funded most
recently, with some leftover funding, has major investment by
one of the health insurers in Utah, because they understand
that, going forward, getting people into a home is going to be
cheaper for them than it is to deal with their health issues,
particularly related to people who are moving into supportive
housing from homelessness.
Senator Cantwell. So health insurers are investing in
affordable housing?
Mr. Whitaker. Yes.
Senator Cantwell. Because they think it helps drive down
costs of health insurance?
Mr. Whitaker. Is that not amazing?
Senator Cantwell. Thank you.
Mr. MacDonald, anything else on that point?
Mr. MacDonald. I just want to second the comment about the
criminal justice system, because there is no way of
ascertaining the costs there, but the end result of
homelessness and despair puts an impact on criminal justice.
Senator Cantwell. Thank you.
Again, thank you, Mr. Chairman. And thank you for your
leadership on this issue.
And again, I thank all of those in the Utah area who
created great models for us to follow.
The Chairman. Well, thank you. I want to thank you for your
leadership on this in this area. This would not have happened
without you.
I just want to say this is one of the best panels I have
seen in all of my years as a member of this committee. You
folks have really been right on. You have made your points very
well, and I think you have been very persuasive, and you have
been coordinated with each other, which is very, very good as
far as I am concerned.
We appreciate your taking the time to help us to understand
this better. Hopefully, we can do a better job than we have
done in the past.
I want to thank, again, Senator Cantwell and other members
of this committee for the work that they are doing on this. And
we will just go from there.
With that, any other questions that people have, we will
want them to get them in as soon as possible, and we will
adjourn this particular meeting at this particular time.
Thank you.
[Whereupon, at 12:05 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Daniel Garcia-Diaz, Director, Financial Markets
and Community Investment, Government Accountability Office
LOW-INCOME HOUSING TAX CREDIT
Actions Needed to Strengthen Oversight and Accountability
GAO Highlights
Why GAO Did This Study
The LIHTC program, established under the Tax Reform Act of 1986, is
the largest source of Federal assistance for developing affordable
rental housing and will represent an estimated $8.5 billion in forgone
revenue in 2017.
LIHTC encourages private-equity investment in low-income rental
housing through tax credits. The program is administered by IRS and
allocating agencies, which are typically State or local housing finance
agencies established to meet affordable housing needs of their
jurisdictions.
Responsibilities of allocating agencies (in section 42 of the
Internal Revenue Code and regulations of the Department of the
Treasury) encompass awarding credits, assessing the reasonableness of
project costs, and monitoring projects.
In this testimony, GAO discusses (1) how allocating agencies
implement Federal requirements for awarding LIHTCs, assess
reasonableness of property costs, and monitor properties' ongoing
compliance; and (2) IRS oversight of the LIHTC program. This statement
is based primarily on three reports GAO issued in July 2015 (GAO-15-
330), May 2016 (GAO-16-360), and February 2017 (GAO-17-285R). GAO also
updated the status of recommendations made in these reports by
reviewing new or revised IRS policies, procedures, and reports and
interviewing IRS officials.
What GAO Found
In its May 2016 report on the Low-Income Housing Tax Credit (LIHTC)
program of the Internal Revenue Service (IRS), GAO found that State and
local housing finance agencies (allocating agencies) implemented
requirements for allocating credits, reviewing costs, and monitoring
projects in varying ways. Moreover, some allocating agencies' day-to-
day practices to administer LIHTCs also raised concerns. For example:
Qualified allocation plans (developed by 58 allocating agencies)
that GAO analyzed did not always mention all selection criteria and
preferences that section 42 of the Internal Revenue Code requires; and
Allocating agencies could increase (boost) the eligible basis
used to determine allocation amounts for certain buildings if needed
for financial feasibility. However, they were not required to document
the justification for the increases. The criteria used to award boosts
varied, with some allocating agencies allowing boosts for specific
types of projects and one allowing boosts for all projects in its
State.
In its 2015 and 2016 reports, GAO found IRS oversight of the LIHTC
program was minimal. Additionally, IRS collected little data on or
performed limited analysis of compliance in the program. Specifically,
GAO found that:
Since 1986, IRS conducted 7 audits of the 58 allocating agencies
we reviewed. Reasons for the minimal oversight may include LIHTC being
viewed as a peripheral program in IRS in terms of its mission and
priorities for resources and staffing.
IRS had not reviewed the criteria allocating agencies used to
award discretionary basis ``boosts,'' which raised concerns about
oversubsidizing projects (and reducing the number of projects funded).
IRS guidance to allocating agencies on reporting noncompliance
was conflicting. As a result, allocating agencies' reporting of
property noncompliance was inconsistent.
IRS had not participated in and leveraged the work of the
physical inspection initiative of the Rental Policy Working Group--
established to better align the operations of Federal rental assistance
programs--to augment its databases with physical inspection data on
LIHTC properties that the Department of Housing and Urban Development
(HUD) maintains.
In its prior reports, GAO made a total of four recommendations to
IRS. As of July 2017, IRS had implemented one recommendation to include
relevant IRS staff in the working group. IRS has not implemented the
remaining three recommendations, including improving the data quality
of its LIHTC database, clarifying guidance to agencies on reporting
noncompliance, and evaluating how the information HUD collects could be
used for identifying noncompliance issues. In addition, because of the
limited oversight of LIHTC, in its 2015 report GAO asked that Congress
consider designating certain oversight responsibilities to HUD because
the agency has experience working with allocating agencies and has
processes in place to oversee the agencies. As of July 2017, Congress
had not enacted legislation to give HUD an oversight role for LIHTC.
_______________________________________________________________________
Chairman Hatch, Ranking Member Wyden, and members of the committee:
I am pleased to be here today to discuss our work on the Low-Income
Housing Tax Credit (LIHTC) program administered by the Internal Revenue
Service (IRS) and allocating agencies, which typically are State or
local authorities established to meet the affordable housing needs of
the residents of their States. LIHTC, established under the Tax Reform
Act of 1986, is the largest source of Federal assistance for developing
affordable rental housing. Each State receives an annual allocation of
LIHTCs, determined by statutory formula. Allocating agencies then
competitively award the tax credits to owners of qualified rental
housing projects that reserve all or a portion of their units for low-
income tenants. In 2017, LIHTC will represent an estimated $8.5 billion
in forgone revenue to the Federal Government.\1\
---------------------------------------------------------------------------
\1\ Joint Committee on Taxation, ``Estimates of Federal Tax
Expenditures for Fiscal Years 2016-2020'' (Washington, DC: Jan. 30,
2017).
My statement today will focus on (1) how allocating agencies
implement Federal requirements for awarding LIHTCs, assess
reasonableness of property costs, and monitor properties' ongoing
compliance; and (2) IRS's oversight of the LIHTC program. This
statement is based primarily on three reports we issued in July 2015,
May 2016, and February 2017.\2\ To conduct the work for the three
reports, among other methodologies, we reviewed IRS regulations and
guidance, including how allocating agencies and taxpayers are selected
for review. We also conducted a structured analysis of 58 Qualified
Allocation Plans (QAP), which outline processes for awarding LIHTCs and
compliance monitoring responsibilities.\3\ We selected a
nonprobability, nongeneralizable sample of nine allocating agencies for
site visits, and during these visits, we reviewed files for randomly
selected housing developments to determine how each agency addressed
Federal requirements for awarding LIHTCs, assessed the reasonableness
of development costs, and monitored properties' compliance with program
requirements. We also interviewed officials from IRS, the Department of
the Treasury (Treasury), the Department of Housing and Urban
Development (HUD), the National Council of State Housing Agencies
(NCSHA), and selected allocating agencies. For our 2017 report, we
gathered data for 32 syndicators in total--31 through a no-cost
contract with CohnReznick, a national accounting firm--and one survey
response directly from a syndicator.\4\ More detailed information on
our scope and methodology can be found in each of the reports cited
throughout this testimony. To update the status of recommendations from
our 2015 and 2016 reports, we reviewed new or revised IRS policies,
procedures, and reports and interviewed IRS officials.
---------------------------------------------------------------------------
\2\ See GAO, ``Low-Income Housing Tax Credit: The Role of
Syndicators,'' GAO-17-285R (Washington, DC: Feb. 16, 2017); ``Low-
Income Housing Tax Credit: Some Agency Practices Raise Concerns and IRS
Could Improve Noncompliance Reporting and Data Collection,'' GAO-16-360
(Washington, DC: May 11, 2016); and ``Low-Income Housing Tax Credit:
Joint IRS-HUD Administration Could Help Address Weaknesses in
Oversight,'' GAO-15-330 (Washington, DC: July 15, 2015).
\3\ Our review examined plans from 2013 or the most recent QAP
available.
\4\ CohnReznick completed a survey to capture requested data on
behalf of the 31 syndicators for which it had information. It then sent
the completed surveys to the syndicators to review and, if necessary,
correct before transmitting the data to us.
We performed the work on which this statement is based in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
background
Overview of IRS Administration of LIHTC Program
IRS administration of the LIHTC program involves overseeing
compliance on the part of allocating agencies and taxpayers and
developing and publishing regulations and guidance. IRS is responsible
for reviewing LIHTC information on three IRS forms that are the basis
of LIHTC program reporting and then determining whether program
requirements have been met. Taxpayer noncompliance with LIHTC
requirements may result in IRS denying claims for the credit in the
current year or recapturing--taking back--credits claimed in prior
years.
Published guidance may include revenue rulings and procedures,
notices, and announcements. Other guidance for the program includes an
Audit Technique Guide for Completing Form 8823 that includes specific
instructions for allocating agencies, including when site visits and
file reviews are to be performed, and guidelines for determining
noncompliance in areas such as health and safety standards, rent
ceilings, income limits, and tenant qualifications.
Role of Allocating Agencies
State and local allocating agencies are responsible for day-to-day
administration of the LIHTC program based on section 42 of the Internal
Revenue Code and Treasury regulations. More specifically, allocating
agencies are responsible for:
Awarding tax credits. Each State receives an annual allocation of
LIHTCs, determined by statutory formula. Allocating agencies then
competitively award the tax credits to owners of qualified rental
housing projects that reserve all or a portion of their units for low-
income tenants, consistent with the agencies' QAPs.\5\ Developers
typically attempt to obtain funding for their projects by attracting
third-party investors willing to contribute equity to the projects; the
project investors then can claim the tax credits.
---------------------------------------------------------------------------
\5\ An allocating agency develops the QAP and receives approval of
the plan by the governmental unit of which the allocating agency is a
part. The agency then evaluates the proposed projects against the
approved QAP. The QAP also must be developed in accordance with section
42 requirements for such plans. Section 42 requires that QAPs give
preference to certain projects, specifically, those that: (1) serve the
lowest-income tenants; (2) are obligated to serve qualified tenants for
the longest periods; and (3) are located in qualified census tracts and
the development of which contributes to a concerted community
revitalization plan.
Monitoring costs. Section 42 states that allocating agencies must
consider the reasonableness of costs and their uses for proposed LIHTC
projects, allows for agency discretion in making this determination,
and also states that credits allocated to a project may not exceed the
amount necessary to assure its feasibility and its viability as a low-
income housing project. However, section 42 does not provide a
definition or offer guidance on determining how to calculate these
---------------------------------------------------------------------------
amounts.
Monitoring compliance. After credits are awarded, Treasury
regulations state that allocating agencies must conduct regular site
visits to physically inspect units and review tenant files for
eligibility information. The agencies also have reporting and
notification requirements. For example, allocating agencies must notify
IRS of any noncompliance found during inspections and ensure that
owners of LIHTC properties annually certify they met certain
requirements for the preceding 12-month period.
Role of Investors and Syndicators
Developers of awarded projects typically attempt to obtain funding
for their projects by attracting third-parties willing to invest in the
project in exchange for the ability to claim tax credits. The developer
sells an ownership interest in the project to one or more investors, or
in many instances, to a fund managed by a syndicator who acts as an
intermediary between the developer and investors.
Investors and syndicators play several roles in the LIHTC market.
For example, syndicators help initially connect investors and
developers and oversee acquisition of projects. Once a project is
acquired, syndicators perform ongoing monitoring and asset management
to help ensure the project complies with LIHTC requirements and is
financially sound. Syndicators attempt to identify potential problems
and intercede if necessary, such as replacing under- or nonperforming
general partners, and may use their own reserves to help resolve
problems. In exchange for these services, syndicators typically are
compensated through an initial acquisition fee--usually a percentage of
the gross equity raised--and an annual asset management fee.
Syndicators that we surveyed for our 2017 report were nonprofit or
for-profit entities, generally had multistate operations, and averaged
more than 20 years of experience with the LIHTC program.\6\ Of the 32
syndicators we surveyed, the syndicators collectively had raised more
than $100 billion in LIHTC equity since 1986, helping to fund more than
20,000 properties and about 1.4 million units placed-in-service through
2014. Projects for which these syndicators raised equity in 2005-2014
represented an estimated 75 percent of all LIHTC properties placed-in-
service in that period.\7\
---------------------------------------------------------------------------
\6\ For more information on the role of syndicators and their
characteristics, see GAO-17-285R.
\7\ We collected data through calendar year 2014 because that was
the most current available at the time of our 2017 report.
---------------------------------------------------------------------------
selected allocating agencies implemented differing practices
for key lihtc requirements
As we reported in 2016, allocating agencies implemented
requirements for QAPs in varying ways and had processes in place to
meet requirements for credit awards. Allocating agencies also had
procedures to assess costs, but determined award amounts for projects
differently, used various cost limits and benchmarks to determine
reasonableness of costs, and used widely varying criteria for basis
boosts. Agencies also had processes in place to monitor compliance.
However, some of these practices raised concerns.
Agencies Implemented Requirements for Allocation Plans and Award
Credits in Varying Ways
In our 2016 report, we generally found that allocating agencies
implemented requirements for QAPs in varying ways and had processes in
place to meet requirements for awarding the tax credit.
Based on our 2016 review of 58 QAPs and our 9 site visits, we
found the QAPs did not always contain, address, or mention preferences
and selection criteria required in section 42. Rather, some allocating
agencies incorporated the information into other LIHTC program
documents, or implemented the requirements in practice.
While section 42 specifies some selection criteria (such as
project location or tenant populations with special housing needs), it
also more broadly states that a QAP set forth selection criteria
``appropriate to local conditions.'' As a result, allocating agencies
have the flexibility to create their own methods and rating systems for
evaluating applicants. We found that nearly all the allocating agencies
that we reviewed used points or a threshold system for evaluating
applicants. They used criteria such as qualifications of the
development team, cost effectiveness, or leveraging of funds from other
Federal or State programs.
According to section 42, allocating agencies must notify the
chief executive officer (or the equivalent) of the local jurisdiction
in which the project is to be located. However, some agencies imposed
an additional requirement of letters of support from local officials.
Specifically, as of 2013, we found that of the 58 agencies in our
review, 12 agencies noted that their review or approval of applications
was contingent on letters of support, and another 10 agencies awarded
points for letters of local support. HUD officials have cited fair
housing concerns in relation to any preferences or requirements for
local approval or support because of the discriminatory influence these
factors could have on where affordable housing is built. In December
2016, IRS issued a revenue ruling that clarified that section 42
neither requires nor encourages allocating agencies to reject all
proposals that do not obtain the approval of the locality where the
project developer proposes to place the project.\8\
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\8\ IRS, Rev. Rul. 2016-29.
Allocating agencies we visited for our 2016 report had processes in
place to meet other section 42 requirements, including awarding credit
to nonprofits and long-term affordability of projects. Allocating
agencies must allocate at least 10 percent of the State housing credit
ceiling to projects involving qualified nonprofit organizations. All
nine allocating agencies we visited had a set-aside of at least 10
percent of credits to be awarded to projects involving nonprofits.
Section 42 also requires allocating agencies to execute an extended
low-income housing commitment of at least 30 years before a building
can receive credits. For example, one allocating agency we visited
required developers to sign agreements for longer extended-use periods,
while some agencies awarded points to applications whose developers
elect longer periods.
Agencies We Reviewed Had Procedures to Assess Costs and Used Widely
Varying Criteria for Basis Boosts
Allocating agencies we reviewed for our 2016 report had procedures
to assess costs, but determined award amounts for projects differently
and used various cost limits and benchmarks to determine reasonableness
of costs. All nine allocating agencies we visited required applicants
to submit detailed cost and funding estimates, an explanation of
sources and uses, and expected revenues as part of their applications.
These costs were then evaluated to determine a project's eligible basis
(total allowable costs associated with depreciable costs in the
project), which in turn determined the qualified basis and ultimately
the amount of tax credits to be awarded.\9\
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\9\ The credit the taxpayer can claim each year is determined by
the following calculations: (1) eligible basis applicable fraction =
qualified basis; and (2) qualified basis applicable percentage =
annual credit amount. Qualified basis is the portion of a project's
total costs--excluding the costs of land, obtaining permanent
financing, rent reserves, syndication, and marketing--allocable to
units that meet section 42 requirements for rent, tenant income, and
habitability. The applicable fraction is the lesser of the portion of
qualified low-income units in relation to total rental units or the
portion of total floor space dedicated to low-income units in relation
to the total floor space of residential rental units. The applicable
percentage is the discount factor needed to limit the present value of
the credit available over a 10-year period to either 70 percent or 30
percent of the qualified basis, depending on the characteristics of the
housing. The credit percentages are adjusted monthly by IRS based on
current interest rates. Under a special rule first enacted in 2008 and
made permanent in 2015, the minimum percentage is 9 percent for the
buildings eligible for the 70 percent credit.
Reasonableness of costs. We found that allocating agencies had
different ways for determining the reasonableness of project costs.
Based on our analysis of 58 QAPs and our 9 site visits, agencies had
established various limits against which to evaluate the reasonableness
of submitted costs, such as applying limits on development costs, total
credit awards, developer fees, and builder's fees.\10\ Section 42 does
not provide a definition of reasonableness of costs, giving allocating
agencies discretion on how best to determine what costs are appropriate
for their respective localities.
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\10\ Our review examined plans from 2013 or the most recent QAP
available. Allocating agencies we observed that did not describe cost
limits in their QAPs still may have used cost limits or other factors
as a measure of reasonableness in their actual application reviews and
these may have been documented elsewhere.
Discretionary basis boosts. Allocating agencies commonly
``boosted'' the basis for projects, but used widely varying criteria
for doing so. Section 42 notes that an increase or ``boost'' of up to
130 percent in the eligible basis can be awarded by an allocating
agency to a housing development in a qualified census tract or
difficult development area.\11\
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\11\ A difficult development area is ``any area designated by the
Secretary of Housing and Urban Development as an area which has high
construction, land, and utility costs relative to area median gross
income.'' 26 U.S.C. Sec. 42(d)(5)(B)(iii)(I). The Housing and Economic
Recovery Act of 2008 amended section 42 and gave allocating agencies
the discretion to designate any building, regardless of location, as
eligible for a boost of up to 130 percent of the eligible basis.
Although the boost is applied to the total eligible basis (as opposed
to the total credit amount), the credit amount awarded increases (the
actual increase to the credit award is less than 30 percent because the
award is determined by multiplying the applicable fraction by the total
eligible basis, which is increased by the boost).
According to our QAP analysis, 44 of 58 plans we reviewed included
criteria for awarding discretionary basis boosts, with 16 plans
explicitly specifying the use of basis boosts for projects as needed
for financial or economic feasibility. The discretionary boosts were
applied to different types of projects and on different scales (for
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example, statewide or citywide).
For example, we found one development that received a boost to
the eligible basis for having received certain green building
certifications, although the applicant did not demonstrate financial
need or request the boost. The allocating agency told us that all
projects with specified green building certifications received the
boost automatically, as laid out in its QAP. At the time of our review,
agency officials said that the agency had changed its practices to
prevent automatic basis boosts from being applied and required
additional checks for financial need.
In another QAP we reviewed, one agency described an automatic
130 percent statewide boost for all LIHTC developments. According to
the officials, the automatic statewide boost remained in effect because
officials made the determination that nearly all projects would need it
for financial feasibility.
Section 42 requires that allocating agencies determine that
``discretionary basis boosts'' were necessary for buildings to be
financially feasible before granting them to developers.\12\ Section 42
does not require allocating agencies to document their analysis for
financial feasibility (with or without the basis boost). However,
legislative history for the Housing and Economic Recovery Act of 2008
included expectations that allocating agencies would set standards in
their QAPs for which projects would be allocated additional credits,
communicate the reasons for designating such criteria, and publicly
express the basis for allocating additional credits to a project.\13\
In addition, NCSHA (a nonprofit advocating for State allocating
agencies) recommends that allocating agencies set standards in their
QAPs to determine eligibility for discretionary basis boosts and make
the determinations publicly available.\14\
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\12\ We use ``discretionary basis boosts'' to describe boosts
awarded to developments outside of qualified census tracts or difficult
development areas.
\13\ H. Rept. No. 110-606, at 25 (2008).
\14\ National Council of State Housing Agencies, Report of the
National Council of State Housing Agencies' Housing Credit Task Force
on Recommended Practices in Housing Credit Allocation and Underwriting
(December 2011).
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Agencies We Visited Had Processes for Monitoring Compliance
In our 2016 report we found that the allocating agencies we visited
had processes for and conducted compliance monitoring of projects
consistent with section 42 and Treasury regulations. Treasury
regulations require allocating agencies to conduct on-site physical
inspections for at least 20 percent of the project's low-income units
and file reviews for the tenants in these units at least once every 3
years. In addition, allocating agencies must annually review owner
certifications that affirm that properties continue to meet LIHTC
program requirements.
Allocating agencies we visited followed regulatory requirements
on when to conduct physical inspections and tenant file reviews.
Allocating agencies we visited generally used electronic
databases to track the frequency of inspections, file reviews, and
certifications, although most of these agencies documented these
reviews on paper.
All the allocating agencies we visited had inspection and review
processes in place to monitor projects following the 15-year compliance
period, as required under section 42. Allocating agencies must execute
an extended low-income housing commitment to remain affordable for a
minimum of 30 years before a tax credit project can receive credits.
After the compliance period is over, the obligation for allocating
agencies to report to IRS on compliance issues ends and investors are
no longer at risk for tax credit recapture.
irs oversight of lihtc has been minimal
Our prior reports found IRS conducted few reviews of allocating
agencies and had not reviewed how agencies determined basis boosts.
Data on noncompliance were not reliable and IRS used little of the
reported program information. IRS had not directly participated in an
interagency initiative to augment HUD's databases with LIHTC property
inspection data. Both our 2015 and 2016 reports concluded that
opportunities existed to enhance oversight of the LIHTC program,
specifically by leveraging the knowledge and experience of HUD.
IRS Conducted Few Reviews of Allocating Agencies and Had Not Reviewed
How Agencies Determined Basis Boosts
Few reviews of allocating agencies. In our 2015 report, we found
that IRS had conducted seven audits (reviews) of allocating agencies
from 1986 (inception of the program) through May 2015. In the audits,
IRS found issues related to QAPs, including missing preferences and
selection criteria.
But in both our 2015 and 2016 reports, IRS officials stated that
they did not regard a regular review of QAPs as part of their
responsibilities as outlined in section 42 and therefore did not
regularly review the plans.\15\ IRS officials said that allocating
agencies have primary responsibility to ensure that the plans meet
section 42 preferences and selection criteria. IRS officials noted that
review of a QAP to determine if the plan incorporated the elements
specified in section 42 could occur if IRS were to audit an allocating
agency.
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\15\ In GAO-15-330, we reported that IRS did not regularly review
QAPs as it was the agency's view that regular reviews of QAPs were
outside the scope of its compliance responsibilities.
No review of agencies' discretionary basis boosts. In our 2016
report, we found IRS had not reviewed the criteria allocating agencies
used to award discretionary basis boosts. The use of basis boosts has
implications for LIHTC housing production because of the risk of
oversubsidizing projects, which would reduce the amount of the
remaining allocable subsidies and yield fewer LIHTC projects overall
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within a State.
IRS also had not provided guidance to agencies on how to determine
the need for the additional basis to make projects financially
feasible. IRS officials told us that section 42 gives allocating
agencies the discretion to determine if projects receive a basis boost
and does not require documentation of financial feasibility.
Additionally, IRS officials explained that because the overall amount
of subsidies allocated to a State is limited, the inherent structure of
the program discourages States from oversubsidizing projects. However,
during our 2016 review, we observed a range of practices for awarding
discretionary basis boosts, including a blanket basis boost that could
result in fewer projects being subsidized and provide more credits than
necessary for financial feasibility. We concluded that because IRS did
not regularly review QAPs, many of which list criteria for
discretionary basis boosts, IRS was unable to determine the extent to
which agency policies could result in oversubsidizing of projects.
Some Program Data Were Not Reliable and IRS Used Little of Reported
Program Information
Unreliable data. We reported in 2015 that IRS had not
comprehensively captured information reported for the program in its
Low-Income Housing Credit database and the existing data were not
complete and reliable. IRS guidance requires the collection of data on
the LIHTC program in an IRS database, which records information
submitted by allocating agencies and taxpayers on three forms. The
forms include:
Credit allocation and certification (Form 8609). The two-part
form is completed by the allocating agency and the taxpayer. Agencies
report the allocated amount of tax credits available over a 10-year
period for each building in a project. The taxpayer reports the date on
which the building was placed in service (suitable for occupancy).
Noncompliance or building disposition (Form 8823). Allocating
agencies must complete and submit this form to IRS if an on-site
physical inspection of a LIHTC project finds any noncompliance. The
form records any findings (and corrections of previous findings) based
on the inspection of units and review of the low-income tenant
certifications.
Annual report (Form 8610). IRS staff review the reports to
ensure allocations do not exceed a statutorily prescribed ceiling for
that year.
Based on our analysis of the information in the database, we found
in 2015 that the data on credit allocation and certification
information were not sufficiently reliable to determine if basic
requirements for the LIHTC program were being achieved. For example, we
could not determine how often LIHTC projects were placed-in-service
within required time frames. We concluded that without improvements to
the data quality of credit allocation and certification information, it
was difficult to determine if credit allocation and placed-in-service
requirements had been met by allocating agencies and taxpayers,
respectively. Thus, we recommended that IRS should address weaknesses
identified in data entry and programming controls to ensure reliable
data are collected on credit allocations.
At the time of our 2015 report, IRS acknowledged the need for
improvements in its controls and procedures (including data entry and
quality reviews). IRS officials agreed that these problems should be
corrected and data quality reviews should be conducted on an ongoing
basis. As of March 2017, in response to our recommendation, IRS
officials said that they had explored possibilities to improve the
database, which not only houses credit allocation information, but also
data from noncompliance and building disposition forms. Specifically,
IRS is working to move the database to a new and updated server, which
will address weaknesses identified in data entry and programming
controls. IRS expects to complete the data migration step by early fall
of 2017. Until IRS implements its plan to improve the data, this
recommendation will remain open.
Limited noncompliance data, analysis, and guidance on reporting. We
found in our 2015 and 2016 reports that IRS had done little with the
information it collects on noncompliance. IRS had captured little
information from the Form 8823 submissions in its database and had not
tracked the resolution of noncompliance issues or analyzed trends in
noncompliance. As of April 2016, the database included information from
about 4,200 of the nearly 214,000 Form 8823s IRS received since 2009
(less than 2 percent of forms received).
For our 2015 report, officials told us the decision was made during
the 2008-2009 time frame to input information only from forms that
indicated a change in building disposition, such as a foreclosure. IRS
focused on forms indicating this change for reasons including the
serious nature of the occurrence for the program and impacts on
taxpayers' ability to receive credit. Officials also stated it was not
cost effective to input all the form information and trend analysis on
all types of noncompliance was not useful for purposes of ensuring
compliance with the tax code.
In addition, as we reported in both 2015 and 2016, IRS had assessed
little of the noncompliance information collected on the Form 8823 or
routinely used it to determine trends in noncompliance. Because little
information was captured in the Low-Income Housing Credit database, IRS
was unable to provide us with program-wide information on the most
common types of noncompliance. Furthermore, IRS had no method to
determine if issues reported as uncorrected had been resolved or if
properties had recurring noncompliance issues.
In our 2016 report, we also found inconsistent reporting on the
noncompliance forms, the reasons for which included conflicting IRS
guidance, different interpretations of the guidance by allocating
agencies, and lack of IRS feedback about agency submissions.
IRS developed guidelines for allocating agencies to use when
completing the Form 8823, the ``fundamental purpose'' of which was
identified as providing standardized operational definitions for the
noncompliance categories listed on the form. The IRS guide adds that it
is important that noncompliance be consistently identified,
categorized, and reported and notes that the benefits of consistency
included enhanced program administration by IRS.
Allocating agencies we visited had various practices for
submitting Form 8823 to IRS, including different timing of submissions,
reporting on all violations (whether minor or corrected during
inspections) or not, and amounts of additional detail provided. Partly
because of these different practices, the number of forms each of the
nine agencies told us they sent to IRS in 2013 varied from 1 to more
than 1,700.
We concluded that without IRS clarification of when to send in the
Form 8823, allocating agencies will continue to submit inconsistent
noncompliance data to IRS, which will make it difficult for IRS to
efficiently distinguish between minor violations and severe
noncompliance, such as properties with health and safety issues. We
recommended that IRS should clarify what to submit and when--in
collaboration with the allocating agencies and Treasury--to help IRS
improve the quality of the noncompliance information it receives and
help ensure that any new guidance is consistent with Treasury
regulations.
In August 2016, IRS stated it would review the Form 8823 Audit
Technique Guide to determine whether additional guidance and
clarification were needed for allocating agencies to report
noncompliance information on the form. If published legal guidance is
required, IRS stated that it will submit a proposal for such guidance
for prioritization. IRS indicated an expected implementation date by
November 2017. In addition, in March 2017, officials stated that IRS
Counsel attended an industry conference with allocating agencies at
which issues related to the Form 8823 were discussed.
Lack of participation in data initiative. Moreover, in our 2016
report we found IRS had not taken advantage of the important progress
HUD made through the Rental Policy Working Group (working group)--which
was established to better align the operation of Federal rental
policies across the administration--to augment its databases with LIHTC
property inspection data.\16\ This data collection effort created
opportunities for HUD to share inspection data with IRS that could
improve the effectiveness of reviews for LIHTC noncompliance. However,
the IRS Small Business/Self-Employed Division managing the LIHTC
program had not been involved in the working group. We concluded that
such involvement would allow IRS to leverage existing resources,
augment its information on noncompliance, and better understand the
prevalence of noncompliance.
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\16\ The Rental Policy Working Group comprises representatives from
the White House Domestic Policy Council, National Economic Council,
Office of Management and Budget, HUD, Treasury, the Department of
Agriculture, and the Department of Justice.
We recommended that staff from the division participate in the
physical inspection initiative of the working group and also
recommended that the IRS Commissioner evaluate how IRS could use HUD's
real estate database, including how the information might be used to
reassess reporting categories on Form 8823 and reassess which
categories of noncompliance information to review for audit potential.
As of March 2017, IRS had implemented our recommendation to include the
appropriate staff at the working group meetings. However, IRS officials
stated that since HUD's database with property inspection data was not
complete as of March 2017 and contained data from 30 States, it was
unclear how the database could be used. IRS officials said they would
continue exploring the HUD database if the data for all LIHTC
properties were included and it was possible to isolate the LIHTC
property data from other rental properties in the HUD database.
Leveraging Experience of HUD May Augment IRS's Capacity to Oversee
Program
Both our 2015 and 2016 reports found that opportunities existed to
enhance oversight of the LIHTC program, specifically by leveraging the
knowledge and experience of HUD. We found in 2015 that while LIHTC is
the largest Federal program for increasing the supply of affordable
rental housing, LIHTC is a peripheral program in IRS in terms of
resources and mission. Oversight responsibilities for the program
include monitoring allocating agencies and taxpayer compliance.
However, as we have discussed previously, IRS oversight has been
minimal and IRS has captured and used little program information. As we
previously stated, such information could help program managers and
congressional decision makers assess the program's effectiveness.
HUD--which has a housing mission--collects and analyzes information
on low-
income rental housing, including LIHTC-funded projects. As we reported
in 2015, HUD's role in the LIHTC program is generally limited to the
collection of information on tenant characteristics (mandated by the
Housing and Economic Recovery Act of 2008). However, it has voluntarily
collected project-level information on the program since 1996 because
of the importance of LIHTC as a source of funding for affordable
housing. HUD also has sponsored studies of the LIHTC program that use
these data. HUD's LIHTC databases, the largest Federal source of
information on the LIHTC program, aggregates project-level data that
allocating agencies voluntarily submit and information on tenant
characteristics that HUD must collect. Since 2014, HUD also has
published annual reports analyzing data it must collect on tenants
residing in LIHTC properties. As part of this report, HUD compares
property information in its tenant database to the information in its
property database to help assess the completeness of both databases.
In our 2015 report, we also discussed HUD's experience in working
with allocating agencies. While multiple Federal agencies administer
housing-related programs, HUD is the lead Federal agency for providing
affordable rental housing. Much like LIHTC, HUD's rental housing
programs rely on State and local agencies to implement programs. HUD is
responsible for overseeing these agencies, including reviewing State
and local consolidated plans for the HOME Investment Partnership and
Community Development Block Grant programs--large grant programs that
also are used to fund LIHTC projects. HUD also has experience in
directly overseeing allocating agencies in their roles as contract
administrators for project-based section 8 rental assistance. HUD has
processes, procedures, and staff in place for program evaluation and
oversight of State and local agencies that could be built upon and
strengthened.
In our 2015 report, we concluded that significant resource
constraints affected IRS's ability to oversee taxpayer compliance and
precluded wide-ranging improvement to such functions, but that IRS
still had an opportunity to enhance oversight of LIHTC. We also
concluded that leveraging the experience and expertise of another
agency with a housing mission, such as HUD, might help offset some of
IRS's limitations in relation to program oversight. HUD's existing
processes and procedures for overseeing allocating agencies could
constitute a framework on which further changes and improvements in
LIHTC could be effected. However, enhancing HUD's role could involve
additional staff and other resources. An estimate of potential costs
and funding options for financing enhanced Federal oversight of the
LIHTC program would be integral to determining an appropriate funding
mechanism.
We asked that Congress consider designating HUD as a joint
administrator of the program responsible for oversight. As part of the
deliberation, we suggested that Congress direct HUD to estimate the
costs to monitor and perform the additional oversight responsibilities,
including a discussion of funding options. Treasury agreed that it
would be useful for HUD to receive ongoing responsibility for, and
resources to perform, research and analysis on the effectiveness of
LIHTCs in increasing the availability of affordable rental housing.
Treasury noted that such research and analysis are not part of IRS's
responsibilities or consistent with its expertise in interpreting and
enforcing tax laws. However, Treasury stated that responsibility for
interpreting and enforcing the code should remain entirely with IRS.
Our report noted that if program administration were changed, IRS could
retain certain key responsibilities consistent with its tax
administration mission.
In our 2016 report, we concluded that IRS oversight of allocating
agencies continued to be minimal, particularly in reviewing QAPs and
allocating agencies' practices for awarding discretionary basis boosts.
As a result, we reiterated the recommendation from our 2015 report that
Congress should consider designating HUD as a joint administrator of
the program responsible for oversight due to its experience and
expertise as an agency with a housing mission.
In response to our 2016 report, HUD stated it remains supportive of
mechanisms to use its significant expertise and experience
administering housing programs for enhanced effectiveness of LIHTC. HUD
also stated that enhanced interagency coordination could better ensure
compliance with fair housing requirements and improve alignment of
LIHTC with national housing priorities. As of July 2017, Congress had
not enacted legislation to give HUD an oversight role for LIHTC.
Chairman Hatch, Ranking Member Wyden, and members of the committee,
this concludes my prepared statement. I would be happy to respond to
any questions that you may have at this time.
______
Questions Submitted for the Record to Daniel Garcia-Diaz
Question Submitted by Hon. Orrin G. Hatch
Question. Are there any best practices or other recommendations you
have for requirements based on oversight done at the State housing
agency level we could put in legislation for State housing agencies to
follow?
Would you recommend any requirements be put in legislation or are
there other ways to address the oversight question?
Answer. In our 2015 and 2016 reports, we reviewed oversight done by
the Internal Revenue Service (IRS) and State and local housing finance
agencies (allocating agencies) on the Low-Income Housing Tax Credit
(LIHTC) program. We made multiple recommendations to IRS for improving
oversight as well as asked Congress to consider designating the
Department of Housing and Urban Development (HUD) as a joint
administrator of the program responsible for oversight.\1\ We discuss
these in more detail below, along with other GAO work underway on
development costs under the LIHTC program.
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\1\ See GAO, ``Low-Income Housing Tax Credit: Some Agency Practices
Raise Concerns and IRS Could Improve Noncompliance Reporting and Data
Collection,'' GAO-16-360 (Washington, DC: May 11, 2016); and ``Low-
Income Housing Tax Credit: Joint IRS-HUD Administration Could Help
Address Weaknesses in Oversight,'' GAO-15-330 (Washington, DC: July 15,
2015).
Leveraging HUD to Improve Oversight. In 2016, we reported that
selected allocating agencies implemented requirements for Qualified
Allocation Plans (QAPs) in varying ways and had processes in place to
meet requirements for awarding credits. Allocating agencies also had
procedures to assess costs, but determined award amounts for projects
differently, used various cost limits and benchmarks to determine
reasonableness of costs, and used varying criteria for basis boosts.
Agencies also had processes in place to monitor compliance. My
testimony on August 1, 2017, and our 2015 and 2016 reports stated these
variations and some of the concerns raised.\2\ For example, all the
required selection criteria and preferences in the Internal Revenue
Code were not always listed in the QAP documents we reviewed (we noted
that they could be documented in other publicly available sources) and
some allocating agencies required local letters of support, which can
lead to fair housing concerns.
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\2\ GAO, ``Low-Income Housing Tax Credit: Actions Needed to
Strengthen Oversight and Accountability,'' GAO-17-784T (Washington, DC:
Aug. 1, 2017).
In our 2015 and 2016 reports, we stated that oversight of the
program was minimal with IRS performing seven audits of all 58
allocating agencies since 1986. Examples of the IRS audit findings
included allocating agencies' policies that conflicted with the
Internal Revenue Code; QAP did not address all compliance requirements
or was outdated; annual report to IRS had incorrect credit allocations;
failure to report noncompliance to IRS; and physical inspections and
tenant file reviews were not completed as required. IRS cited multiple
reasons for not conducting regular reviews of QAPs and audits of
allocating agencies, including not regarding regular review of QAPs as
a part of its compliance responsibilities and competing priorities for
resources and staffing. We found that without regular monitoring of
allocating agencies, IRS could not determine the extent to which
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agencies comply with program requirements.
In our comparison of tax credit programs (similar in purpose and
structure of LIHTC) in our 2015 report, we found that these programs
were jointly administered by IRS and a Federal agency to conduct
monitoring, report on performance, and collect data. These other
Federal agencies had missions consistent with the purposes of the tax
credit programs. For example, the National Park Service's Technical
Preservation Services (TPS) administers the Historic Rehabilitation Tax
Credit program and the Department of the Treasury's (Treasury)
Community Development Financial Institutions (CDFI) Fund administers
the New Markets Tax Credit program. As part of its oversight, TPS
directly oversaw State entities through on-site inspections of
projects, and the CDFI Fund performed programmatic- and risk-based
compliance site visits of the private-sector partner entities that
monitor investments. Further, TPS and the CDFI Fund published annual
reports and worked with research institutions to conduct additional
evaluation of the programs. The LIHTC program does not have a Federal
agency that jointly administers the program.
We stated that Congress should consider designating HUD as a joint
administrator of the program responsible for oversight given its
experience and expertise as the Nation's lead housing agency.
Specifically, applying HUD's experience in administering affordable
housing programs to address areas such as QAP review, Federal fair
housing goals, and tenant income and rent issues would provide
information, analysis, and potentially guidance on issues that apply
across all allocating agencies. We also stated that HUD has processes,
procedures, and staff in place for program evaluation and oversight of
State and local agencies that could be built upon and strengthened. IRS
would retain certain key responsibilities consistent with its tax
administration mission.
Strengthening Data Collection and Noncompliance Reporting. We found
in 2015 that the data on credit allocation and certification
information were not sufficiently reliable to determine if basic
requirements for the LIHTC program were being achieved. For example, we
could not determine how often LIHTC projects were placed in service
within required time frames. We concluded that without improvements to
the data quality of credit allocation and certification information, it
was difficult to determine if credit allocation and placed-in-service
requirements had been met by allocating agencies and taxpayers,
respectively. Thus, we recommended that IRS should address weaknesses
identified in data entry and programming controls to ensure reliable
data are collected on credit allocations. As we stated in the
testimony, this recommendation remains open.
We found that select allocating agencies we visited for our 2016
report had varying practices for monitoring and submitting
noncompliance information to IRS using the Form 8823 (report of
noncompliance or building disposition). For example, the Illinois and
Massachusetts allocating agencies had both inspected about 200
properties in 2013, but Illinois filed only one Form 8823 with IRS in
that year, while Massachusetts had filed almost 100 forms in the same
year. As a result, in order to receive more consistent information on
LIHTC noncompliance, we recommended the IRS Commissioner should
collaborate with the allocating agencies to clarify when allocating
agencies should report such information on the Form 8823. Additionally,
IRS should collaborate with Treasury in drafting such clarifications to
help ensure that any new guidance is consistent with Treasury
regulations. As we stated in the testimony, this recommendation remains
open.
Tracking and Analyzing Development Cost Information. We are
conducting a review of development costs under the LIHTC program,
including reviewing development cost data and allocating agencies'
approaches to managing these costs. Because there is no national
database of project costs, we are currently building a database of
nearly 2,000 projects (from 12 different allocating agencies) that were
completed from 2011 through 2015. This effort has required discussions
with allocating agencies to determine standard definitions of
variables, consolidation of data across allocating agencies, and manual
entry of data into the database. While our work on development costs is
ongoing, we have observed variation in how allocating agencies manage
development costs. For example, some of the allocating agencies we
spoke to incorporate several types of cost management measures into
their project selection criteria, while others incorporate fewer. These
cost management measures include cost or credit limits by region or
development type, competitive points for lower-cost or more cost-
efficient projects, and cost-based tie breaker criteria. As we
mentioned earlier, our 2016 report found that allocating agencies had
procedures to assess costs, but determined award amounts for projects
differently and used various cost limits and benchmarks to determine
reasonableness of costs. The demand for affordable housing among low-
income renters far exceeds the amount of assistance available. Thus,
understanding and managing costs are important in ensuring that scarce
Federal resources are used as efficiently and effectively as possible.
______
Question Submitted by Hon. Tim Scott
Question. Manufactured housing is a topic that often goes
unmentioned in the affordable housing discussion. One in five homes in
South Carolina are prefabricated. That's the highest percentage of any
State. At the same time, the average household income for a
manufactured home owner is $30,000 versus the $52,000 national average.
The folks that buy manufactured housing are the least equipped to deal
with rising costs. A 2014 GAO study found that ``high financing costs
often keep these homes from being even more affordable.''
What conclusions did the GAO reach on improving manufactured
housing affordability?
Answer. GAO has published three reports on manufactured housing in
the last several years.\3\ As you note, in our 2014 report, we found
that owners of manufactured homes tended to have both lower incomes
than other homeowners and lower monthly housing costs than site-built
owners and apartment renters. However, high financing costs often keep
these homes from being even more affordable. Our report stated that
owners of manufactured homes are more likely to have higher-priced
financing than owners of site-built homes. Unlike site-built homes,
which are titled as real property and usually financed through a
mortgage, a manufactured home may be financed as either personal or
real property. When a home buyer purchases a manufactured home without
tying the purchase to land, the home is generally considered personal
property, or chattel--that is, it is a movable, ``personal''
possession, much like an automobile.
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\3\ GAO, ``Federal Housing Administration: Agency Should Assess the
Effects of Proposed Changes to the Manufactured Home Loan Program,''
GAO-07-879 (Washington, DC: Aug. 24, 2007); ``Manufactured Housing
Standards: Testing and Performance Evaluation Could Better Ensure Safe
Indoor Air Quality,'' GAO-13-52 (Washington, DC: Oct. 24, 2012); and
``Manufactured Housing: Efforts Needed to Enhance Program Effectiveness
and Ensure Funding Stability,'' GAO-14-410 (Washington, DC: July 2,
2014).
We found there are several reasons for the high cost of financing
for manufactured homes. Manufactured homes are sometimes grouped
together in communities where residents may either own or lease the
home, but lease the land. When a manufactured home is attached to the
underlying land by a permanent foundation and the home and the land are
treated as a single real estate title under State law, the home is
considered real property. In such instances, the borrowers can obtain a
conventional real estate loan or a government-guaranteed mortgage
through traditional mortgage lenders. HUD's Federal Housing
Administration (FHA) has two insurance programs for manufactured home
loans. Although most manufactured homes are titled or owned as personal
property, HUD's programs primarily insure loans on manufactured homes
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financed as real estate.
We found that another reason for high financing cost of
manufactured homes was related to the securitization of manufactured
housing on the secondary market. In our 2014 report, we discussed
limited liquidity options for lenders through the secondary market.
Ginnie Mae offers a mechanism to securitize manufactured home loans.
Although the agency had experienced losses in the past, a Ginnie Mae
official explained that the agency had conducted outreach to lenders to
increase participation in the program. Further, we noted that Fannie
Mae and Freddie Mac (the enterprises), which guarantee and purchase
loans from mortgage lenders, play less of a role in providing liquidity
to lenders of manufactured home loans than they do in providing
liquidity to lenders of loans on other single-family properties. One
lender of manufactured home loans cited certain underwriting
constraints that limited their participation in Fannie Mae and Freddie
Mac programs. For example, Fannie Mae requires an appraisal of the
manufactured home with comparable local manufactured homes titled as
real estate, a requirement that can be challenging, particularly in
rural areas with relatively few homes and where many manufactured homes
are titled as personal property. Fannie Mae and Freddie Mac do not
purchase loans for manufactured homes titled as personal property.
Because of these constraints, most financing for manufactured homes,
whether chattel or real property, is provided through private lenders.
Finally, we found that HUD had not developed a plan to review the
effectiveness of the FHA programs for manufactured homes. Noting that
the higher cost of financing manufactured homes can limit their
potential affordability, we concluded that such reviews would allow HUD
to identify (1) potential changes to its mortgage insurance programs
that would further promote the affordability of manufactured homes or
(2) efforts to determine the potential for the enterprises and Ginnie
Mae to actively develop and implement better secondary market
securitization programs for manufactured home loans. We concluded that
without analysis and research into the financing mechanism as it
relates to the affordability of manufactured housing, HUD had little
assurance that its loan programs and the securitization programs of
Ginnie Mae and the enterprises were appropriately promoting the
availability of affordable manufactured homes. As a result, GAO
recommended that HUD develop a plan to assess how FHA financing might
further promote the affordability of manufactured homes and identify
the potential for better securitization of manufactured housing
financing. As of August 2017, we are still awaiting an update from HUD
on the recommendation. Therefore, this recommendation remains open. We
plan to continue to follow up with HUD on the status of this
recommendation.
______
Prepared Statement of Hon. Orrin G. Hatch,
a U.S. Senator From Utah
WASHINGTON--Senate Finance Committee Chairman Orrin Hatch (R-Utah)
today delivered the following opening statement at a hearing to examine
effective ways to increase access to affordable housing:
This is an important issue, and this hearing will allow the
committee to hear from experienced and well-educated witnesses who can
provide more context on our affordable housing policies and the
sections of the tax code that were written with the intent of
mitigating this long-time problem in our society.
As many of you are aware, the last time we underwent a national,
comprehensive revision of the tax code was in 1986, with the passage of
the Tax Reform Act. At that time, affordable housing tax incentives
were baked into statute, with the Low-Income Housing Tax Credit being
chief among them.
Since then, this important section of the tax code has enjoyed
bipartisan support. Still, it is worth examining the law as we continue
to ramp up our work on tax reform.
Throughout today's hearing, I want each member to keep in mind some
guiding principles for tax reform. I've repeated these principles quite
a bit in recent years. But, for those in the audience who may not have
heard me mention them, the principles are: fairness, efficiency,
simplicity, and American competitiveness.
These principles are important within the context of affordable
housing tax policy because they should be able to help us improve upon
what is currently in the code. I know the prospect of more oversight
can be seen as a challenge, but I think we should all view this
examination as an opportunity to determine where we can improve.
While some sections of the tax code have undergone changes in the
past three decades, solutions on affordable housing remain as elusive
as ever.
There seem to remain many households facing cost burdens associated
with renting, with perhaps as much as 26 percent of renter households
having paid more than half of their incomes in rent in 2015, for
example. And the burdens seem to fall heavily on lower-income
households.
And this is not just simply a problem of arithmetic. In 2015, 25
million children lived in households in which rent comprised a fairly
large share of household income.
This is a problem that should be ready for a bipartisan solution.
We've already introduced bipartisan legislation to address some of
these issues. And, many are hopeful that cooperation on these efforts
will continue. I believe they will.
With that, I would just like to thank everyone for attending today
and I look forward to hearing from our distinguished panel of
witnesses.
______
Prepared Statement of Granger MacDonald, Chairman, Board of Directors,
National Association of Home Builders
On behalf of the approximately 140,000 members of the National
Association of Home Builders (NAHB), I appreciate the opportunity to
testify today.
My name is Granger MacDonald, and I am CEO of the MacDonald
Companies based in Kerrville, TX. I am a proud second-generation
builder with 40 years of experience in real estate development. I run
the business my parents founded in the mid-1950s to meet post-war
demand for affordable housing. My son Justin serves as president of our
business, continuing our family legacy.
Our company specializes in the construction and management of
affordable rental housing, and we currently own and manage 4,700 units
in 41 communities in 25 Texas cities. I have constructed affordable
rental housing with the Low-Income Housing Tax Credit (LIHTC) since
1997. I am proud to have committed my life's work to providing safe,
decent, affordable housing to thousands of Texans.
NAHB is a Washington, DC-based trade association focused on
enhancing the climate for housing, homeownership and the residential
building industry. We represent builders and developers who construct
many types of housing--including
single-family for-sale homes, affordable and market-rate rental
apartments, and remodelers. About one-third of our members are builders
and remodelers; the other two-thirds work in closely related
specialties, such as sales and marketing, insurance, and financial
services.
NAHB is a member of the A Call To Invest in Our Neighborhoods
(ACTION) Campaign, a grassroots coalition of over 2,000 national,
State, and local organizations and businesses calling on Congress to
protect, expand and strengthen the Low-Income Housing Tax Credit.
While the housing industry continues to recover slowly from the
Great Recession, housing affordability in both the single and multi-
family markets has become a rising challenge in the industry.
Multifamily housing affordability has reached crisis proportions. The
number of renter households considered ``severely cost burdened,''
meaning they spend more than half of their monthly income on rent, is
at an all-time high of 11.4 million.\1\ That translates to more than
one in four of all U.S. renters.
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\1\ Harvard University Joint Center for Housing Studies (JCHS),
``The State of the Nation's Housing 2016.''
I am grateful to the committee for focusing today's hearing on this
important issue. The tax code plays a major role in multifamily
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development, most visibly through the Low-Income Housing Tax Credit.
The best solution to this crisis is to pass S. 548, the Affordable
Housing Credit Improvement Act of 2017. This bipartisan bill provides
needed additional resources and includes other reforms to promote the
construction of affordable housing nationwide.
affordable housing development requires policy support
To understand what is needed to address the affordable housing
crisis, you need to understand the challenges facing the development
community.
Let me be direct. Where there is housing demand, as a businessman,
I want to supply that demand. But there is no magic wand to erase basic
development costs. Fees, regulatory compliance, modern building and
energy codes, building materials, land and labor costs determine
whether a project is financially viable. If we want to provide
affordable rental housing for lower-income households, it is
financially impossible to do so without a subsidy.
A 2011 study from the Harvard University Joint Center on Housing
Studies reiterates this point: ``[t]he rising costs of construction
make it difficult to build new housing for lower-income households
without a subsidy.'' \2\
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\2\ ``America's Rental Housing: Meeting Challenges, Building on
Opportunities,'' Joint Center for Housing Studies of Harvard
University, 2011. Page 23.
In 2009, the median asking rent for new unfurnished apartments was
$1,067; for minimum-wage workers, an affordable monthly rent using the
30% of income standard is just $377.\3\ The study calculated that to
develop new apartments with rents affordable to households with incomes
equivalent to the full-time minimum wage, the construction costs would
have to be 28% of the current average.\4\
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\3\ Page 23 and 21.
\4\ Page 24.
Without Federal assistance, it is financially infeasible to
construct new, unsubsidized affordable rental units. The LIHTC is a
critical program, and as noted in the study, ``[a]t present, the Low-
Income Housing Tax Credit (LIHTC) program is nearly alone in
replenishing the affordable stock, supporting both new construction and
substantial rehabilitation of existing properties including older
assisted developments.'' \5\
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\5\ Page 5.
We also need to recognize the important role affordable housing
plays in our communities. There are meaningful social effects, which
can be seen as middle- and lower-income Americans try to make ends
meet. I see how affordable housing creates stability for my tenants and
their families. My properties help to revitalize neighborhoods.
Breaking the cycle of poverty starts with access to stable and
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affordable housing.
The housing affordability crisis affects our economy as well. It
costs us jobs, productivity and economic growth. I challenge everyone
in this room to ask the owners of the small businesses you frequent
about labor shortages. Housing affordability is critical in areas of
the country experiencing robust economic growth. As the number of open,
unfilled jobs grows, the operation of the housing market plays a key
role in allowing individuals to relocate to areas where jobs need to be
filled. And if we don't address this issue, where do our employers find
their workers? How do we grow the economy?
And for our fellow citizens who want to realize the American dream,
if they cannot afford to live where the economic opportunities are, we
are just creating an economic divide based on housing ``haves'' and
``have nots.''
This isn't complicated economics here. Simple supply and demand. To
address it, we need to commit to increasing supply. That is why I
respectfully ask you to support and pass S. 548.
development costs are increasing: factors driving up costs
Regulation
Increasing costs due to regulation are a significant challenge for
the residential construction industry. For example, regulatory costs at
all levels of government now make up roughly 25% of the price of a home
and have increased by one-third since 2011.\6\ Costs incurred in the
development stage alone account for over half of the cost of a finished
site sold to a builder. At the local level, jurisdictions may charge
permit, hook-up, and impact fees, and establish development and
construction standards that either directly or indirectly increase
costs to builders and developers. The Federal Government can also
affect the price of a home. For example, the government may require
permits for stormwater discharge on construction sites, which may lead
to delays in addition to permit costs.
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\6\ http://eyeonhousing.org/2016/12/top-posts-of-2016-regulation-
is-24-3-percent-of-the-average-new-home-price/.
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Building Materials
Building material price increases continue to outpace inflation by
a wide margin, significantly increasing development costs nationwide.
For example, since the start of this year, the industry average price
of framing lumber has increased 18%. The cost of many softwood lumber
products has risen well over 30% in the same period, and lumber futures
suggest that prices are expected to keep climbing. The increase in
softwood lumber prices adds nearly $500 to the development and
acquisition cost of a typical multifamily unit.\7\
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\7\ http://eyeonhousing.org/2017/06/duties-on-lumber-now-enough-to-
threaten-thousands-of-u-s-jobs/?_ga=2.116462790.1957391554.1501190622-
192765943.1501190622.
The costs of other materials used in residential construction have
also risen significantly. Oriented strand board (OSB), commonly used as
sheathing in walls, flooring, and roof decking, is nearly 30% more
expensive than in August 2016. The price of drywall has also increased
9% over the same period.
Labor Shortages
Labor costs and availability remain large problems. In 2012, only
21% of builders reported labor cost or availability problems. That
figure rose to 46% in 2014 and increased to 56% in 2016. The rate of
construction job openings has risen substantially in the past year,
meaning builders have available jobs but cannot find people to fill
them.\8\ This translates into higher prices and/or construction delays,
both of which increase project costs.
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\8\ http://eyeonhousing.org/2016/06/more-builders-report-
laborsubcontractor-shortages/.
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Lot Shortages
Another significant problem is the availability and supply of sites
ready for construction. In a recent NAHB survey, 64% of builders cited
site availability as ``low'' or ``very low.'' Unsurprisingly, the price
of sites has gone up as well, with 65% of builders saying prices were
``substantially'' or ``somewhat'' higher than they were a year ago.
Taken together, the cost and availability of sites was cited as a
significant problem by more than 60% of builders in 2016, a nearly
threefold increase from 2011, when only 21% of builders identified site
supply as an issue.
There are many inputs that go into developing a multi-family
project, and they have all increased in price in the past few years.
This adds to the strain of the existing affordable housing resources.
Put simply, projects require additional financial support, yet
financial resources remain either flat or have been significantly
reduced, as in the case of Federal programs like HOME.
the lihtc is a success story, but demand exceeds resources
The Low-Income Housing Tax Credit (LIHTC) was created during the
Reagan administration as part of the Tax Reform Act of 1986 as a more
effective mechanism to produce affordable rental housing. It is the
most successful affordable rental housing production program in U.S.
history. Since its inception, the LIHTC has produced and financed more
than 2.9 million affordable apartments. As LIHTC properties must
generally remain affordable for 30 years or longer, they provide long-
term rent stability for low-income households around the country. But
the demand for affordable housing is acute and exceeds the availability
of financing through the LIHTC program.
The LIHTC is a unique private-public partnership. The benefits of
this structure are evident in the quality of the projects. Moreover,
NAHB estimates that the LIHTC program in a typical year supports 95,000
new, full-time jobs, adds $7.1 billion to the economy, and generates
approximately $2.8 billion in Federal, State, and local tax revenue.
Unfortunately, the supply of private, affordable housing stock is
rapidly shrinking. According to a 2011 Harvard study:
. . . the private low-cost stock is rapidly disappearing. Of
the 6.2 million vacant or for-rent units with rents below $400
in 1999, 11.9% were demolished by 2009. Upward filtering to
higher rent ranges, conversions to seasonal or nonresidential
use, and temporary removals because of abandonment added to the
losses. On net, more than 28% of the 1999 low-cost stock was
lost by 2009.\9\
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\9\ ``America's Rental Housing: Meeting Challenges, Building on
Opportunities,'' Joint Center for Housing Studies of Harvard
University, 2011. Page 6. http://www.jchs.harvard.edu/publications/
rental/rh11_americas_rental_housing/AmericasRentalHousing-2011.pdf.
And the private marketplace needs a subsidy to build new
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construction to replace those lost units.
While no program is perfect, the LIHTC works incredibly well. Its
public-private partnership model is one that frankly should be
replicated in other government programs. When I start a LIHTC project,
my investors and I assume all the risk. If the project fails, the
taxpayer is protected, as the IRS can and will reclaim the tax credits.
Since the investors cannot claim the credits until after the project is
placed in service, it is the rare public program where the taxpayer
gets what they are paying for, or the taxpayer does not pay.
A key component to the LIHTC's success is the flexibility the State
agencies have to target specific types of affordable housing
developments. For example, a State with a large population of seniors
may offer a developer bonus points on an application for focusing on
senior housing. Nationally, in 2014, approximately 27% of LIHTCs were
directed to senior housing.\10\ Other targeted projects include
assisted living; family housing; homeless; and housing for the
disabled. This flexibility allows each State to determine what types of
affordable housing are best suited to the demographics of their State,
rather than applying a single, national standard. Ultimately, however,
a lot of needs are not being met as demand simply outstrips the
availability of credits.
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\10\ 2014 NCSHA State FHA Factbook. Page 111.
As the map below shows, every State has a large population of rent-
burdened households. Correspondingly, demand for credits greatly
outstrips the resources available. According to the most recent annual
survey released by the National Council of State Housing Agencies
(NCSHA), State housing finance agencies generally receive more than $2
in requests for every $1 in LIHTCs available. In 2014, State agencies
received applications for $1,836,172,240 in credits. Total allocations
were $775,844,195. This means that for every tax credit allocated,
there was a demand for approximately 2.4 tax credits.\11\
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\11\ Page 94.
But this does not tell the whole story. As an experienced
developer, I will not submit applications for viable projects when
there are inadequate resources to support it. So there is a shadow
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demand for credits not reflected in the above data.
Nationally, demand varies somewhat from year to year but generally
remains high. It is useful to compare the 2014 national numbers against
2008, 2008 was the height of the financial crisis, and multifamily
development was at a low point. Many traditional LIHTC project
investors were not investing, which made putting together deals much
more challenging. Nationally, there were applications for
$1,873,311,018 in credits. Credits allocated were $939,924,853.\12\
Even in one of the most challenging times for real estate development,
demand was still double the amount of available credits.
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\12\ State HFA Factbook: 2008 NCSHA Annual Survey Results. Page 92.
Looking back to better times in 2006, there were applications for
$1,509,779,928 in credits. Credits allocated were $691,073,326,\13\
2006 had approximately $2.20 in credit requests for every $1 available.
We can see over several years and in different economic environments,
demand for tax credits remained steady at double or more of the
available credits.
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\13\ State HFA Factbook: 2006 NCSHA Annual Survey Results. Page 88.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
LIHTC development remains stable because the need for affordable
housing is significant. Consistent demand for credits also reflects the
advantage of creating this credit in the tax code. Investors have
confidence in the predictability of the tax code, which allow LIHTC
developments to continue even during economic downturns. The LIHTC
enables a fairly constant supply of affordable housing, as well as a
financing mechanism that ensures long-term operation of affordable
housing. In fact, LIHTC tax credit projects outperform the rest of the
multifamily housing sector in one key measure: the annualized
foreclosure rate. This rate is less than one-tenth of a percent \14\
and a third of the rate for other multifamily properties. The success
of these projects partially reflects the ever-present threat that the
government can recapture tax credits if the project fails.
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\14\ ``The Low Income Housing Tax Credit: Assessment of Program
Performance and Comparison to Other Federal Affordable Rental Housing
Subsidies,'' by Novogradac and Company, LLP, 2011, page 4. https://
www.novoco.com/sites/default/files/atoms/files/special_report_lihtc_
assessment_program_performance_052313.pdf.
To start meeting the growing and significant demand for affordable
rental housing, we must increase resources supporting production. S.
548 takes a significant and needed step to boost supply by increasing
LIHTC allocations by 50%. NAHB estimates that based on the estimates of
the bill's sponsor that enacting
S. 548 would result in an additional 400,000 LIHTC units over the next
10 years, the economic effects from that construction would increase
Federal tax revenue by $11.4 billion and State and local revenues by
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$5.6 billion over 10 years.
Failure to take action now will only deepen the crisis. Rental
housing demand remains solid, and more housing is needed to help
address growing affordability challenges. For example, the peak age of
the Millennials is approximately age 27. While historically the typical
age of a first-time home buyer is just above age 30, we can expect
continued demand for rental housing in the years ahead. Absent new
supply, this demand will increase rents and worsen existing
affordability issues.
cost containment: effectively utilizing existing resources
Reducing and containing LIHTC development costs is a critical, yet
difficult, balancing act. For starters, there are simply more fees
associated with LIHTC development, which can account for 10% of the
cost of a project. These fees are associated with compliance and
necessary to ensure that the program is fulfilling its intended goals.
Other trends which have understandable policy goals, such as locating
affordable housing near transit hubs or in higher-income neighborhoods,
result in higher development costs. Land costs tend to be significantly
higher when constructing near transportation centers, and wealthier
communities may require more expensive exterior architectural details
to blend into the surrounding neighborhood.
But we have also seen a growing trend towards gold-plating
Qualified Allocation Plans (QAPs). Every State housing finance agency
develops a QAP, which establishes the criteria used by the State for
awarding tax credits. States have significant latitude to write a QAP
to ensure that resources are meeting the unique affordable needs of
each State. As mentioned earlier, a State QAP may steer more investment
into affordable seniors housing, for example. This flexibility is
important, but should have some limits. One troubling trend we are
seeing is QAPs pushing energy efficiency requirements significantly
above the current code requirements, which can greatly increase project
costs. Pennsylvania, for example, is pushing for ``net zero energy''
projects, which is not even common in high-end single-family homes.
A more cost-effective means of promoting energy efficiency is
through tax incentives. While a number of energy efficiency tax
credits, such as section 45L, the New Energy Efficient Home Tax Credit,
have been allowed to expire, they were not utilized for LIHTC
development because they required a basis adjustment. Because the total
basis in a property determines the amount of LIHTCs a project can be
awarded, using an energy tax credit that requires reducing basis in the
project had the effect of reducing the amount of LIHTCs the project
received--offsetting any gains from the energy efficiency tax credit.
Section 311 would remove this barrier by eliminating the LIHTC basis
adjustment requirement when using energy tax credit. NAHB strongly
supports section 311 and also urges the committee to restore the
section 45L tax credit and section 179D deduction.
QAPs should weigh the cost and benefit of various development
requirements to produce as much affordable housing with the limited
resources we have, but unfortunately that does not always occur. As an
example, Texas briefly considered, and fortunately rejected, a proposal
to require LIHTC projects to include a carport. At the time, it made me
wonder if we were housing cars or people. The quality of affordable
housing built under the LIHTC is part of the program's 31-year success
story, but we cannot lose sight that this program's goal is to produce
and preserve as much affordable housing as possible. We must strike a
reasonable balance between development requirements and cost.
Local governments may also impose costly requirements on
development, which apply whether the project is market-rate or
affordable. In one Texas community, I was required to plant 200 trees,
which probably doubled the number of trees in this community. Sadly,
the community also had water restrictions due to a drought, so while
the trees were planted as required, I could not water them, and most
died. This is simply the reality of developing housing in this country.
While academics may offer assorted ideas on how affordable development
should work, until you have actually done a deal, you cannot possible
understand the challenges developers face.
Some criticize the program for not directing more affordable
housing to higher-income communities. This is an interesting academic
debate, but let me shed light on the challenges I face as a developer
working in higher-income communities. The Texas QAP awards bonus
points, without which receiving an allocation is nearly impossible, for
LIHTC projects that are endorsed by the appropriate State legislator
and the local community, even if that project is otherwise permitted
under the municipality's comprehensive plan and zoning rules. In other
words, if I was building a market rate project, I could simply pull the
permits and start construction. But for tax credit projects, developers
are subject to a special review process that oftentimes results in
community opposition.
Any affordable housing developer in Texas has many stories of
battling community opposition simply because the project would serve
lower-income residents. The problem is so acute that The New York Times
recently highlighted the challenges Texas developers face when building
in higher-income areas.\15\ The article quoted a resident who is
opposing an affordable housing project in the Houston, Texas, area: ``I
will fight very hard before I give up that privilege and dignity to
those who, either from lack of initiative or misfortune, don't deserve
to be there.'' If we are going to break the cycle of poverty and ensure
all Americans have equal opportunity to succeed, we must reject the
notion that only some people ``deserve'' to live in well-off
communities. I can assure the committee that this reaction is not
unique and is often associated with racial undertones. Nonetheless,
this is a real-world challenge that developers of affordable housing
across the country face on a daily basis.
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\15\ ``Program to Spur Low-Income Housing Is Keeping Cities
Segregated,'' New York Times, July 2, 2017.
Fortunately, relief is possible. Section 308 of S. 548 would
prohibit State QAPs from requiring special local approval of LIHTC
developments. This will ensure that if the zoning allows it, I will be
able to develop affordable housing on the same terms as a market-rate
project.
improving utilization of existing resources:
create a minimum floor for 4% credits
Under the Low-Income Housing Tax Credit (LIHTC) program, affordable
housing developments receive tax credits that are used to attract
equity capital. There are two types of tax credits: one credit provides
70% of the financing cost and is used for new construction and
substantial rehabilitation; and a second credit that provides 30% of
the financing cost and is used to acquire an existing property for
rehabilitation. These are often referred to as the 9% and 4% credits,
respectively, because that was the original credit amount when the
program was created in 1986.
The Tax Reform Act of 1986 did not fix those credit rates at 9% and
4%, but rather created a floating rate system where the credit rates
are adjusted on a monthly basis. The IRS calculates the monthly values
of the credits based on the cost of borrowing by the Federal
Government. As a result, today's low Federal borrowing costs produce
very low credit rates, which reduces the amount of private equity
invested in LIHTC development. For August 2017, the 9% credit was only
worth 7.52%; the 4% credit was worth 3.22%. These low rates reduce the
amount of equity properties could receive by more than 15%, making it
more difficult to do LIHTC developments, particularly as State and
Federal governments cut back on direct spending that is used to fill
financing gaps for LIHTC properties. The ``floating rate'' system also
creates uncertainty for owners and investors, and complicates State
administration of the program.
In response to the declining rates, the Housing and Economic
Recovery Act of 2008 (HERA) set the rate for new construction and
substantial rehab credits from each State's allocation at no less than
9%, which was the rate when the program was created. The provision was
then extended for credits allocated by the end of 2013 through the
American Taxpayer Relief Act of 2012 (ATRA). The 9% minimum floor was
made permanent in the Protecting Americans from Tax Hikes Act of 2015
(PATH ACT).
Unfortunately, while the Finance Committee has favorably reported
legislation that included a minimum 4% credit floor for acquisition,
the legislation enacted into law (HERA, ATRA and the PATH Act) failed
to address the 4% credit. S. 548 will correct this by creating a
minimum floor for 4% credits. Applying the minimum floor rate for 4%
credits would similarly remove the uncertainty and financial complexity
of the floating rate system, simplify State administration, and
increase the number of units that can be preserved and developed into
affordable housing. As our housing stock ages--the first LIHTC projects
are now over 30 years old--preservation and rehabilitation is a cost-
effective tool.
income averaging
The LIHTC serves tenants with an area median income (AMI) of no
more than 60%. Many tax credit projects target significantly lower-
income individuals. It is important to recognize that the tax credit
only partially covers development costs. LIHTC projects also rely on
other sources of financing, including a mortgage. The amount of debt a
project can take on is determined by rental income. As rent is based on
the tenant's income, projects targeting lower-income residents cannot
assume as much debt, which may affect the financial viability of a
project.
Section 201 of S. 548 would allow for income averaging, providing
States with the flexibility to target lower-income tenants while also
ensuring the financial viability of the project by allowing a limited
number of units to serve tenants with incomes up to 80% of AMI. This is
an excellent solution for achieving income targeting below the current
60% AMI minimum while ensuring that the project is viable and can be
built. However, the entire project must still maintain an average
income of 60% or below.
improve rural affordable development opportunities
My company specializes in rural affordable housing development,
which has unique challenges. Although housing costs tend to be lower in
rural areas, these areas are often plagued with lower incomes and high
poverty rates. Nearly half of rural renters are rent-burdened, paying
more than 30% of their income in rent. Rural areas also often have
limited rental options.
S. 548 includes a number of provisions that will enhance rural
development opportunities. They include income averaging, discussed
above, but also standardizing rural income limits. The bill also
provides a basis boost for projects serving extremely low-income
tenants. This is an important provision considering that rural
residents' income tends to be lower than in urban areas. The bill would
also encourage development in Native American communities, which are
home to some of our most vulnerable rural residents.
tax reform and the lihtc: preserving production levels in the
next generation tax code
NAHB believes that lower rates, simplification, and a fair system
will spur economic growth and increase competitiveness. And that's good
for housing, because housing not only equals jobs, but jobs mean more
demand for housing. As the committee moves forward on tax reform, NAHB
wants to be a constructive partner and help the committee with this
important issue.
Corporate tax reform poses a unique challenge to syndicated tax
credits such as the LIHTC. Investor valuation of a tax credit is based
on how much tax liability that credit offsets. As the committee
considers lowering the corporate tax rate, NAHB also recommends the
committee consider options to ensure that tax credit equity remains
stable. We believe that a lower corporate rate and a robust LIHTC are
both possible to achieve.
Earlier this year, we saw a significant drop in tax credit pricing
throughout the country as investors began to assume a drop in the
corporate tax rate. In some cases, projects were unable to move
forward. We believe the effects of the lower corporate tax rate on
LIHTCs can be mitigated through two policy changes.
The first recommendation is to update the discount rate formula
used to calculate the 9% and 4% credit rates. The basis of that formula
reflects the cost of borrowing for the Federal Government, which is not
a reflection of investor return in the private market. The formula can
also be adjusted based on the final corporate tax rate to ensure that
tax credit equity remains stable.\16\
---------------------------------------------------------------------------
\16\ See: https://www.novoco.com/notes-from-novogradac/how-
congress-could-offset-effects-affordable-housing-production-reduced-
corporate-rate.
The second recommendation is to expand the investor base. Greater
demand for credits will increase pricing. Currently, most tax investors
are financial institutions, as tax credits also help banks meet their
Community Reinvestment Act obligations, as well as other large C-Corps
with stable and constant profits. Individuals, pass-through businesses,
and S-Corp banks are largely shut out of the tax credit market due to
the current passive-loss rules. While C-Corps can fully claim passive
losses, and are therefore willing to pay a higher price for tax
credits, individuals and pass-throughs are limited to a $25,000
deduction. NAHB does not recommend a complete repeal of the passive
loss rules, but rather suggests that additional flexibility for
individual investors and pass-throughs investing in LIHTCs should be
---------------------------------------------------------------------------
considered.
We believe a targeted tweak of the passive-loss rules would also
enhance deals in smaller communities, particularly rural areas, where
tax credits can be marketed to local professionals.
conclusion
The challenges of housing affordability are increasing. In some
communities, even middle-class households are feeling the financial
strain of today's housing costs. The problem is simple: we lack enough
affordable housing. The only effective, long-term solution is to
increase supply. S. 548 would greatly enhance our ability to increase
the supply of affordable rental units, and NAHB urges the committee to
mark up and favorably report out the bill.
We also must recognize that without a sizable investment in our
housing stock, particularly as older units reach obsolescence, we risk
a worsening problem for middle-income Americans. We commend Senator
Wyden for recognizing this emerging problem and his legislation last
Congress to create a Middle Income Housing Tax Credit (S. 3384),
modeled on the LIHTC. NAHB would also urge the committee to take up
this legislation. Frankly, addressing these challenges now before they
reach a national crisis point will be much cheaper in the long-run.
NAHB greatly appreciates the overwhelming bipartisan Senate support
to solve our affordable housing crisis. In this era of increasingly
partisan political discord, I hope we can all unite around this issue
and take action. Shelter is a basic human need, and we have an
opportunity to do something that not only makes good economic sense,
but will uplift the lives of millions of Americans.
NAHB stands ready and willing to help.
______
Prepared Statement of Kirk McClure, Ph.D., Professor, Urban Planning
Program, School of Public Affairs and Administration, University of
Kansas
reform of the low-income housing tax credit program
How does the Low-Income Housing Tax Credit (LIHTC) program work?
Tax credit authority is allocated annually from the Federal
Government to each State which, through its Housing Finance Agency
(HFA), awards the tax credits to development proposals. The annual
allocations totaled to about $7.6 billion in fiscal year 2015
(Gramlich, 2015).
Each developer sells the tax credits to investors who join into the
ownership of the development with the proceeds from the sale of the tax
credits used to pay for a portion of the development costs. In exchange
for receiving the tax credits, developers agree to limit the rents on
the housing units to levels affordable to low-income households and to
maintain low-income occupancy in the tax credit supported units for a
period of at least 15 years.
How has the program performed?
The program began in 1987 and produced about 2.6 million low-income
units since its inception. Annually, the program typically produces
about 90,000 units in 1,400 projects.
Who is served by the program?
The income ceilings for participation in the LIHTC program vary
with the metropolitan area or with the county if the location is
outside of a metropolitan area. The maximum income for a household
occupying a tax credit unit is a set percentage of the Area Median
family Income (AMI). The LIHTC program limits the highest income of
households who reside in LIHTC units at either 50 percent or 60 percent
of the AMI, depending upon developer selection and State HFA
preferences. In 2015, the national median family income was $66,011.
Thus, the program tends to serve households with incomes below either
$33,000 or $40,000.
The U.S. Department of Housing and Urban Development (HUD) defines
low-
income somewhat differently than does the LIHTC program, but the HUD
definitions are helpful for understanding which households are served
by the various low-income housing programs. HUD defines any household
as low-income if its income is below 80 percent of the AMI. HUD further
defines two subsets of the low-income households as: (1) Very low-
income, those with income between 30 and 50 percent of AMI; and (2)
Extremely low-income, those with income below 30 percent of AMI. These
distinctions are important because markets very widely in terms of
which category of low-income renter households suffer from shortages of
units.
O'Regan and Horn (2013) find that about 45 percent of LIHTC
households have incomes below 30 percent of AMI, and 55 percent have
incomes between the 30 percent and the 60 percent ceiling level. Low-
income households with income in the upper tier, between 60 and 80
percent of AMI, are not permitted into the units as their income is too
high. Households with incomes in the lowest tier, below 30 percent of
AMI, can usually afford the rents charged in LIHTC developments only if
they have additional subsidy through the Housing Choice Voucher (HCV)
program. Williamson (2011) found that about 10 percent of Florida LIHTC
households had vouchers. Thus, most non-voucher LIHTC households tend
to have income at the middle tier of the low-income levels or about
$20,000 to $40,000. For comparison, public housing and the HCV programs
serve the poorest tier of the low-income renter population, households
with an average income of about $14,000 (calculated from HUD data for
2015).
Does the LIHTC program produce units in a price range where there is a
need?
If the LIHTC program tends to serve households with incomes in
range of $20,000 to $40,000, does this income segment suffer from a
shortage of rental units priced so that they can afford the units?
Figure 1 divides the rental housing stock of the Nation into market
segments. Renter households are divided into income categories from the
American Community Survey, 2015. Rental units are divided into
categories based on gross rents (rents plus utilities). These rent
categories correspond to the renter income categories assuming that
these households spend 30 percent of income on housing, which is about
the median level of spending for renters nationwide.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
For example, a household with income of $25,000 per year can afford
a unit with rent at $625, and a household with and income of $35,000
can afford rent of $875. Thus, the rental units with gross rents from
$625 to $875 can be compared to the numbers of households with incomes
from $25,000 to $35,000. In rent categories where the number of units
exceeds the number of renter households, a surplus exists, and where
households exceed units, a shortage exists.
The segment of the rental housing market served by the LIHTC
program has a large surplus of units. There are many more units renting
in the price range of $625 to $875 per month than there are households
with incomes in the range of $25,000 to $35,000, the households who can
afford units in this price range. This is the market segment where the
LIHTC is adding units.
It is a very different story in the rental housing market segment
served by the HCV program. This program assists households with incomes
below $20,000. Households in this market segment can only afford rental
units with much lower rents, averaging about $350 per month. All the
market segments with rents below $500 have fewer units than there are
households.
Thus, the LIHTC program is adding units to a market segment with a
large surplus of units indicating a lack of need in most markets.
Does the LIHTC program locate units in tracts with a shortage of units?
What is true for the Nation as a whole is not necessarily true for
individual markets. While the Nation may have a surplus of units in the
market segment with rents from $625 to $875, many individual markets
may have a shortage. The LIHTC could be the right form of governmental
intervention to resolve this problem if it is targeting those locations
with shortages.
Table 1 indicates that LIHTC units are being located in census
tracts that do not have a shortage of rental units in the price range
serving low-income renter households. Table 1 categorizes the 73,000
census tracts in the Nation by comparing the number of renter
households with income between $25,000 to $35,000 to the number of
rental units with rents between $625 and $875. If the LIHTC program is
working well, it should be locating units in tracts with a shortage of
units in this price range compared to the number of households in the
income range.
Table 1. Low-Income Housing Tax Credit Units by Tract Rental Market Need
Number of rental units with rents $625 to $875 minus renter households
with income of $25,000 to $35,000
------------------------------------------------------------------------
Rental market need
category Tracts (Percent) LIHTC Units (Percent)
------------------------------------------------------------------------
Shortage 200 or more units 231 (0.3%) 18,013 (0.7%)
Shortage 50 to 199 units 5,102 (7.0%) 190,868 (7.9%)
Balanced -49 to +49 units 39,033 (53.4%) 687,597 (28.3%)
Surplus 50 to 199 units 21,966 (30.1%) 929,850 (28.3%)
Surplus 200 or more units 6,724 (9.2%) 603,944 (24.9%)
------------------------------------------------------------------------
Total 73,056 (100.0%) 2,430,272 (100.0%)
------------------------------------------------------------------------
Source: American Community Survey, 2015, 1-year estimates; HUD LIHTC
Database, 2017.
Fewer than 9 percent of LIHTC units are located where there is a
shortage. This is not entirely surprising as fewer than 8 percent of
all the tracts in the Nation have a shortage suggesting that the need
for units in the price range served by the LIHTC program is small. Over
one-half of all LIHTC units are in tracts with a surplus of more than
50 units. One-fourth of all LIHTC units are in tracts with a surplus of
200 or more units.
Does the LIHTC add new units to tight markets and rehabilitate existing
units in soft markets?
It would be expected that the program would add new construction
units to tight markets, those with low vacancy rates, and rehabilitate
existing units in soft markets, those with high vacancy rates.
Table 2. LIHTC Units by Construction Type in Tracts by Rental Vacancy
Rate
------------------------------------------------------------------------
LIHTC Units
Rental -----------------------------------------------------------
Vacancy Rate Units
New Construction Rehabilitation Type Known
------------------------------------------------------------------------
Tight 0% to 440,692 305,227 745,919
4.9%
59% 41% 100%
Normal 5.0% 155,153 113,323 268,476
to 6.9%
58% 42% 100%
Soft 7.0% to 207,558 139,446 347,004
9.9%
60% 40% 100%
Very soft 357,266 232,960 590,226
10%+
61% 39% 100%
------------------------------------------------------------------------
Total 1,160,669 790,956 1,951,625
59% 41% 100%
------------------------------------------------------------------------
Source: American Community Survey, 2015, 1-year estimates; HUD LIHTC
Database, 2017.
The LIHTC program favors new construction over rehabilitation in
all markets. Nine percent credits are awarded against new construction
costs, and 4 percent credits are awarded against rehabilitation costs,
independent of market conditions.
Developers have responded by developing 47 percent more new
construction units than rehabilitation units. There is a strong
tendency for the program to produce new construction units over
rehabilitation units without regard to the rental vacancy rate.
Does the LIHTC program support mixed-income housing?
Research demonstrates that projects wholly populated by the poor
are not good for the households, the developments or the surrounding
neighborhoods (Smith 2002). Mixed-income housing is a more beneficial
format for everyone involved (Kleit 2005).
The LIHTC program does not provide any incentives to developers to
generate mixed-income housing. Rather, the program sets minimums,
rather than maximums, on the percentages of households with incomes
below 50 percent and 60 percent of AMI. As a result, 76 percent of all
LIHTC developments are occupied entirely by low-income households.
Fewer than 3 percent are configured with market-rate units comprising
more than one-half of all units.
Conclusions and recommendations
It can be concluded that the LIHTC program is:
Serving a segment of renters with a surplus of units and not
serving the lowest-income segment with a shortage of units.
Adding units to neighborhoods with a surplus of units and
failing to add units where there are shortages.
Favoring new construction over rehabilitation independent of
market condition.
Not promoting mixed-income housing.
It is time to rethink how the LIHTC program works. Four changes are
recommended:
More rigorous market analysis: State Housing Finance Agencies
should have to justify each LIHTC allocation by demonstrating a market
need. Each HFA should have to show that both neighborhood and
metropolitan vacancy rates justify production subsidies. The HFA should
have to find that vacancy rates are low and that a shortage of units
exists at the price point to be served by the proposed LIHTC
development. There is little value in adding units to a market that has
a high rental vacancy rate or in adding units to a market segment that
is saturated.
Exchange tax credit authority for voucher authority: Currently,
housing authorities can convert up to 20 percent of tenant-based
voucher contract authority into project-based voucher authority. HFAs
should be permitted the same latitude to convert project-based LIHTC
funding into vouchers. These vouchers could be tenant-based vouchers,
permitting extremely low-income households to rent apartments in the
market if market conditions suggest this to be the preferred approach.
These vouchers could also be project-based vouchers that could be
layered on top of LIHTC subsidy to serve households who could not
otherwise afford the tax credit units. These vouchers would help the
LIHTC program both serve households with extremely low income as well
as permit these households to pay a rent based on their incomes, rather
than a flat rent now used in the LIHTC program. This approach prevents
a high housing cost hardship among these households.
Favor rehabilitation over new construction: The LIHTC program
should be modified so that it favors the appropriate type of
development for each market. The higher 9 percent credits should be
given for rehabilitation and the lower 4 percent credits should be
given to new construction developments. The higher 9 percent credits
would only be available to new construction units if the market is
truly tight (the rental vacancy rate is very low) or the new units are
replacing severely deteriorated units.
Favor mixed-income development: The LIHTC should mandate mixed-
income occupancy in most developments. A majority of the units in each
tax credit supported development should be set-aside for market-rate
occupancy. A development that is configured with a majority of units
for low-income occupancy should be permitted only in a highly
distressed area where mixed-income housing is not feasible and the tax
credit development contributes to a community revitalization strategy.
References
Gramlich, Ed. (2015). Low-Income Housing Tax Credits. 2015 Advocates
Guide. National Low-Income Housing Coalition. At: http://nlihc.org/
sites/default/files/Sec5.10_LIHTC_2015.pdf.
Kleit, Rachel Garshick. (2005). ``HOPE VI New Communities: Neighborhood
Relationships in Mixed-Income Housing.'' Environment and Planning A
37(8): 1413-1441.
O'Regan, Katherine M. and Horn, Keren M. (2013). ``What Can We Learn
About the Low-Income Housing Tax Credit Program by Looking at the
Tenants?''. Housing Policy Debate 23(3): 597-613.
Smith, Alastair. (2002). Mixed-Income Housing Developments: Promise and
Reality. NeighborWorks and the Joint Center for Housing Studies.
U.S. Census Bureau, 2011-2015 American Community Survey-Year Estimates.
Tables B25119 and B25063. At: https://factfinder.census.gov/faces/
tableservices/jsf/pages/productview.xhtml?src=bkmk.
U.S. Department of Housing and Urban Development. (2017). LIHTC
Database. At: https://lihtc.huduser.gov.
Williamson, Anne R. (2011). ``Can They Afford the Rent? Resident Cost
Burden in Low-Income Housing Tax Credit Developments.'' Urban Affairs
Review 47(6): 775-799.
______
Questions Submitted for the Record to Kirk McClure, Ph.D.
Questions Submitted by Hon. Orrin G. Hatch
Question. Are there State and local issues we should consider, or
at least keep in mind, such as zoning requirements and land use
regulations, that are working against us in that they make housing
artificially more expensive or otherwise limit its availability?
Are there ways we can and should account for that, such as by
applying certain requirements to Federal incentives for affordable
housing?
Answer. One of the great success stories of the Low-Income Housing
Tax Credit (LIHTC) program has been its ability to locate units in low-
poverty suburban neighborhoods. The LIHTC program is able to do this on
par with the Housing Choice Voucher program. The voucher program would
be expected to perform better due to the mobility granted to
participating households. However, the LIHC developers have managed to
overcome many of the barriers that suburban communities so often use to
stop affordable housing from locating in their midst.
S. 548 includes a provision that would prohibit States from
requiring local approval of LIHTC developments. This much-needed reform
to the LIHTC program would remove a barrier that communities use to
limit the availability of affordable housing and will help the program
perform even better.
Question. In your testimony you noted that the LIHTC program does
not produce units in price ranges where there are shortages of units;
that it is not very efficient at adding new units to tight markets and
rehabilitating existing units in soft markets; and that it does not
support mixed-income housing.
How would you recommend that the program be reformed to address
these issues?
Answer. The LIHTC program needs reforms that will cause it to
better fit housing market conditions. The program needs improvements in
terms of:
Reaching the poorest renters confronting the greatest need for
affordable housing;
Promoting development of mixed-income housing; and
Emphasizing rehabilitation in soft markets and new
construction in tight markets.
Reaching Extremely Low-Income Renters Who Are the Population Most in
Need
The LIHTC program tends to serve the least worst off among low-
income renters, those with income ranging from 30 to 60 percent of each
market's Area Median family Income (AMI). The program tends not to
serve the poorest population, those with income from 0 to 30 percent of
AMI, because the LIHTC rents are too high to be unaffordable for them.
Yet, in most markets across the Nation, the renters in the 30 to 60
percent of AMI enjoy more than ample numbers of rental units, while
renters in the 0 to 30 percent of AMI face shortages.
S. 548 includes income averaging which is a step in the right
direction toward serving the poorer renter households. Income averaging
will permit property managers to admit households with incomes up to 80
percent of AMI to offset admission of households with lower incomes, as
long as the average income of all households does not exceed 60 percent
of AMI. However, this mechanism will not reach very far down the income
spectrum. S. 548 also contains a provision to give greater credit
amounts to developments serving the 0 to 30 percent of AMI population.
Again, this is a step in the right direction, but the units will
continue to have flat rents. If the LIHTC developments are to serve the
extremely low-income renters households without creating high housing
cost burdens, the integration of a voucher approach is needed.
Housing credit agencies should have the capacity to exchange some
portion of their LIHTC authority for housing vouchers for renter
households who are extremely low-income (below 30 percent of AMI).
These vouchers could be attached to a portion of the units in the LIHTC
developments. This would permit the LIHTC developments to serve the
extremely low-income households who could not otherwise afford to live
in a LIHTC development. With the voucher format, the tenant would pay
30 percent of income toward the cost of the housing, rather than a flat
rent. The voucher would pay the portion between the tenant's
contribution and the rent on the unit, eliminating high housing cost
burden in these units.
A very similar arrangement now exists with Public Housing
Authorities (PHAs) who operate the Housing Choice Voucher (HCV)
program. PHAs can convert up to 20 percent of its voucher authority
into project-based vouchers. This procedure is helping developers
include units that serve extremely low-income households in mixed-
income developments. The LIHTC program would benefit from a similar
provision incentivizing the generation of mixed-income developments
that provide a portion of units for extremely low-income households.
Promote Mixed-Income Developments
Serving a poorer renter population, those with income below 30
percent of AMI, is only one of the needed reforms. These households are
best served of housed in mixed-income developments. Developments that
are entirely occupied by extremely low-income households tends to
exacerbate the problems of concentrated poverty. Unfortunately, the
LIHTC program does not foster mixed-income housing as 76 percent of all
LIHTC developments are occupied entirely by low-income households.
Fewer than 3 percent of developments are configured with market-rate
units comprising more than one-half of all units.
Where market conditions permit mixed-income housing to be
successful, the LIHTC program should promote this form of housing. The
program now sets minimums on the percentages of low-income units in the
development. To obtain any credits, the development must have at least
20 percent of units designated for households with income no higher
than 50 percent of AMI or at least 40 percent of units designated for
households with income no higher than 60 percent of AMI. Instead of
these minimums, the program should set maximums such as no more than 20
percent of units would be for extremely low-income households and no
more than an additional 20 percent of units would be for very low-
income households with the remainder for moderate- and middle-income
households.
Unfortunately, mixed-income housing will not work in all
marketplaces. Middle-income households often cannot be attracted to
distressed neighborhoods with high concentrations of poverty. Where
rigorous market analysis establishes that mixed-income housing cannot
be successfully marketed but that a LIHTC development would contribute
to neighborhood revitalization, exceptions could be made. State housing
finance agencies should be required to perform this market analysis,
and HUD should provide oversight to ensure that the market analysis is
rigorous.
Better Market Analysis So That the Right Type of LIHTC Is Developed in
Each Market
The LIHTC program also needs tools to ensure that it is adding new
units only where there is a shortage of units and rehabilitating units
where there is no shortage.
As currently structured, the LIHTC program gives more lucrative 9
percent tax credits to new construction projects and less lucrative 4
percent tax credits to rehabilitation projects. This arrangement
encourages developers to pursue new construction, independent of the
type of construction appropriate to a market.
Most rental markets in the Nation have normal to high rental
vacancy rates indicating no need for additional units through new
construction. A minority of rental markets are tight with low vacancy
rates. The LIHTC program should be restructured to reflect this
condition. Rehabilitation should receive the 9 percent tax credits, and
new construction would receive the 4 percent tax credits. This would
shift the emphasis of the program from building new units to preserving
the stock of older housing units. New construction should receive the 9
percent credits only where local market conditions indicate that the
market has a very low vacancy rate or where the new construction units
replace a larger number of deteriorated units demolished as part of a
redevelopment plan.
State housing finance agencies should be required to perform
rigorous market analysis to determine whether the use of 9 percent
credits for new construction is appropriate. Oversight is needed to
ensure that this market analysis is performed properly, and the U.S.
Department of Housing and Urban Development is well-equipped to take on
this role.
______
Question Submitted by Hon. Michael F. Bennet
Question. I am interested in the research you've done on the extent
to which housing policies, including vouchers, can help low-income
families move closer to opportunity or, on the other hand, further
socioeconomic and racial segregation.
Could you comment on what the most effective steps would be to
reform our current housing policies to better help more low-income
families live in places with access to opportunity?
Answer. The Federal Government has two rental assistance programs
that are actively placing low-income households in new locations, the
LIHTC program and the Housing Choice Voucher (HCV). Neither program
strongly promotes movement to high-opportunity neighborhoods.
The HCV program only minimally promotes the notion of helping
assisted households locate in high-opportunity neighborhoods through a
provision of the technique used to monitor the performance of the
administering Public Housing Authority.
The LIHTC program does not mandate that States give priority to
developments located in neighborhoods offering high levels of
opportunity. A few States have taken steps in this direction, but the
process in not widespread.
For either the LIHTC program or the HCV program, the criteria used
to identify high-opportunity neighborhoods should be locally defined.
The research agrees that these neighborhoods should have low
concentrations of poverty, low exposure to crime, high-performing
schools, and access to gainful employment. Beyond these, the research
has yet to identify criteria that can be applied universally. It
appears that each metropolitan area will need to adopt its own criteria
appropriate to individual markets. For example, access to public
transit may be an important issue in some markets but not in others.
The HCV could be modified to mandate that a portion of vouchers be
set aside for households who would be willing to accept the voucher on
the condition that it be used only in a high-opportunity neighborhood.
The LIHTC program could be modified to mandate that States give
priority to developments located in high-opportunity neighborhoods.
Program administrators should engage in opportunity mapping to
identify, at the metropolitan level, high-opportunity neighborhoods as
targets for voucher households or for tax credit units. The U.S.
Department of Housing and Urban Development is especially skilled in
this type of work and should be charged with overseeing the opportunity
mapping process.
______
Prepared Statement of Hon. Katherine M. O'Regan, Ph.D., Professor of
Public Policy and Planning, Robert F. Wagner Graduate School, and
Faculty Director, Furman Center for Real Estate and Urban Policy, New
York University
Chairman Hatch, Ranking Member Wyden, and members of the committee,
thank you for inviting me to appear today to discuss America's
affordable housing crisis, challenges and solutions. I am speaking
today from my perspective as a researcher, particularly on affordable
housing policy, and from my experience at the Department of Housing and
Urban Development, where I chaired the cross-agency Rental Policy
Working Group (RPWG) which specifically focused on alignment of Federal
rental programs and rental affordability.
american's affordable housing crisis
As has been reported widely and frequently in the press, and
documented well by the researchers at Harvard's Joint Center, the
Furman Center and many others, we have a housing affordability crisis
in this country that is not going away. Let me start with just some
facts.
Housing Cost Burdens Are Extremely High, Particularly for Renters
Using the affordability standard of spending no more than 30
percent of income on housing, in 2015 nearly 39 million households were
``cost-burdened.'' \1\ This is about a third of all households in
America. And renters are much more likely to face cost burdens. Nearly
half (48.3 percent) of all renters were cost burdened in 2015. More
than a quarter (25.6 percent) face severe cost burdens, spending at
least half of their income on housing.
---------------------------------------------------------------------------
\1\ Joint Center for Housing Studies. The State of the Nation's
Housing 2017.
---------------------------------------------------------------------------
These Rates Remain Far Above Pre-Housing Crisis Levels
While rent cost burdens have declined slightly since their peak in
2011, they remain considerably above pre-housing crisis levels.
Focusing on those most burdened, 11.1 million renter households were
severely cost burdened in 2015, nearly 4 million more than in 2001.
Affordability Challenges Are Widespread--Beyond Highest Cost Cities and
Lowest Income Households
Affordability issues are not limited to highest-cost markets or a
handful of States. With more than 30 percent of its renters
experiencing severe cost burdens, Augusta, GA is among the 10
metropolitan areas with the highest rates of severe burdens for
renters, for example.\2\ While Florida, California and Hawaii had the
highest shares of renters facing cost burdens, at least 37% of renter
households in every State across the Nation were cost burdened in
2014.\3\ High levels of cost burdens are also not confined to larger
metropolitan areas. Almost 12 million households living outside the top
100 metropolitan areas are cost burdened, about half of whom are
severely burdened.\4\
---------------------------------------------------------------------------
\2\ Joint Center for Housing Studies, The State of the Nation's
Housing 2017.
\3\ Joint Center for Housing Studies. Rental Housing Affordability
2015, Appendix Tables and Additional web-only Tables, A-5.
\4\ Smaller metro and non-metro areas. Joint Center for Housing
Studies, The State of the Nation's Housing 2017.
The sharpest growth in cost-burdened shares over the past decade
and a half has been among middle-income households: burdened households
within the middle quintile of the income distribution increased from 13
percent in 2001 to 25 percent in 2014.\5\
---------------------------------------------------------------------------
\5\ Joint Center for Housing Studies. Rental Housing Affordability
2015.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Looking specifically at cost burdens for renters by their income
levels, in 2015:\6\
---------------------------------------------------------------------------
\6\ Joint Center for Housing Studies, The State of the Nation's
Housing 2017. Chapter 7--Appendix Tables.
For renter households with incomes below $15,000--comparable to
full-time work at the Federal minimum wage--more than 80 percent were
cost-burdened in 2015, with 70 percent facing severe cost burdens
---------------------------------------------------------------------------
(spending more than half of income on housing).
Sixty-four percent of renters with incomes between $15,000 and
$30,000 were cost-burdened in 2015, 32 percent severely so.
Over 40 percent of renters earning between $30,000 and $45,000
were cost-
burdened in 2015.
Housing Supply Is Not Keeping Up With Demand
The country has experienced 7 consecutive years of growth in new
construction, with 1.17 million housing units added to the national
stock in 2016.\7\ Even with this, construction is well below the
historical annual rates of 1.4 to 1.5 million experienced during the
1980s and 1990s. Housing completions in the last 10 years are lower
than any other 10-year period since the late 1970s.
---------------------------------------------------------------------------
\7\ Joint Center for Housing Studies, The State of the Nation's
Housing 2017.
Despite the gains in multifamily construction, rental markets
remain extremely tight. Based on the Housing Vacancy survey, the Joint
Center reports that rental vacancy rates continued to decline for the
7th year in a row.\8\ In 2016, the rental vacancy rate fell to its
lowest level in 30 years, 6.9 percent. Throughout the country, rent
increases continue to far exceed inflation.
---------------------------------------------------------------------------
\8\ Joint Center for Housing Studies, The State of the Nation's
Housing 2017.
Meanwhile, over the past 15 years, there has been a shift in the
rental stock toward the higher end. Nearly half of the 100 largest
metropolitan areas reported absolute declines in the number of low rent
units, even as their housing stocks increased.\9\
---------------------------------------------------------------------------
\9\ Joint Center for Housing Studies, The State of the Nation's
Housing 2017.
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consequences of high housing costs
There are obvious reasons to be concerned about the escalating
costs of housing and the myriad of ways it affects people. Households
spending large portions, even half or more of their incomes on housing,
face difficult tradeoffs in how to meet their basic needs with what
remains. For example, severely cost-burdened families with children who
are in the bottom quartile of income spend 75 percent less on health
care than non-burdened families in the same income quartile. Low-income
and severely burdened seniors also cut back drastically on health care,
spending 60 percent less than other low-income seniors.
High housing costs affect where people live, and may constrain
families with children to neighborhoods and locations that do not
support healthy child development, or upward economic mobility.
There may also be aggregate consequences if people are priced out
of a high cost but highly productive markets, and choose to live in
another area altogether. This affects the wages of that worker, and
overall productivity in the Nation. Recent work by Berkeley economists
estimates that had higher housing costs not inhibited the movement of
workers and capital over the past four decades, national output would
have been 10 percent higher in 2009.\10\ Higher cost housing may be a
greater obstacle for low-wage earners, exacerbating inequality and
locking in economic differences across States.\11\ The differential
mobility also may have very long term effects on inequality, because
many of the areas to which more highly educated workers may move have
higher levels of intergenerational mobility than the areas in which
less educated workers remain.\12\
---------------------------------------------------------------------------
\10\ Hsieh, C., and Moretti, E. (2017). ``Housing Constraints and
Spatial Misallocation'' (Working Paper). Berkeley, CA: National Bureau
of Economic Research (NBER).
\11\ Ganong, P., and Shoag, D. (2015). ``Why Has Regional Income
Convergence in the U.S. Declined?'' (Working Paper). Cambridge, MA:
Harvard Kennedy School.
\12\ Schleicher, D. (2017). ``Stuck! The Law and Economics of
Residential Stability.'' Yale Law Journal, 127 (forthcoming).
---------------------------------------------------------------------------
the federal role: low-income housing tax credit
In terms of Federal response, Tax Policy plays a key role in
housing markets. For affordable rental housing, this is primarily
through the Low-Income Housing Tax Credit (LIHTC), the largest source
of Federal financing for the private production and rehabilitation of
affordable rental housing in the country.\13\ I will focus my policy
comments on LIHTC.
---------------------------------------------------------------------------
\13\ https://www.huduser.gov/portal/datasets/lihtc.html.
---------------------------------------------------------------------------
reforming and streamlining lihtc
We now have more than 30 years of LIHTC experience to inform
reforms--to increase the credit's flexibility and feasibility in a
broader set of market conditions, to streamline, and to more
effectively meet key policy goals. I would like to highlight three
areas for improvement that are also part of S. 548 (the Affordable
Housing Credit Improvement Act of 2017).
(1) Working in a Broader Set of Markets, Across a Broader Set of
Incomes
LIHTC's Federal income and associated rent limits are tied to
either 50 or 60 percent of area median income during the application
process. Since 2000, States are to prioritize developments reaching
lowest income tenants, and indeed, nearly half (47.5 percent) of LIHTC
tenants have incomes below 30 percent of Area Median Income (AMI), and
58 percent have annual incomes below $20,000.\14\ Serving such
households with extremely low incomes (ELI) generally requires some
form of additional rental assistance, such as project-based or tenant-
based vouchers, or other
development-level subsidies. Without those additional subsidies,
reaching lowest income households is not economically feasible in most
markets. Yet those additional subsidies are in decreasing supply, may
not be within the control of the HFA or developer, and even if
available require coordination and layering across funding streams.
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\14\ ``Understanding Whom the LIHTC Program Serves: Data on Tenants
in LIHTC Units as of December 31, 2014. HUD USER.'' 2017. Accessed
April 19. https://www.huduser.gov/portal/publications/
LIHTCTenantReport-2014.html.
Income Averaging (section 201) can help address these challenges as
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well as improve economic feasibility in different market settings.
Income averaging permits developments to employ an ``average
income'' cap of 60 percent of AMI, with no household's income exceeding
80 percent of AMI. Rents set for 80 percent of AMI can be used to
offset the lower rents for those at 30 (or 40) percent of AMI. This
means a broader set of incomes can be served in a development, where
the additional resources needed to reach lower income households comes
from within the finances of the development itself. This ``cross-
subsidy'' will be useful in high-cost markets, as well as for
developments that are part of mixed-income community revitalization
plans. It also addresses some of the issues in rural markets, where it
may be necessary to serve a broader set of income ranges to be
economically feasible. This greater flexibility is one of the most
important LIHTC reforms.
Permitting States to increase the maximum basis boost for serving
ELI tenants (section 309) adds a similar flexibility in terms of
identifying resources within LIHTC for reaching lowest income
households, avoiding additional layering of financing and the
associated complexities. Finally, broadening the definition of
Difficult Development Areas (DDAs, section 402) to automatically
include Indian areas (along with the increased DDA cap, section 311)
also enable the credit to work in a different, high need environment
that it has historically underserved.
(2) Achieving Locational Goals
Over time and in practice, at least two (potentially conflicting)
locational goals have emerged. On the one hand, there is a desire to
avoid locating subsidized housing in neighborhoods in which poverty
rates are already high, as this may further concentrate poverty. An
additional concern is that high poverty neighborhoods may lack
conditions conducive to self-sufficiency and economic mobility. Recent
work by Raj Chetty and his co-authors, looking at the adult outcomes
for children in assisted housing affirms that neighborhoods matter;
children provided access to lower poverty neighborhoods were more
likely to go to college and had higher earnings as adults.\15\
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\15\ Chetty, R., Hendren, N., and Katz, L.F. (2016). ``The Effects
of Exposure to Better Neighborhoods on Children: New Evidence From the
Moving to Opportunity Experiment.'' American Economic Review, 106(4),
855-902.
On the other hand, the desire to preserve existing affordable
housing might drive investments to higher poverty neighborhood, and it
is argued that such investments might spur broader community
revitalization. This community reinvestment goal was made explicit in
2000, when the Community Renewal Tax Relief Act of 2000 required States
to give preference to applications for LIHTC developments in area of
lower income/higher poverty (Qualified Census Tracts or QCTs) with
concerted community revitalization plans. Recent research provides
compelling evidence that LIHTC developments in low-income neighborhoods
do indeed have positive effects on the surrounding neighborhood,
increasing property values, lowering crime, and attracting a more
racially and economically diverse population.\16\
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\16\ Diamond, R. and McQuade, T. 2016. Who Wants Affordable Housing
in Their Backyard? An Equilibrium Analysis of Low-Income Property
Developments.
How States are to balance these competing goals remains a live
debate. To achieve either locational goal, however--siting LIHTC in
higher income/higher opportunity neighborhoods or contributing to
neighborhood improvement through LIHTC investments, requires two
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reforms contained in S. 548.
In terms of accessing higher income neighborhoods, section 308
would prohibit local approval and contribution requirements. Beyond the
Federal requirement that agencies provide notice to local government
and a reasonable opportunity to comment on planned LIHTC
developments,\17\ some States also require proof of local support or
provide other competitive points for such support. Such local approvals
can, in essence, give jurisdictions the ability to veto developments.
Considerable anecdotal evidence from developers and States suggest such
``veto power'' creates sizable location barriers in some States.
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\17\ 26 U.S.C. Sec. 42(m)(1)(A)(ii).
In terms of prioritizing developments in QCTs with concerted
community revitalization plans, no guidance has been provided on who is
to define what constitutes such a plan. In the absence of clarity, some
States have provided the same prioritization to all developments
proposed in QCTs, regardless of evidence of a plan. Clarification that
States have the authority to determine the definition of community
revitalization plan (section 307) would encourage States to employ
prioritization that is consistent with Federal intent.
Preservation of Existing Affordable Housing
LIHTC is also used for the preservation of existing affordable
housing, primarily through the so-called 4-percent credit. Preserving
existing affordable housing is a key (and potentially cost-effective)
strategy for narrowing the gap between demand and supply. Due to how
the credit formula is calculated, its value actually fluctuates, adding
uncertainty to credit deals. While a permanent minimum has been
established for the 9-percent credit,\18\ section 301 would establish a
permanent minimum for the 4-percent credit. Along with modifying
building repurchase rights (section 303), this would improve the
ability of the tax credit to be used for preserving existing affordable
housing.
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\18\ Protecting Americans from Tax Hikes Act of 2015 (PATH).
Additional Reform
Housing markets and needs vary greatly across jurisdictions and
States. LIHTC is a Federal credit, but implemented by States to permit
tailoring to local conditions. It is possible to add additional
flexibility to the credit that could improve cost-
effectiveness by permitting a portion of the value of the credits, or
of any credit expansion, to finance State (HFA)-issued vouchers.
Perhaps modeled on the Tax Credit Assistance Program (TCAP) \19\ in
which States could apply to provide grants in lieu of credits, the
funding in this case would support a set of State-issued vouchers,
likely time limited to match the timing of the funding. For those
markets in which there is an adequate supply of quality housing across
a range of price points, it may be more cost effective to permit States
to utilize tenant-based vouchers.
---------------------------------------------------------------------------
\19\ The American Recovery and Reinvestment Act of 2009.
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lihtc resources
Finally, I want to end by making a point about the level of
resources for LIHTC. Due to the nature of how investors in LIHTC
properties receive tax benefits--through both the credit and through
losses, any decrease in corporate tax rates also lowers the amount of
equity raised by the credit. LIHTC funding is predicted to decline by
up to 17 percent under expected decreases in the corporate tax rate if
per-capita allocations are not increased to keep pace.\20\ Uncertainty
over future corporate rates has already led to delays in deal closing
and decreases in the price investors are willing to pay for the
credit.\21\
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\20\ https://www.novoco.com/notes-from-novogradac/how-congress-
could-offset-effects-affordable-housing-production-reduced-corporate-
rate.
\21\ Capps, Kriston. 2017. ``Tax Reform Hasn't Started Yet, but
Affordable Housing Is Already Taking a Hit.'' CityLab. Accessed May 1.
http://www.citylab.com/housing/2017/01/uncertainty-over-tax-reform-is-
already-hurting-affordable-housing/514235/.
This means failure to increase the per-capita allocation is
equivalent to cutting LIHTC resources relative to its funding in recent
years. This also means that some amount of increase in the per-capita
allocation is budget neutral relative to past years. Given the breadth
and depth of affordability issues in the country, now does not seem a
time to withdraw Federal resources for affordable housing, particularly
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for LIHTC.
It is, however, an opportune time to make substantive improvements
in LIHTC, making it a more effective and efficient program as the
Nation grapples with a serious and persistent rental affordability
crisis.
______
Questions Submitted for the Record to Hon. Katherine M. O'Regan, Ph.D.
Question Submitted by Hon. Orrin G. Hatch
Question. Are there State and local issues we should consider, or
at least keep in mind, such as zoning requirements and land use
regulations, that are working against us in that they make housing
artificially more expensive or otherwise limit its availability?
Are there ways we can and should account for that, such as by
applying certain requirements to Federal incentives for affordable
housing?
Answer. Local zoning requirements and regulations provide a number
of benefits to communities, including increased health and safety for
residents. But local zoning and regulatory constraints play a
significant role in impeding housing production \1\ and increase the
costs of housing.\2\ There is also growing evidence that the prevalence
and intensity of land use regulations have increased over time, as
housing affordability declines.\3\
---------------------------------------------------------------------------
\1\ Glaeser, Gyourko, and Saks, 2005; Glaeser and Ward, 2009;
Malpezzi, 1996; Quigley and Raphael, 2005; Saks 2008.
\2\ Glaeser and Gyourko, 2003; Gyourko and Molloy, 2015.
\3\ Furman, 2015; Gyourko, Saiz, and Summers, 2008; Mullen, 2015.
To the extent that land use regulations restrict the supply of
housing and raise prices, they also make it more difficult for workers
to move to the cities with more productive businesses, potentially
contributing to slower productivity growth and increased economic
inequality.\4\
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\4\ Hsieh and Moretti, 2017; Ganong and Shoag 2015.
While zoning and land use restrictions are locally determined, the
effect of their use on housing costs is felt beyond the borders of
local jurisdictions and could be addressed by higher levels of
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government.
The Federal Government could provide incentives directly to
localities specifically to decrease regulatory barriers through a newly
created competitive grant program or similar vehicle.
The Obama administration, for example, proposed $300 million in
competitive grant funds for localities and regional coalitions that
embrace reforms to zoning and land use regulations that create a ``more
elastic and diverse'' supply of housing (HUD, Local Housing Policy
Grants).\5\ The proposal would have allowed local governments to use
the funding to support infrastructure expansion or any activities that
would facilitate the regulatory reforms, such as market analyses and
assistance with identifying reform options.
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\5\ The HUD proposal requires matching funds from State, local, or
private sources, presumably to indicate serious commitment on the part
of applicants.
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To add some specifics, any such competitive grant program might:
Offer technical assistance and funding to encourage local
building authorities and departments to redesign and simplify their
permitting systems. To become eligible for funds, localities might, for
example, commit to promising approvals within a certain time window, or
adopt procedural reforms to help streamline the process, such as
establishing a single, standard, application for all needed permits,
combining public hearings, or creating an on-line application and
tracking system for permit requests.\6\
---------------------------------------------------------------------------
\6\ Massachusetts Association of Regional Planning Agencies, 2007.
---------------------------------------------------------------------------
Encourage localities and/or regional coalitions to adopt more
relaxed land use regulations, such as upzoning certain areas to allow
for more residential density, or perhaps removing restrictions on
multifamily housing development. Similar to the Massachusetts Chapter
40R law, the program might also require that some minimum percentage of
the additional units built be set aside as affordable to low-income
households. In this case, incentive funds could be used to offset the
development costs of those units.
Finally, the Federal Government might issue a model zoning
code (or a set of zoning provisions to allow for more flexibility),
which localities could adopt in order to be automatically eligible for
these funds.\7\
---------------------------------------------------------------------------
\7\ There has been some exploration of the feasibility of such
model codes. See APA (1996) for a set of useful articles.
Alternatively, or in addition, the Federal Government might include
incentives in existing funding streams. Those funding sources need not
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be limited to housing programs per se.
For example, the Department of Transportation (DOT), which already
offers competitive grants to State and local governments for capital
investments in transit, is a natural source of support. Indeed, the
DOT's New Starts program already gives priority to projects built in
areas with high population density and relatively high shares of
affordable housing. Specifically, the program regulations require that
in rating alternative proposals, Federal officials must consider the
population density around proposed stations, and the ratio of the
proportion of ``legally binding affordability restricted'' housing
within a half mile of the proposed station to the proportion of
``legally binding, affordability restricted'' housing in the counties
through which the route travels. These criteria could be expanded to
cover population density and affordable housing in a jurisdiction as a
whole, or measures to reform local zoning, and the criteria could be
given more weight in selection. Additional points could be granted to
applications that involve regional coalitions that aim to collectively
permit more building.
Finally, a particularly promising approach is for the Federal
Government to provide incentives to States which have much greater
direct authority over local zoning powers. While the degree of local
autonomy varies across States, it has long been established that local
governments are ultimately ``creatures of the State.''\8\ Thus, even in
``home rule'' States where local governments have relatively high
levels of autonomy, State legislatures have considerable authority over
what local governments can and cannot do. As cities derive their very
power to zone from States' zoning enabling acts, the latter's authority
over the former very much extends to the ability to condition,
restrict, or otherwise alter their land use power.
---------------------------------------------------------------------------
\8\ Most States follow the judicial rule of interpretation embodied
by ``Dillon's Rule.'' Even in States that do not, John Dillon's deeper
argument that cities only have the powers that States give them (even
if a State decides that a city has expansive powers that cannot be
limited by the State except through State constitutional amendment) has
been widely accepted. See David J. Barron, ``Reclaiming Home Rule,''
116 Harv. L. Rev. 2255 (2003); Gerald E. Frug, ``The City as a Legal
Concept,'' 93 Harv. L. Rev. 1057 (1980).
There are numerous examples of State actions that could be
---------------------------------------------------------------------------
encouraged. For example:
Massachusetts Chapters 40R and 40S tie State aid of some form
to local construction in higher demand areas.
A bill is working its way through the Massachusetts
legislature to require every jurisdiction to include at least one
district that allows MF housing construction as of right.\9\
---------------------------------------------------------------------------
\9\ https://malegislature.gov/Bills/189/House/H4140/.
---------------------------------------------------------------------------
About half of States require comprehensive plans, which could
be broadened. Five States require affordable housing as part of that
planning.\10\ Minimum parking restrictions, which drive up the cost of
housing, could be reduced or eliminated by States (though it is unclear
if any have).
---------------------------------------------------------------------------
\10\ Pendall paper provided summary of existing State laws, http://
www.jchs.harvard.edu/sites/jchs.harvard.edu/files/rr07-11_pendall.pdf.
The Federal Government could offer a pool of funds to States that
adopt measures to check local zoning or incentivize residential
development in localities, such as those highlighted above. Such State
incentive programs might arguably be more effective than direct
incentives to localities, given the greater political distance States
have from homeowners concerned about growth and development in their
communities. The scale of the potential funds to States is enormous.
Consider that the Federal Government granted $51 billion to States in
highway funds in 2014, which amounted to about 25 percent of spending
on highways and transit.\11\ While State highway funds are allocated
through a statutory formula (see 23 U.S.C. Sec. 104), Congress could
potentially alter the formula and set aside some amount to be allocated
through competitive grants. Alternatively, Congress could allocate
additional funds that could be allocated through a competitive process
that would reward States that enact laws to check local zoning or
incentivize localities to allow greater density. Finally, it could add
checks on local zoning as a condition or a criterion for existing
competitive funding for capital investment (about $2.3 billion per
year) that goes to States and localities.\12\
---------------------------------------------------------------------------
\11\ http://www.cbo.gov/sites/default/files/cbofiles/attachments/
44434-HighwayTrustFund_
Testimony.pdf and http://www.pewtrusts.org/en/research-and-analysis/
analysis/2015/02/24/funding-challenges-in-highway-and-transit-a-
federal-state-local-analysis.
\12\ https://www.transit.dot.gov/funding/grant-programs/capital-
investments/about-program.
______
Questions Submitted by Hon. Robert P. Casey, Jr.
high housing costs and lack of access to affordable housing
Question. I know you touched on this somewhat in your testimony,
but can you elaborate on how high housing costs and lack of access to
affordable housing can negatively impact families, seniors, worker
wages, economic mobility and access to health care for children? Can
you discuss how the Low Income Housing Tax Credit has and can be used
to mitigate those outcomes?
Answer. There are (at least) three channels through which the high
cost of housing negatively impacts families and individuals: by
decreasing resources for other crucial spending; by lowering the
quality of housing consumed; and by lowering the quality of the
neighborhoods the selected housing is in.
Cost of Housing
The high cost of housing results in households spending large
portions of their incomes on housing. More than a quarter of renters in
the United States are spending half or more of their income on their
housing,\13\ facing difficult tradeoffs in how to meet their basic
needs with what remains. This results in cutting back on food,
particularly nutritional food, and medical care.
---------------------------------------------------------------------------
\13\ Joint Center for Housing Studies. The State of the Nation's
Housing 2017.
---------------------------------------------------------------------------
For example,
Severely cost-burdened families with children who are in the
bottom quartile of income spend 40 percent less on food and 75 percent
less on health care than non-burdened families in the same income
quartile.
Low-income and severely burdened seniors also cut back
drastically on health care, spending 60 percent less than other low-
income seniors.\14\
---------------------------------------------------------------------------
\14\ Joint Center for Housing Studies. The State of the Nation's
Housing 2017.
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The stresses associated with living in unaffordable housing
could also undermine mental health.
Lack of access to affordable housing also means households face
difficult tradeoffs and limited options in the housing they do get to
live in. In particular, households are more likely to end up in lower
quality housing and in neighborhoods that do not support the health,
well-being, and economic mobility of residents.
Housing Quality
In terms of housing quality, there is evidence of negative effects
on both health and education from living in low quality or crowded
housing. In particular, the literature suggests:\15\
---------------------------------------------------------------------------
\15\ For details, see summaries of the housing/health and housing/
education nexus, see Center for Housing Policy, http://
docs.wixstatic.com/ugd/19cfbe_c1919d4c2bdf40929852291a57e5246f.
pdf and http://www2.nhc.org/HSGandHealthLitRev_2015_final.pdf.
Substandard housing puts residents at greater risk for
exposure to lead paint and other toxins, and to injuries.
The health benefits of living in structurally sound homes that
are free of toxins are likely largest for children as they develop, and
for seniors, who spend more of their time in their homes and are also
most vulnerable to injuries and falls.
To the extent that living in higher quality housing improves
children's health, children will then be less likely to miss school or
fall behind in classwork.
Living in adequately sized housing, with space for studying,
may also directly affect children's performance in school.\16\
---------------------------------------------------------------------------
\16\ Leventhal and Newman (2010). ``Housing and child
development.'' Children and Youth Services Review, 32(9), 1165-1174.
Neighborhood Characteristics and Quality
Research finds that neighborhood characteristics are also quite
important for the health and educational outcomes, the physical and
social aspects of the neighborhood itself, and the schools, health
care, and jobs that may be proximate to the neighborhood. Some relevant
findings include:\17\
---------------------------------------------------------------------------
\17\ Also see summaries of the housing/health and housing/education
nexus, see Center for Housing Policy http://docs.wixstatic.com/ugd/
19cfbe_c1919d4c2bdf40929852291a57e5246f.pdf and http://www2.nhc.org/
HSGandHealthLitRev_2015_final.pdf.
Low air quality, car emissions, and proximity to hazardous
waste increase negative health outcomes for children, such as increased
children hospitalizations, premature births, low weight births, and
infant mortality.\18\
---------------------------------------------------------------------------
\18\ Chay and Greenstone, ``The Impact of Air Pollution on Infant
Mortality: Evidence from Geographic Variation in Pollution Shocks
Induced by a Recession,'' Quarterly Journal of Economics 118 (2003):
1121-67. Currie, Neidell, and Schmieder, ``Air Pollution and Infant
Health: Lessons from New Jersey,'' Journal of Health Economics 28
(2009): 688-703. Currie, Greenstone, and Moretti, ``Superfund Cleanups
and Infant Health,'' Working Paper 16844 (National Bureau of Economic
Research, Cambridge, MA, 2011). Currie and Walker, ``Traffic Congestion
and Infant Health: Evidence from E-ZPass, '' Working Paper 15413
(National Bureau of Economic Research, Cambridge, MA, 2009).
---------------------------------------------------------------------------
As documented rigorously in HUD's Moving to Opportunity
Demonstration (MTO), getting to live in lower poverty, safer
neighborhoods leads to significant reductions in obesity and diabetes
among mothers, as well improvements in mental health, as least among
adults and girls.\19\
---------------------------------------------------------------------------
\19\ Ludwig et al., ``Neighborhoods, Obesity, and Diabetes--a
Randomized Social Experiment,'' New England Journal of Medicine 365
(2011): 1509-19, doi: 10.1056/NEJMsa1103216, https://www.nejm.org/doi/
pdf/10.1056/NEJMsa1103216.
---------------------------------------------------------------------------
Lack of safety in a neighborhood, particularly exposure to
violent crime, has been shown to significantly undermine children's
ability to focus and cognitive functioning.\20\
---------------------------------------------------------------------------
\20\ Patrick Sharkey, ``Acute Effect,'' http://www.pnas.org/
content/pnas/107/26/11733.full.
pdf; Sharkey et al., ``High Stakes,'' https://
www.sociologicalscience.com/download/volume%201
/may(3)/high-stakes-in-the-classroom-high-stakes-on-the-street.pdf.
---------------------------------------------------------------------------
Finally, as documented by more recent assessments of the adult
outcomes of children in HUD's MTO, being raised in low poverty/safer
neighborhoods increases the likelihood of going to college, quality of
college attended, and earnings as an adult.\21\
---------------------------------------------------------------------------
\21\ Chetty, Raj, Nathaniel Hendren, and Lawrence Katz. 2016. ``The
Effects of Exposure to Better Neighborhoods on Children: New Evidence
from the Moving to Opportunity Project.'' American Economic Review 106
(4).
---------------------------------------------------------------------------
Worker Productivity and Inequality
There may also be aggregate consequences if people are priced out
of high cost but highly productive markets, and choose to live in
another area altogether. This affects the wages of that worker, and
overall productivity in the Nation.
Work by Berkeley economists estimates that had higher housing
costs not inhibited the movement of workers and capital over the past 4
decades, national output would have been 10 percent higher in 2009.\22\
---------------------------------------------------------------------------
\22\ Hsieh and Moretti. (2017). ``Housing Constraints and Spatial
Misallocation'' (Working Paper). Berkeley, CA: National Bureau of
Economic Research (NBER).
---------------------------------------------------------------------------
Higher cost housing may be a greater obstacle for low-wage
earners, exacerbating inequality and locking in economic differences
across States.\23\
---------------------------------------------------------------------------
\23\ Ganong and Shoag. (2015). ``Why Has Regional Income
Convergence in the U.S. Declined?'' (Working Paper). Cambridge, MA:
Harvard Kennedy School.
---------------------------------------------------------------------------
This differential mobility may also have very long term
effects on inequality, because many of the areas to which more highly
educated workers may move have higher levels of intergenerational
mobility than the areas in which less educated workers remain.\24\
---------------------------------------------------------------------------
\24\ Schleicher (2017). ``Stuck! The Law and Economics of
Residential Stability.'' Yale Law Journal, 127 (forthcoming).
---------------------------------------------------------------------------
mitigating these negative effects through
the low-income housing tax credit (lihtc)
LIHTC can and does affect the three channels already mentioned:
affordability of housing, its quality, and the associated
neighborhoods. As the largest source of Federal funding for the
production and rehabilitation for affordable rental housing in the
United States, LIHTC plays a critical role in the provision of quality
affordable housing, including the rehabilitation of potentially
substandard housing. I will focus on a few key aspects here.
Housing Affordability
Nearly 3 million housing units have been placed in service through
LIHTC as of 2015.\25\ In terms of affordability, LIHTC's Federal income
and associated rent limits are tied to either 50 or 60 percent of area
median income. Broadly, this means the Federal limits would make LIHTC
units affordable to households whose incomes were no greater than
$28,258 to $33,910 in 2015. While there is great need for housing
affordable to these low- and very low-income households,\26\ households
with extremely low incomes (30 percent of AMI or below) face the
greatest affordability challenge. Since 2000, States are to prioritize
developments reaching lowest income tenants, and indeed, nearly half
(47.5 percent) of LIHTC tenants have incomes below 30 percent of Area
Median Income (AMI), and 58 percent have annual incomes below
$20,000.\27\ Serving such households with extremely low incomes
generally requires additional subsidy to be economically feasible. This
is done with some form of additional rental assistance, such as
project-based or tenant-based vouchers, or other development-level
subsidies. This requires coordination and layering across funding
streams.
---------------------------------------------------------------------------
\25\ https://www.huduser.gov/portal/datasets/lihtc.html.
\26\ HUD considers households with income at or below 50 percent of
AMI as ``very low income'' and those with incomes between 50 and 80
percent of AMI as ``low income.''
\27\ ``Understanding Whom the LIHTC Program Serves: Data on Tenants
in LIHTC Units as of December 31, 2014. HUD USER.'' 2017. Accessed
April 19, https://www.huduser.gov/portal/publications/
LIHTCTenantReport-2014.html.
There are several ways in which LIHTC could be modified to be more
effective or efficient at reaching lowest income households, increasing
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its affordability for those most in need. Such as:
Income averaging (permitting an average income cap of 60
percent of AMI, with an overall income cap of 80 percent of AMI). The
higher rents received for units set above 60 percent of AMI can provide
the subsidy for units at 40 or 30 percent of AMI.
Increase the maximum ``basis boost'' for developments
targeting those with extremely low incomes.
The common theme here is for the additional subsidy needed to reach
the lowest income households to come from within LIHTC or the
development, and avoiding complicated and cumbersome layering of
multiple funding streams.
An additional means of increasing affordability would be to permit
a portion of the credits, or of any credit expansion, to finance State
(HFA)-issued vouchers. For those markets in which there is an adequate
supply of quality housing across a range of price points, it may be
more cost effective to permit States to utilize tenant-based vouchers.
This would permit States to either reach deeper down the income
distribution or to serve a greater number of households, for any given
amount of resources.
Neighborhood Quality
Studies show that Low-Income Housing Tax Credit (LIHTC) units are
generally located in lower poverty neighborhoods than other forms of
project-based, subsidized rental housing.\28\ That said, LIHTC units
are more likely to located in high poverty tracts than the rental stock
overall, though research on most recently funded units shows some
decline in the share of units in higher poverty tracts.\29\
---------------------------------------------------------------------------
\28\ Ellen, O'Regan, and Voicu. (2009). ``Siting, spillovers, and
segregation: A reexamination of the Low Income Housing Tax Credit
program,'' McClure (2006). ``The low income housing tax credit program
goes mainstream and moves to the suburbs.'' Housing Policy Debate.
\29\ Ellen and Mertens. ``Points for Place: Can State and Local
Governments Steer Private Investments in Subsidized Housing to New
Neighborhoods?'' Working Paper.
There are two proposed LIHTC reforms that would improve locational
outcomes, the first by improving the ability for developments to be
built in higher opportunity neighborhoods, and the second by increasing
the likelihood that neighborhoods around LIHTC properties improve after
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the development is constructed.
Prohibiting local approval and contribution requirements. Some
States require proof of local support or provide other competitive
points for such support. Such local approvals can, in essence, give
jurisdictions the ability to veto developments. Considerable anecdotal
evidence from developers and States suggest such ``veto power'' creates
sizable location barriers in some States, specifically for building in
lower poverty, higher opportunity areas.
Clarification that States have the authority to determine the
definition of community revitalization plan. The Federal requirement
that States prioritize developments in Qualified Census Tracts with
concerted community revitalization plans is meant to foster the
redevelopment of those neighborhoods. Yet, in the absence of any
Federal guidance on what constitutes such a plan, some States have
provided the same prioritization to all developments proposed in QCTs,
regardless of evidence of a plan or whether that development is likely
to contribute to neighborhood improvements.
Finally, there are numerous small ``fixes'' that have been
proposed, that would ease the use of LIHTC with other funding streams,
such as employing a uniform income eligibility for rural projects and a
consistent definition of student status. Simplifying the use of LIHTC
with other funding streams lowers the administrative costs of creating
affordable housing.
Question. Can you discuss the importance of having stable housing,
in addition to affordable housing, and how lack of stable and
affordable housing may affect children and childhood development?
Answer. Housing affordability and stability are obviously quite
linked, with instability being a fourth channel through which the high
cost of housing can negatively affect families and children (see
response above). Lack of affordability can lead to ``reactive'' moves,
as families unable to make the rent need to quickly find alternative
housing.\30\ Such moves put families under great stress, don't allow
for a careful housing search process, and may be poorly timed for the
school year. Even absent actual moves, insecure housing tenure may
cause both parents and children to feel acute levels of stress, making
it more difficult for children to focus on school and parents on their
parenting.
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\30\ Deluca, Rosenblatt, and Wood. ``Why Poor People Move (and
Where They Go): Residential Mobility, Selection, and Stratification.''
Working Paper, http://www.law.nyu.edu/sites/default/files/
ECM_PRO_074751.pdf
Some key findings from the literature on housing stability and
children:\31\
---------------------------------------------------------------------------
\31\ Section largely builds from: Center for Housing Policy, http:/
/docs.wixstatic.com/ugd/19cfbe_c1919d4c2bdf40929852291a57e5246f.pdf.
Changing schools is associated with declines in education
achievement, particularly if mobility is frequent or occurs during key
developmental stages.\32\
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\32\ For example, see Grigg, ``School Enrollment Changes and
Student Achievement Growth: A Case Study in Educational Continuity,''
Sociology of Education, October 2012 (85): 4 388-404. Alexandra Beatty,
Rapporteur; Committee on the Impact of Mobility and Change on the Lives
of Young Children, Schools, and Neighborhoods, National Research
Council and Institute of Medicine; ``Student Mobility: Exploring the
Impact of Frequent Moves on Achievement: Summary of a Workshop''
(Washington, DC: The National Academies Press, 2012).
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Frequent residential mobility, regardless of whether changing
schools, also are associated with negative effects for students.\33\
For example, poor children who move three or more times before turning
six years old are more likely to demonstrate behavior and attention
problems.\34\
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\33\ Cohen and Wardrip, Should I Stay or Should I Go? Exploring the
Effects of Housing Instability and Mobility on Children (Washington,
DC: Center for Housing Policy, 2011); Scanlon and Devine, ``Residential
Mobility and Youth Well-Being: Research, Policy, and Practice Issues,''
Journal of Sociology and Social Welfare 28(1) (2001): 119-138;
Vandivere, Hair, Theokas, Cleveland, McNamara, and Atienza, How Housing
Affects Child Well-Being (Coral Gables, FL: Funders' Network for Smart
Growth and Livable Communities, 2006).
\34\ Ziol-Guest and McKenna, ``Early Childhood Housing Instability
and School Readiness,'' Child Development 85(1) (2014): 103-113.
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Residential instability among children and adolescents may
negatively affect behavior and mental well-being, particularly for
families with limited social connections or other key supports.\35\
---------------------------------------------------------------------------
\35\ Leventhal and Newman. 2010. ``Housing and Child Development.''
Children and Youth Service Review 32(9): 1165-1174.
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Families forced to move through formal or informal evictions
report worsened health for the mothers and children.\36\
---------------------------------------------------------------------------
\36\ Desmond and Kimbro. 2015. ``Eviction's Fallout: Housing,
Hardship, and Health'' Social Forces, Volume 94, Issue 1, September 1,
2015, pages 295-324, https://doi.org/10.1093/sf/sov044.
At the extreme, housing instability can result in homelessness. In
this country, a person is most likely to spend a night in a homeless
shelter, when they are an infant, in their first year of life.\37\ A
recently completed randomized trial, assessing the efficacy of three
common homelessness interventions, provides perhaps some of the most
rigorous and compelling evidence to date on how children are affected
by housing instability that leads to homelessness.
---------------------------------------------------------------------------
\37\ https://pdfs.semanticscholar.org/7764/
698bc0817371fd7ae26c6a05d144654f86e2.pdf.
HUD's Family Options Study followed more than 2,000 homeless
families in 12 communities, for 3 years.\38\ The top-line finding is
that providing homeless families with access to long term housing
subsidies significantly reduced all forms of housing instability, with
greatly reduced emergency shelter stays, doubling up, and housing
mobility. Stable, affordable housing outperformed all other
interventions.
---------------------------------------------------------------------------
\38\ https://www.huduser.gov/portal/sites/default/files/pdf/
FamilyOptionsStudySummary
Report.pdf.
---------------------------------------------------------------------------
Perhaps as important, were the effects on non-housing outcomes:
The offer of stable affordable housing--usually through a
voucher, resulted in reductions in adult psychological distress,
intimate partner violence, economic stress, school mobility, and food
insecurity.
There were also positive impacts in the child well-being
domain, including reductions in behavior and sleep problems, and an
increase is pro-social behavior.
Within 20 months of random assignment, families assigned to
receive the subsidy, experienced significant reductions in three of the
seven categories of Adverse Childhood Experiences (ACES). These adverse
experiences have been linked to negative health and mental health
outcomes as adults.\39\
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\39\ Centers for Disease Control, Adverse Childhood Experiences
Study, https://www.cdc.gov/violenceprevention/acestudy.
It is increasingly my view that as a country, we cannot make
headway on breaking the intergenerational transmission of poverty
without addressing the housing needs of families with young children.
Housing is the foundation for healthy child development, through all
four dimensions mentioned here. Without affordable, stable, quality
housing in neighborhoods that support child development and upward
mobility, children born into low-income families will continue to face
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a steep uphill climb to escape poverty as adults.
Question. In your testimony, you mentioned that studies have shown
children have better outcomes, higher earnings, and receive higher
education when they live in low poverty neighborhoods. Can you
elaborate on this research and how it may be used to inform Federal
policymaking?
Answer. The recent work by Raj Chetty and his co-authors provides
the best evidence to date on the role of a child's neighborhood in
their adult outcomes.\40\ The work builds from HUD's Moving to
Opportunity Demonstration (MTO), in which families living in public
housing were offered different forms of vouchers, one form that could
only be used in low poverty neighborhoods. A key strength of this study
is that it was a randomized trial; whether a family was offered a
voucher that would more likely lead them to a low poverty neighborhood
was random and not determined by the participants.
---------------------------------------------------------------------------
\40\ Chetty, Hendren, and Katz. 2016. ``The Effects of Exposure to
Better Neighborhoods on Children: New Evidence From the Moving to
Opportunity Project.'' American Economic Review 106(4).
By linking data from the original study to IRS data, Chetty
extended this work to look at the adult outcomes of the low-income
children in the demonstration. The main finding is that young children
in families offered vouchers more likely to get families to low
poverty, safer neighborhoods did much better as adults than otherwise
similar children. Specifically, they were more likely to go to college,
to go to a higher quality college, and to earn more as adults. It is
important to note that these positive effects were found for children
who were 12 years old or younger at the time of the demonstration.
There were no effects, or even negative effects, for children who were
older at the time the voucher was offered. This may shed some light on
the potentially negative effect of residential moves; older children
may mainly experience the ``down side'' of a disruptive move, while
having less time living in the low poverty neighborhoods, so less of
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the ``up side.''
This work highlights that Federal policy needs a heightened
emphasis on the neighborhood context of families, particularly those
with young children. Federal policy also needs to be cognizant of the
disruptive effect of moves. Federal efforts need to focus on improving
choices, including the choice to remain in one's community, among
existing support networks.
Let me highlight two policy approaches where this evidence is
particularly useful: improving neighborhood options for families with
vouchers, and improving the neighborhoods where so many low income
families lives.
improving neighborhood options in hud's housing choice voucher program
More than 2 million children live in families receiving HUD rental
assistance through tenant-based vouchers.\41\ Those vouchers should
provide households with relief on housing affordability, and the
ability to choose across better neighborhoods. Many believe the voucher
program has been less successful on this second goal. For example, less
than 13 percent of voucher households with children live in
neighborhoods of low poverty (less than 10 percent of the population
being poor).\42\ In some jurisdictions, the share is much lower than
this.
---------------------------------------------------------------------------
\41\ https://www.cbpp.org/housing-choice-voucher-fact-sheets.
\42\ https://www.cbpp.org/research/housing/realizing-the-housing-
voucher-programs-potential-to-enable-families-to-move-to.
While many factors affect where families receiving a voucher
ultimately live, one factor may be how HUD determines Fair Market Rents
(FMRs), which bound allowable rental payments to landlords. HUD's
Metropolitan-wide FMRs (set at the 40th percentile of rents in the
metropolitan area) may not be sufficient in some markets to help
voucher holders access high opportunity/high rent areas--and thus
voucher holders end up highly concentrated in a few high poverty areas.
Given the importance of neighborhood quality for a child's life
outcomes, HUD determined it needed to consider alternatives to
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metropolitan-wide FMRs.
HUD initiated a Small Area Fair Market Rent (SAFMR) demonstration
to test the effects of setting FMRs at the ZIP code level within a
metropolitan area, rather than metropolitan-wide (in 2010 via court
settlement in Dallas and in 5 PHAs in 2012).\43\ This permits FMRs/
payment standards to be higher in high rent/low poverty areas, and
lower in low rent/high poverty areas. Early evidence from Dallas was
quite promising--suggesting SAFMRs led to de-concentration to lower
poverty, lower crime neighborhoods at essentially the same cost per
voucher as using the 40th percentile metropolitan FMR.\44\
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\43\ Cook County, IL; Mamaroneck, NY; Chattanooga, TN; Long Beach,
CA; Laredo, TX.
\44\ Collinson and Ganong, September 2014, ``The Incidence of
Housing Voucher Generosity,'' NBER.
Based on that evidence, and two rounds of public comments, HUD
issued a final SAFMR rule in November of 2016, mandating the use of
SAFMRs in a limited number of metropolitan areas in which voucher
households are disproportionately concentrated in high poverty census
tracts.\45\ Implemented in January of 2017, the rule would first affect
FMRs announced in the fall of 2017.
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\45\ https://portal.hud.gov/hudportal/HUD?src=/press/
press_releases_media_advisories/2016/HUDNo_16-173.
Yet on August 15, 2017, HUD announced that it was suspending the
mandatory SAFMR for at least 2 years.\46\ HUD's letter to affected
Public Housing Agencies noted several reasons for the delay, including
an interim report on the demonstration.\47\ The letter noted particular
concern over potential increases in rent burdens and stated further
analysis was warranted. However, concern over possible effects on
household rent burdens were raised during the public comment period,
and led HUD to include multiple tenant protections in the final SAFMR
rule. Meaning, the final rule differs substantially from how SAFMRs
were implemented in the demonstration sites, specifically in terms of
protecting tenants from large increases in rent burden.
---------------------------------------------------------------------------
\46\ https://www.housingonline.com/2017/08/23/hud-suspends-
mandatory-implementation-small-area-fair-market-rents/.
\47\ https://www.huduser.gov/portal/sites/default/files/pdf/SAFMR-
Interim-Report.pdf.
Interestingly, the interim report confirms key findings from the
earlier research: using SAFMRs, voucher households were more likely to
move to lower poverty, higher opportunity neighborhoods, at somewhat
lower average voucher costs. The outcomes documented in the report are,
of course complicated and quite varied. They do not, however, appear to
contradict the key expectations HUD had when it finalized the SAFMR
rule. It is unclear why HUD would provide a blanket 2-year delay for
all newly-designated SAFMR areas, for one of the few policies proven to
help voucher households reach better neighborhoods.
improving where families already live and lihtc
Most low-income families do not have vouchers, and many families do
not want to move from their communities in order to access decent
schools and be safe at home. Reinvesting in the neighborhoods where
families already live also needs to be part of the Federal approach.
There are a variety of Federal programs meant to spur community
redevelopment. Programs aimed at comprehensive community development,
however, can be difficult to evaluate, due to numerous data and
methodological challenges.
Recent research by Stanford economists has filled one important
knowledge gap, specifically whether developing LIHTC in a neighborhood
fosters--or hinders--neighborhood improvements.\48\ Using extensive
data on the property values of nearby homes before and after LIHTC
housing is created, the authors provide compelling evidence that LIHTC
developments in low-income neighborhoods do help revitalize those
neighborhoods. Creating LIHTC developments in low-income neighborhoods
increases property values by over 6%, lowers crime, and attracts a more
racially and economically diverse population. The authors estimate that
a LIHTC development in a low-income area ``improves welfare by $23,000
per local homeowner and $6,500 per local renter, with aggregate welfare
benefits to society of $115 million.''
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\48\ https://web.stanford.edu/diamondr/LIHTC_spillovers.pdf.
States and localities need the continued flexibility to use LIHTC
as part of redevelopment strategies. Along with such flexibility should
come more clarity in what constitutes a concerted community
revitalization plan in order for a LIHTC application in a qualified
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census tract to qualify for additional basis boost.
______
Question Submitted by Hon. Michael F. Bennet
Question. Reporters in places like Milwaukee have highlighted a
troubling trend: some landlords set up Limited Liability Company--or
LLC--structures to avoid paying property taxes and fines, allowing them
to abandon properties more easily. LLCs obscure landlords' personal
information and assets, making it difficult to hold them accountable.
Are you aware of this practice? How widespread do you believe this
LLC problem to be? What changes to the tax code or other policies might
address this issue?
Relatedly, some landlords buy up cheap properties, ``milk'' them by
charging rents until they deteriorate, and then abandon them. What can
we do to deter this activity and instead incentivize long-term landlord
investment in communities?
Answer. The ability of investors to hide their identity or assets
behind Liability Corporations--or LLCs-- makes it very difficult for
local governments and community groups to track who is acquiring
property. This limits the ability to detect trends that might warrant
attention, or to deter inappropriate behavior by landlords. The extent
of the problem likely varies by context and the LLC registration
requirements of the State.
In New York City, for example, LLCs have been implicated by
affordable housing advocates and the media in the ``flipping'' of rent-
stabilized apartments to luxury apartments.\49\ The inability to easily
identify landlords accused of harassment tactics impedes policy efforts
to support housing market functions. This includes identifying
landlords who may be misusing the eviction process as part of
harassment.
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\49\ https://patch.com/new-york/prospectheights/flippers-playbook-
how-nyc-slumlords-terrorize-tenants-get-away-it.
A starting point for deterring counter-productive behavior by
landlords is more transparency in the corporate structure. According to
a cross-country comparison of corporate transparency, the U.S. ranked
below at least 28 other countries, with a score of 31 out of 100.\50\
Some States within the U.S., however, scored much more highly.
Washington State, for example, has adopted their own LLC registration
requirements that greatly increase LLC transparency, and could provide
a model for a Federal requirement.\51\
---------------------------------------------------------------------------
\50\ http://registries.opencorporates.com/.
\51\ https://sunlightfoundation.com/2014/08/14/washington-a-better-
practices-state-for-llc-transparency.
The Federal tax code could require that all LLCs provide and keep
current the name and address of the founders, members, and managers of
any LLC to the local government in any municipality in which they hold
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real property.
______
Prepared Statement of Grant Whitaker, President,
National Council of State Housing Agencies
Mr. Chairman, Ranking Member Wyden, and members of the committee,
thank you for this opportunity to testify on behalf of the National
Council of State Housing Agencies (NCSHA) on our Nation's critical need
for affordable housing, the roles the Low-Income Housing Tax Credit
(Housing Credit) and tax-exempt private activity Housing Bonds (Housing
Bonds) play in responding to that need, and how Congress can seize the
opportunity of tax reform to further strengthen these programs.
I am Grant Whitaker, president and chief executive officer of the
Utah Housing Corporation. I also have the privilege to serve as
president of NCSHA, which is a nonprofit, nonpartisan, national
organization created by the Nation's State Housing Finance Agencies
(HFA) more than 40 years ago to coordinate and leverage their Federal
advocacy efforts for affordable housing. In addition to NCSHA's
advocacy work, the organization provides HFAs with education and
training on the Housing Credit, Housing Bonds, and other Federal
housing programs.
HFAs are governmental and quasi-governmental, nonprofit agencies
that address the full spectrum of affordable housing need, from
homelessness to homeownership. HFAs effectively employ the Housing
Credit and Housing Bonds, entrusted by Congress to State
administration, to advance their common public-purpose mission of
providing affordable housing to the people of their jurisdictions who
need it.
Thank you, Mr. Chairman, for your steadfast leadership in support
of the Housing Credit and Housing Bonds over many years. I also want to
thank Senator Maria Cantwell (D-WA), who too has been a true champion
of these crucial housing programs and a tireless advocate for low-
income households who need housing help. Together, you have introduced
the most important housing legislation Congress has considered in many
years, S. 548, the Affordable Housing Credit Improvement Act. NCSHA
strongly supports your bill, which would increase Housing Credit
authority, facilitate Housing Credit development in challenging markets
and for hard-to-reach populations, support the preservation of existing
affordable housing, and simplify program requirements.
NCSHA also thanks committee Ranking Member Ron Wyden (D-OR) and
committee members Dean Heller (R-NV), Michael Bennet (D-CO), Rob
Portman (R-OH), and Johnny Isakson (R-GA) for their cosponsorship of
this legislation. We urge all Senators to become cosponsors.
The Housing Credit has long enjoyed strong bipartisan, bicameral
support, and this bill is no exception. Already, approximately one-
third of the Senate has either cosponsored the Affordable Housing
Credit Improvement Act or declared their intention to do so. Its House
companion legislation, H.R. 1661, also enjoys significant bipartisan
backing in that chamber, including cosponsorship by over half of the
Ways and Means Committee, with near equal numbers of Republicans and
Democrats.
In addition to strong support in Congress, more than 2,000 local,
State, and regional organizations and businesses nationwide support
this legislation as members of the A Call To Invest In Our
Neighborhoods (ACTION) Campaign. NCSHA is proud to co-chair this
important grassroots coalition, which advocates in support of
protecting, expanding, and strengthening the Housing Credit.
Given this broad support, we urge the committee to include this
important bill in any tax legislation it considers.
the need for affordable housing is great and growing
The need for affordable housing across the country has reached
crisis proportions, and is growing substantially. Nearly half (48
percent) of renters in the United States pay an excessive share of
their income for housing. The crisis is most acute for those earning
the least. Of those renter households with annual incomes of $15,000 or
less--approximately equivalent to working full-time at the minimum
wage--83 percent pay more than 30 percent of their income for housing,
and 70 percent devote more than half of their income to housing. This
leaves little money left over for other critical necessities like food,
transportation, childcare, health care, and utilities.
The housing crisis affects both homeowners and renters. For many
low- and
moderate-income borrowers, purchasing a home is by far their best
opportunity to build wealth, yet these families face significant
challenges as they seek to achieve homeownership. Even as the housing
market strengthens, many creditworthy home buyers, especially first-
time buyers, struggle to obtain mortgages they can afford. According to
the most recent data from the National Association of REALTORS, first-
time home buyers accounted for only 33 percent of home purchases in May
and 32 percent of home purchases in June, compared to the 40 percent
historical average.
As more and more people turn to the rental market, they find a
severe shortage of affordable homes. Those available to extremely low-
income (ELI) households, those earning 30 percent or less of Area
Median Income (AMI), are especially scarce. Nationwide, there are 11.4
million ELI renter households, but only 4 million rental homes
affordable and available to them, leaving a gap of 7.4 million needed
homes. The rental shortage is exacerbated as hundreds of thousands of
new renter households enter the market each year, while the Nation
loses countless affordable units from the housing stock due to
conversion to market rate rentals or condominiums, demolition, or
obsolescence.
The housing crisis impacts working families, seniors, people with
disabilities, and so many more across the country--those living in
high-cost cities, in suburban neighborhoods, and in rural communities.
Coastal cities like New York, San Francisco, and Seattle are well known
for their extreme housing costs.
But, I speak from experience when I say that low-income households
in Utah face immense struggles to find affordable housing, too. Over
58,000 renter households living in Utah pay more than half of their
income for housing. Those most in need are extremely low-income
renters, for whom there is an estimated affordable rental housing
shortage of over 38,000 units.
I know from my conversations with my colleagues at HFAs across the
country that what we face in Utah is not unique. Every State confronts
this challenge.
This crisis will only get worse unless we act. According to
research by Harvard University's Joint Center for Housing Studies and
Enterprise Community Partners, if current rent and income trends
continue, the number of severely cost-burdened renters--those paying 50
percent or more of their income for rent--will reach 14.8 million
nationwide by 2025. That is 25 percent more severely cost-burdened
households than we have today.
While the Housing Credit and Housing Bond programs are
extraordinarily successful, the resources devoted to them are woefully
insufficient to meet the Nation's affordable housing needs of today,
let alone those of tomorrow.
the housing credit and housing bonds: our nation's most effective
response to the affordable rental housing crisis
The Housing Credit and Housing Bonds are the most important tools
we have to address the affordable housing shortage. These programs are
highly successful
public-private partnerships that draw on State HFAs' sophisticated
underwriting, asset management, and oversight capacity as well as
private sector expertise and investment. Without question, the Housing
Credit and Housing Bonds are the most effective means of targeting
limited affordable housing resources to the people and places that need
them, while transferring risk to private sector investors.
Since the Housing Credit's establishment in the Tax Reform Act of
1986, it has financed roughly 3 million affordable rental homes for
low-income families, seniors, veterans, and those with special needs.
Approximately 40 percent of these rental homes are financed with 4
percent Housing Credit authority, which is triggered by the use of
multifamily Housing Bonds and therefore is not subject to the Housing
Credit volume cap. These homes would not exist were it not for those
bonds. In addition to the rental homes financed with both the 4 percent
Credit and Housing Bonds, HFAs also finance affordable rental housing
properties with multifamily Housing Bonds alone.
These programs transform lives by creating quality, affordable
living environments that lift up families; help children thrive;
support seniors, people with special needs, and veterans; and
permanently house persons at risk of or experiencing homelessness. They
contribute to community revitalization by inspiring business growth,
infrastructure advances, transportation solutions, and much more.
State HFAs are proud, not only of the high quality, sustainable
housing we help produce with the Housing Credit and Housing Bonds, but
also of our strong program administration. We take very seriously our
responsibility for program operation and oversight, as entrusted to
States by Congress. We steadfastly enforce Federal program rules,
developing statewide allocation plans with extensive public input;
allocating to developments only the amount of Credit necessary to
ensure their feasibility and long-term viability; serving only income-
qualified households and the lowest income people we can possibly
reach; ensuring the financial and physical health of the properties for
the duration of their affordability periods through regular and
thorough inspections; and reporting noncompliance to the IRS.
States often exceed Federal requirements, collaborating on the
development through NCSHA of national recommended practices in Housing
Credit administration that set very high standards, while preserving
the genius of the program's devolved design that allows States to
determine their highest and best use of Credit authority within broad
and appropriate Federal mandates. Strong State administration has been
cited by the U.S. Government Accountability Office in the past and in
its most recent Housing Credit study on State administration released
in 2016.
affordable housing successes and challenges in utah
We have had significant success in Utah using the Housing Credit
and Housing Bonds. I am pleased to say that, with these programs, we
have made considerable progress in reducing our chronically homeless
population. Just last week, my board voted to devote 30 percent of our
2018 Housing Credit authority to supportive housing projects that will
move us closer to the goal of ending chronic homelessness in Utah.
We are particularly proud of projects such as the Kelly Benson
Apartments, a supportive housing development for seniors in Salt Lake
County. Many of its residents are formerly homeless veterans who have
struggled with physical and mental health challenges and drug and
alcohol addictions. This property serves seniors earning 35 percent of
the AMI or less and offers supportive services to those who need extra
help getting through the day or night. Resisted by the community at
first, the project is now considered a neighborhood jewel.
But, we still have significant work ahead as we seek to tackle
family homelessness and help the many other low-income households in
our State who are housed, but pay more than they can afford for rent.
The fact is we simply do not have enough resources to meet our
affordable housing needs. In 2017, Utah Housing Corporation received 22
proposals for Housing Credit developments in our competitive 9 percent
Housing Credit round, requesting a total of $14,631,181. But, with our
limited Housing Credit authority, we were able to fund just 12 of them.
affordable housing is a vital part of a pro-growth tax code
Congress is embarking upon one of the most significant and
challenging endeavors of recent decades--reform of the Federal tax code
to create a tax system that better promotes economic growth. As it
pursues this goal, we urge Congress to consider how it can strengthen
our Nation's housing infrastructure, as housing is the foundation for
an economically vibrant country.
The use of the tax code to provide affordable housing--both through
the production and preservation of affordable rental properties with
the Housing Credit and multifamily Housing Bonds and through the
provision of lower cost mortgages for working families with single-
family Housing Bonds (under the Mortgage Revenue Bond (MRB) and
Mortgage Credit Certificate (MCC) programs)--has been one of the
singular successes of the current system.
The housing stability that can be achieved through the Housing
Credit and Housing Bonds creates better health outcomes, improves
children's school performance, and can help low-income individuals gain
employment and keep their jobs. And, the production and preservation of
affordable housing helps drive economic growth, through job creation
and the generation of tax revenues at all levels of government.
Sadly, the affordable housing crisis we face now is exacting an
economic toll on our Nation. Homelessness and hypermobility suffered by
unassisted low-income families have dire consequences for children's
educational attainment. Numerous studies show that children who move
frequently--as they often must without stable housing--are more likely
to drop out of school, repeat grades, perform poorly, or have numerous
school absences compared to those with stable housing. The social and
economic cost of this effect on children's lives is immeasurable.
Sadly, there were nearly 25 million children living in households with
cost burdens as of 2015.
Affordable housing also can promote economic mobility. A recent
Harvard University study, The Equality of Opportunity Project, found
that moving younger children from a high-poverty neighborhood to a more
integrated, lower poverty neighborhood improves their chances of going
to college, lowers their risk of becoming a single parent, and
increases their expected income as an adult by as much as 30 percent.
Housing production programs, such as the Credit and Bonds, which build
and preserve affordable housing in lower poverty neighborhoods, are
critical to achieving these results.
Affordable housing sited near transportation and areas with
employment opportunities as part of larger redevelopment plans provides
low-income households with better access to work, which increases their
financial stability and may help them eventually achieve independence
from government assistance. It also provides employers in those areas
with needed labor.
Not only do affordable housing programs deliver immeasurable
benefits to the low-income households for whom they provide homes, they
also have an enormous immediate impact on the economy through the
creation of jobs and generation of tax revenue. The Housing Credit
supports approximately $3.5 billion in Federal, State, and local taxes;
$9.1 billion in wages and business income; and 95,700 jobs across
various U.S. industries every year. The National Association of Home
Builders estimates that in its first year, a typical 100-unit Housing
Credit property on average provides $8.7 million in additional wages
for local workers and business profits; creates $3.3 million in
additional Federal, State, and local tax revenue; and supports 116
jobs.
Housing Bonds also have a profound economic impact. According to
models formulated by the National Association of Home Builders and the
National Association of REALTORS, in the 10-year period from 2006 to
2015, State HFA MRB homeownership programs generated almost 50,000 jobs
annually. Multifamily Housing Bonds also spur important economic
growth. Over the same period of time, State construction and
rehabilitation of apartments financed with HFA multifamily Housing
Bonds generated approximately 27,000 jobs and added over $2 billion to
GDP annually on average.
preserve, expand, and strengthen the housing credit
Since the Housing Credit's creation over 30 years ago, Congress has
acted several times to strengthen and refine it so that the program is
equipped to meet new and changing housing challenges. As you now
consider changes to the current tax structure, NCSHA urges you to use
this opportunity to build on what works, not only by preserving the
Housing Credit program, but also by expanding Credit resources so that
we can better address the Nation's severe affordable rental housing
shortage, and by enacting policy modifications to strengthen this
already highly successful program.
Passing Senator Cantwell and Chairman Hatch's Affordable Housing
Credit Improvement Act, S. 548, is essential to addressing the
affordable housing crisis. The lynchpin provision of this legislation
would expand the Housing Credit authority each State receives by 50
percent over 5 years. This cap increase would allow States to make
meaningful progress towards meeting the housing needs of their low-
income residents. We know that Congress faces extraordinary pressure as
it directs limited Federal resources to so many priorities. However, we
strongly believe that investing new resources in the Housing Credit
makes sense, even in this time of budget austerity.
Each year, State Housing Credit allocating agencies receive
applications requesting nearly three times more Housing Credit
resources than agencies have to allocate. Yet even this does not
quantify the extent to which demand for affordable rental housing
outstrips the supply of Credits, as many developers with worthwhile
projects do not even bother applying because the competition for Credit
is so fierce.
State Housing Credit allocating agencies face difficult choices--
not just whether to direct their limited Credit resources to
preservation as opposed to new construction, but also whether to commit
them to rural rather than urban areas or to neighborhood revitalization
rather than to projects in high-opportunity areas. Agencies must
balance whether to finance supportive housing for persons experiencing
homelessness against assisted living for the elderly, housing for needy
families, and projects for veterans--all of which serve populations
with extraordinary housing and service needs.
Reliance on the Housing Credit to meet the needs of so many
populations has only grown as Federal resources for housing programs
funded through the appropriations process have shrunk. Funding for the
HOME Investment Partnerships (HOME) program has been cut by nearly half
since 2010. HOME has long been a critical source of gap financing in
Housing Credit developments, and without adequate funding for it we
must rely even more on Housing Credit equity to build those properties.
Moreover, the Federal Government in recent years has turned to the
Housing Credit time and again to achieve other Federal priorities such
as transforming the Nation's public housing through the Rental
Assistance Demonstration (RAD) program and producing housing for
persons with disabilities in conjunction with the section 811 Project
Rental Assistance program. Congress has already raised the cap on
public housing units eligible for RAD multiple times, and the
administration this year proposed to eliminate that cap entirely.
Moreover, Congress is now considering allowing section 202 elderly
housing properties with Project Rental Assistance Contracts also to
become eligible for RAD. Those public housing and section 202
properties will likely need to rely on the Housing Credit for the
equity necessary to undertake the RAD transition. There simply are not
enough Housing Credit resources to meet all these demands.
In addition to the increase in authority, NCSHA strongly supports
other provisions of the Affordable Housing Credit Improvement Act that
would strengthen the bond-financed portion of the Housing Credit
program; amend the Housing Credit income limits to allow for income
averaging, thus allowing low-income families earning up to 80 percent
of AMI access to Credit properties, while improving affordability for
ELI households; provide parity in Housing Credit income rules for rural
properties; simplify complex program rules, such as the Housing Credit
student rule; and establish a State-determined basis boost of up to 50
percent for units in Housing Credit properties reserved for ELI
households. These, and all of the bill's other provisions, would make
an already successful program even more so.
Lastly, we also ask that you be mindful of the impact other changes
you may make to the tax code could have on the Housing Credit and
Housing Bonds, and seek to prevent any unintentional negative effects
those tax changes could have on these programs.
preserve the tax-exempt private activity housing bond program
For decades, the Housing Bond program--multifamily bonds for
financing affordable rental housing and the MRB and MCC programs for
financing affordable first-time, modest home purchases--has been an
essential and successful tool in our affordable housing efforts. While
these bonds are private activity bonds (PAB), Congress deemed that the
affordable housing they make possible is worthy of a tax exemption, not
just because of the direct housing benefits these bonds provide but
also because of the positive effects the housing opportunities they
create have more broadly on families, communities, and the economy.
In recent years, a few tax reform proposals have been advanced,
both in Congress and from outside experts, which would eliminate the
tax deduction for interest on PABs while maintaining the exemption for
other municipal bonds. This would be a mistake, and would drastically
set back our efforts to provide affordable housing to those in need.
While it is true PABs provide direct financing to private entities,
the bonds fulfill a very important public purpose that the market is
often unable to meet. This is certainly the case with Housing Bonds. In
addition to affordable housing, PABs support many other critical public
priorities, such as financing for airport renovations, sewage
facilities, public power, and affordable student loans. Simply put,
repealing or limiting the tax exemption for PABs would severely hamper
State and local governments' efforts to support affordable housing and
other locally determined priorities.
The Housing Bond market, like many financial markets, has not fully
recovered from the financial, housing, and broader economic crises of
recent years. The historically low interest rates we have experienced
during the recovery have hampered further the Housing Bond market by
greatly reducing the Housing Bond tax-exempt interest rate advantage.
However, interest rates now are beginning to rise and are likely to
continue to climb.
As we enter a more typical interest rate environment, the tax
exemption afforded to Housing Bonds will be even more critical to
helping lower income home buyers purchase their first homes. Already,
the market for Housing Bonds has strengthened. The most recent
available data shows that in just 1 year--from 2013 to 2014--State HFA
bond issuance jumped by 39 percent, as demand for tax-exempt bond-
financed housing grew. At this pace, we fully expect the PAB cap soon
will be fully subscribed in most States--and oversubscribed in some--
just as it has been historically.
Given the considerable need for more bond authority in many States,
we hope to explore with the committee a mechanism--not unlike that
which already exists for the Housing Credit--for the redistribution of
expiring bond authority to those States that are using all of their
authority.
In Utah, our Housing Bond programs are well oversubscribed. We
could easily use 3 times our allotment for MRBs, and demand for
multifamily Housing Bonds has been staggering as well.
streamline and simplify the housing bond program
NCSHA recommends Congress take a few modest steps to make the
highly successful Housing Bond program even more effective. With tax
reform, Congress has the opportunity to further strengthen Housing
Bonds by making low or no cost changes to eliminate outdated rules and
to give States more flexibility to respond to their unique needs and
circumstances. For example, within the MRB program, the purchase price
limit is no longer needed, as the income limits Congress later imposed
much more effectively control the price of homes MRB borrowers can
purchase. The considerable resources HUD and Treasury expend coming up
with the purchase price limits annually could be deployed elsewhere.
In addition, the MRB home improvement loan program, especially
important now given the repair needs of foreclosed properties and the
home maintenance families were forced to defer during the recession,
would be much more useful if Congress increases its loan limit of
$15,000 by an amount at least adequate to reflect the rise in
construction costs since it was first established in 1980 and indexes
that limit to keep up with construction cost inflation annually. We
also encourage Congress, as it did on a temporary basis from 2008
through 2010, to allow State HFAs to use MRBs for refinancing, so State
HFAs can help otherwise qualified borrowers.
In addition, we urge you to adopt proposals that would improve
investor interest in the Housing Bond program. For example, NCSHA
supports exempting interest earned on refunding Housing Bonds from the
Alternative Minimum Tax. Conversely, we urge you to resist proposals
that would undermine investor interest in Housing Bonds, such as
limiting the value of the municipal bond interest deduction to a lower
tax rate, as this would greatly diminish the value of Housing Bond
investments and, consequently, investor interest in them.
We also have several suggestions for simplifying the MCC program,
which the tax code provides as an alternative to MRBs and which states
utilize more when the Housing Bond rate advantage is limited, as it has
been in recent years. MCCs help lower income families afford
homeownership by allowing first-time home buyers who meet the MRB
program's income requirements to claim a dollar-for-dollar tax credit
for a portion of the mortgage interest they pay each year, up to
$2,000. Specifically, we urge you to simplify the MCC calculation;
permit HFAs to recycle MCCs, as you allow them to recycle Housing
Bonds; provide HFAs the flexibility to shorten the MCC term and/or
``front load'' its benefits; eliminate the $2,000 annual credit cap on
MCC benefits; and provide HFAs the flexibility to structure the MCC
assistance to respond to diverse home buyer needs. We would be happy to
provide further detail on any of these proposals.
Thank you for your commendable efforts to support affordable
housing. I am honored to have had this opportunity to testify before
the committee to provide NCSHA's and my own State's perspective on the
effectiveness of the Housing Credit and Housing Bond programs, and on
how the committee can strengthen these programs. NCSHA and its member
HFAs stand ready to assist you in any way we can.
______
Questions Submitted for the Record to Grant Whitaker
Question Submitted by Hon. Orrin G. Hatch
Question. Are there any best practices or other recommendations you
have for requirements based on oversight done at the State housing
agency level we could put in legislation for State housing agencies to
follow? Would you recommend any requirements be put in legislation or
are there other ways to address the oversight question?
Answer. State Housing Finance Agencies (HFA) take their Low Income
Housing Tax Credit (Housing Credit) oversight responsibilities very
seriously. In fact, in many areas, HFAs exceed the requirements of
Federal law and regulation, such as by requiring deeper income
targeting, longer property affordability terms, and more stringent
market study requirements.
HFAs collectively through our national organization, the National
Council of State Housing Agencies (NCSHA), have developed recommended
practices in Housing Credit administration that support HFAs in their
pursuit of the highest standards of administration while preserving
their need to respond most effectively to their own housing needs and
priorities. The U.S. Government Accountability Office (GAO) has
recognized the value of NCSHA's recommended practices in several of its
reports on the Housing Credit.
HFAs have revised and updated these recommended practices multiple
times over the last three decades, and are currently engaged in an
effort to further strengthen and expand them. This effort has been
underway for the last year, and we expect the NCSHA board of directors
to adopt the updated practices later this year. These recommended
practices cover all areas of program oversight, including cost
certification, cost containment, developer fee limits, and compliance
during the extended use period.
There are, however, steps we suggest Congress consider taking to
further strengthen State oversight of the Housing Credit program
through legislative changes. Our recommendations are as follows:
Foreclosure prevention: Congress should pass the Affordable
Housing Credit Improvement Act, S. 548, sponsored by Senator Maria
Cantwell (D-WA) and Senate Finance Committee Chairman Orrin Hatch (R-
UT), which already has strong bipartisan support. Among the bill's many
provisions that would give States stronger administrative authority and
flexibility is the provision ensuring that affordability restrictions
endure in the case of illegitimate foreclosures. Under current law, if
a property is acquired by foreclosure (or instrument in lieu of
foreclosure) during the extended use period, the affordability
restrictions terminate unless the Secretary of the Treasury determines
that the acquisition was part of an arrangement to terminate the
affordability restrictions and not a legitimate foreclosure. In
practice, it is difficult--if not impossible--for the Treasury
Secretary to make such determinations about individual properties. S.
548 would transfer that responsibility from Treasury to the States,
which already are tasked with ongoing compliance monitoring of Housing
Credit properties. The legislation would further require the owner or
successor acquiring the property to provide the State with 60 days
written notice of its intent to terminate the affordability period so
that States have time to assess the legitimacy of the foreclosure.
Underwriting of Housing Bond-financed Housing Credit
properties: Congress should consider amending Internal Revenue Code
section 42(m)(2)(D), which provides that the governmental unit that
issues the Housing Bonds used to finance a 4 percent Housing Credit
property must ensure that the Housing Credit amount provided to the
property does not exceed that which is necessary for the property's
financial feasibility. Unfortunately, some local government entities
that issue Housing Bonds do not have the capacity to underwrite
properties and properly ensure that sufficient Credit authority is
provided, while not over-subsidizing the property. Instead, we believe
that underwriting bond-financed properties should be the responsibility
of the State Housing Credit allocating agency, not only for the 9
percent Housing Credit, but also for bond-financed 4 percent Credit
properties. State allocating agencies have the capacity and expertise
to underwrite these deals, and in practice, they typically undertake
this responsibility for bond-financed properties, even though the law
does not require it of them, because of their interest in ensuring
proper underwriting. However, it would be prudent for Congress to
clarify in statute that this responsibility lies with the State
allocating agency and not the local bond issuer.
Resources for IRS oversight: GAO's reports on the Housing
Credit have pointed to several areas where it believes increased
federal oversight of the Housing Credit would be beneficial. NCSHA
would support increasing the resources provided to the Internal Revenue
Service (IRS) so that it is better able to achieve these goals, which
would further support state oversight capacity. Specifically, we
encourage Congress to increase resources for IRS so that it may improve
internal protocols related to the Housing Credit and allow it to
undertake community outreach to industry groups and taxpayers. More
resources would also better equip IRS to determine if tax returns may
warrant an audit and conduct those audits if necessary, assist it in
reconciling Housing Credit forms from allocating agencies and taxpayers
to identify potential inconsistencies, and populate and make necessary
technical updates to IRS's Low-Income Housing Credit database.
Increased resources would also help the IRS Office of Chief Counsel in
its provision of timely Housing Credit guidance. Lastly, IRS could use
additional resources to develop and fund a whistleblower hotline at the
IRS so that individuals who are aware of potential fraudulent
activities can make reports to IRS.
______
Questions Submitted by Hon. Robert P. Casey, Jr.
Question. This is a little out of scope, as it pertains to HUD's
section 202 Supportive Housing for the Elderly program, but I would
welcome your thoughts. We all know the population of our country is
growing rapidly, and there is an acute shortage of affordable senior
housing. Thirty-eight percent of section 202 tenants are frail or near-
frail, requiring assistance with basic activities of daily living.
Without access to supportive housing, these individuals would be at
high risk of institutionalization. Do you think funding section 202 as
a means of keeping older adults out of nursing homes is a worthy public
policy goal? If you are able to, can you share best practices for home
modification programs that would help low-income elderly and/or
disabled individuals stay in their existing homes?
Answer. NCSHA supports the section 202 Supportive Housing for the
Elderly program, which is a critical tool for meeting the needs of
America's aging population. However, section 202 cannot possibly meet
the vast and growing needs of our seniors on its own. As it is for all
other populations of low-income renters, the Housing Credit is central
to addressing seniors' affordable housing needs. Of the 3 million
affordable homes financed with the Housing Credit since its inception
in 1986, more than 800,000 are headed by older adults. More than half
of states provide additional points in their Housing Credit application
process for developments that house persons over 55 or 62 years old or
making other provisions that benefit seniors, such as providing
services, using universal design components, or locating near a senior
service center.
Both the administration's FY 2018 budget request and the Senate
Appropriations Committee-passed Transportation, Housing, and Urban
Affairs funding bill would make section 202 units eligible to
participate in HUD's Rental Assistance Demonstration (RAD) and lift the
cap on total units eligible for RAD participation. The RAD program is
highly dependent on the Housing Credit as a means of attracting the
private capital to RAD developments. Therefore, should Congress
implement this proposal, it would create additional demand for Housing
Credit authority.
Seniors' dependence on the Housing Credit and the unmet need for
affordable housing for seniors underscore the need for increasing
Housing Credit authority. The Affordable Housing Credit Improvement Act
would expand Housing Credit resources by 50 percent, phased in over 5
years. NCSHA believes that Congress should increase the Housing Credit
cap by at least this much.
In regards to Senator Casey's question regarding home modification
program best practices, many State HFAs administer successful emergency
home repair programs that help elderly homeowners, among others. Often
these repairs allow seniors to age in place and are critical for people
on fixed-incomes, as so many seniors are. These programs frequently
rely on HOME Investment Partnerships (HOME) program or Community
Development Block Grant (CDBG) funding.
In Utah, the Bear River Association of Governments, consisting of
Utah's three northern most counties, offers two essential CDBG-funded
home repair programs. The Emergency HOME Repair Program provides grants
of up to $2,000 for minor home repairs needed to correct hazardous
situations and ensure safe living conditions. The Single Family
Rehabilitation and Reconstruction Program provides low interest rate
loans to households living in substandard housing in need of major
repairs.
In 2013, the Indiana Housing Development Authority won an NCSHA
Annual Award for Program Excellence for a program it implemented to
support home and community improvements designed to help seniors age in
place. This program, and others like it across the country, are models
for how State agencies can assist seniors with home modifications and
repairs.
Unfortunately, Federal tax law imposes a significant limitation on
States' abilities to finance home improvement loans for critical
repairs by setting an exceptionally low limit on the home improvement
loans States can finance with the Mortgage Revenue Bond (single-family
private activity tax-exempt Housing Bond) program. The limit is set by
statute at $15,000 and has not been increased since it was first
established in 1980. Over that time period, inflation (as measured by
the Consumer Price Index) has increased nearly 200 percent ($15,000 in
1980 is worth the equivalent of more than $43,000 today). Consequently,
many of the critical repairs the program was designed to support are
now too expensive to qualify for MRB financing. Therefore, we strongly
encourage Congress to either raise the MRB home improvement loan limit
to reflect the increase in construction cost since 1980 and index it to
annually reflect cost increases or preferably, to just eliminate it
entirely and allow States to set their own limits.
Question. According to the Center for Budget Policy and Priorities,
the cuts to HUD's FY 2018 budget proposed by the White House would
eliminate more than 250,000 Housing Choice Vouchers next year. This
comes at a time when public housing agencies across the country are
already facing massive wait lists for these vouchers. Philadelphia
alone projected 18,230 households on its HCV wait list at the beginning
of FY 2017. With the need for HUD rental assistance far outpacing the
available funds, can you discuss the challenges States face in
prioritizing different high-need groups such as families with children,
people with disabilities, and homeless veterans?
Answer. NCSHA strongly opposes cuts in the voucher program. There
simply are not enough affordable housing resources--both capital
resources like the Housing Credit and operating or rental resources
like the Housing Choice Voucher program--to meet the need. More than
11.2 million severely cost-burdened renter households spend more than
half their income on housing. Demand is increasing, as more and more
low-income households enter the rental market each year, while we
confront the loss of increasing amounts of our existing affordable
housing stock.
In Utah, we have seen a significant increase in the population of
extremely low-income (ELI) renters (those with incomes of 30 percent or
less of area median income). In 2009, ELI households made up 20.7
percent of all renters in Utah, but by 2013 they comprised 22.5 percent
of renters. More than three quarters of these households are severely
cost-burdened, meaning they pay more than 50 percent of their income
for rent
Both the Housing Credit and Housing Choice Vouchers play a critical
role in addressing the need. These programs have distinct and
complementary purposes. Unlike the Housing Credit, the voucher program
was not designed to address challenges such as expanding affordable
rental housing supply in tight markets, producing housing for
households with special needs, building properties in areas
experiencing job growth, recapitalizing and preserving aging
properties, and revitalizing low-income communities. Rather, vouchers
are designed to make existing housing more affordable to low-income
households. We need both to address our growing housing needs.
Question. Can you discuss current mechanisms and best practices to
ensure that units available to low-income renters continue meeting
basic quality standards, particularly after the 15 year LIHTC period?
Answer. One of the most important roles State agencies play in
administering the Housing Credit is compliance monitoring, which
includes inspecting properties to ensure quality standards are met
throughout the full affordability period, including the extended use
period after year 15. In its 2016 report on State administration of the
Housing Credit program, GAO found that all the agencies it visited had
processes in place for conducting compliance monitoring of properties
consistent with law and regulations, including processes for monitoring
properties after year 15, and many went above and beyond Federal
statutory and regulatory requirements in their monitoring.
In 2012, the U.S. Department of Housing and Urban Development
published an extensive report titled What Happens to Low-Income Housing
Tax Credit Properties at Year 15 and Beyond?, in which HUD found, ``The
vast majority of LIHTC properties continue to function in much the same
way they always have, providing affordable housing of the same quality
at the same rent levels to essentially the same population without
major recapitalization.''
While tax credits are no longer eligible for recapture by IRS after
year 15, States still have a variety of means for enforcing
affordability restrictions in the extended use period. These include
helping owners to ensure property performance while still complying
with rent and income limits, barring owners who fail to comply from
receiving future Housing Credit allocations, and even pursuing legal
action against owners who fail to comply with the extended use
agreement. Sadly, Utah Housing Corporation has been forced to file suit
recently against a project owner for failing to maintain project
compliance. However, this underscores the fact that allocating agencies
can and do take legal action when it is necessary to ensure compliance
with the Housing Credit statute after year 15.
Question. The HOME program and Community Development Block Grants
are two of the most often-used Federal programs for gap financing for
construction of affordable housing. President Trump's FY18 budget
proposes eliminating both of these programs. At the same time, housing
agencies across the country are facing major low-income housing
shortages. Philadelphia, for example, had nearly 40,000 people on the
Philadelphia Housing Agency's public housing wait list in October 2016.
Can you discuss the anticipated impact of eliminating the HOME and CDBG
programs on the supply of low-income housing?
Answer. The elimination of HOME would be disastrous to the efforts
to address our Nation's severe housing needs. HOME is an essential and
flexible housing resource that is critical not only to rental housing
financed with the Housing Credit, but also to programs to help low-
income creditworthy home buyers through down payment assistance and
lower rate mortgages and homeowners through home rehabilitation
programs. HOME funding already has been cut by nearly half since 2010.
HOME funding is a critical ``gap filler'' resource in nearly 20
percent of Housing Credit properties nationwide. In 2015, Utah used
HOME funding in over half of our Housing Credit units. The gap is the
difference between the Housing Credit equity for which a property is
eligible and the actual cost of building or rehabilitating that
property. It can either be filled with hard debt, such as a bank
mortgage, or soft financing sources like HOME, which reduce or
eliminate the amount of debt required to finance the property, thus
making it possible to charge lower rents. HOME helps States serve ELI
households, including families with young children, seniors, persons
with disabilities, veterans, and other needy households, with the
Housing Credit, sometimes even without rental assistance. Therefore, we
strongly urge Congress to at least level fund HOME at $950 million in
FY 2018, as the Senate Appropriations Committee has proposed.
______
Question Submitted by Hon. Michael F. Bennet
Question. According to the National Low-Income Housing Coalition, a
worker in Colorado needs to make $22 per hour to make a modest two-
bedroom apartment affordable. As is the case elsewhere, affordable
housing is in short supply, and the crisis has disproportionately
impacted low-income families. What do you believe are the causes for
the shortage of affordable options, especially for low- and moderate-
income households?
Answer. The private market is unable to respond to the need for
affordable housing absent an incentive such as the Housing Credit
because it simply costs too much to build housing to rent it at rates
low-income people can afford. Harvard's Joint Center for Housing
Studies states that, ``to develop new apartments affordable to renter
households with incomes equivalent to the full-time minimum wage, the
construction cost would have to be 28 percent of the current average.''
The fact is, that unlike many other tax expenditures, which subsidize
activity that would occur at some level without a tax benefit,
virtually no affordable rental housing development would occur without
the Housing Credit.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
At the outset of this morning's hearing, I want to begin by
thanking Chairman Hatch and Senator Cantwell. They are leading the
charge when it comes to affordable housing, particularly through smart
tax policies the committee will discuss today, and I'm looking forward
to working more with them on these issues.
Our country's housing policy needs an urgent remodel. Today
millions of Americans struggle to pay the rent, and they can't even
dream of purchasing a home.
To get into a bit of Introduction to Economics, a key housing
challenge is increasing supply. When housing is scarce in the
communities where people want to live and work, prices get bid up, and
working people get pushed out. Rent increases faster than people's
incomes, even among people who earn a decent wage. There are few
incentives to build affordable housing near schools, public transit and
amenities like parks and retail.
Oftentimes, the only places where people can afford housing are an
hour or more from where they work or want their kids to go to school.
Many people either spend a small fortune on train tickets and bus
fares, or they spend eternities sitting behind a steering wheel on the
daily commute. Many families wind up in food deserts where it's next to
impossible to get healthy, fresh meals.
This crisis is a five-alarm fire across the country and all over my
home State of Oregon--in Portland, Bend, Hood River, Astoria, Medford
and so many other places. It's evident in the faces of far too many
Oregon children, veterans, and families living on the streets.
On this committee, Senator Cantwell and Chairman Hatch have spent
considerable time fighting this supply shortage. They've got an
important bill that I co-
sponsored called the Affordable Housing Credit Improvement Act of 2017.
Their proposal is all about supercharging the Low-Income Housing Tax
Credit and wringing more value out of every dollar that goes into it.
And it builds on what the three of us got in the 2015 tax bill, which
made the expanded LIHTC credit permanent.
In my view they've developed smart ways of attacking this scarcity
problem, and that will mean more housing goes up in communities where
people want to work and plant roots.
I'll have other ideas to talk about in the days and weeks ahead--
ideas about helping the middle class and first-time homebuyers, as well
as better-linking services with low-income housing.
But as for today's hearing, I'm looking forward to talking with our
witnesses about some of the ideas Senators Cantwell and Hatch have put
forward, as well as how it'll be possible to incentivize more housing
construction near transit, schools and amenities.
I'll wrap up with one last thought. Senators Cantwell and Hatch are
demonstrating how the two sides can work together on major economic
challenges. After a heated few weeks in the Senate, I know both sides
crave a return to bipartisanship and regular order, and for this
committee that would mean tax reform is likely on the horizon.
Senate Democrats outlined our principles for a tax overhaul in a
letter to the majority this morning. It spells out what our caucus will
bring to the debate. And in my view, it's in the best tradition of this
committee to tackle big issues like tax reform on a bipartisan basis,
so it's my hope that we're able to bring the two sides together on this
issue in the months ahead.
______
Communications
----------
A Call To Invest in Our Neighborhoods (ACTION) Campaign
The A Call To Invest in Our Neighborhoods (ACTION) Campaign,
representing over 2,000 national, state, and local organizations and
businesses, thanks the Senate Finance Committee for holding a hearing
on ``America's Affordable Housing Crisis: Challenges and Solutions.''
This hearing provided the Committee an opportunity to hear from expert
witnesses about the scope of the affordable housing crisis and how
Congress can strengthen critical housing programs administered through
the tax code, namely the Low-Income Housing Tax Credit (Housing Credit)
and tax-exempt private activity Housing Bonds, so that we can better
address the significant and growing need for affordable housing
nationwide.
Much of the hearing focused on the Affordable Housing Credit
Improvement Act,
S. 548, which Senator Maria Cantwell (D-WA) and Senate Finance
Committee Chairman Orrin Hatch (R-UT) introduced earlier this year.
This crucial piece of legislation would increase Housing Credit
authority, facilitate Housing Credit development in challenging markets
and for hard-to-reach populations, support the preservation of existing
affordable housing, and simplify program requirements. The
ACTION Campaign is grateful to Senator Cantwell and Chairman Hatch for
their leadership, and to the other Committee members--Ranking Member
Ron Wyden (D-OR) and Senators Dean Heller (R-NV), Michael Bennet (D-
CO), Rob Portman (R-OH), and Johnny Isakson (R-GA)--for their co-
sponsorship support. We strongly urge the Committee to advance this
critical bill as part of any tax legislation it considers.
The Housing Credit Has a Remarkable Track Record
President Reagan and the Congress showed remarkable foresight when they
created the Housing Credit as part of the Tax Reform Act of 1986. The
Housing Credit is now our nation's most successful tool for encouraging
private investment in the production and preservation of affordable
rental housing, with a proven track record of creating jobs and
stimulating local economies. For over 30 years, the Housing Credit has
been a model public-private partnership program, bringing to bear
private sector resources, market forces, and state-level administration
to finance more than 3 million affordable apartments--nearly one-third
of the entire U.S. inventory--giving more than 6.7 million households,
including low-income families, seniors, veterans, and people with
disabilities, access to homes they can afford. Roughly 40 percent of
these homes were financed in conjunction with multifamily Housing
Bonds, which are an essential component of the program's success.
The Housing Credit Is a Proven Solution to Meet a Vast and Growing Need
Despite the Housing Credit's tremendous impact, there are still 11
million renter households--roughly one out of every four--who spend
more than half of their income on rent, leaving too little for other
necessary expenses like transportation, food, and medical bills. This
crisis is continuing to grow. HUD reports that as of 2015, the number
of households with ``worst case housing needs'' had increased by 38.7
percent over 2007 levels, when the recession began, and by 63.4 percent
since 2001. A study by Harvard University's Joint Center for Housing
Studies and Enterprise Community Partners estimates that the number of
renter households who pay more than half of their income towards rent
could grow to nearly 15 million by 2025.
Without the Housing Credit, there would be virtually no private
investment in affordable housing. It simply costs too much to build
rental housing to rent it at a level that low-income households can
afford. In order to develop new apartments that are affordable to
renters earning the full-time minimum wage, construction costs would
have to be 72 percent lower than the current average.
The Housing Credit Creates Jobs
Housing Credit development supports jobs--roughly 1,130 for every 1,000
Housing Credit apartments developed, according to the National
Association of Home Builders (NAHB). This amounts to roughly 96,000
jobs per year, and more than 3.25 million since the program was created
in 1986. NAHB estimates that about half of the jobs created from new
housing development are in construction. Additional job creation occurs
across a diverse range of industries, including the manufacturing of
lighting and heating equipment, lumber, concrete, and other products,
as well as jobs in transportation, engineering, law, and real estate.
The Housing Credit Stimulates Local Economies and Improves Communities
The Housing Credit has a profound and positive impact on local
economies. NAHB estimates that the Housing Credit adds $9.1 billion in
income to the economy and generates approximately $3.5 billion in
federal, state, and local taxes each year.
Conversely, a lack of affordable housing negatively impacts economies.
Research shows that high rent burdens have priced out many workers from
the most productive cities, resulting in 13.5 percent foregone GDP
growth, a loss of roughly $1.95 trillion, between 1964 and 2009.
Housing Credit development also positively impacts neighborhoods in
need of renewal. About one-third of Housing Credit properties help
revitalize distressed communities. Stanford University research shows
Housing Credit investments improve property values and reduce poverty,
crime, and racial and economic isolation, generating a variety of
socio-economic opportunities for Housing Credit tenants and
neighborhood residents.
Affordable Housing Improves Low-Income Households' Financial Stability
Affordable housing promotes financial stability and economic mobility.
It leads to better health outcomes, improves children's school
performance, and helps low-
income individuals gain employment and keep their jobs. Affordable
housing located near transportation and areas with employment
opportunities provides low-income households with better access to
work, which increases their financial stability and provides employers
in those areas with needed labor.
Families living in affordable homes have more discretionary income than
low-income families who are unable to access affordable housing. This
allows them to allocate more money to other needs, such as health care
and food, and gives them the ability to pay down debt, access
childcare, and save for education, a home down payment, retirement, or
unexpected needs.
The Housing Credit Is a Model Public-Private Partnership
The Housing Credit is structured so that private sector investors
provide upfront equity capital in exchange for a credit against their
tax liability over 10 years, which only vests once the property is
constructed and occupied by eligible households paying restricted
rents. This unique, market-based design transfers the risk from the
taxpayer to the private sector investor. In the rare event that a
property falls out of compliance during the first 15 years after it is
placed in service, the Internal Revenue Service can recapture tax
credits from the investor. Therefore, it is in the interest of the
private sector investors to ensure that properties adhere to all
program rules, including affordability restrictions and high-quality
standards--adding a unique accountability structure to the program.
The Housing Credit Is State Administered with Limited Federal
Bureaucracy
The Housing Credit requires only limited federal bureaucracy because
Congress wisely delegated its administration and decision-making
authority to state government as part of its design. State Housing
Finance Agencies, which administer the Housing Credit in nearly every
state, have statewide perspective; a deep understanding of the needs of
their local markets; and sophisticated finance, underwriting, and
compliance capacity. States develop a system of incentives as part of
their Qualified Allocation Plans (QAP), which drives housing
development decisions, including property siting, the populations
served, and the services offered to residents. States are also deeply
involved in monitoring Housing Credit properties, including compliance
audits and reviews of financial records, rent rolls, and physical
conditions.
The Housing Credit Is Critical to Preserving Our Nation's Existing
Housing Investments
The Housing Credit is our primary tool to preserve and redevelop our
nation's current supply of affordable housing. Without the Housing
Credit, our ability to revitalize and rehabilitate our nation's public
housing and Section 8 housing inventory, decades in the making, would
be significantly diminished. In addition to putting the residents of
these properties at risk of displacement, we would lose these
investments that taxpayers have already made.
In rural areas, where direct funding for rural housing programs has
been cut significantly, the Housing Credit is the backbone for
preservation and capital improvements to the existing housing stock.
Low-income rural residents' incomes average just $12,960, and they are
often living in areas with extremely limited housing options, making
preservation of the existing housing stock crucial.
The Demand for Housing Credits Exceeds the Supply
Viable and sorely needed Housing Credit developments are turned down
each year because the cap on Housing Credit authority is far too low to
support the demand. In 2014--the most recent year for which data is
available--state Housing Credit allocating agencies received
applications requesting more than twice their available Housing Credit
authority. Many more potential applications for worthy developments are
not submitted in light of the intense competition, constrained only by
the lack of resources.
The scarcity of Housing Credit resources forces state allocating
agencies to make difficult trade-offs between directing their extremely
limited Housing Credit resources to preservation or new construction,
to rural or urban areas, to neighborhood revitalization or developments
in high opportunity areas, or to housing for the homeless, the elderly,
or veterans. There simply is not enough Housing Credit authority to
fund all of the properties needed, but with a substantial increase in
resources, many more of these priorities would be addressed--and the
benefits for communities would be even greater.
Though the need for Housing Credit-financed housing has long vastly
exceeded its supply, Congress has not increased Housing Credit
authority permanently in 16 years.
We Urge Congress to Expand and Strengthen the Housing Credit
To meaningfully grow our economy and address our nation's growing
affordable housing needs through tax reform, we urge Congress to
increase the cap on Housing Credit authority by 50 percent. Such an
expansion would support the preservation and construction of up to
400,000 additional affordable apartments over a 10-year period. We also
call on Congress to retain the tax exemption on multifamily Housing
Bonds, which are essential to Housing Credit production.
S. 548, which would authorize such an expansion, has earned strong
bipartisan support in the Senate and among Senate Finance Committee
members.
This legislation would increase Housing Credit allocation authority by
50 percent phased in over 5 years, and enact roughly two dozen changes
to strengthen the program by streamlining program rules, improving
flexibility, and enabling the program to serve a wider array of local
needs. For example, S. 548 would encourage Housing Credit development
in rural and Native communities, where it is currently more difficult
to make affordable housing developments financially feasible; Housing
Credit developments that serve the lowest-income tenants, including
veterans and the chronically homeless; the development of mixed-income
properties; the preservation of existing affordable housing; and
development in high-opportunity areas. The legislation would also
generate a host of benefits for local communities, including raising
local tax revenue and creating jobs.
An investment in the Housing Credit is an investment in individuals,
local communities, and the economy. It transforms the lives of millions
of Americans, many of whom are able to afford their homes for the first
time--and it transforms their communities and local economies. The
ACTION Campaign applauds the leadership the Senate Finance Committee
has shown in support of the Housing Credit to date and urges the
Committee to expand and strengthen the Housing Credit and multifamily
Housing Bonds.
ACTION Campaign Co-Chairs
National Council of State Housing Agencies
Enterprise Community Partners
ACTION Campaign Steering Committee Members
Affordable Housing Tax Credit Coalition
Council for Affordable and Rural Housing
Council of Large Public Housing Authorities
CSH
Housing Advisory Group
Housing Partnership Network
LeadingAge
Local Initiatives Support Corporation/National Equity Fund
Make Room
National Association of Affordable Housing Lenders
National Association of Home Builders
National Association of Housing and Redevelopment Officials
National Association of REALTORS
National Association of State and Local Equity Funds
National Housing and Rehabilitation Association
National Housing Conference
National Housing Trust
National Low Income Housing Coalition
National Multifamily Housing Council
Stewards of Affordable Housing for the Future
Volunteers of America
For a full list of ACTION Campaign members, visit
www.rentalhousingaction.org.
______
Affordable Housing Developers Council (AHDC)
Chairman Hatch, Ranking Member Wyden, and Members of the Committee:
The Affordable Housing Developers Council (AHDC) would like to thank
you for holding a hearing on the critically important issue of
affordable housing. AHDC is a CEO level member organization
representing 19 of the top 50 affordable housing developers in the
country. We are proud that our work not only produces affordable
housing for families, but that the construction of our multi-family
affordable housing communities also create jobs and tax revenue. Our
mission is to increase federal resources for addressing affordable
housing issues, support and defend existing affordable housing
programs, and work to defeat changes to programs that would have a
negative impact on the supply of affordable housing in the United
States.
This hearing comes at a crucial time. The lack of affordable housing in
our country has reached a level of crisis, and projections show that
the crisis will continue to get worse without a legislative fix.
Furthermore, with discussions about comprehensive tax reform underway,
there is both an opportunity to address some of these problems and a
need to focus on protecting the successful programs already being
utilized. We urge Congress to preserve the low-income housing tax
credit (LIHTC) in any comprehensive tax reform package, and enhance
LIHTC through legislation such as the Affordable Housing Credit
Improvement Act (S. 548) and disaster tax relief including provisions
to address housing shortages in impacted communities.
Background
The United States faces a severe housing affordability crisis. Working
families across America including police officers, teachers, and nurses
are spending far too much of their income on rent due to the affordable
housing shortage, with more than half of all renters spending over 30%
of their income on rent and over 11 million households spending more
than half of their income on rent. This increase represents 4 million
more renting families with a critical housing affordability problem
than there were in 2001. Furthermore, almost 400,000 low-income and
working family households are expected to enter the market each year
for the next 10 years.
We believe that LIHTC is a valuable tool in addressing the growing
problem of affordable housing in this country. The tax credit
encourages public-private partnerships designed to encourage the
development of affordable housing nationwide. Signed into law in 1986
by President Reagan, the structure of the program ensures that private
developers bear the financial risk instead of the government, taking
advantage of using market forces and private sector resources to
provide economic revitalization in both rural and urban communities.
LIHTC is a critical program that provides low-income families, seniors,
veterans, and people with disabilities access to affordable housing,
financing nearly 3 million rental units across the country since its
adoption.
Preserving the low-income housing tax credit
LIHTC must be maintained in any deliberation on tax reform, especially
as Congress grapples with the revenue neutrality of the legislation.
This program is a documented long term success that attracts private
at-risk investment and creates jobs that stay here in the United
States, and resources for affordable housing must be maintained as low-
income and working class Americans continue to struggle to make ends
meet.
As tax reform is considered, Congress should also be aware that
lowering the corporate tax rate impacts and decreases the value of
LIHTC. In other words, you could maintain LIHTC in its current form,
but absent any enhancement to LIHTC, with a lower corporate rate there
will be less equity to build affordable housing in the United States.
These unintended consequences must be addressed in any lowering of the
corporate tax rate.
Expanding the credit
LIHTC should not only be preserved and secured during negotiations over
comprehensive tax reform, but strengthened by passing the Affordable
Housing Credit Improvement Act of 2017 (S. 548) and comprehensive
disaster tax relief to address affordable housing shortages in impacted
communities throughout the country.
The Affordable Housing Credit Improvement Act expands the annual
allocation of the credit by 50 percent and includes key provisions to
streamline the administration of the program. Several members of the
Committee have already joined as cosponsors, and we thank you again for
leader ship on this issue. We urge all committee members to support the
legislation. As mentioned above, this program has a long record of
success, and its expansion is a simple way to help alleviate the
housing affordability crisis in America.
We also support legislation that provides comprehensive natural
disaster tax relief, including housing relief, in the wake of
presidentially declared FEMA disasters. Affordable housing stock is
even further reduced in the wake of the many natural disasters our
country unfortunately endures on a yearly basis. Unfortunately,
Congress has not acted to help communities with tax relief since
Senator Roberts' last major effort, the Heartland Disaster Tax Relief
Act of 2008. Individuals, small businesses and housing need help to
recover in the wake of a major natural disaster. We urge you to review
this policy in the context of addressing our nation's affordable
housing challenges.
Conclusion
Despite the successes of LIHTC, it is important now more than ever to
strengthen and secure the program, and take a critical step towards
addressing the affordable housing supply gap. We urge Congress to
preserve the program in the upcoming tax reform deliberations, and to
enhance LIHTC through the Affordable Housing Credit Improvement Act of
2017 and comprehensive disaster tax relief.
We thank you again for holding a hearing on this critically important
topic. We look forward to being a resource to the Committee and are
happy to answer any additional questions.
The A.H.D.C. is bringing together the CEOs of the nation's top
affordable housing developers to advance federal policies that support
the industry's ability to meet the nation's affordable housing needs.
To date, the Founders Council includes:
AU Associates Carleton Residential Properties
Holly Weidmann Jeffrey Fulenchek
President and CEO Partner and Director of Development
http://auassociates.com/ http://carletonresidential.com/
The Commonwealth Companies Conifer
Louie Lange Tim Fournier
President Chairman and CEO
http://commonwealthco.net/ http://coniferllc.com/
Dominum Hudson Housing Capital
Paul Sween W. Kimmel Cameron
Co-Managing Partner Vice President
http://dominiumapartments.com/ http://hudsonhousing.com/
Gorman and Company, Inc. Meta Housing Corporation
Gary Gorman Kasey Burke
CEO President
http://www.gormanusa.com/ http://www.metahousing.com/
The Michaels Organization The NHP Foundation
Gary Beuchler Richard Burns
President President
http://themichaelsorg.com/ http://www.nhpfoundation.org/
Norstar USA NYS/FAH
Linda L. Goodman Jolie A. Milstein
Senior Vice President President and CEO
http://norstarcompanies.com/ http://nysafah.org/index.php
Pennrose Preservation of Affordable Housing
Mark Dambly Rodger Brown
President Managing Director
https://pennrose.com/ http://pokopartners.com/
RedStone Equity Partners Related
Eric McClelland Jeff Brodsky
President and CEO Vice Chairman
http://redstoneco.com/ http://related.com/
Silver Street Development
Corporation Sugar Creek Capital
Roger J. Gendron Chris Hite
President President
http://silver-street.net/ http://sugarcreekcapital.com/
Winn Companies
Larry H. Curtis
President and Managing Partner
http://winncompanies.com/
______
Capital One Financial Corporation
1680 Capital One Drive
McLean, VA 22102
August 1, 2017
Chairman Orrin Hatch
Ranking Member Ron Wyden
Senate Committee on Finance
219 Dirksen SOB
Washington, DC 20510
Chairman Hatch and Ranking Member Wyden,
Thank you for convening today's hearing, ``America's Affordable Housing
Crisis: Challenges and Solutions.'' The United States faces a current
shortage of 7.4 million affordable and available apartments for low-
income households, and the Low-Income Housing Tax Credit is an
essential tool to help us meet the growing need for affordable housing
in communities across the country.
Like many companies, Capital One joins in the bipartisan call for
thoughtful and balanced reform of our corporate tax system, including
improvements to the Low-Income Housing Tax Credit (LIHTC). As with most
legislation, the most important part of tax reform will be in the
details. The definitions, transition rules and timing, among other
things, will be of extreme importance.
Capital One Financial Corporation (www.capitalone.com) is a financial
holding company whose subsidiaries, which include Capital One, N.A.,
and Capital One Bank (USA), N.A., had $239.8 billion in deposits and
$350.6 billion in total assets as of June 30, 2017. Headquartered in
McLean, Virginia, Capital One offers a broad spectrum of financial
products and services to consumers, small businesses and commercial
clients through a variety of channels. Capital One, N.A. has branches
located primarily in New York, New Jersey, Texas, Louisiana, Maryland,
Virginia and the District of Columbia. Capital One 360 is the nation's
preeminent digital bank, offering best-in-class products and services
to customers across the country. A Fortune 500 company, Capital One
trades on the New York Stock Exchange under the symbol ``COF'' and is
included in the S&P 100 index.
Founded in 1988, Capital One today employs over 41,000 associates
primarily in the U.S., with small card operations in Canada and the
United Kingdom. Because of Capital One's significant domestic business
and simple product offerings, we pay a high corporate tax rate. This
year, our estimated effective tax rate is 32 percent, which equates
approximately to a $2 billion tax bill. A lower corporate tax rate
would enable Capital One to better lend to our customers, to reinvest
in our company and our associates, and enable us to compete with
international banks.
Capital One joins with you in your call today to examine the
difficulties and solutions to increasing access to affordable housing
in America. Capital One is a strong supporter of increasing the number
of available affordable housing units and supports S. 548, the
Affordable Housing Credit Improvement Act, as an important step in
providing increased affordable housing and strengthening the LIHTC
program. The LIHTC is an essential tool to help us meet the growing
need for affordable housing in communities across the country, and the
program enjoys bipartisan support at the federal, state and local
levels, and represents the best of what private-public partnerships can
offer. The United States faces a current shortage of 7.4 million
affordable and available apartments for low-income households. The
first attachment to this letter is a national infographic intended to
provide greater detail on the $8.7 billion in loans and investments
Capital One has been fortunate to provide since 2007, with another $1.1
billion planned through the end of 2017.
Attached to this letter are two state specific infographics providing
details on affordable housing in Utah and Iowa. Capital One is proud to
be a part of $51 million in investments in Utah, which represents 844
housing units in the state. In Iowa, Capital One is partner to $169
million in investments, representing 2,148 affordable housing units.
These investments represent real families in critical need of truly
affordable housing. If not for these investments, the LIHTC and
community-based partnerships, affordable housing and these families
would suffer. Capital One stands with you to improve and strengthen the
affordable housing inventory for America's families.
Capital One appreciates the opportunity to share our priorities for
federal tax reform, including our strong support for the LIHTC. We look
to serve as a resource to you and your staff. Please do not hesitate to
contact Kate Bonner, Director of Government and Policy Affairs,
([email protected], or 571-663-8100), for any additional
assistance Capital One can provide. We welcome the opportunity to meet
with you to discuss this matter in greater detail.
Sincerely,
Laura Bailey
Senior Vice President, Community Development Banking
Attachment: Capital One's Impact on Low-Income Housing; Affordable
Housing: Utah; Affordable Housing: Iowa.
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
______
Center for Fiscal Equity
Statement of Michael G. Bindner
Chairman Hatch and Ranking Member Wyden, thank you for the opportunity
to submit these comments for the record to the Committee on Finance. As
usual, we will preface our comments with our comprehensive four-part
approach, which will provide context for our comments.
A Value-Added Tax (VAT) to fund domestic military spending and
domestic discretionary spending with a rate between 10% and 13%, which
makes sure every American pays something.
Personal income surtaxes on joint and widowed filers with net
annual incomes of $100,000 and single filers earning $50,000 per year
to fund net interest payments, debt retirement and overseas and
strategic military spending and other international spending, with
graduated rates between 5% and 25%.
Employee contributions to Old Age and Survivors Insurance (OASI)
with a lower income cap, which allows for lower payment levels to
wealthier retirees without making bend points more progressive.
A VAT-like Net Business Receipts Tax (NBRT), which is
essentially a subtraction VAT with additional tax expenditures for
family support, health care and the private delivery of governmental
services, to fund entitlement spending and replace income tax filing
for most people (including people who file without paying), the
corporate income tax, business tax filing through individual income
taxes and the employer contribution to OASI, all payroll taxes for
hospital insurance, disability insurance, unemployment insurance and
survivors under age 60.
The Subtraction VAT/Net Business Receipts Tax is the relevant item for
the purposes of this topic. Among the possible credits and deductions
from this tax are the diversion of Social Security Old Age and
Survivors tax revenue to employee stock grants, with a third of those
traded into an insurance fund of similar companies. This is important,
though not essential, because employee-owned firms can spend
cooperatively as well as manage cooperatively. Current employee-owned
firms could, of course, pursue these options immediately. A second
credit could be for education, collegiate, trade and remedial. This
credit would include both tuition and living expenses, including both
pay and housing.
Larger firms would have larger apartment buildings ``on campus'' or
would pay for campus housing from universities, trade schools and
remedial education providers (both public and religious--religious
adult education would fill in a whole in their product portfolio--one
that is sorely lacking).
Student housing would not be ``one size fits all.'' Students with
children would also get $10,000 per child per month, payable with
stipends. Students would not be one size fits all either. They could be
teens, young adults or middle-aged learners who have never before had a
chance at literacy or workers who have lost their jobs to automation,
as well as the disabled who need skills to enter the workforce.
At some points, employee-owned cooperatives may dominate a local
economy without employing all members. In such cases, in lieu of land
value taxes, cooperatives could house and pay a citizens' dividend to
non-workers.
Work and student rules will require that rented housing be kept neat.
Longer-term workers will receive permanent housing (possibly with
indoor gardening capabilities made possible by Mars exploration
research) which they will be responsible for maintaining, but with
maintenance and repair services so no one need let problems go unfixed.
Ownership and responsibility both guard against bad landlords and bad
tenants. This plan will maximize both, but only if you think outside
the box.
Thank you for the opportunity to address the committee. We are, of
course, available for direct testimony or to answer questions by
members and staff.
______
Council for Affordable and Rural Housing (CARH)
116 S. Fayette Street
Alexandria, Virginia 22314
(703) 837-9001
(703) 837-8467 Fax
[email protected]
www.carh.org
Statement of Tanya Eastwood, President
Chairman Hatch, Ranking Member Wyden and members of the Committee, as
President of the Council for Affordable and Rural Housing (``CARH''),
and on behalf of CARH and their membership, I would like to submit
written testimony in support of efforts to address the affordable
housing crisis, especially in rural America. CARH, the leading national
trade association headquartered in Alexandria, Virginia, represents the
interests of both for-profit and non-profit builders, developers,
management companies, and owners, as well as financial entities and
suppliers of goods and services to the affordable rural rental housing
industry.
Among other organizations I am involved with, I am also President of
Greystone Affordable Development, whereby I am responsible for the
strategic growth and implementation of Greystone's affordable housing
preservation efforts. In that role, I work closely with non-profit and
for profit owners and developers in meeting the challenges associated
with the preservation, recapitalization and rehabilitation of their
affordable housing across the U.S. To date, we have successfully
recapitalized and rehabilitated approximately 256 apartment communities
(over 9,000 housing units) in the USDA Rural Development (``RD'')
Section 515 multifamily rural rental housing programs; and we are
currently in the process of preserving an additional 85 Section 515
properties (approximately 3,700 units) across multiple states using
Housing Bonds and the Affordable Housing Credit.
Rural Americans: Great Hardships Compared With Non-Rural Areas
During the August 1, 2017 Senate Finance Committee hearing, Senator
John Thune (R-SD) accurately noted the affordable housing crisis is not
just an urban community concern but also greatly affects rural
communities across the country. Lower incomes and higher poverty rates
often make housing options simply unaffordable for many rural
residents, even though housing costs are generally lower in the rural
communities. In fact, rural renters are more than twice as likely to
live in substandard housing compared to people who own their own homes.
USDA's 2016 Multi-Family Housing Occupancy Report published December 6,
2016 revealed the average household living in RD's Section 515 housing
with rental assistance lives on only $10,732 per year of income and
$12,960 for tenants that do not receive rental assistance.
While the demand for rental housing in rural areas remains high, the
supply, particularly of new housing, has significantly decreased.
According to a recent report published by the National Rural Housing
Coalition (``NHRC''), the Section 515 Rural Rental Housing Loan program
was once the principal source of financing for new rural rental housing
development.\1\ Since its peak in the mid-1980s, program levels have
been cut by more than 96 percent from $954 million to just $35 million
today (with further proposed cuts in the FY18 budget). Since 2012, the
program has largely halted financing the construction of new rental
housing; hence, the need for preservation of the existing (but aging)
house stock is more critical today than any time in our nation's
history. USDA reports a reduction of 271 rural rental properties in
just the past year, representing a loss of 4,220 much needed apartment
units.
---------------------------------------------------------------------------
\1\ NRHC, ``A Review of Federal Rural Rental Housing Programs,''
Policy and Practices; April 2017.
Housing is particularly difficult to develop or preserve in the
portions of rural America that are classified as ``Persistent
Poverty''--defined by the Economic Research Service at USDA as those
counties where 20% or more of their population was poor over the last
30 years. Of the 353 persistently poor counties, 301 or an astounding
85.3% are rural counties.\2\ The demand is there and the need is there,
but too many Americans are simply unable to afford basic decent
housing. Areas that are particularly persistently poor include middle
Appalachia, the lower Mississippi Delta, the southern Black Belt,
border Colonias areas, and Native American lands. In fact, 21 million
people live in persistent poverty counties.\3\ High poverty counties
with 17% or more living in poverty essentially exist in nearly every
state.
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\2\ Id.
\3\ HAC Rural Research Brief, June 2012.
Housing instability has well-documented effects on the education and
health of this country's greatest asset--our children. Neither the
private nor the public sector can produce affordable rural housing
independently of the other; it must be a collaborative partnership.
The Affordable Housing Credit_An Essential Tool
The low-income housing tax credit (``Affordable Housing Credit'') is a
model of success, implemented through a federal-state model that
utilizes federal economies of scale, state and local decision making,
and partnership with the private non-profit and for-profit sectors to
deliver new and rehabilitated quality housing to elderly and low income
Americans. It has been noted that 90% of affordable housing constructed
in recent years is done in partnership with the Affordable Housing
Credit and has provided more than 2.5 million rental units since its
inception.\4\ The Affordable Housing Credit is likewise an essential
tool for preservation of aging affordable housing that exist in high
cost areas, or have been starved from the necessary capital to
modernize.
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\4\ New York Times, ``A Tax Credit Worth Preserving,'' December 20,
2012.
When the Affordable Housing Credit program was enacted as part of the
Reagan-era Tax Reform Act of 1986, it did not create a large new
bureaucracy. Instead, it uses a small policy-setting staff at the
Internal Revenue Service to coordinate funding to states, which in turn
works with state Housing Finance Agencies or local agencies, depending
on the local choices. These state and local agencies rigorously inspect
and asset manage, but their job is made easier by the private
investment system. Affordable Housing Credit investors are strongly
motivated to require project owners and managers to consistently comply
with housing requirements, even before government inspections.
CARH Strongly Supports S. 548, Housing Bonds and Other Proposals
CARH strongly supports S. 548, the Affordable Housing Credit
Improvement Act, as we agree with the bipartisan expression of concern
and support to find solutions to the affordable housing crisis. It has
always been difficult to attract investors to transactions in rural
areas. While land costs in rural markets are typically less than urban
areas, there are offsetting concerns caused by greater transportation
costs and fewer vendors from which to choose. Housing assistance
programs are generally geared toward urban areas, with programs like
the Community Development Block Grant largely unavailable to rural
areas. This is why the Affordable Housing Credit has been even more
important to rural areas--because it is truly the single largest path
to preserving existing housing and constructing new affordable housing.
S. 548 would help facilitate preservation and new construction of this
much needed affordable housing. Some of the key points we see in S. 548
are outlined below:
Rural areas often compete with larger urban properties for the
Affordable Housing Credit. This competition has grown intense and seems
to be crowding out rural needs. In fact, between 1995 and 2009, only 9
percent of Affordable Housing Credit financed rental properties were in
rural markets utilizing Section 515 funding.\5\ Congress has not
increased Affordable Housing Credit authority in 17 years. This
legislation would increase the Affordable Housing Credit by at least 50
percent. Such an expansion would support the preservation and
construction of 350,000 to 400,000 additional affordable apartments
over a 10-year period, undoubtedly many in rural areas.
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\5\ Jill Khadduri, Carissa Climaco, and Kimberly Burnett, ``What
Happens to Low-Income Housing Tax Credit Properties at Year 15 and
Beyond,'' U.S. Department of Housing and Urban Development, August
2012.
S. 548 would permit income averaging in Housing Credit
properties. However, to be fully effective in rural areas, there should
be an added provision instructing Rural Development to permit income
averaging in Section 514/515 rural rental multifamily programs.
Currently, Rural Development does not permit such practices under their
statutory authorities. Rents that households with incomes above 60% AMI
(up to the max of 80% AMI) could afford have the potential to offset
lower rents than households below 40% or even 30% AMI could afford,
allowing developments to maintain financial feasibility while providing
a deeper level of affordability. Furthermore, the diversification of
rents within a given property would broaden the marketability,
providing more flexibility and responsiveness to local needs. As such,
projects with tiered rents would be more attractive to Affordable
Housing Credit investors, potentially attracting more capital to rural
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affordable housing projects.
The legislation would base income limits in rural properties on
the greater of area median income or the national non-metropolitan
median income. This would make Housing Bond financed developments more
feasible in rural areas while streamlining program rules. Housing Bonds
have been an important tool for preserving and financing multiple
properties into one transaction, capitalizing on the economies of
scale. Many existing small 515 properties have been preserved as part
of a portfolio financing that otherwise would not have a means for
recapitalization and modernization.
The bill simplifies the current Affordable Housing Credit
student rule and better achieves the intended targeting by replacing it
with a new rule that is aligned with the Department of Housing and
Urban Development's (``HUD'') rule, which would simplify multiple
subsidy compliance. Many rural residents seek to re-tool and to improve
their employment status by pursuing university, college, community
college and vocational school. CARH has recognized this need for
skilled training and has created a scholarship fund for residents of
affordable housing to assist with college and vocational school costs.
The proposed legislation would provide for a fixed floor rate
for acquisition credits at no less than 4 percent and should similarly
remove the uncertainty and financial complexity of the floating rate
system, simplify state administration, and facilitate preservation of
affordable housing at little or no cost to the federal government.
Acquisition credits are currently set by the floating rate system just
like new construction and substantial rehab credits were before the
Housing and Economic Recovery Act (HERA) of 2008. A floating rate makes
it very difficult to plan and assemble capital necessary for
development. This fixed rate would potentially provide additional
private capital to preservation transactions, greatly reducing the
funding gap now being created from reduced credit pricing provided by
investors.
S. 548 provides up to a 50 percent basis boost of Affordable
Housing Credits for developments serving extremely low-income families
and individuals in at least 20 percent of the units, as well as
allowing states to provide up to a 30 percent basis boost for Housing
Bond-financed properties. This provision will provide parity between
Housing Bond-financed developments and those that use allocated Housing
Credits. As noted above, rural properties tend to serve very low and
extremely low income persons with the average annual household income
in unsubsidized Section 515 properties of only $12,960.
It is also important to note that Affordable Housing Credit properties
can improve neighborhoods and property values. This very positive
effect was discussed in ``A Surprising Way to Increase Property Values:
Build Affordable Housing,'' Washington Post, July 6, 2017 by Tracy Jan,
which pointed to the November 2016 study by Rebecca Diamond and Tim
McQuade at Stanford University. Their conclusion, based on their
research, is that the Affordable Housing Tax Credit revitalizes low-
income neighborhoods, increases housing prices 6.5%, lowers crime rates
and attracts racially and income diverse populations.
Other Affordable Housing Credit Proposals
While not part of S. 548, it is worth noting that rural housing
providers and developers have discussed additional ways to potentially
bring in capital with the Affordable Housing Credit in rural areas:
(1) Affordable Housing Credits should be available to S
Corporations, Limited Liability Companies, and closely-held C
Corporations to the same degree Affordable Housing Credits are
currently available to widely held C Corporations, to offset revenue
with Affordable Housing Credits that would otherwise be taxable when
passed through to the owners of these businesses. The Federal Internal
Revenue Code restricts potential Affordable Housing Credit investors
through passive loss limitations, limiting the ability of associations
that are not real estate professionals from investing. To ensure high
standards of oversight, such entities should have at least $10 million
in annual gross receipts, be formed for reasons other than just
avoidance of Federal income tax, and have an expectation of reasonable
asset management. This proposal is aimed at accessing substantial
investment capital available from sophisticated financial institutions
and businesses that happen not to be widely-held Schedule C
corporations. Indeed, this change would allow the 1,954 commercial
banks and 55 savings institutions to invest in low-income housing tax
credits in the communities in which they operate.
(2) Another barrier to preservation and tenant protection is an
unintended one, resulting from a conflict between the tax code and
market forces. Almost all Rural Development (RD) Section 515 properties
were constructed through limited partnership arrangements whose
structure makes it exceedingly difficult to introduce new capital into
these properties, either through additional capital contributions from
current owners or through the transfer of such properties to new
owners. Most were also created before the 1986 Tax Reform Act. Because
rent restrictions limit cash flow, new capital contributions would only
generate additional passive losses that cannot be utilized by current
investors. Yet, if the current owners sell a property it is almost
impossible to generate sufficient cash to pay off the steep recapture
taxes that would be owed. The best alternative for current limited
partners is to hold the investment until death, enabling their heirs to
acquire the property with a stepped up basis that avoids any recapture
taxes. While that is a perfectly rational decision at the partner
level, it is not consistent with sound housing policy and risks
imposing far higher costs on the federal government, as these capital-
starved properties either continue to deteriorate into substandard
housing or are sold off as market rate housing as a means of generating
cash on the sale to pay exit taxes for investors.
A modest change in the tax rules must be adopted to preserve
the stock of Section 515 affordable housing. This could be accomplished
by waiving the depreciation recapture tax liability where investors
sell their property to new owners who agree to invest new capital in
the property and to preserve it as affordable housing for another 30
years. Since very few investors subject themselves to recapture taxes
today, opting instead to pass the property to their heirs at a stepped-
up basis, the cost of this proposal should be modest while the benefit
to the federal government of extending the affordability restrictions
will be far-reaching. During the 111th Congress, legislation was
introduced, H.R. 2887, the Affordable Housing Tax Relief Act of 2009,
which if enacted, would have embodied this concept.
Other Essential Tools Needed With the Affordable Housing Credit
Rural housing is dependent on several sources of funding for
construction and preservation of the existing housing stock. While much
focus deservedly is on the Affordable Housing Credit, there needs to be
a tool box with a variety of tools. Just like needs and resources can
differ in different places, there must be a broad set of tools to mix
and match to get the most effective solution.
RD has the Section 538 guaranteed loan program, HUD has the HOME
program, both widely used in rural rental housing. But the existing
portfolio under stress is the Section 515 Rural Multifamily Housing and
Section 514 Farm Labor Multifamily properties which are a lynchpin for
affordable rural housing. These 514/515 programs supply mortgages to
more than 14,000 apartment communities. However, RD calculates 74
projects with 1,788 units are maturing out of the program each year
over the next 12 years. This not only means a loss to the program, the
project based Section 521 rental assistance (``RA'') provided to the
tenant is also lost when the Section 514/515 mortgage matures because
these programs are tied together by statute.
The RA program has been adjusted solely through the appropriations
process for about two decades. While we appreciate the hard work of
appropriators in both the House and Senate, we believe it is time for a
thorough review through the Congressional authorizing committees (the
House Financial Services and the Senate Banking, Housing and Urban
Affairs Committees), and that hearings on the Agency programs and
proposals should be a priority for the Congress.
Congressional review should also include program updates such as the
ability to utilize flexible rents and longer term rent incentives to
more efficiently occupy vacant units at turnover. Another simple
improvement to make RA more efficient is to provide 20 year contracts,
subject to annual appropriations. Not only would this reduce the costs
associated with reprocessing contracts on an annual basis without
increased appropriations, it would also create a more reliable subsidy.
This will help attract potential investors and lenders to Section 514
and 515 properties. Most of these properties are 35+ years old and are
ready for modernization.
Affordable Rural Housing Is Part of a Healthy Economy and Provides Jobs
In 2002, RD estimated that 4,250 Section 515 properties with 85,000
units ``will physically deteriorate to the point of being unsafe or
unsanitary within the next 5 years.'' At that time, RD estimated it
would need $850 million to maintain just this portion of the portfolio,
and that as much as $3.2 billion will be required for portfolio-wide
rehabilitation. Little progress has been made since 2002. Adjusted for
inflation, the 2002 $3.2 billion estimate is now approximately $5.5
billion. Due to RD's policies over the past 6 years, the RD multifamily
portfolio is under 15,000 projects for the first time in 20 years. In
2016, RD contracted for its own study, which confirmed the existence of
significant deferred maintenance. At this rate of lost properties, we
encourage preservation prioritization of existing properties ahead of
new construction, as it is much more cost effective to complete a
substantial rehabilitation compared to the cost of building new.
Providing for this portfolio will not only care for the extremely low
income families and elderly residents, but will improve infrastructure
and create jobs. For each 100 apartment units, 116 jobs (plus an
additional 32 recurring local jobs) are created, generating more than
$3.3 million in federal, state and local revenue. Moreover, many rural
areas are facing worker shortages due to the lack of available
affordable housing near rural jobs.
In conclusion, affordable housing plays a critical role in rural
communities across America. There is not a single solution to this
national affordable housing crisis. It takes a village. And thus, we
encourage and support the continued Congressional efforts to do your
part in prioritizing the protection of the essential housing stock in
rural areas.
Thank you for this opportunity to provide written testimony to the
Committee.
______
Council of Large Public Housing Authorities (CLPHA)
455 Massachusetts Avenue, NW, Suite 425
Washington, DC 20001-2621
phone: 202-638-1300
fax: 202-638-2364
web: www.clpha.org
Statement of Sunia Zaterman, Executive Director
The Council of Large Public Housing Authorities (CLPHA) is pleased to
submit the following statement for the record to the Senate Finance
Committee and appreciates the opportunity to weigh in on this important
topic.
CLPHA is a non-profit organization committed to preserving, improving,
and expanding the availability of housing opportunities for low-income,
elderly, and disabled individuals and families. CLPHA's members
comprise more than 70 of the largest housing authorities, in most major
metropolitan areas in the United States These agencies act as both
housing providers and community developers, effectively serving over 1
million households, managing almost half of the nation's multi-billion
dollar public housing stock, and administering over one-quarter of the
Section 8 Housing Choice Voucher program.
We are grateful to the Committee for calling attention to the deepening
affordable housing crisis facing many American families. We applaud
Finance Committee Chairman Orrin Hatch's and Committee member Senator
Maria Cantwell's leadership in championing legislation to expand and
strengthen the Low-Income Housing Tax Credit (LIHTC), our nation's
primary tool for encouraging private investment in affordable rental
housing.
America's affordable rental housing crisis is growing.
A lack of stable, affordable housing is one of the biggest threats to
economic success that any American can face. Stagnating wages along
with declines in homeownership rates have exacerbated the demand for
rental housing to its highest level since the mid-1960s, driving up
rents, especially in areas with low vacancies. Stable, affordable
housing also plays a crucial role in improving outcomes for low-income
families across sectors like health and education. Research has shown
that housing stability is foundational to academic achievement for
children; securing and maintaining employment for adults; and accessing
health and prevention services.
Currently, there are more than 11 million renter households--
approximately one out of every four--who spend more than half of their
income on rent. This leaves little room for other necessary expenses
like transportation, food, medical bills, and education. Additionally,
low-income renters that spend more than 50 percent of their rent on
housing are at increased risk of becoming homeless. According to the
Harvard University Joint Center for Housing Studies, the number of
households spending more than 50 percent of their income on rent is
expected to rise at least 11 percent from 11.8 million to 13.1 million
by 2025. This is coupled with the fact that the affordable housing
supply is not keeping up with the demand. For every 100 extremely low-
income (ELI) renter households in 2015, there are only 31 available and
affordable units, amounting to a shortfall of 7.2 million available and
affordable homes. This trend is further confirmed in HUD's recently
released Worst Case Housing Needs 2017 Report to Congress which found
that ``despite continued signs of a strengthening national economy . .
. severe housing problems are on the rise.''
Public housing and the Low-Income Housing Tax Credit are vital tools to
address the nation's affordable housing needs and bolster economic
activity.
As one of the nation's largest sources of affordable housing, public
housing plays a central role in providing stable housing to America's
most vulnerable citizens; connecting low-income workers to economic
opportunities; and spurring regional job creation and economic growth.
A multibillion dollar public asset for local communities; public
housing is home to over 1.1 million low-income families, including
800,000 children. Over half of public housing households are elderly or
disabled, and more than half of non-elderly, non-disabled households
consist of working families.
Despite the growing need for and proven benefits of affordable housing,
federal appropriations for the maintenance and capital repair of public
housing has declined severely over the past several years, making it
impossible even to keep up with the new repair needs that arise each
year for public housing properties. This adds to the backlog of capital
needs, which currently stands at over $26 billion nationwide. Increased
disinvestment has led to the substantial loss of over 300,000 public
housing units since 1990, and approximately 12,000 units each year,
resulting in fewer and fewer people served by the program.
The Low-Income Housing Tax Credit (LIHTC) program, authorized in 1986,
has become the nation's primary source of funds for the production and
rehabilitation of affordable housing. As a model private-public
partnership program, LIHTC has employed private sector resources,
market forces, and state-level administration to finance more than 3
million affordable apartments--nearly one-third of the entire U.S.
inventory. Particularly as federal appropriations for the public
housing capital funds have decreased, LIHTC has proven to be an
essential tool in leveraging private investment to redevelop distressed
public housing across the country.
Since the federal Capital Fund dollars appropriated are insufficient to
redevelop public housing, housing authorities heavily depend upon tax
credit investment to improve and rehabilitate their properties.
Important platforms such as the Choice Neighborhoods Initiative (CNI),
the Moving to Work (MTW) program, mixed financing, and most recently,
the Rental Assistance Demonstration (RAD) program, have been the only
mechanisms available to housing authorities to partner with non-profit
and private developers in using tax credits to revitalize much-needed
public housing properties. Through these platforms, housing authorities
are able to combine scarce public housing capital funding with private
and other public resources, including tax credits, in a layered
financing process in order to rehabilitate properties and revitalize
communities. Under the RAD program, housing authorities have been able
to rehabilitate and convert over 61,000 public housing units to date,
leveraging approximately $4 billion in new private and public funds,
which equates to a 9:1 ratio of private dollars to public housing
dollars.
Additionally, the revitalization of public housing provides positive
economic benefits to families and communities. Research has shown that
for every $1 spent on rehabilitation funding for public housing, an
additional $2.12 is generated in regional economic activity,
contributing to local tax revenue and supporting job creation and
retention. Per $1 million spent, public housing outpaces other sectors
when it comes to job creation and generating economic activity.
However, a lack of affordable housing has been shown to negatively
impact economies. Researchers estimate that the growth in GDP from
1964-2009 would have been 13.5 percent higher if families had better
access to affordable housing. This would have led to a $1.7 trillion
increase in total income, or $8,775 in additional wages per worker.
Overall, the shortage of affordable housing in major metropolitan areas
costs the American economy about $2 trillion a year in lower wages and
productivity.
Congress should expand and strengthen the Low-Income Housing Tax
Credit.
The LIHTC program continues to be an extremely important preservation
tool for public housing and for the overall production and
rehabilitation of affordable housing. CLPHA strongly supports the
efforts of Senator Hatch and Senator Cantwell and others on the
Committee to expand and strengthen the LIHTC program. Housing
authorities have a long history of leveraging private equity through
LIHTCs to fill the funding gap created by decreased federal
appropriations. Housing authorities have acknowledged that without the
LIHTC program, the preservation of their public housing stock would not
be possible.
To meaningfully grow our economy and address our nation's growing
affordable housing needs through tax reform, we urge the Committee to
support Senator Cantwell and Senate Finance Committee Chairman Hatch's
Affordable Housing Credit Improvement Act of 2017 (S. 548). This
legislation would increase LIHTC allocation authority by 50 percent
phased in over 5 years, and enact roughly two dozen changes to
strengthen the program by streamlining program rules, improving
flexibility, and enabling the program to serve a wider array of local
needs.
CLPHA is well aware that competition for more valuable 9% LIHTC is
fierce in many states and that there have been concerns within the
affordable housing community about increased demand from the public
housing portfolio. Increasing the allocation authority by 50 percent
would support the preservation and construction of up to 400,000
additional affordable apartments over a 10-year period, including vital
public housing units that are at-risk. Additionally, the legislation
allows for an increased basis boost for projects serving extremely low-
income households. This would be particularly beneficial to housing
authorities, as 75% of public housing residents are extremely-low
income.
The legislation would also generate a host of benefits for local
communities, including increased local tax revenue, local income, and
jobs, all benefits that meet the Committee's goals for tax reform. An
investment in LIHTC is an investment in individuals, local communities,
and the economy. CLPHA applauds the leadership the Senate Finance
Committee has shown in support of LIHTC to date and urges the Committee
to expand and strengthen the program.
Thank you for the opportunity to submit our views for the record, and
we ask that you give them your full consideration.
______
Local Initiatives Support Corporation (LISC)
1825 K Street, NW, Suite 1100
Washington, DC 20006
The Local Initiatives Support Corporation (LISC) is pleased to provide
a statement for the record with respect to the Committee's hearing on
``America's Affordable Housing Crisis: Challenges and Solutions,'' held
on August 1, 2017.
As one of the largest national nonprofit housing and community
development organizations in the country, LISC often relies upon
public-private partnerships to engage in the type of comprehensive
community development work that is needed in low-income communities.
The Low-Income Housing Tax Credit (Housing Credit) is the single most
important federal resource available to encourage private sector
investments in the development and rehabilitation of affordable housing
for low, very-low and extremely low-income renter households. As
discussed further below, Congress must act to preserve and strengthen
this successful program; and should also consider enacting a new tax
incentive, the Neighborhood Homes Tax Credit, to spur investments in
single family homes in communities characterized by high rates of
vacancy and low property values.
Background on LISC
Established in 1979, LISC is a national non-profit Community
Development Financial Institution (CDFI) that is dedicated to helping
community residents transform distressed neighborhoods into healthy and
sustainable communities of choice and opportunity--good places to work,
do business and raise children. LISC mobilizes corporate, government
and philanthropic support to provide local community development
organizations with loans, grants and equity investments; technical and
management assistance; and policy support.
LISC has local programs in 31 cities, and partners with 77 different
organizations serving over 2,000 rural counties in 44 states throughout
the country. LISC focuses its activities across five strategic
community development goals:
Expanding investment in housing and other real estate;
Increasing family income and wealth;
Stimulating economic development;
Improving access to quality education; and
Supporting healthy environments and lifestyles.
Background on the Housing Credit
Supported on a broad bipartisan basis, the Housing Credit was enacted
as part of the Tax Reform Act of 1986, the last major overhaul of the
tax code. The Housing Credits are allocated to the states through a
formula allocation, and then awarded through competition to developers
of qualified projects. Developers sell the property to investors to
raise equity capital for construction of their projects, thus reducing
the debt service and allowing the projects to provide affordable rents
to low-income families. Investors claim the credits over a 10-year
period, and are at risk of tax credit recapture for an additional 5
years if the property does not remain in compliance with the rules.
To date, the Housing Credit has financed the development of
approximately 3 million affordable homes across the nation with
projects in every state, leveraged more than $100 billion in private
capital, and helped to create well over 3 million jobs in the
construction and property management industries.\1\ It is the country's
most successful affordable housing production program.
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\1\ ``Low-Income Housing Tax Credit Impacts in the United States,''
Affordable Rental Housing ACTION Coalition.
LISC, through its subsidiary the National Equity Fund (NEF), is one of
the nation's largest syndicators of Housing Credits. To date, NEF has
invested $13.3 billion in close to 2,500 housing properties, creating
approximately 159,000 affordable homes for low-income families in 46
states, and spurring the creation of an estimated 194,000 jobs. In
recent years, LISC has been able to use the credit to support disaster
recovery efforts, a veterans housing initiative, and an initiative to
link housing to critical community health services.
Successful Attributes of the Housing Credits
The Housing Credit has achieved tremendous success in financing
affordable housing in rural, urban and suburban communities throughout
the country. Some of the more noteworthy characteristics that have led
to the success of these credits include:
1. The credits correct market failures. The potential financial return
achieved via the tax credit enables investment in projects that would
not otherwise produce profitable returns. This is clearly evidenced
with respect to Housing Credit investments, where it's been
demonstrated that a typical housing project would have to reduce its
construction costs by 72 percent to be able to serve a low-income
family at an affordable rent.\2\
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\2\ Harvard University Joint Center for Housing Studies (JCHS),
``America's Rental Housing,'' (2011).
2. The credits are responsive to locally determined needs. The Housing
Credits are allocated by state housing finance agencies, which
determine the state's affordable housing priorities in annual funding
rounds. Based on the needs within the states and localities, priorities
in any given year could include elderly housing, veterans housing,
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units serving homeless families, workforce housing, rural housing, etc.
3. The competition for credits produces better outcomes. Applications
for the Housing Credit typically outpace availability by 3 to 1, and in
some states this ratio is as high as 7 to 1. This competition drives
applicants to achieve better outcomes than are minimally required in
program regulations. Most notably:
Housing Credit properties must satisfy affordability
requirements for 30 years after completion, but state allocating
agencies often require much longer affordability periods as a condition
of allocation.
Housing Credit units must be affordable to persons
making less than 60 percent of area median income (AMI), but states set
higher goals to achieve deeper income targeting. As a result, the most
recent Department of Housing and Urban Development (HUD) data indicate
that 48 percent of Housing Credit units are occupied by families making
less than 30 percent of AMI and 82 percent are occupied by families
making less than 50 percent of AMI.\3\
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\3\ U.S. Department of Housing and Urban Development, Office of
Policy Development and Research, ``Data on Tenants in LIHTC Units as of
December 31, 2013'' (2016).
4. The tax credit structure allows for more efficient program
administration. Investors--with their own capital at risk--impose
underwriting and asset management oversight. The investor due diligence
leads to a more robust and efficient compliance monitoring system, and
results in projects that are financially strong. For instance, Housing
Credit properties far outperform other real estate classes, with
occupancy rates topping 96 percent nationwide and a cumulative
foreclosure rate of just 0.66 percent over the program's history.\4\
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\4\ ``The Low-Income Housing Tax Credit at Year 30: Recent
Investment Performance (2013-2014).''
In addition, investors and developers--not taxpayers--assume the
financial risks of these projects. If projects are not in compliance
with statutory requirements, tax credits are forfeited back to the
Treasury. In the case of the Housing Credit, investors cannot even
begin claiming credits until the apartments are occupied by low-income
families at affordable rents. This is in stark contrast to most federal
grant-making programs, in which grants are advanced and an agency must
seek a return of funds (often after they are already spent) in the case
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of program noncompliance.
5. The credits provide a great return on investment for the Federal
government. The National Association of Homebuilders estimates that, on
an annual basis, the Housing Credit produces 95,000 new, full-time
jobs, adds $6.8 billion into the economy, and generates approximately
$2 billion in federal, state and local tax revenues.
Uniqueness Within the Tax Code
The Housing Credit is distinct from almost every other type of tax
credit, in at least two critical ways:
1. It spurs activity that would not occur but for the tax incentive.
Most federal tax benefits reward business behavior that already
directly aligns with their operational interests. While these tax
benefits may have some effect on business behavior, it is likely on the
margins of activities in which they are already likely to engage even
in the absence of the tax incentive. Conversely, the Housing Credit
directs investments to activities in which companies would not
otherwise invest in because: (a) it does not further their normal
business operations; and/or (b) if not for the benefits provided in the
tax code, they would not be profitable for the company. So if these
credits were to disappear, so too would the investments.
2. The benefits of the credit extend far beyond the investors to
fulfill a broader public need. The Housing Credit fulfills a
fundamental public purpose that most other credits do not. As with all
tax credits and deductions contained within the tax code, the entity
claiming the Housing Credit does achieve a financial benefit in the
form of reduced tax payments. However, the Housing Credit is among one
of very few tax benefits provided in the corporate tax code that focus
exclusively on improving the lives of low-income persons and low income
communities (the New Markets Tax Credit being the other most notable
one). In other words, unlike most other provisions in the tax code
which solely benefit a corporation's bottom line, the ultimate
beneficiaries of these credits are the end users: the low-income family
that is paying significantly below-market rent, thus freeing up more
resources for the family to cover other critical expenses and to save
for education, retirement, homeownership or other activities that will
better enable the family to escape the cycle of poverty.
Priorities for Tax Reform
Protect and expand the Housing Credit. The Housing Credit is a
permanent part of the tax code, enacted in 1986 as part of the last
major tax reform effort. However, despite its longevity and its track
record of success, there may be some who would seek to scale back or
even eliminate this credit to help offset a reduction to the overall
corporate tax rate. To do so would put the future of the country's
strongest program for affordable housing development in great jeopardy
at a time when demand for affordable housing continues to increase.
It is noteworthy that the Bipartisan Policy Center's Housing
Commission, which was co-chaired by two former Secretaries of HUD (one
a Democrat and one a Republican) and two former Senators (one a
Democrat and one a Republican), released a report in 2013 not only
citing the critical role of the Housing Credit in supporting affordable
housing, but also calling for an expansion of the Housing Credit by 50
percent over current funding levels. While LISC recognizes the
importance of fiscal restraint as part of the tax reform exercise, we
also believe that tax reform presents an opportunity for reflection on
what truly has worked in the tax code, and every consideration should
be given to expanding this vital initiative.
In considering additional measures to protect and strengthen the
Housing Credit, the best starting point is The Affordable Housing
Credit Improvement Act (S. 548), the bi-partisan legislation introduced
by Senator Hatch and Senator Cantwell which would, among other things:
Increase the formula for allocating the credit by 50% over 5
years;
Streamline program requirements and provide states with
additional flexibility;
Facilitate Housing Credit development in challenging markets,
including rural and Native American communities;
Increase the Housing Credit's ability to serve extremely low
income populations;
Better support the preservation of existing affordable housing;
and
Enhance the ``4% credit'' and multifamily housing bond portion
of the program.
In addition, as the Committee undertakes efforts to reform the broader
tax code, it needs to consider making adjustments to the applicable
housing credit rate (i.e., the 9% or 4% rate) to offset the impact that
a lower corporate tax rate and/or changes to depreciation would have on
utilization of the Housing Credit. It also needs to retain the
multifamily housing private activity bonds, which are used in
conjunction with the 4% credit and account for about 40% of all Housing
Credit production annually.
Create a new Neighborhood Homes Tax Credit. LISC, along with many other
organizations, is calling for the creation of a Neighborhood Homes Tax
Credit (NHTC). The NHTC is designed to attract private capital to
support investment in single family homes in communities where the
costs of developing and rehabilitating homes for sale exceed the
appraised value of the home. The NHTC would provide the developer or
investor with a tax credit to cover this ``appraisal gap.'' The tax
credit would work as follows:
State allocating agencies (most likely the state Housing Finance
Agencies) would be allocated a new tax credit authority and/or be given
the flexibility to convert unused private activity bond authority or
mortgage credit certificate authority into NHTCs.
The credits would be awarded by the state agencies to eligible
entities through an annual competition. The eligible entity would
identify a strategy for developing or rehabilitating properties in
eligible communities, either for new homes, existing owner-occupied
homes, or for homes that are vacant and will be brought to market. The
eligible entities could be developers or financial institutions,
including non-profit CDF is or other entities looking to capitalize a
loan pool.
States would allocate only the tax credits reasonably needed for
financial feasibility, determined both at the time of application and
again when homes are sold or owner-occupied rehabilitations are
completed.
Program limitations would ensure the credit is benefitting the right
projects and communities.
The maximum value of the credit would be 35% of
construction, substantial rehabilitation, and building acquisition and
demolition costs.
The maximum cost basis for calculating the tax
credits could not exceed the national median existing home sales price
or four times the area MFI, whichever is higher.
The credits would generally only be available to
support homeownership by low income and middle-income homebuyers.
Only those neighborhoods characterized by some
combination of high poverty, low median family income and low home
values would be eligible for investments. In addition, the states would
be required to further define neighborhood eligibility requirements to
ensure that the program is not targeting neighborhoods where there has
been a recent influx of investment marked by improving property values,
higher rents or a displacement of lower-income families.
The NHTC addresses the need for neighborhood revitalization in
communities hit with blocks of home foreclosures and vacant properties.
Vacant properties inflict heavy costs on American communities: blight,
crime, lowered home values, and decreased property tax revenue. There
are mounting costs and difficulties associated with vacant and
abandoned properties, especially when concentrated within
neighborhoods. There are negative spillover effects ranging from crime
and safety to reduced property values and increased costs for municipal
governments. RealtyTrac found that 142,462 U.S. properties in the
foreclosure process were vacant, representing 25 percent of all
properties in the foreclosure process. The states with the most owner-
vacated foreclosures were Florida with 35,903 (25 percent of the
national total), New Jersey (17,983), New York (16,777), Illinois
(9,358), and Ohio (7,360).\5\
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\5\ ``One in Four U.S. Foreclosures are `Zombies' Vacated by
Homeowner, Not Yet Repossessed by Foreclosing Lender.'' RealtyTrac.
Feb. 5, 2015.
Part of the reason property abandonment becomes contagious is because
it lowers nearby home values making it more difficult to attract
mortgage capital to an area. This makes it harder for people to sell
their homes, in turn causing lenders to lower appraisals or to deny
loans entirely. Vacant properties deteriorate and the underlying value
of the property declines, causing neighboring property values to also
decline.\6\ These neighborhoods are trapped in a cycle where low
property values prevent the construction of new homes and the
renovation of attractive of existing homes, and where the absence of
these investments keeps property values unsustainably low. Declining
homeownership rates, property abandonment, the erosion of family
assets, and concentrated poverty are too often the result. Studies
attempting to quantify the effect of foreclosures on surrounding
property values find that foreclosures depressed the sales prices of
nearby homes by as little as 0.9 percent to as much as 8.7 percent.\7\
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\6\ http://www.communityprogress.net/filebin/
CCP_BaltimoreTASP_Final_Report_102616.pdf.
\7\ W. Scott Frame. ``Estimating the Effect of Mortgage
Foreclosures on Nearby Property Values: A Critical Review of the
Literature.'' Federal Reserve Bank of Atlanta, Economic Review, Nov. 3,
2010.
The NHTC would provide an effective and necessary tool for revitalizing
blighted neighborhoods. As noted above, the NHTC would fill the gap
between cost of construction and the appraised value of the property,
with the private market bearing construction and marketing risks--much
as is done with the Housing Credit. However, the Housing Credit, which
was designed to create affordable rental housing for low- and very-low
income families, cannot readily be utilized to support homeownership
housing. And while tax exempt private activity bonds and mortgage
credit certificates (MCCs) do support homebuyers by reducing mortgage
interest costs, these incentives cannot fill the gap between
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development or renovation costs and appraised home values.
Only those neighborhoods characterized by some combination of high
poverty, low median family income, and low home values would be
eligible for NHTC investments. In these neighborhoods, where inventory
is high and appraisals are low, it is simply not possible for the
private sector to invest in these properties without additional
subsidy. By creating this incentive through the tax code, financial
companies will now be able to participate in the recovery of these
communities.
Although legislation authorizing the NHTC has not yet been introduced
in the 115th Congress, similar legislation was proposed by the George
W. Bush administration and was introduced in the 108th Congress and
received tremendous bi-partisan support. The Senate legislation (S.
875) had 46 co-sponsors, and the House legislation (H.R. 839,
introduced by then Congressman Portman and Congressman Cardin) had 304
co-sponsors.
Conclusion
The Housing Credit has a proven track record of success in producing
affordable housing, is a unique fixture within the tax code that cannot
readily be replaced by other public or private sources of capital. The
corporate investors who will benefit from lower tax rates will not be
negatively impacted by the elimination of these tax incentives, but
lower income individuals and communities will. The scaling back or loss
of this tax incentive would be felt immediately and could be
irreversible. To this end, it should be the priority of Congress to
preserve and strengthen these invaluable credits, and to support a new
Neighborhood Homes Tax Credit to provide a needed incentive to spur
homeownership in many of these same blighted communities.
Thank you for your consideration of our comments.
Matt Josephs
Senior Vice President for Policy, LISC
______
LOCUS
1707 L St., NW, Suite 1050
Washington, DC 20036
202-207-3355
www.locusdevelopers.org
Chairman Hatch, Ranking Member Wyden, and Members of the Committee,
thank you for holding today's hearing on the pressing need for more
affordable housing in communities across our country.
LOCUS is a national coalition of real estate developers and investors
who advocate for sustainable, equitable, walkable development in
America's metropolitan areas. Our members are among our nation's
leading developers--representing billions of dollars of investment
annually--and they see every day the pent-up demand for attainable
residential and commercial development in communities with a great
sense of place.
As you know, the primary policy for promoting the construction of
affordable housing today is the Low-Income Housing Tax Credit (LIHTC).
Many of our members use this vital tool in their work and LOCUS
strongly supports LIHTC. As evidenced by the unmet need though, we
believe we can do more.
First, LOCUS supports strengthening the existing LIHTC program.
Legislation introduced by Senator Cantwell and Chairman Hatch, the
Affordable Housing Credit Improvement Act of 2017 (S. 548), would
increase LIHTC allocations by 50% and gives states and developers more
flexibility to use credits in ways that reflect their local markets.
Second, Ranking Member Wyden's proposal to create a Middle-Income
Housing Tax Credit (MIHTC) would help fill a critical gap between
LIHTC-eligible projects and truly attainable housing. The reality is
that many families that make too much for LIHTC eligible projects still
struggle to find affordable housing. In addition, both the Cantwell
Hatch bill and the Wyden proposal would promote more of the mixed-
income housing that our members have seen is crucial for building
vibrant communities.
Finally, we also believe tax reform presents a unique opportunity to
create an outcome based framework that encourages greater private
capital investment in attainable housing and ``making doing the right
thing profitable'' during neighborhood revitalization projects.
Even though rehabilitating existing buildings and neighborhoods can
increase the local tax base and save municipalities money by reusing
and improving valuable public infrastructure, decades worth of deferred
infrastructure maintenance can make neighborhood redevelopment projects
cost-prohibitive.
LOCUS believes the most effective way to accomplish this is to convert
the existing Rehabilitation Tax Credit under Section 47 into a
Neighborhood Rehabilitation and Investment Credit.
Under the LOCUS proposal, the historic credit would not change, however
the Rehabilitation Tax Credit in Section 47 of the Internal Revenue
Code would be converted from a 10 percent credit into a scalable and in
some cases refundable credit; broadening eligibility to include
redevelopment and public infrastructure costs beyond those associated
with a specific building; making residential buildings eligible for the
credit; rewarding projects that include greater affordable housing and
community services; and changing the age criteria so that any building
over 50 years old would be eligible for the credit. Overall, credit
would be applied to an entire redevelopment project instead of just an
individual building, including adjacent new construction,
infrastructure and community services.
In its current form, the Rehabilitation Credit can only be claimed for
buildings built before 1936, making a huge amount of development
projects ineligible. In addition, the credit can only be claimed for
individual buildings and not for larger projects. For many developers,
this makes the credit too cumbersome to use.
And finally, the credit right now can only be used for commercial
development. This excludes residential properties, which could also
obviously benefit from the credit, and also makes using the credit on
mixed-use development--where part of the property is eligible and part
is not--extremely challenging.
Under the LOCUS proposal, there will be an incentive for all developers
and investors to incorporate fiscally responsible and economically
enhancing place-making principals of rehabilitation, transit
orientation, mixed-use, affordability and walkability into their plans.
We believe this proposal is consistent with tax reform principles of
simplification, modernization and pro-growth job creation. But we also
understand the need for trade-offs in tax reform. LOCUS has also
endorsed reforms to elements of the federal tax treatment of real
estate that have encouraged sprawling, drivable development over dense,
walkable communities. For instance, we support further limitations on
the mortgage interest deduction and the exclusion of gains from the
sale of a primary residence.
Thank you for your consideration, and we look forward to working with
you and your staff.
______
National Affordable Housing Management Association (NAHMA)
400 North Columbus Street, Suite 203
Alexandria, VA 22314
(703) 683-8630
(703) 683-8634 FAX
www.nahma.org
August 7, 2017
Chairman Orrin Hatch Ranking Member Ron Wyden
Senate Finance Committee Senate Finance Committee
U.S. Congress U.S. Congress
Dear Chairman Hatch and Ranking Member Wyden,
On behalf of the National Affordable Housing Management Association
(NAHMA), we greatly appreciate the opportunity to provide this
Statement for the Record to the Senate Finance Committee for the
hearing, ``America's Affordable Housing Crisis: Challenges and
Solutions,'' held on August 1, 2017. NAHMA would like to share our
perspectives about tax reform and the importance of the Low-Income
Housing Tax Credit (Housing Credit) with regards to affordable
multifamily housing programs, which are critical to providing quality
rental housing to families in need and to improving economic
opportunity for all Americans. As a member of A Call To Invest in Our
Neighborhoods (ACTION) Campaign, representing over 2,000 national,
state, and local organizations and businesses, NAHMA submits the
subsequent industry recommendations on how Congress can utilize tax
reform to further strengthen the Housing Credit.
NAHMA is the leading voice for affordable housing management,
advocating on behalf of multifamily property managers and owners whose
mission is to provide quality affordable housing. NAHMA supports
legislative and regulatory policy that promotes the development and
preservation of decent and safe affordable housing, is a vital resource
for technical education and information and fosters strategic relations
between government and industry. NAHMA's membership represents 75
percent of the affordable housing management industry, and includes its
most distinguished multifamily owners and management companies.
We are especially grateful for the leadership of Finance Committee
Chairman Hatch, Committee Ranking Member Wyden, and Committee Member
Cantwell in championing legislation to expand and strengthen the
Housing Credit, our nation's primary tool for encouraging private
investment in affordable rental housing. We strongly urge the Committee
to advance the Affordable Housing Credit Improvement Act of 2017 (S.
548) this year, and to protect both the Housing Credit and multifamily
Housing Bonds--a central component of the Housing Credit program--as
part of any tax reform effort considered by Congress.
The Housing Credit Has a Remarkable Track Record
President Reagan and the Congress showed remarkable foresight when they
created the Housing Credit as part of the Tax Reform Act of 1986. The
Housing Credit is now our most successful tool for encouraging private
investment in the production and preservation of affordable rental
housing, with a proven track record of creating jobs and stimulating
local economies. For over 30 years, the Housing Credit has been a model
public-private partnership program, bringing to bear private sector
resources, market forces, and state-level administration to finance
more than 3 million affordable apartments--nearly one-third of the
entire U.S. inventory--giving more than 6.7 million households,
including low-income families, seniors, veterans, and people with
disabilities, access to homes they can afford. Roughly 40 percent of
these homes were financed in conjunction with multifamily Housing
Bonds, which are an essential component of the program's success.
The Housing Credit Is a Proven Solution to Meet a Vast and Growing Need
Despite the Housing Credit's tremendous impact, there are still 11
million renter households--roughly one out of every four--who spend
more than half of their income on rent, leaving too little for other
necessary expenses like transportation, food, and medical bills. This
crisis is continuing to grow. HUD reports that as of 2015, the number
of households with ``worst case housing needs'' had increased by 38.7
percent over 2007 levels, when the recession began, and by 63.4 percent
since 2001. A study by Harvard University's Joint Center for Housing
Studies and Enterprise Community Partners estimates that the number of
renter households who pay more than half of their income towards rent
could grow to nearly 15 million by 2025.
Without the Housing Credit, there would be virtually no private
investment in affordable housing. It simply costs too much to build
rental housing to rent it at a level that low-income households can
afford. In order to develop new apartments that are affordable to
renters earning the full time minimum wage, construction costs would
have to be 72 percent lower than the current average.
The Housing Credit Creates Jobs
Housing Credit development supports jobs--roughly 1,130 for every 1,000
Housing Credit apartments developed, according to the National
Association of Home Builders (NAHB). This amounts to roughly 96,000
jobs per year, and more than 3.25 million since the program was created
in 1986. NAHB estimates that about half of the jobs created from new
housing development are in construction. Additional job creation occurs
across a diverse range of industries, including the manufacturing of
lighting and heating equipment, lumber, concrete, and other products,
as well as jobs in transportation, engineering, law, and real estate.
The Housing Credit Stimulates Local Economies and Improves Communities
The Housing Credit has a profound and positive impact on local
economies. NAHB estimates the Housing Credit adds $9.1 billion in
income to the economy and generates approximately $3.5 billion in
federal, state, and local taxes each year. Conversely, a lack of
affordable housing negatively impacts economies. Research shows that
high rent burdens have priced out many workers from the most productive
cities, resulting in 13.5 percent foregone GDP growth, a loss of
roughly $1.95 trillion, between 1964 and 2009.
Housing Credit development also positively impacts neighborhoods in
need of renewal. About one-third of Housing Credit properties help
revitalize distressed communities. Stanford University research shows
Housing Credit investments improve property values and reduce poverty,
crime, and racial and economic isolation, generating a variety of
socio-economic opportunities for Housing Credit tenants and
neighborhood residents.
Affordable Housing Improves Low-Income Households' Financial Stability
Affordable housing promotes financial stability and economic mobility.
It leads to better health outcomes, improves children's school
performance, and helps low-
income individuals gain employment and keep their jobs. Affordable
housing located near transportation and areas with employment
opportunities provides low-income households with better access to
work, which increases their financial stability and provides employers
in those areas with needed labor.
Families living in affordable homes have more discretionary income than
low-income families who are unable to access affordable housing. This
allows them to allocate more money to other needs, such as health care
and food, and gives them the ability to pay down debt, access
childcare, and save for education, a home down payment, retirement, or
unexpected needs.
The Housing Credit Is a Model Public-Private Partnership
The Housing Credit is structured so that private sector investors
provide upfront equity capital in exchange for a credit against their
tax liability over 10 years, which only vests once the property is
constructed and occupied by eligible households paying restricted
rents. This unique, market based design transfers the risk from the
taxpayer to the private sector investor. In the rare event that a
property falls out of compliance during the first 15 years after it is
placed in service, the Internal Revenue Service can recapture tax
credits from the investor. Therefore, it is in the interest of the
private sector investors to ensure that properties adhere to all
program rules, including affordability restrictions and high-quality
standards.
The Housing Credit Is State Administered with Limited Federal
Bureaucracy
The Housing Credit requires only limited federal bureaucracy because
Congress wisely delegated its administration and decision-making
authority to state government as part of its design. State Housing
Finance Agencies, which administer the Housing Credit in nearly every
state, have statewide perspective; a deep understanding of the needs of
their local markets; and sophisticated finance, underwriting, and
compliance capacity.
The Housing Credit Is Critical to Preserving Our Nation's Existing
Housing Investments
The Housing Credit is our primary tool to preserve and redevelop our
nation's current supply of affordable housing. Without the Housing
Credit, our ability to revitalize and rehabilitate our nation's public
housing and Section 8 housing inventory, decades in the making, would
be significantly diminished. In addition to putting the residents of
these properties at risk of displacement, we would lose these
investments that taxpayers have already made.
In rural areas, where direct funding for rural housing programs has
been cut significantly, the Housing Credit is the backbone for
preservation and capital improvements to the existing housing stock.
Low-income rural residents' incomes average just $12,960, and they are
often living in areas with extremely limited housing options, making
preservation of the existing housing stock crucial.
The Demand for Housing Credits Exceeds the Supply
Viable and sorely needed Housing Credit developments are turned down
each year because the cap on Housing Credit authority is far too low to
support the demand. In 2014--the most recent year for which data is
available--state Housing Credit allocating agencies received
applications requesting more than twice their available Housing Credit
authority. Many more potential applications for worthy developments are
not submitted in light of the intense competition, constrained only by
the lack of resources.
The scarcity of Housing Credit resources forces state allocating
agencies to make difficult trade offs between directing their extremely
limited Housing Credit resources to preservation or new construction,
to rural or urban areas, to neighborhood revitalization or developments
in high opportunity areas, or to housing for the homeless, the elderly,
or veterans. There simply is not enough Housing Credit authority to
fund all of the properties needed, but with a substantial increase in
resources, many more of these priorities would be addressed--and the
benefits for communities would be even greater.
Though the need for Housing Credit-financed housing has long vastly
exceeded its supply, Congress has not increased Housing Credit
authority permanently in 16 years.
We Urge Congress to Expand and Strengthen the Housing Credit
To meaningfully grow our economy and address our nation's growing
affordable housing needs through tax reform, we urge Congress to
increase the cap on Housing Credit authority by 50 percent. Such an
expansion would support the preservation and construction of up to
400,000 additional affordable apartments over a 10-year period. We also
call on Congress to retain the tax exemption on multifamily Housing
Bonds, which are essential to Housing Credit production.
The Affordable Housing Credit Improvement Act of 2017 (S. 548), which
would authorize such an expansion, has earned strong bipartisan support
in the Senate and among Senate Finance Committee members. This
legislation would increase Housing Credit allocation authority by 50
percent phased in over 5 years, and enact roughly two dozen changes to
strengthen the program by streamlining program rules, improving
flexibility, and enabling the program to serve a wider array of local
needs. The legislation would also generate a host of benefits for local
communities, including increased local tax revenue, local income, and
jobs, all benefits that meet the Committee's goals for tax reform.
An investment in the Housing Credit is an investment in individuals,
local communities, and the economy. It transforms the lives of millions
of Americans, many of whom are able to afford their homes for the first
time--and it transforms their communities and local economies. We
applaud the leadership the Senate Finance Committee has shown in
support of the Housing Credit to date and urges the Committee to expand
and strengthen the Housing Credit and multifamily Housing Bonds.
We look forward to working together with the Committee to preserve and
improve the Low-Income Housing Tax Credit throughout tax reform; the
Housing Credit and other multifamily housing programs are critical to
providing quality rental housing to families in need and to improving
economic opportunity for all Americans. Please don't hesitate to direct
any questions to NAHMA's Director of Government Affairs, Larry Keys, at
(703) 683-8630 ext. 111 or [email protected].
Sincerely,
Kris Cook, CAE
Executive Director
______
National Association of Housing and Redevelopment Officials (NAHRO)
630 Eye Street, NW
Washington, DC 20001-3736
(202) 289-3500
Toll Free: (877) 866-2476
Fax: (202) 289-8181
website: www.nahro.org
e-mail: [email protected]
Formed in 1933, NAHRO represents nearly 20,000 housing and community
development professionals and agencies. Collectively, our members
manage more than 950,000 public housing units, 1.6 million Housing
Choice Vouchers, approximately 70,000 Low-Income Housing Tax Credit
(LIHTC) units, and receive over $1.5 billion in Community Development
Block Grant (CDBG) and HOME Investment Partnerships (HOME) Program
funding to use in their communities. In all, NAHRO members provide
housing for more than 7.9 million low-income people. NAHRO is unique in
its ability to represent public housing agencies (PHAs), local
redevelopment agencies (LRAs), and other HUD grantees of all sizes and
geography. Many NAHRO members depend on LIHTC as a source of funding
for their affordable housing projects.
LIHTC is a critical tool for PHAs/LRAs preserving and creating
affordable housing. PHAs own and operate over 1.1 million units of
federally subsidized public housing, supporting low income families,
the elderly, disabled persons, and veterans. Although the public
housing inventory is an integral component of our nation's
infrastructure, chronic underfunding of the Capital and Operating Funds
(the two primary funding mechanisms of public housing) has placed the
inventory at risk, with a mounting capital needs backlog of well over
$26 billion. PHAs turn to LIHTC to preserve and revitalize their
distressed public housing inventory, and both PHAs and LRAs often take
advantage of LIHTC's leveraging power to secure other state, local,
federal resources (e.g., CDBG) for affordable housing projects that
revitalize their communities.
Last March, the Housing Authority of Salt Lake gathered alongside their
public and private partners to celebrate the opening of the 9th Lofts
at Bennion Plaza--a 68-unit mixed-use LIHTC development that will help
chip away at the city's 7,500 unit affordable housing deficit. The
project serves a mix of community low-income housing needs; a third of
the units are reserved for residents with specific needs beyond
affordability, including residents with physical disabilities, victims
of domestic violence, military veterans, and those transitioning out of
homelessness. Overall, NAHRO estimates that between 1984 and 2014,
LIHTCs awarded to PHAs/LRAs have supported at least 53,200 low income
housing units.\1\
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\1\ Department of Housing and Urban Development, Office of Policy
Development and Research: LIHTC Database. (https://www.huduser.gov/
portal/datasets/lihtc.html#about). Accessed on November 16, 2016.
The LIHTC is also important to the success of HUD's Rental Assistance
Demonstration (RAD). RAD allows PHAs to leverage public and private
debt and equity to address the capital needs backlog of their public
housing portfolios. For example, Home Forward (previously known as the
Housing Authority of Portland) is currently in the process of
converting 31 public housing properties, with a total of 1,063 units,
into Project-based Vouchers. Of the 31 properties undergoing
conversion, 30 of those projects would utilize LIHTCs in their
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financing to assist with necessary capital improvements.
HUD data shows that the LIHTC has been essential in many of the RAD
transactions closed by the Department thus far. Notably, 186 closed RAD
conversions, amounting to almost 21,000 public housing units, had LIHTC
in their financing.\2\ As a cost-neutral program, Congress has
supported RAD by expanding its current cap on conversions to 225,000
units. Without additional action to strengthen the LIHTC, this support
falls short of its intent.
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\2\ Department of Housing and Urban Development, Rental Assistance
Demonstration Resource Desk: RAD First Component Data. (http://
www.radresource.net/firstcomponent.cfm). Accessed July 27, 2017.
Currently there is a shortage of 7.2 million affordable and available
rental units for the nation's 11.4 million extremely low-income
households (those earning below 30 percent area median income [AMI]).
One in four renter households is spending over half of their income on
housing costs, and there is no state in the U.S. where a worker earning
full-time minimum wage can afford a modest, two-bedroom apartment.
NAHRO urges the committee to support a greater investment in the LIHTC
as part of any efforts to address the America's affordable housing
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crisis.
Additionally, the LIHTC program benefits middle-class families who
struggle with high housing costs. While the lowest-income renters
disproportionally make up the largest share of cost-burdened households
(those spending over 30 percent of income on housing costs), the
sharpest growth in cost burden shares have been among middle-income
households. Between 2001 and 2014, the share of cost-burdened
households in the $30,000-$44,999 income range increased from 37
percent to 48 percent, while households in the $45,000-$74,999 range
nearly doubled from 12 percent to 21 percent.\3\
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\3\ America's Rental Housing: Expanding Options for Diverse and
Growing Demand. Harvard Joint Center for Housing Studies, 2015.
NAHRO, along with the ACTION Campaign,\4\ urges the Committee to pass
the Affordable Housing Credit Improvement Act of 2017 (S. 548).
Provisions strongly supported by NAHRO include:
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\4\ The ACTION Campaign, of which NAHRO is a Steering Committee
member, is a national coalition of roughly 1,300 organizations and
businesses calling on Congress to expand and strengthen LIHTC. Learn
more at: http://rentalhousingaction.org/.
Expand the overall LIHTC allocation authority by 50 percent.
NAHRO supports this expansion since 9 percent LIHTCs are highly
competitive and difficult for PHAs/LRAs to secure. At a time where
other federal housing resources are limited, expanding the volume cap
by 50 percent will allow greater access for PHAs/LRAs, which would be a
meaningful step towards addressing our nation's growing affordable
housing deficit.
Establish a minimum 4 percent credit rate. In 2015, Congress
provided greater stability in the LIHTC market by establishing a
minimum 9 percent LIHTC rate. However, NAHRO members often turn to 4
percent LIHTCs because they are non-competitive and more accessible.
The current floating 4 percent rate is an impediment to projects.
Establishing a permanent rate will make project financing more
predictable and feasible.
Enable income averaging in LIHTC developments. Housing Credit
projects currently serve renters with incomes up to 60 percent of AMI,
and rents are comparably restricted. While states are encouraged to
give preference to developments that serve the lowest-income
populations, it can be difficult to make these developments financially
feasible, especially in certain areas where many of NAHRO's members are
located. Examples include: rural areas with very low median incomes,
economically depressed communities pursuing mixed-income
revitalization, and high-cost markets.
The LIHTC is the most successful tool for enabling and encouraging
private sector investment in the production and preservation of
affordable rental housing. It has been a critical source of equity for
almost 3 million affordable apartments over the last 30 years (almost
one-third of the entire U.S. inventory), providing over 6.7 million
low-income households with access to homes that they can afford.
The LIHTC spurs job creation and stimulates local economies. Since
1986, LIHTC developments have supported over 3.26 million jobs. The
National Association of Home Builders (NAHB) estimates that for every
1,000 apartments developed by LIHTC, roughly 1,130 jobs are created--
approximately 96,000 jobs per year. Additionally, LIHTC adds
approximately $9.1 billion in income to the economy and generates about
$3.5 billion in federal, state, and local taxes each year.
The LIHTC requires limited federal bureaucracy. The original
authorizers of LIHTC recognized the importance of local control in its
administration and decision-making authority. State and local housing
entities have a much greater understanding of the needs of their local
markets and possess the sophisticated finance, underwriting, and
compliance capacity necessary to administer LIHTC.
By preserving affordable housing, producing new housing options,
creating jobs, and helping struggling low- and moderate-income families
across the country, LIHTC program is a common-sense approach to
ensuring a stronger housing infrastructure.
Mr. Chairman and members of the Senate Finance Committee, thank you for
your interest in meeting the nation's affordable housing needs and
NAHRO welcomes your continued support of the LIHTC.
______
National Housing Conference
1900 M Street, NW, Suite 200
Washington, DC 20036
p 202-466-2121
f 202-466-2122
www.nhc.org
Members of the Senate Finance Committee,
The National Housing Conference thanks the Senate Finance Committee for
holding a hearing on ``America's Affordable Housing Crisis: Challenges
and Solutions,'' and appreciates your attention to the challenge of
housing affordability which affect s too many American households. Much
of the hearing focused on the Affordable Housing Credit Improvement
Act, S. 548, which Senator Maria Cantwell (D-WA) and Senate Finance
Committee Chairman Orrin Hatch (R-UT) introduced earlier this year.
This crucial piece of legislation would increase Housing Credit
authority, facilitate Housing Credit development in challenging markets
and for hard-to-reach populations, support the preservation of existing
affordable housing, and simplify program requirements. NHC is grateful
to Senator Cantwell and Chairman Hatch for their leadership, and to the
other Committee members--Ranking Member Ron Wyden (D-OR) and Senators
Dean Heller (R-NV), Michael Bennet (D-CO), Rob Portman (R-OH), and
Johnny Isakson (R-GA)--for their co-sponsorship support. NHC strongly
urges the Committee to advance the Affordable Housing Credit
Improvement Act as part of any tax legislation it considers.
The Housing Credit is a proven, effective solution to producing
affordable housing; strengthening and expanding it will help create and
preserve more rental homes for families and individuals, revitalize
neighborhoods, and spur private sector investment.
The Housing Credit has a remarkable track record, a model
public-private partnership program that has financed more than 3
million affordable homes.
The Housing Credit is a proven solution to meet a large and
growing need; 11 million renter households are severely cost burdened
and need affordable housing.
The Housing Credit stimulates local economies and improves
communities; Stanford University research shows Housing Credit
investments reduce poverty, crime, and racial and economic isolation.
The Housing Credit is state administered with limited federal
bureaucracy.
The Housing Credit is our primary tool to preserve and redevelop
our nation's current supply of affordable housing.
The demand for Housing Credits exceeds the supply. In 2014,
state Housing Credit allocating agencies received applications
requesting more than twice their available Housing Credit authority.
To meaningfully grow our economy and address our nation's growing
affordable housing needs as part of tax reform, NHC urges Congress to
increase the cap on Housing Credit authority by 50 percent which would
support the preservation and construction of up to 400,000 additional
affordable apartments over a 10-year period. We also call on Congress
to retain the tax exemption on multifamily Housing Bonds. S. 548 would
authorize such an expansion and has strong bipartisan support in the
Senate and among Senate Finance Committee members. This legislation
would also enact roughly two dozen changes to strengthen the program by
streamlining program rules, improving flexibility, and enabling the
program to serve a wider array of local needs.
An investment in the Housing Credit is an investment in people,
communities, and the economy. It transforms the lives of millions of
Americans, many of whom are able to afford their homes for the first
time, and it helps transform their communities and local economies. NHC
applauds the leadership the Senate Finance Committee has shown in
support of the Housing Credit to date and urges the Committee to expand
and strengthen the Housing Credit and multifamily Housing Bonds.
To discuss any of these comments in further detail, please contact
Rebekah King, Policy Associate, National Housing Conference, (202) 466-
2121 ext. 248, [email protected].
Sincerely,
Chris Estes
President and CEO
______
National Low Income Housing Coalition
1000 Vermont Avenue, NW, Suite 500
Washington, DC 20005
Diane Yentel, President and CEO
Congress and the Trump administration should use tax reform to address
one of the most critical issues facing extremely low-income families
today: the lack of decent, accessible, and affordable housing. Through
smart, modest reforms to the mortgage interest deduction (MID)--a $70
billion tax write-off that primarily benefits higher income
households--Congress can reprioritize and rebalance federal spending on
housing to make the deeply targeted investments in affordable rental
housing that our nation needs for the economy, our communities, and
families to thrive. All without increasing costs to the federal
government.
Access to an affordable rental home is essential to economic prosperity
and job creation. An affordable home is necessary for families to
participate fully in the economy, making it easier for adults to find
and keep good jobs and contribute to economic growth. Living in an
affordable home improves children's health and education, increasing
their economic success as adults. Moreover, federal investments in
affordable homes boost local economies and create jobs. Despite the
benefits of affordable homes, three out of four families eligible for
rental assistance are turned away due to a lack of funding and half a
million people are homeless on any given night. As a result, 71% of
extremely low income households those earning less than the poverty
guideline or 30% of the Area Median Income--pay at least half of their
limited income on rent, leaving few resources to cover basic needs,
like food, healthcare, childcare, and transportation.
At the same time, three-fourths of the nearly $200 billion spent by the
federal government to help Americans buy or rent their homes goes to
higher income households. In fact, the federal government spends more
to subsidize the homes of the 7 million households with incomes above
$200,000 than to assist the 55 million households with incomes below
$50,000, even though they are far more likely to struggle to afford a
place to live.
Reprioritizing federal housing policy starts with reforming the MID and
reinvesting the savings into affordable rental homes for people with
the greatest needs. Experts from across the political spectrum are
increasingly calling the MID what it is: a wasteful use of federal
resources that encourages households to take on higher levels of debt,
disrupts the housing market by increasing costs for everyone, and
mostly benefits those who do not need federal assistance to live in a
stable home. Research confirms that the MID has no impact on
homeownership.
The National Low Income Housing Coalition (NLIHC) and the United for
Homes campaign proposes modest reforms to the MID to provide 25 million
low and moderate income homeowners greater tax relief and to reinvest
the $241 billion in savings over 10 years to provide affordable rental
homes to people with the lowest incomes.
President Trump has proposed indirect changes to the MID, including
doubling the standard tax deduction. This could provide a greater tax
break to low and moderate income households. However, because the
resulting MID would become even more regressive, benefiting only the
wealthiest homeowners with the largest mortgages, Congress should pair
any proposal to increase the standard deduction with additional MID
reforms and reinvest the savings into deeply targeted affordable rental
housing.
By reprioritizing federal housing policy, Congress and the Trump
administration can help end homelessness and housing poverty once and
for all, giving all families an opportunity to break through the cycle
of poverty and climb the ladder of economic success.
The Need for Affordable Housing
The affordable housing crisis in America continues to reach new
heights. Rents are rising, wages of the lowest income workers are flat,
and more people are renting their homes than ever before. But the
supply of affordable housing and rental assistance has not kept pace.
As a result, record-breaking numbers of families cannot afford a decent
place to call home. Every state and congressional district is impacted.
Unless we increase investments in affordable housing to keep up with
the need, these challenges will only get worse as demand for rental
housing grows over the next decade.\1\
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\1\ Poethig, Erika C. ``Better housing policy could save us all
money. Why are we ignoring it?'' The Washington Post. Oct. 11, 2016.
https://www.washingtonpost.com/news/in-theory/wp/2016/10/11/better-
housing-policy-could-save-us-all-money-why-are-we-ignoring-
it?utm_term=.74
1ab09f87cf. Last visited July 28, 2017.
The greatest need for affordable housing--on the local, state, and
national level--is concentrated among extremely low-income renters who
earn no more than the poverty guideline or 30% of the area median
income (AMI). NLIHC's recent report, ``The Gap: The Affordable Housing
Gap Analysis 2017,'' found a shortage of 7.4 million affordable and
available rental homes for the nation's 11.4 million extremely low
income renter households. Nationally, only 35 affordable homes are
available for every 100 extremely low income renter households. As a
result, 71% of the poorest families are severely cost burdened,
spending more than half of their limited income on rent and utilities.
These 8.1 million households account for 72.6% of all severely cost
burdened renters in the country. They are forced to make difficult
choices between paying rent and buying groceries or visiting their
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doctor. In the worst cases, these families become homeless.
NLIHC's report, ``Out of Reach 2017: The High Cost of Housing,'' shows
the difference between wages and the price of housing in every state
and county by estimating each locality's ``housing wage,'' the hourly
wage a full-time worker needs to earn to afford a modest, two-bedroom
apartment. In 2017, the national housing wage was $21.21 per hour. A
worker earning the federal minimum wage would need to work 117 hours a
week--or 2.9 full-time jobs--to afford a modest two-bedroom apartment.
While the housing wage changes from state to state and county to
county, there is no jurisdiction in the United States where a full-time
worker earning the prevailing minimum wage can afford a modest, two-
bedroom apartment. And it's not just minimum wage workers for whom
rents are out of reach: the average renter in the U.S. earns $16.38 per
hour--nearly $5 an hour less than the national housing wage.
The public is looking to the White House and Congress for solutions.
According to a recent How Housing Matters survey, 81% of Americans
believe housing affordability is a problem in America, and 60%
characterize the lack of affordable housing as a serious problem. Three
out of four (76%) Americans believe it is important for federal elected
officials to take action on housing affordability, and 63% believe the
issue is not getting enough attention.\2\
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\2\ ``Affordable Housing: An Investment in Kids and Their Future.''
How Housing Matters. 2016. https://howhousingmatters.org/articles/
affordable-housing-investment-kids-future/. Last visited July 28, 2017.
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Impact on Economic Mobility
Affordable housing is a long-term asset that helps families and
children climb the economic ladder. According to the How Housing
Matters survey, 70% of Americans agree that ``investing in affordable,
quality housing is investing in kids and their future.'' \3\
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\3\ ``Affordable Housing: An Investment in Kids and Their Future.''
How Housing Matters. 2016. https://howhousingmatters.org/articles/
affordable-housing-investment-kids-future/. Last visited July 28, 2017.
Increasing the supply of affordable housing and rental assistance--
especially in areas connected to good schools, well-paying jobs, health
care, and transportation--helps families climb the economic ladder. In
addition, children who live in stable, affordable homes have better
health and educational outcomes, gain greater access to economic
opportunities, enjoy better mental and physical well-being, and benefit
from stronger communities. Research shows that increasing access to
affordable housing is the most cost-effective strategy for reducing
childhood poverty in the United States.\4\
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\4\ Giannarelli, Linda et al. ``Reducing Child Poverty in the US:
Costs and Impacts of Policies Proposed by the Children's Defense
Fund.'' Urban Institute. January 30, 2015. http://www.urban.org/
research/publication/reducing-child-poverty-us. Last visited July 28,
2017.
Groundbreaking research by economist Raj Chetty offers persuasive
evidence of the impact of affordable housing on upward mobility for
children. Using new tax data, Chetty and his colleagues assessed the
long-term outcomes for children who moved at a younger age to lower
poverty neighborhoods. Chetty's study found that children who were
younger than 13 when their family moved to lower poverty neighborhoods
saw their earnings as adults increase by approximately 31%, were more
likely to live in better neighborhoods as adults, and less likely to
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become a single parent.
Other research shows that children living in stable, affordable homes
are more likely to thrive in school and have greater opportunities to
learn inside and outside the classroom. Children in low income
households that live in affordable housing score better on cognitive
development tests than those in households with unaffordable rents.\5\
Researchers suggest that that is partly because parents with affordable
housing can invest more in activities and materials that support their
children's development.\6\ Having access to affordable housing allows
the lowest income families to devote more of their limited resources to
other basic needs. Families paying large shares of their income for
rent have less money to spend on food, health care, and other
necessities.\7\
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\5\ Newman, Sandra J. and C. Scott Holupka. ``Housing Affordability
and Child Well-Being.'' Housing Policy Debate 25.1 (2014): 116-51.
Taylor and Francis Online. http://www.tandfonline.com/doi/abs/10.1080/
10511482.2014.899261. Last visited July 28, 2017.
\6\ Newman, Sandra J. and C. Scott Holupka. ``Affordable Housing Is
Associated with Greater Spending on Child Enrichment and Stronger
Cognitive Development.'' How Housing Matters. MacArthur Foundation.
July 2014. https://www.macfound.org/media/files/Affordable_Housing
_Child_Enrichment_Stronger_Cognitive_Development.pdf. Last visited July
28, 2017.
\7\ America's Rental Housing: Expanding Options for Diverse and
Growing Demand. Rep. Joint Center for Housing Studies at Harvard
University, 2015. http://www.jchs.harvard.edu/sites/jchs.harvard.edu/
files/americas_rental_housing_2015_web.pdf. Last visited July 28, 2017.
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Impact on the Economy and Job Creation
Beyond the broad benefits to economic mobility, an investment in
affordable housing for the lowest income households bolsters
productivity and economic growth. By connecting workers to communities
with well-paying jobs, good schools, and transit, investments in
affordable housing can spur local job creation and increase incomes.
Research shows that the shortage of affordable housing in major
metropolitan areas costs the American economy about $2 trillion a year
in lower wages and productivity. Without affordable homes, families
have constrained opportunities to increase earnings, causing slower GDP
growth.\8\ Moreover, each dollar invested in affordable housing boosts
local economies by leveraging public and private resources to generate
income--including resident earnings and additional local tax revenue--
and supporting job creation and retention. Building 100 affordable
rental homes generates $11.7 million in local income, $2.2 million in
taxes and other revenue for local governments, and 161 local jobs in
the first year.\9\
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\8\ Hsieh, Chang-Tai and Enrico Moretti. ``Housing Constraints and
Spatial Allocation.'' UC Berkeley and the National Bureau of Economic
Research. May 18, 2017. http://faculty.chicagobooth.edu/chang-
tai.hsieh/research/growth.pdf. Last visited July 28, 2017.
\9\ The Economic Impact of Home Building in a Typical Local Area:
Income, Jobs, and Taxes Generated. Rep. National Association of Home
Builders, Apr. 2015. https://www.nahb.org//media/Sites/NAHB/
Economic%20studies/1-REPORT_local_20150318115955.ashx?la=en. Last
visited July 28, 2017.
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The Need to Reprioritize Federal Housing Policy
Federal investments in affordable housing--at the U.S. Departments of
Housing and Urban Development (HUD) and Agriculture (USDA)--have lifted
millions of families out of poverty. Without these investments, many of
these families would be homeless, living in substandard or overcrowded
conditions, or struggling to meet other basic needs because too much of
their limited income would go to paying rent. Despite their proven
track record, HUD and USDA affordable housing investments have been
chronically underfunded. Today, of the families who qualify for housing
assistance, only a quarter will get the help that they need. Every
state and congressional district is impacted.
There is no silver-bullet solution. Housing challenges differ from
community to community. Congress and the Trump administration, as well
as state and local governments, must use every tool available to solve
the problem. A comprehensive set of solutions to end housing insecurity
in America includes preserving and rehabilitating our nation's existing
affordable housing stock, increasing investments in the production of
affordable rental homes for low income families, and expanding rental
assistance and other housing programs that help make housing
affordable.
Underlying all these solutions is the need to increase targeted federal
investments in affordable housing to help families and communities
thrive. This can be done--without increasing costs for the federal
government--by reforming the MID, our nation's largest housing subsidy
that largely benefits higher income homeowners, and reinvesting the
savings to serve those with the greatest needs.
Most Federal Housing Resources Are Poorly Targeted to Serve People With
the Greatest Needs
Each year, the federal government spends almost $200 billion to help
Americans buy and rent their homes. A full 75% of all these resources--
including both program spending and tax expenditures--goes to subsidize
higher income homeowners though the MID and other homeownership tax
breaks. Targeted federal housing resources at HUD and USDA, which have
seen deep funding cuts in recent years due to the low spending caps
required by the Budget Control Act, amount to just a quarter of all
federal spending on housing.\10\
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\10\ Fischer, Will and Barbara Sard. ``Chart Book: Federal Housing
Spending Is Poorly Matched to Need.'' Center on Budget and Policy
Priorities. March 8, 2017. https://www.cbpp.org/research/housing/chart-
book-federal-housing-spending-is-poorly-matched-to-need. Last visited
July 28, 2017.
Federal housing policy is so unbalanced, in fact, that we as a nation
spend more to subsidize the homes of the 7 million highest income
households with incomes above $200,000 than we do to help the 55
million households with incomes of $50,000 or less, even though these
families are more likely to struggle to afford housing.\11\
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\11\ Fischer, Will and Barbara Sard. ``Chart Book: Federal Housing
Spending Is Poorly Matched to Need.'' Center on Budget and Policy
Priorities. March 8, 2017. https://www.cbpp.org/research/housing/chart-
book-federal-housing-spending-is-poorly-matched-to-need. Last visited
July 28, 2017.
The Center on Budget and Policy Priorities estimates households with
incomes of $200,000 or more receive an average federal housing benefit
of $6,076 per year--about four times the average annual benefit of
$1,529 received by households with incomes below $20,000.
MID Is a Wasteful Use of Federal Resources
The MID is poorly targeted and largely benefits America's highest
income households. For this reason, experts from across the ideological
spectrum criticize the MID as a wasteful use of federal resources that
encourages households to take on higher levels of debt, disrupts the
housing market by increasing costs for everyone, and mostly benefits
those who do not need federal assistance to live in a stable home.
Research confirms that the MID has no impact on homeownership.
The MID Promotes Debt, Not Homeownership
According to estimates by the congressional Joint Committee on
Taxation, the MID primarily benefits households with the higher
incomes. Households earning less than $100,000 represent two-thirds
(68%) of all taxable returns. However, these households amount to one-
third (36%) of all households that claim the MID, and they receive just
16% of all MID dollars.
In comparison, households with incomes of more than $100,000 represent
32% of all taxable returns, but more than two-thirds (64%) of all
households that claim the MID, they receive 84% of all MID dollars. And
households with incomes above $200,000 file only 8% of all taxable
returns. They amount to 21% of all households claiming the MID and they
receive nearly half (46%) of all MID dollars.
The nonpartisan Congressional Budget Office (CBO) reports that 75% of
the benefits of the MID go to the top 20% of earners. In fact, 15% of
the benefits of the MID, or nearly $11 billion each year, goes to the
top 1% of earners, the wealthiest households in America.
Everyone else gets almost nothing. Approximately 70% of all taxpayers
do not receive the MID, including half of all homeowners who do not
itemize their tax deductions and instead take the standard deduction.
Economists agree that the MID does little to promote homeownership.
Higher income households that benefit from the MID would likely choose
to buy a home regardless of whether they receive a tax break. Instead,
the MID incentivizes these higher income households to take on larger
mortgages; greater mortgage debt results in more mortgage interest
eligible for a tax break. Moreover, the value of the MID corresponds to
a household's marginal tax rate, so households in higher tax brackets
receive more than households in lower tax brackets.
For example, in the first comprehensive, long-term study of how tax
subsidies affect housing decisions, the National Bureau of Economic
Research found that the MID ``has a precisely estimated zero effect on
homeownership,'' even in the long term. Instead, the data show that the
MID encourages homeowners to buy larger and more expensive houses and
to take on increased levels of debt.
Meanwhile, lower income homeowners receive little to no benefit from
the MID. These households are far less likely to itemize their tax
deductions; their mortgages tend to be smaller and, therefore, they
have less mortgage interest eligible for a tax break. And even if they
claim the mortgage deduction, because their marginal tax rate is lower,
the value of the MID is significantly less than homeowners with higher
incomes.
Households earning more than $1 million receive an average annual MID
benefit of nearly $9,000, while households earning between $40,000 and
$50,000 receive an average MID benefit of $528 per year.\12\
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\12\ ``Options to Reform the Deduction for Home Mortgage
Interest,'' Tax Policy Center, 2015.
Economists note that many developed countries without a MID have the
same or higher homeownership rate as the U.S. As the CBO has reported,
``Despite the favorable tax treatment that mortgage interest receives
in the United States, the rate of homeownership here is similar to that
in Australia, Canada, and the United Kingdom, and none of those
countries currently offers a tax deduction for mortgage interest.''\13\
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\13\ ``Reducing the Deficit: Spending and Revenue Options.''
Congressional Budget Office. March 10, 2011. https://www.cbo.gov/
publication/22043. Last visited July 28, 2017.
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The MID Distorts Markets and Increases Costs
The MID distorts the housing and investment markets, increasing the
cost of homeownership and dampening economic growth. By inflating home
values, the MID largely benefits households that already own their
homes at the expense of those who hope to become homeowners in the
future. While higher income households can absorb higher housing costs
without a significant impact on homeownership rates, this added expense
makes it more difficult for low and moderate income families to buy a
home. Others have also argued that the MID distorts the housing market
by discouraging investment in one consumer good--homes--at the expense
of other possibly more productive economic activity.\14\
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\14\ ``The Houses of Lobbyists.'' The Wall Street Journal. May 6,
2017. https://www.wsj.com/articles/houses-of-lobbyists-1494024305. Last
visited July 28, 2017.
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The MID Increases Income Inequality and Fuels the Racial Wealth Gap
Pulitzer prize-winning author and sociologist Matthew Desmond
illustrated how the MID has become ``the engine of American
inequality'' in his recent New York Times magazine article. Dr. Desmond
notes that the federal government spends about $134 billion to
subsidize the homes of higher income households through the MID and
other homeownership tax breaks--more than the entire budgets of the
U.S. Departments of Education, Justice and Energy combined and more
than half the entire gross domestic product of countries like Chile,
New Zealand and Portugal. At the same time, too few low income
households that use more than half of their limited incomes for rent
each month, leaving very little left to cover the cost of groceries,
medicine, and other basic needs.
In his new book, Toxic Inequality: How America's Wealth Gap Destroys
Mobility, Deepens the Racial Divide, and Threatens Our Future,
sociologist Thomas Shapiro examines the role the MID has played in
exacerbating growing income inequality and racial inequity. After
noting that ``we invest five times more public money in home ownership
for families that can afford homes than in decent, affordable housing
for those who cannot,'' Shapiro argues that this public investment in
homeownership ``flows mostly to the best-off homeowners, redistributing
wealth at the top, driving wealth inequality, and contributing to toxic
inequality.''\15\
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\15\ Shapiro, Thomas. ``Moyers and Company: How Our Tax Code Makes
Inequality Worse.'' United for Homes. May 18, 2017. http://
www.unitedforhomes.org/news/moyers-company-tax-code-makes-inequality-
worse/. Last visited July 28, 2017.
While there is less direct data on the racial impact of the MID--
largely because race and ethnicity data are not collected on tax
forms--there is significant evidence that the MID negatively impacts
households of color. Recently, the Tax Policy Center examined ZIP codes
in which high rates of residents claimed the MID; it found that black
households represent only 5.6% of the population in these areas, less
than half their national proportion. By comparison, residents of ZIP
codes with the highest rates of taxpayers claiming the MID are
disproportionately white.\16\
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\16\ Shapiro, Thomas. ``Moyers and Company: How Our Tax Code Makes
Inequality Worse.'' United for Homes. May 18, 2017. http://
www.unitedforhomes.org/news/moyers-company-tax-code-makes-inequality-
worse/. Last visited July 28, 2017.
Moreover, by examining MID beneficiaries by income bracket, the Tax
Policy Center found that black households receive only 3.5% of tax
expenditures in individual wealth building, which includes the MID,
despite comprising 13.2% of the population. ``African-American families
would accumulate $35 billion more in wealth each year if their incomes
were distributed according to their national representation--13.2% in
each income bracket.''\17\
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\17\ Shapiro, Thomas. ``Moyers and Company: How Our Tax Code Makes
Inequality Worse.'' United for Homes. May 18, 2017. http://
www.unitedforhomes.org/news/moyers-company-tax-code-makes-inequality-
worse/. Last visited July 28, 2017.
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Proposals to Reform the MID
Congress has a clear opportunity to enact tax reform that addresses the
growing affordable rental housing crisis facing millions of low-income
people in every state and community. That starts with reforming the
MID, our nation's largest housing subsidy, and reinvesting these scarce
resources to serve those with the greatest needs. Experts from across
the political spectrum agree, including The Wall Street Journal
editorial board, former President George W. Bush advisor Dennis Shea,
the CATO Institute, the Ronald J. Terwilliger Foundation, former
President Obama advisor Michael Stegman, former Labor Secretary Robert
Reich, Pulitzer prize-winning author and sociologist Matthew Desmond,
and many others.
NLIHC's United for Homes campaign--which has been endorsed by more than
2,300 organizations, local governments, and elected officials--proposes
to reform the MID. The changes are simple and modest. United for Homes
calls for:
1. Reducing the amount of mortgage eligible for tax relief from $1
million to the first $500,000, generating $87 billion in savings over
10 years.\18\
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\18\ If phased in over 5 years.
An analysis of 2013-2015 Home Mortgage Disclosure Data (HMDA) shows
that just 6% of new mortgages in the U.S. are over $500,000. And
homeowners with large mortgages would still receive tax relief on the
first $500,000 of their mortgage. For example, a homeowner with a
mortgage of $600,000 would still benefit from a tax break on the first
$500,000 of their mortgage. Lowering the cap would have ``virtually no
effect on homeownership rates.'' Economist Edward Glaeser argues that
capping the MID at the first $500,000 would have only ``modest effects
on home prices'' in supply-constrained cities like San Francisco and
virtually no effect in cities with plenty of available land, like
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Houston. ``Most homeowners wouldn't even feel it,'' Glaeser says.
2. Converting the deduction into a nonrefundable, 15% capped
credit, generating $191 billion in savings over 10 years.
Half of all homeowners receive no benefit from the MID because they do
not itemize their tax deductions. By converting MID to a credit, an
additional 15 million homeowners--99% of whom have incomes under
$100,000--who currently get no benefit under the MID would receive a
much-needed tax break. In total, 25 million low and moderate income
homeowners would receive a greater tax break than they currently do
under the MID. Converting the deduction to a credit has been proposed
by several high-level bipartisan groups--President George W. Bush's
Advisory Panel on Federal Tax Reform, the Simpson-Bowles Deficit
Commission established by President Barack Obama, and the Bipartisan
Policy Center's Debt Reduction Task Force--as a way to expand the tax
break to more low and moderate income homeowners.
3. Reinvesting the $241 billion in savings over 10 years into
affordable rental homes for families with the greatest, clearest
housing needs.
The UFH reforms would generate $241 billion in savings over 10 years
\19\ to be reinvested into highly targeted rental housing programs that
serve families with the greatest needs, including the national Housing
Trust Fund (HTF), a new renters' credit, Housing Choice Vouchers, and
other solutions for the lowest income people.
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\19\ If phased in over 5 years.
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National Housing Trust Fund
The national Housing Trust Fund is the first new housing resource in a
generation, targeted to build, preserve, and rehabilitate housing for
people with the lowest incomes.
NLIHC led a national coalition that played a critical role in the
creation of the Housing Trust Fund through the passage of the Housing
and Economic Recovery Act of 2008. In 2016, the first $174 million in
Housing Trust Fund dollars were allocated to states. This is an
important step, but far more resources are necessary to meet the need.
The Housing Trust Fund is the only federal housing program exclusively
focused on providing states with resources targeted to serve households
with the clearest, most acute housing needs. Because the Housing Trust
Fund is administered by HUD as a block grant, each state has the
flexibility to decide how to best use Housing Trust Fund resources to
address its most pressing housing needs. Each state distributes the
resources based on its annual Allocation Plan, which identifies the
state's priority housing needs. States decide which housing
developments to support.
The Housing Trust Fund is also the most targeted federal rental housing
production and homeownership program. By law, at least 75% of Housing
Trust Fund dollars used to support rental housing must serve extremely
low income (ELI) households earning no more than 30% of the Area Median
Income (AMI) or the federal poverty limit. All Housing Trust Fund
dollars must benefit households with very low incomes earning no more
than 50% of AMI. Most other federal affordable housing programs can
serve families up to 60% or 80% of AMI. The statute requires that at
least 90% of the HTF funds be used for the production, preservation,
rehabilitation, or operation of rental housing. Up to 10% may be used
for homeownership activities for first-time homebuyers: production,
preservation, and rehabilitation, and down payment, closing cost, and
interest rate buy-down assistance.
Currently, the Housing Trust Fund is funded with dedicated sources of
revenue outside of the appropriations process. The initial source of
funding designated in the statute is an annual assessment of 4.2 basis
points (0.042%) of the volume of business of Freddie Mac and Fannie
Mae, 65% of which goes to the Housing Trust Fund.
The statute also provides that the Housing Trust Fund can be funded by
other sources of revenue, such as any appropriations, transfers, or
credits that Congress may designate in the future. However, the Housing
Trust Fund should be funded with dedicated revenues generated outside
of the appropriations process so that it does not compete with existing
HUD programs.
Renters' Credit
NLIHC supports proposals to establish a tax credit to help make housing
affordable for renters with the lowest incomes.\20\ Our nation has long
provided mortgage tax relief for higher income homeowners, most of whom
would be stably housed without assistance. A renters' tax credit that
could help ensure that the lowest income households can afford a safe,
decent home is long overdue.
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\20\ CBPP proposal: Sard, Barbara and Will Fischer. ``Renters' Tax
Credit Would Promote Equity and Advance Balanced Housing Policy.''
Center on Budget and Policy Priorities. August 21, 2013. https://
www.cbpp.org/research/housing/renters-tax-credit-would-promote-equity-
and-advance-balanced-housing-policy. Last visited July 28, 2017.
Terner Center proposal: Galante, Carol et al. ``The Fair Tax
Credit: A Proposal for a Federal Assistance in Rental Credit to Support
Low-Income Renters.'' UC Berkeley Terner Center for Housing Innovation.
November 2016. http://ternercenter.berkeley.edu/fair-tax-credit. Last
visited July 28, 2017.
A renters' tax credit could complement the existing Low-Income Housing
Tax Credit--which works well as a subsidy for affordable housing
development, but is rarely sufficient on its own to push rents down to
levels poor families can pay--and rental assistance programs, such as
Housing Choice Vouchers--which are highly effective, but reach only a
modest share of the families in need of such assistance. Any renters'
credit should benefit individuals with the lowest incomes and the
greatest needs. Efforts to ensure that extremely low income households
do not pay more than 30% of their incomes on housing should be
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prioritized.
Proposals to establish a renters' tax credit offer a promising
opportunity to address the affordable housing challenges of the many
lowest income households who go without assistance and to help these
families keep more of their incomes for other necessities.
Housing Choice Vouchers
Housing Choice Vouchers are a proven tool in reducing homelessness and
housing insecurity, as well as helping families climb the economic
ladder. Housing vouchers help people with the lowest incomes afford
housing in the private market by paying landlords the difference
between what a household can afford to pay in rent and the rent itself,
up to a reasonable amount. Administered by HUD, housing vouchers
comprise the agency's largest rental assistance program, assisting more
than 2.2 million households.
Despite the program's proven success in ending homelessness and
reducing housing insecurity, limited funding means that relatively few
eligible families receive this needed assistance. Today, just one in
four eligible families receives the rental assistance they need.
Given the program's effectiveness, we recommend that Congress
significantly expand housing vouchers to provide families in need with
housing choice. While housing vouchers offer families the prospect of
moving to areas of opportunity, barriers to mobility prevent many from
doing so. Many private-sector landlords refuse to accept housing
vouchers--whether because of the administrative costs, because vouchers
do not cover the full cost of rent in high-cost areas, or outright
discrimination. There are a number of steps that can be taken to
address these issues, including consolidating public housing
authorities' administration of vouchers within a housing market,
directing HUD to adopt small area fair market rents (SAFMRs) with
strong tenant protections, barring source-of-income discrimination, and
funding mobility counseling pilot programs, among others.
Proposals to Double the Standard Tax Deduction
President Trump's broad principles for tax reform includes indirect
changes to the MID, including a proposal to double the standard
deduction.
If the standard deduction were doubled, many households would no longer
claim the MID and instead would take the increased standard deduction.
This change in the tax code could provide a greater tax break to many
low- and moderate-income households and could lead to higher
homeownership rates over the long-term.
However, without additional reforms, Mr. Trump's proposal would amplify
the MID's regressive effect; only higher income Americans with the
largest mortgages would benefit. NLIHC agrees with the Wall Street
Journal editorial board that if Congress doubles the standard
deduction, it should also embrace other reforms to make MID less
regressive--like reducing the amount of mortgage eligible for the MID
from $1 million to the first $500,000. The savings from such a change
must be reinvested into deeply targeted affordable rental housing.
Doubling the Standard Deduction Could Boost Homeownership Rates and
Home Values
Economists argue that doubling the standard deduction could boost
homeownership rates over the long-term. Trulia's Chief Economist Ralph
McLaughlin states, ``While the tax benefits of homeownership will erode
for some, it might help increase the ability of renters to save up for
the all elusive down payment. In turn, this could boost home buying
activity in the long run.''\21\
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\21\ McLaughlin, Ralph. ``How the Trump Administration's Tax Plan
Might Impact Homebuying.'' May 16, 2017. https://www.trulia.com/blog/
trends/trump-tax-proposal-may-17/. Last visited July 28, 2017.
Dennis Ventry from the American Enterprise Institute likewise suggests
that doubling the standard deduction would increase demand for
homeownership, especially among low and moderate income families
because the proposal ``subsidizes taxpayers on the margin between
owning and renting rather than taxpayers who can purchase a home with
or without a subsidy.''\22\ Millions of current homeowners would see a
greater tax break and so would first-time homeowners eager to jump into
the homeownership market.
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\22\ Ventry, Dennis J., Jr. ``The Hill: Trump's Tax Plan Can Boost,
Not Reduce, Homeownership.'' United for Homes. May 23, 2017. http://
www.unitedforhomes.org/news/hill-trumps-tax-plan-can-boost-not-reduce-
homeownership/. Last visited July 28. 2017.
Some industry groups have warned that doubling the standard deduction
could dampen home values--a claim that experts dispute. While Ventry
concedes that home prices may decrease initially, this effect would be
temporary and would be outweighed by a longer-term increase in the
demand for homeownership: ``Positive effects on homeownership rates
from lower home prices would more than offset negative effects from
loss of the deductions, particularly in high-priced, space-
constricted markets.'' Ventry argues that, in most parts of the
country, doubling the standard tax deduction would ``have no negative
effect on prices and might even raise prices due to the purchasing
power of the new tax-free dollars.''\23\
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\23\ Ventry, Dennis J., Jr. ``The Hill: Trump's Tax Plan Can Boost,
Not Reduce, Homeownership.'' United for Homes. May 23, 2017. http://
www.unitedforhomes.org/news/hill-trumps-tax-plan-can-boost-not-reduce-
homeownership/. Last visited July 28, 2017.
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Additional Reforms Are Needed if Congress Doubles Standard Deduction
Today, about 70% of taxpayers do not benefit from the MID. This
includes half of all homeowners who do not itemize their tax
deductions. The National Association of Realtors estimates that if the
standard deduction is doubled, as proposed by President Trump, 95% of
taxpayers will choose to take the standard deduction. The higher
standard deduction would provide them with a greater tax break than
itemizing their tax deductions. As a result, only 5% of taxpayers--
primarily higher income households with the largest mortgages would
continue to claim the MID.\24\
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\24\ Gopal, Prashant and Joe Light. ``25 Million Americans Could
Find Mortgage Tax Break Useless Under Trump's Plan.'' Bloomberg. May
16, 2017. https://www.bloomberg.com/news/articles/2017-05-16/trump-tax-
plan-would-make-mortgage-break-worthless-for-millions. Last visited
July 28, 2017.
Prashant Gopal and Joe Light estimate that a married couple would need
a mortgage of at least $608,000 before it would make sense to itemize
rather than use the standard deduction, assuming that the couple did
not have any other itemizable deductions, which was proposed by the
Trump administration.\25\ Only higher income Americans--those who would
likely become homeowners without a tax break and who would likely have
stable housing without federal assistance--would benefit from the MID.
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\25\ Gopal, Prashant and Joe Light. ``Trump Tax Proposal Would Make
Mortgage Deduction Useless for Most Homeowners.'' The Seattle Times.
May 16, 2017. http://www.seattletimes.com/business/real-estate/trump-
tax-proposal-would-make-mortgage-deduction-useless-for-most-
homeowners/. Last visited July 28, 2017.
Because the resulting MID would become even more regressive after the
standard deduction was doubled, Congress should pair any proposal to
double the standard deduction with additional MID reforms, including
reducing the amount of mortgage eligible for the MID from $1 million to
the first $500,000 and reinvesting the savings into deeply targeted
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affordable rental housing.
______
National Multifamily Housing Council (NMHC) and
National Apartment Association (NAA)
1775 Eye St., NW, Suite 1100
Washington, DC 20006
202-974-2300
https://weareapartments.org/
The National Multifamily Housing Council (NMHC) and the National
Apartment Association (NAA) respectfully submit this statement for the
record for the Senate Finance Committee's August 1, 2017, hearing
titled ``America's Affordable Housing Crisis: Challenges and
Solutions.''
For more than 20 years, the National Multifamily Housing Council (NMHC)
and the National Apartment Association (NAA) have partnered in a joint
legislative program to provide a single voice for America's apartment
industry. Our combined memberships are engaged in all aspects of the
apartment industry, including ownership, development, management and
finance. NMHC represents the principal officers of the apartment
industry's largest and most prominent firms. As a federation of more
than 160 state and local affiliates, NAA encompasses over 73,000
members representing nearly 9 million apartment homes globally.
Rental Housing--The Supply-Demand Imbalance
Housing affordability is a significant challenge facing many Americans
today who seek to rent an apartment home. The number of families
renting their homes stands at an all-time high and is still growing
strongly, placing significant pressure on the apartment industry to
meet the demand. This is making it challenging for millions of families
nationwide to find quality rental housing that is affordable at their
income level.
Affordability has been a longstanding problem in housing. The total
share of cost-burdened apartment households (those paying more than 30
percent of their income on housing) increased steadily from 42.4
percent in 1985 to 54.8 percent in 2015. Also during this period, the
total share of severely cost-burdened apartment households (those
paying more than half their income on housing) increased from 20.9 to
29.2 percent.\1\ This housing cost burden also places pressure on a
household's ability to pay for basic necessities, including food and
transportation, and ultimately impacts their future financial success.
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\1\ NMHC tabulations of American Housing Survey microdata (1985-
2015).
This issue is not unique to households receiving federal subsidies and,
in fact, is encroaching on the financial well-being of households
earning up to 120 percent of area median income. Consider that the
median asking rent for an apartment constructed in 2015 was $1,396. For
a renter to afford one of those units at the 30 percent of income
standard, they would need to earn at least $55,840 annually.\2\ As a
basis of comparison, the median household income in 2015 was
$56,516.\3\ Accordingly, this is an issue also impacting those
supporting the very fabric of communities nationwide, including
teachers, firefighters, nurses and police officers.
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\2\ NMHC calculation based on U.S. Census Bureau, Survey of Market
Absorption Detailed Tables, Table 2.
\3\ U.S. Census Bureau, Current Population Survey, 2015 and 2016
Annual Social and Economic Supplements.
Setting aside that real (inflation-adjusted) incomes in the U.S. have
been stagnant for the past three decades--clearly the key factor
driving the affordability crisis--housing industry leaders agree that
promoting construction, preservation and rehabilitation are three of
the vital ways to meet the surging demand for apartment homes.
Changing Housing Dynamics
The U.S. is in the midst of a fundamental shift in our housing dynamics
as changing demographics and housing preferences drive more people
toward renting as their housing of choice. Today, demand for apartments
is at unprecedented levels as the number of renters has reached an all-
time high. Since 2010, the number of renter households has increased by
an average of more than 800,000 annually--almost as much as 1.2 million
a year, by some measures.\4\ Meanwhile, apartment vacancy rates as
measured by MPF Research fell or remained the same for 7 straight years
from 2009 to 2016.\5\
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\4\ NMHC tabulations of American Community Survey and Current
Population Survey microdata.
\5\ MPF Research.
Changing demographics are driving the demand for apartments. Married
couples with children now represent only 19 percent of households.
Single-person households (28 percent), single parent households (9
percent) and roommates (7 percent) collectively account for 43 percent
of all households, and these households are more likely to rent.\6\
Moreover, the surge toward rental housing cuts across generations. In
fact, nearly 73 million Baby Boomers (those born between 1946 and
1964), as well as other empty nesters, have the option of downsizing as
their children leave the house and many will choose the convenience of
renting.\7\ Over half (58.6 percent) of the net increase in renter
households from 2006 to 2016 came from householders 45 years or
older.\8\
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\6\ 2015 Current Population Survey, Annual Social and Economic
Supplement, U.S. Census Bureau, ``America's Families and Living
Arrangements: 2015: Households'' (H table series), table H3/Family
groups (FG series), table FG6.
\7\ Annual Estimates of the Resident Population by Single Year of
Age and Sex for the United States: April 1, 2010 to July 1, 2015, U.S.
Census Bureau. Baby Boomers are defined as those born 1946 through
1964.
\8\ NMHC tabulations of 2016 Current Population Survey, Annual
Social and Economic Supplement, U.S. Census Bureau.
Unfortunately, the supply of new apartments is falling well short of
demand. Just-released research by Hoyt Advisory Services, Dinn Focused
Marketing, Inc. and Whitegate Real Estate Advisors, LLC, U.S. Apartment
Demand--A Forward Look, commissioned by NMHC/NAA shows that the nation
will need 4.6 million new apartments by 2030, or an average of 328,000
units a year.\9\ Just 244,000 apartments were delivered from 2012-
2016.\10\
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\9\ Hoyt Advisory Services, Dinn Focused Marketing, Inc., and
Whitegate Real Estate Advisors, LLC, U.S. Apartment Demand--A Forward
Look, May 2017, p. 38.
\10\ NMHC tabulations of 2016 Current Population Survey, Annual
Social and Economic Supplement, U.S. Census Bureau.
[GRAPHIC] [TIFF OMITTED] T80117.007
Building more apartment homes will help improve the supply-demand
imbalance that drives these affordability challenges, but developers
and localities must work together to remove obstacles to development.
Even if local officials and planning boards agree that new, affordable
apartments must be built, land costs, entitlement expenditures, labor
expenses, building materials and property taxes all contribute to
making their construction extremely costly.
Why Are Rents so High?
As the discussion above demonstrates, the nation faces a significant
shortage of affordable rental housing. Addressing this challenge will
require new development and the preservation and rehabilitation of the
existing housing stock. Barriers to these activities, described below,
only serve to slow down the market response to our housing supply
challenges. Before discussing these barriers, however, it is worthwhile
to assess the reasons why Americans are facing high rents and why there
is too little available rental housing that is affordable.
First and foremost, America's housing affordability issue is more than
just a housing problem. It is not only that rental housing has gotten
more expensive to produce and operate, but also that other economic
factors have suppressed household income growth. On an inflation-
adjusted basis, median renter household income today is little changed
from its 1980 level.
Because income stagnation is such a significant part of the equation,
simply building more housing cannot be the sole solution to this
affordable housing shortage. In fact, in many markets where demand is
strongest, even if, hypothetically, developers agreed to take no
profit, the cost to build still exceeds what people can afford to pay.
Second, today's strong rent growth is a temporary situation in what is
a highly cyclical market driven by factors largely outside of the
industry's control. For example, the collapse of the U.S. financial
markets in 2008 virtually shut down new apartment construction for a
number of years, severely constricting supply right at a time when
rental demand surged to levels not seen for decades. Development is
only now beginning to meet the annual increase in apartment demand.
Finally, as mentioned above, apartment construction has increased. As
new units are delivered, rent growth will moderate. That said, even
with more apartments in the pipeline, construction activity remains, at
best, at the low end of the level needed to make up for supply deficits
in previous years. Many non-financial obstacles to new development
continue to stifle new construction and raise the costs of those
properties that do get built, contributing to higher rents for our
residents. Many of these are imposed by localities and have to be
addressed by those jurisdictions.
Barriers to Multifamily Development
Developing real estate, whether it is multifamily, single-family or
commercial, is difficult. Production of any kind has its natural
barriers. Those are, for the most part, objective barriers that can,
and often do, fluctuate, but are predictable enough to still meet a pro
forma. Multifamily however, brings with it a level of entitlement
subjectivity layered on top of these common barriers and is much more
difficult to predict.
Plainly stated, many municipalities have a development preference that
works against multifamily housing production. Multifamily development
often faces stiff community resistance, competes with other forms of
real estate that produce sales tax revenue desired by municipalities,
and is subject to increasing regulatory barriers.
Community resistance to proposed multifamily developments typically
takes the form of organized community resistance efforts commonly known
as ``Not In My Back Yard'' or NIMBY. The narrative of NIMBY typically
focuses on a handful of themes outside of the normal zoning approval
process, including:
b Traffic impact;
b Homeowner property values;
b School overcrowding; and
b Community character.
There is also a revenue subjectivity often found at the municipal level
when it comes to multifamily versus other forms of real estate. Local
governments faced with the annual task of balancing budgets feel
obligated to derive as much tax revenue as possible from scarce
developable land. This places multifamily in stiff competition with
commercial real estate developments that produce sales tax revenue.
All these factors contribute to the uncertainty of any multifamily
development. In a speech before the Urban Institute in November 2015,
Jason Furman, then chairman of The White House Council of Economic
Advisers for President Obama, said that the U.S. could build a lot more
apartments, but noted ``multifamily housing units are the form of
housing supply that is most often the target of regulation.'' As an
industry, we agree with this assessment.
Below is a brief summary of the most notable barriers to development
within several broad categories: location, time, bureaucracy, cost and
environmental assessment. Also included is a brief review of
affordability mandates, which can actually depress development of new
multifamily homes.
Location
b Land Cost: In an attractive market--take any major metropolitan
area as an example--land can account for a significant portion of total
development costs. This cost increase can stretch or stress other
financial assumptions and, in some extreme cases, even make the
property impossible right out of the gate.
b Zoning Laws: Zoning laws impact what is permitted to be built at
a site. In some places, zoning requirements can make it extremely
difficult to build new multifamily housing. Changing zoning can be
onerous and expensive if it is even possible.
Time
b Entitlements: The entitlement process, which covers approvals,
zoning and nearly everything in between, is an amalgam of outright
costs, additional fees, land-use regulation and code compliance. During
the navigation of this often-lengthy process, an apartment developer
bears both direct and indirect costs with no assurance of a successful
outcome. The long lead time and significant upfront investment required
to obtain entitlement on land is leading some investors to rethink
continued interest in multifamily development. Reduced investor demand
for multifamily development may lead to fewer units delivered in the
future and increased cost per unit delivered as remaining investor
capital becomes scarce.
Bureaucracy
b Regulations: Like all of real estate, the apartment industry is
governed by a flood of regulations issued by many diverse federal
agencies, as well as state and local governments. Excessive regulation
and compliance uncertainty results in costly mandates that divert
resources from the production and operation of multifamily housing.
Regulations must have demonstrable benefits that justify the
cost of compliance, and federal agencies should be aware that broad-
stroke regulations often have disproportionate effects on various
industries. Therefore, those rules and regulations affecting housing
should reflect the industry's diverse business and operational
structure and must rely on the latest scientific and/or economic
evidence.
Cost
b Construction Costs: The cost of construction in terms of labor
and materials is a critical component to the cost of building
apartments. Depending upon market and materials used, these have a
significant impact on the viability of a given project.
b Cost of Capital: New regulatory regimes, such as Dodd-Frank and
Basel III, are making access to capital more difficult and costlier.
Increased capital requirements and conflicting new regulations are
driving up the cost of borrowing from banks, as well as constricting
lending in certain markets.
b Labor Costs: Federal building programs, as well as some state
level programs, require the use of prevailing Davis-Bacon wages that
have proven to be difficult to manage, complex to accurately
incorporate in preliminary planning and often do not reflect the going
market. Additionally, as a result of the economic downturn, skilled
labor migrated away from the construction industry, producing an
environment today where wages have increased well in excess of
inflation, which directly impacts the cost of development.
b Impact Fees: Impact fees are payments required of new
development by local governments to providing new or expanded public
capital facilities required to serve that development. These fees
typically require cash payments in advance of the completion of
development, are based on a methodology and calculation derived from
the cost of the facility and the nature and size of the development,
and are used to finance improvements offsite from, but to the benefit
of, the development.
b Linkage Fees: A linkage fee is assessed on a development to pay
for the cost of providing a public service. These fees are attributed
to select developments to pay for a benefit deemed outside of what is
recovered from property taxes.
b Business License Taxes: These are additional municipal taxes
assessed on property owners that are not assessed on other forms of
housing. They are used to justify the cost of impacts not covered by
property tax assessments.
b Assessment and Inspection Fees: These are additional municipal
fees assessed on property owners to inspect rental housing for
habitability. While these fees are often assessed annually, the rental
housing communities often do not realize additional benefits reflecting
the cost.
b Parking Space Requirements: The requirement to build or offer
parking spaces, especially in urban settings, can significantly impact
site use and cost.
Environmental Assessment
b Environmental Site Assessment: An environmental site assessment
is a report that identifies potential or existing environmental
contamination liabilities. In many local jurisdictions, each
development site requires an environmental site assessment, the results
of which could require costly remediation and/or project
reconfiguration. Additionally, these assessments have been used by
development opponents to frustrate planning and can serve to severely
hamper or defeat the entitlement process.
Affordability Mandates
b Rent Control: There are various forms of rent control outside of
the traditional version that most are accustomed to seeing: a rent
control board that sets maximum rent for a unit or the maximum amount
that rent can be raised annually. Rent control, in this context, is any
mechanism that obligates a property owner to set rental rates for all
or a portion of the units on a property. In any form, this policy works
as a disincentive to investing and developing the diversity of housing
units that a community requires. There are alternatives to rent
control, such as mandatory inclusionary zoning, that take slightly
different approaches but have the same effect.
b Mandatory Inclusionary Zoning: Mandatory inclusionary zoning
refers to municipal and county planning ordinances that require a given
share of new construction to be affordable to people with low to
moderate incomes without an investment from the municipality. It is
normally a condition of approval of the development. Depending on the
requirements, the overall feasibility of a project could be threatened.
Bottom Line for Policymakers
The bottom line is that policymakers at all levels of government must
recognize that addressing local housing affordability needs requires a
partnership between government and the private sector. Municipalities
have the difficult task of trying to most efficiently manage their
resources to the greatest benefit of their constituents, often
challenged with balancing shrinking budgets and growing needs. However,
local governments also have a tool box of approaches they can take to
support affordable housing production. They can do this by
incentivizing for-profit entities to produce the necessary multifamily
units at a price point that households can afford.
Municipalities can defer taxes and other fees for a set period of time
to help the developer reduce the price point. They also own tangible
assets--buildings, raw land and entitled parcels--some of which can be
leveraged to bring down the cost of construction or redevelopment.
Finally, they can help streamline the development and approval
processes with fast-tracking programs.
As is outlined in the following section, however, the Federal
Government also has a key role to play. When both the public and
private sides bring all their tools and assets into play, there will be
a greater likelihood of finding viable solutions to meet our rental
housing challenges.
Key Federal Solutions to the Nation's Housing Challenges
The nation's challenge is to reduce the barriers and obstacles that
inhibit the expansion of the housing stock. While the preceding section
made it clear that new construction is often impeded at the local
level, there are federal solutions that may be beneficial as well. At
NMHC/NAA, we believe the solution at the federal level requires a
three-pronged answer of new development, preservation and
rehabilitation:
1. New development is absolutely critical to address the scarcity
of units available for the population of Americans whose household
incomes are below the average for their areas--and the one receiving
much of attention and criticism.
2. Preservation means ensuring that the financing and subsidy
programs that currently keep units available at below market rents
continue to be there in the future, providing some degree of certainty
in the affordable housing market.
3. Rehabilitation is vital because it can keep existing apartment
stock from dwindling further.
Federal Initiatives and Programs Vital to Addressing Affordability
Congress should play an integral role in addressing housing
affordability. The Senate Finance Committee has jurisdiction over the
Low-Income Housing Tax Credit (LIHTC), the nation's singular tool for
developing new affordable housing. The Finance Committee is currently
also keenly focused on tax reform. In the sections below, NMHC/NAA make
recommendations with regard to both the LIHTC and tax reform. We also
then examine programs outside of the Finance Committee's jurisdiction.
Programs Within the Finance Committee's Jurisdiction
Expand and Enhance the Low-Income Housing Tax Credit (LIHTC) and Enact
the Middle-Income Housing Tax Credit (MIHTC) to Support Workforce
Housing
The Low-Income Housing Tax Credit (LIHTC) has a long history of
successfully generating the capital needed to produce low-income
housing while also enjoying broad bipartisan support in Congress. This
public/private partnership program has led to the construction of
nearly 3 million units since its inception in 1986. It is the nation's
principal driver of new affordable housing.
The LIHTC program also allocates units to low-income residents while
helping to boost the economy. According to a December 2014 Department
of Housing using and Urban Development study, Understanding Whom the
LIHTC Program Serves: Tenants in LIHTC Units as of December 31, 2012,
the median Income of a household residing in a LIHTC unit was $17,066
with just under two-thirds of residents earning 40 percent or less of
area median income.\11\ Finally, the National Association of Home
Builders reports that, in a typical year, LIHTC development supports
approximately: 95,700 jobs; $3.5 billion in federal, state and local
taxes; and $9.1 billion in wages and business income.\12\
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\11\ Department of Housing and Urban Development, ``Understanding
Whom the LIHTC Program Serves: Tenants in LIHTC Units as of December
31, 2012,'' December 2014, p. 23.
\12\ Robert Dietz, The Economic Impact of the Affordable Housing
Credit, National Association of Home Builders, Eye on Housing, July 15,
2014. http://eyeonhousing.org/2014/07/the-economic-impact-of-the-
affordable-housing-credit/.
Maintaining and bolstering the LIHTC's ability to both construct and
rehab affordable housing is critical given acute supply shortages.
Indeed, the Harvard Joint Center for Housing Studies estimated that
there were only 45 affordable units for every 100 very low-income
households (those earning up to 50 percent of area median income) in
the United States in 2015.\13\
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\13\ NMHC tabulations of 2015 American Community Survey public use
microdata, IPUMS-USA, University of Minnesota, www.ipums.org.
First and foremost, Congress should retain the LIHTC as part of any tax
reform legislation. In so doing, Congress must take care to offset any
reduction in equity LIHTC could raise attributable to a reduction in
the corporate tax rate. Furthermore, NMHC/NAA reminds Congress that
tax-exempt private activity multifamily housing bonds are often paired
with 4 percent tax credits to finance multifamily development, and that
such tax-exempt bonds should be retained in any tax reform legislation
---------------------------------------------------------------------------
as they play a critical role in making deals viable to investors.
Second, Congress should also look to strengthen the credit by both
increasing program resources so that additional units can be developed
or redeveloped and making targeted improvements to the program to
improve its efficiency. Congress could increase program authority by
allocating additional tax credits. Further, program rules should be
adjusted that require owners to either rent 40 percent of their units
to households earning no more than 60 percent of area median income
(AMI) or 20 percent to those earning no more than 50 percent of AMI. If
program rules were revised to allow owners to reserve 40 percent of the
units for people whose average income is below 60 percent of AMI, it
could serve a wider array of households.
In this regard, the multifamily industry strongly supports the
Affordable Housing Credit Improvement Act of 2017 (S. 548) and commends
Senator Cantwell and Chairman Hatch for its introduction. We also thank
Finance Committee Senators Wyden, Bennet, Heller, Isakson and Portman
for their cosponsorship. This legislation, which would increase tax
credit allocations by 5.0 percent, would enable LIHTC to help build or
preserve 1.3 million units over 10 years, 400,000 more units than is
possible under current law. The measure also includes the income
averaging proposal.
Finally, we would also urge the Committee to strongly consider the
Middle-Income Housing Tax Credit Act of 2016 (S. 3384) that Ranking
Member Wyden introduced during the 114th Congress to address the
shortage of workforce housing available to American households. A
worthy complement of measures to expand and improve LIHTC, the Middle-
Income Housing Tax Credit (MIHTC) takes over where LIHTC leaves off.
LIHTC is currently designed to serve populations of up to 60 percent of
area median income. MIHTC is designed to benefit populations earning
below 100 percent of area median income. In fact, approximately 40
percent of renter households earning between $35,000 and $49,999 were
cost burdened in 2015. This population is exactly the one Ranking
Member Wyden's legislation would serve.
Tax Reform Must Not Disrupt the Industry's Ability to Construct and
Operate Housing Across All Income Levels
Congress is rightly continuing to develop proposals to reform the
nation's overly complex tax code to foster economic competitiveness and
economic growth. That said, much is potentially at stake for the
apartment industry and its ability to meet the nation's multifamily
housing needs given that apartment firms pay tax when they build,
operate, sell or transfer communities to their heirs. We believe that
any tax reform legislation should not disrupt the industry's ability to
construct and operate affordable and, workforce housing and, therefore,
must:
b Protect Flow-Through Entities. The multifamily industry is
dominated by ``flow-through'' entities (e.g., LLCs, partnerships, S
Corporations, etc.) instead of publicly held corporations. This means
that the company's earnings are passed through to the partners who pay
taxes on their share of the earnings on their individual tax returns.
Accordingly, Congress must not reduce corporate tax rates financed by
forcing flow-through entities to pay higher taxes through subjecting
them to a corporate-level tax or by denying credits and deductions.
b Maintain Like-Kind Exchanges. Like-kind exchange rules enable
property owners to defer capital gains tax if, instead of selling their
property, they exchange it for another comparable property. These rules
encourage property owners to remain invested in the real estate market
while providing them with the flexibility to shift resources to more
productive properties, different geographic locations or to diversify
or consolidate holdings. Any proposal to revise or restrict like-kind
exchanges may have a significantly harmful effect on the value and
trading of property. As a result, Congress should not change present
law.
b Ensure Depreciation Rules Avoid Harming Real Estate. Cost
recovery rules should reflect the life of properties. Depreciation
periods that overstate economic lives would reduce development and
investment, leading to lower real estate values and stifling the
industry's role in job creation. Tax reform should reflect the critical
role cost recovery plays in our ability to create new jobs.
b Retain the Deduction for Business Interest. Efforts to prevent
companies from overleveraging are leading to calls to scale back the
current deduction for business interest expenses. Unfortunately,
reducing this deductibility would greatly increase the cost of debt
financing necessary for large-scale projects, curbing development
activity when the nation is suffering from a shortage of apartment
homes.
Programs Outside of the Finance Committee's Jurisdiction
GSE Reform
While outside of the Finance Committee's purview, the first and
foremost priority to addressing housing affordability is getting
multifamily right in housing finance reform and recognizing its unique
characteristics; it is the single most important factor to ensuring
that the apartment industry can meet the nation's growing rental
housing demand.
The very successful multifamily programs of the Government-Sponsored
Enterprises (GSEs), Fannie Mae and Freddie Mac, were not part of the
2008 financial meltdown and have actually generated over $26 billion in
net profits since the two firms were placed into conservatorship.
Preservation of the mortgage liquidity currently provided by the GSEs
in all markets during all economic cycles is critical. NMHC/NAA urge
lawmakers to recognize the unique needs of the multifamily industry.
We believe the goals of a reformed housing finance system should be to:
b Maintain an explicit federal guarantee for multifamily-backed
mortgage securities available in all markets at all times;
b Ensure that the multifamily sector is treated in a way that
recognizes the inherent differences of the multifamily business; and
b Retain the successful components of the existing multifamily
programs in whatever succeeds them.
These principles can be achieved through a reformed structure that
preserves the high quality and value of the current multifamily
secondary mortgage market's activities.
Multifamily Federal Housing Administration (FHA) Programs
FHA Multifamily is best known for offering an alternative source of
construction debt to developers that supplements bank and other private
construction capital sources. It also serves borrowers with long-term
investment goals as the only capital provider to offer 35-40 year loan
terms. FHA lending is essential to borrowers in secondary markets,
borrowers with smaller balance sheets, new development entities,
affordable housing developers and non-profit firms, all of which are
often overlooked or underserved by private capital providers.
It is important to the apartment industry that FHA continues to be a
credible and reliable source of construction and mortgage debt. FHA not
only insures mortgages, but it also builds capacity in the market,
providing developers with an effective source of construction and long-
term mortgage capital. The FHA Multifamily Programs provide a material
and important source of capital for underserved segments of the rental
market, and do so while maintaining consistently high loan performance
standards. NMHC/NAA encourage Congress to continue funding FHA's
Multifamily Programs.
Finally, we believe a special note is warranted regarding the 221(d)(4)
program. Providing flexible loan terms, is beneficial in supporting the
development of workforce and affordable housing. However, we note that
the program includes a bevy of restrictions, including loan size,
allowable prevailing Davis-Bacon wage requirements, and other
associated fees and disbursement restrictions. We ask to have a
dialogue with Congress regarding feasible ways to make modest
modifications to this program to make it even more effective in
encouraging the production of workforce and affordable housing.
Funding for Affordable Housing Programs
Housing costs continue to grow, demand for rental housing continues to
escalate, but incomes for many low-income families remain stagnant.
Given these realities, demand for subsidized affordable housing has
increased dramatically through the economic crisis and into the
recovery years since, However, federal funding for the primary programs
serving low income households has been virtually flat or declining.
Programs like Tenant Based Section 8 and Project Based Rental
Assistance allow low income families to rent market rate housing,
taking advantage of the broad offering of privately owned and operated
properties in a given market. Meanwhile, programs like HOME and CDBG
allow developers to address financing shortfalls often associated with
affordable housing properties, and stimulate meaningful development and
preservation activity as a result. To address housing affordability
challenges for all Americans, across the income spectrum, adequate
funding for these programs is essential.
Section 8 Housing Choice Voucher Program
This public-private partnership has the potential to be one of the most
effective means of addressing our nation's affordable housing needs and
supporting mixed-income communities. However, the program's potential
success is limited by too many inefficient and duplicative
requirements, which discourage private providers from accepting
vouchers. These include a required three-way lease between the
provider, resident and the public housing authority; repetitive unit
inspections; resident eligibility certification; and other regulatory
paperwork. Collectively, these make it more expensive for a private
owner to rent to a Section 8 voucher holder.
It is also imperative for lawmakers to reinforce the voluntary nature
of the program. Congress specifically made participation voluntary
because of the regulatory burdens inherent in the program. However,
state and local governments are enacting laws that make it illegal for
a private owner to refuse to rent to a Section 8 voucher holder. Recent
examples include ``source of income discrimination'' provisions passed
by a number of cities. While often well intentioned, such mandates are
self-defeating because they greatly diminish private-market investment
and reduce the supply of affordable housing.
Rental Assistance Demonstration (RAD) Program
NMHC/NAA support RAD, which was established in 2011 as an affordable
housing preservation strategy for public housing authorities (PHAs).
The program allows PHAs to convert public housing properties at risk of
obsolescence or underfunding into project-based vouchers or rental
assistance contracts under the Section 8 program. Once the units are
re-designated from public housing (Section 9 of the 1937 Housing Act)
to Section 8 housing, housing authorities are able to leverage private
capital to address capital needs. This allows housing authorities to
work with private sector developers and managers to preserve their
affordable housing stock. RAD is designed to reverse the trend of lost
affordable units by accessing private capital to make up for related
funding shortfalls.
Government-Supported Preferred Equity
Investor equity for development transactions is the most expensive type
of capital. Reducing the required return for this portion of capital
would reduce the cost of developing multifamily units and could help
spur the construction of additional workforce housing. NMHC/NAA would
like to work with Congress on a plan that would enable a federal entity
to provide developers with preferred equity to help offset the cost of
workforce housing production. NMHC/NAA believe that such a program
could be integrated into the very successful multifamily programs run
by Fannie Mae and Freddie Mac and implemented at minimal cost.
Modifying the Community Reinvestment Act
The CRA could be modified to include greater incentives for banks to
provide loans for multifamily apartments that include workforce and
affordable housing. CRA guidelines currently allow banks to obtain
Community Development (CD) credit for multifamily units serving
occupants with incomes of up to 80 percent of area median income. While
this level captures a significant portion of workforce and affordable
households, the rules themselves make it difficult to obtain the CD
credit due to a requirement to report incomes, information that is not
captured.
Davis-Bacon Wage Determination
Under current law, developers must adhere to Davis-Bacon wage rates for
construction financed by federal dollars. Unfortunately, the Department
of Labor's methodology of determining these so-called prevailing wages
suffers from structural defects related to the availability of data.
For example, the methodology frequently produces wage rates that exceed
prevailing market-based wages, which only exacerbates the cost of
developing multifamily housing. NMHC/NAA request that Congress urge the
Department of Labor to reexamine and modify its methodology.
Conclusion
In closing, NMHC/NAA look forward to working with the Finance Committee
and the entire Congress to address the nation's affordable workforce
housing challenges. On behalf of the apartment industry and our 38.8
million residents, we stand ready to work with Congress to ensure that
every American has a safe and decent place to call home at a price that
enables individuals to afford life's necessities.
______
National Trust for Historic Preservation, National Trust Community
Investment Corporation, and Historic Tax Credit Coalition
The Watergate Office Building
2600 Virginia Avenue, NW, Suite 1100
Washington. DC 20037
E [email protected]
P 202-588-6000
F 202-588-6038
https://savingplaces.org/
The Honorable Orrin Hatch The Honorable Ron Wyden
Chairman Ranking Member
Committee on Finance Committee on Finance
U.S. Senate U.S. Senate
Washington, DC 20510 Washington, DC 20510
Re: Affordable Housing Crisis: Challenges and Solutions
Dear Chairman Hatch and Ranking Member Wyden:
The National Trust for Historic Preservation (``National Trust''), the
National Trust Community Investment Corporation (``NTCIC''), and the
Historic Tax Credit Coalition (``HTCC'') are pleased to submit joint
comments to the Senate Finance Committee noting the role the federal
Historic Tax Credit (``HTC'') plays in the production of affordable
housing for inclusion in the record for the hearing titled,
``Affordable Housing Crisis: Challenges and Solutions'' that occurred
on August 1, 2017.
The National Trust is a private, nonprofit organization chartered by
Congress in 1949 to facilitate public participation in the preservation
of our nation's heritage. With headquarters in Washington, DC, 9 field
offices, 27 historic sites, more than 1 million members and supporters,
and a national network of partners in states, territories, and the
District of Columbia, the National Trust works to save America's
historic places and advocates for historic preservation as a
fundamental value in programs and policies at all levels of government.
NTCIC is a wholly owned for-profit subsidiary of the National Trust and
enables tax credit equity investments that support sustainable
communities nationwide. NTCIC places qualified tax credits for federal
and state historic (HTC), new markets (NMTC), solar (ITC) and low-
income housing (LIHTC). Since its inception in 2000, NTCIC has provided
tax credit financing of over $1 billion in capital for HTC, NMTC, ITC,
and LIHTC investments for 142 transactions with over $4 billion in
total development costs.
The HTCC is a nonprofit organization comprising 78 member firms
including leading historic tax credit developers, investors,
syndicators, tax attorneys, accountants and preservation consultants
who came together in 2009 to advocate for the modernization of the HTC.
It works to educate Congress, engage with the IRS and the National Park
Service on regulatory issues and conduct research on the economic
impact of the HTC.
Communities throughout the nation demonstrate time and again the value
of historic buildings and neighborhoods in community-strengthening
efforts, whether it be producing homes for low-income residents or
housing small businesses that are important to a neighborhoods economic
vitality. Old and historic buildings are resources that already exist
in many communities and can serve as a foundation for an area's housing
program. Rehabilitation and maintenance of existing building stock is a
key factor in breaking the cycle of deterioration, disinvestment, and
loss that reduces our affordable housing supply. Outlined below are
several ways of analyzing the value the HTC adds to existing programs
that seek to address the lack of affordable housing for too many
Americans.
Twinning the HTC With the Low-Income Housing Tax Credit (LIHTC)
A primary way of measuring the impact the HTC has on the production of
affordable housing is to examine data on how often the HTC and LIHTC
are used together to make an affordable housing transaction feasible
when the building is historic. According to the most recent National
Council of State Housing Agencies (``NCSHA'') statistical report
(2014), approximately 95,000 affordable units were completed that year
with 5.5 percent of those transactions also utilizing the HTC. That
equates to 5,525 affordable units created in historic buildings in
2014.
While statistics on the types of historic properties that are
repurposed as affordable housing are not readily available, we know
anecdotally that many of these projects involve the rehabilitation of
vacant historic schools. These schools are often located in the heart
of their communities. The effect of rehabilitating historic schools
into affordable housing, as one example, is not only that these
residential units are in high demand because of their unique character,
but also because of the memories that community residents have of
attending these schools. Developers take advantage of these factors to
market these properties to local residents while creating a sense of
renewal and continuity for the surrounding communities.
It is important to note that twinning the HTC with the LIHTC helps make
historic affordable housing developments possible that likely would not
occur using just one of the credits. If only the LIHTC were available,
historic properties would likely be passed over or razed in favor of
new construction, while if only the HTC were available, most of the
housing in historic properties would be unaffordable to low-income
families. Each tax credit advances an important public policy objective
in its own right, but the ability to twin tax credits enables
communities to preserve their heritage and provide needed affordable
housing on the same property resulting in reduced NIMBY opposition.
Rutgers University Research on the HTC and Affordable Housing Outcomes
Another way of understanding the HTC's impact on the nation's
affordable housing supply is to look the annual analysis conducted by
Rutgers University Center for Urban Policy Research for the National
Park Service. The FYI 6 report on the economic impact of the HTC
indicates that over the life of the federal historic tax credit,
roughly half of all HTC transactions produced housing. From 1978
through 2016, the HTC was used to create 549,005 housing units. Of the
total units, 153,255, or 28 percent, were affordable to low- and
moderate-income families. Further, the 2017 report reflects an increase
in the number of affordable units created with HTC financing. Of the
21,139 housing units created utilizing the HTC in 2017, 7,181, or 34
percent, were affordable.
National Park Service Statistical Reports
Another key source of information about the role of the HTC in
producing affordable housing comes from NPS's Statistical Reports. The
above data indicates the average annual affordable housing production
by the HTC is roughly 4,400 units over the past 39 years. However, this
number is less than the NCSHA estimate of 5,525 for 2014 alone, which
only includes twinned HTC/LIHTC transactions. A look at the National
Park Service's statistical reports over the last 5 years shows that the
amount of affordable housing units produced in buildings that utilize
the HTC is trending up significantly. The NPS data is summarized in the
graph below.
[GRAPHIC] [TIFF OMITTED] T80117.008
The graph indicates that annual affordable housing units associated
with the HTC is now in the 7,000-8,000 range. Some of these units
result from combining the HTC and LIHTC. Others, however, are financed
through a combination of federal and state HTCs and the twinning of
historic tax credits with the New Markets Tax Credits in mixed-use
buildings.
In summary, historic buildings are well-suited to help meet the
nation's affordable housing needs. The units produced are highly
attractive in the market place due to the special historic features
that are retained as part of the National Park Service's program
requirements. As older structures, they are typically found in
communities well-served by existing public transit, job centers,
utilities and local schools--benefits that are essential for low- and
moderate-income households. These developments spur a cycle of renewal
in communities that have been left behind. Links to three illustrative
case studies from the National Park Service's website can be found
below:
https://www.nps.gov/tps/tax-incentives/case-studies.htm#riverside-
plaza.
https://www.nps.gov/tps/tax-incentives/case-studies.htm#toms-brook-
school.
https://www.nps.gov/tps/tax-incentives/case-studies.htm#rockville-mill.
Thank you for the opportunity to submit these comments. For further
information, please contact us at [email protected],
[email protected], ormhoopengardner
@ntcic.org.
Sincerely,
Shaw Sprague John Leith-Tetrault
Senior Director, Government
Relations Chairman
National Trust for Historic
Preservation Historic Tax Credit Coalition
Merrill Hoopengardner
President
National Trust Community Investment
Corporation
______
New York City Department of Housing Preservation and Development and
New York City Housing Development Corporation
Testimony of
Maria Torres-Springer, Commissioner
New York City Department of Housing Preservation and Development
100 Gold Street
New York, NY 10038
and
Eric Enderlin, President
New York City Housing Development Corporation
110 William Street
New York, NY 10038
Chairman Hatch, Ranking Member Wyden, and Members of the Committee:
thank you for holding a hearing on one of the most critical issues
facing our country--the insufficient supply of safe, decent and
affordable housing. We appreciate the opportunity to submit the
following comments for the record regarding America's affordable
housing crisis and potential solutions.
The New York City Department of Housing Preservation and Development
(HPD) and Housing Development Corporation (HDC) are the largest
municipal housing agency and leading local housing finance agency in
the nation, respectively. Together, HPD and HDC finance the
preservation and new construction of affordable housing, enforce
housing quality standards to promote the health and safety of all New
Yorkers, and ensure sound management of the City's affordable housing
stock. As we pursue the goal of connecting people to opportunity
through affordable housing, we strongly urge the Committee to protect
the Low-Income Housing Tax Credit (Housing Credit) and private activity
tax exempt bonds for housing as part of any tax reform effort
considered by Congress. Additionally, we offer our comments on the
potential benefits of the Affordable Housing Credit Improvement Act, S.
548, which would mark the first meaningful expansion of affordable
housing resources in decades.
The Affordable Housing Crisis
The affordable housing crisis is a bipartisan issue impacting cities,
states, and rural areas across the country. In New York City, more than
half of all renters are cost-burdened, meaning they pay more for rent
than they can afford, often at the expense of other necessities like
food and healthcare. We know that it is not just renters in high-cost
cities like New York facing these terrible tradeoffs. A recent report
by the National Low-Income Housing Coalition found only 12 counties
nationwide where a minimum wage worker can afford a modest two-bedroom
apartment. Nationally, one in four renter households pay more than half
of their income on housing costs, leaving more than 11 million families
one paycheck away from homelessness.
Ongoing trends in the rental housing market further perpetuate the
housing crisis. In New York City in 2011, there were approximately
400,000 homes affordable to the more than 900,000 extremely and very
low income households. The shortage in supply of affordable housing
drives up rents. Meanwhile, wages haven't kept pace and federal rental
subsidy resources are shrinking. To reverse this tide, we need to build
more affordable housing. To do that, we must protect and expand the
Housing Credit and private activity tax-exempt bonds for multifamily
housing.
Benefits of the Housing Credit and Tax-Exempt Bonds
The Housing Credit--including both the 9 percent credit, as well as the
4 percent credit paired with private activity tax-exempt bonds--is the
strongest driver of affordable housing in the United States, financing
nearly 90 percent of all new construction and preservation. As one of
our country's longest standing public-private partnership models, the
Housing Credit leverages private investment at a rate of three to one,
supports 96,000 jobs per year, and has financed nearly 3 million
affordable rental homes nationwide. In New York City alone, Housing
Credits and tax-exempt bonds have helped to create or preserve more
than 160,000 safe, quality affordable homes for working families and
vulnerable populations, such as seniors and homeless families.
Despite this incredible track record, the Housing Credit is in need of
expansion and refinement in order to keep up with demand, and to
provide housing agencies and their development partners with maximum
flexibility in serving the needs in their communities. Each year,
viable and much needed affordable housing developments go unbuilt due
to the shortage of Housing Credits available and constrained bond cap
authority.
Enhancing the Housing Credit: Key Provisions in the Affordable Housing
Credit Improvement Act
S. 548 builds upon the most productive aspects of the Housing Credit
while proposing changes to strengthen the program by streamlining
rules, improving flexibility, and enabling the program to serve a wider
array of local needs. Among the many significant improvements included
in the bill that HPD and HDC strongly support are:
A 50 percent increase in per-capita and small state minimum
allocations, phased in over 5 years, which is estimated to support
production and preservation of an additional 400,000 units nationally
over a 10-year period.
A permanent minimum 4 percent rate for Housing Credits used to
finance the acquisition of property or generated by tax-exempt bonds.
Minimum credit rates are needed in order to increase the predictability
and financial feasibility of affordable housing development and would
allow developers to target more units to the lowest income households.
A new income-averaging election, allowing the current 60 percent
of Area Median Income (AMI) ceiling to apply to the average of all
apartments within a property, as long as no apartment exceeds a maximum
of 80 percent AMI. The higher rents that households with incomes above
60 percent of AMI could afford have the potential to offset lower rents
for households below 30 or 40 percent of AMI, allowing developments to
maintain financial feasibility while providing a deeper level of
affordability.
A provision that gives housing agencies discretion to provide
basis boosts for tax-exempt bond financed developments, allowing more
of these developments to be financially feasible, and for developments
serving very low income households.
We strongly support all proposed enhancements to the Housing Credit in
S. 548 as ways to help meet the growing need for affordable housing. In
addition, we are pleased to share additional proposals to complement
the Housing Credit.
Proposals to Increase Private Activity Tax-Exempt Bond Volume Cap
Private activity tax-exempt bonds are essential to the success of the
Housing Credit, helping to finance roughly 40 percent of Housing Credit
properties nationwide. In states like New York, affordable housing
development is constrained by insufficient private activity bond cap
and limits on the use of recycled bonds.
New York State uses essentially all private activity bond volume cap
allocated to it each year. With ambitious housing plans at the city and
state level, and an aggressive preservation plan for the City's Public
Housing Authority, increased demand for volume cap creates challenges
in meeting the City's affordable housing pipeline's financing needs.
Two ways to increase volume cap in order to meet these important
priorities are making technical changes to bond recycling and creating
a national reallocation pool for unused private activity bond volume
cap.
Bond Recycling
As of the passage of the Housing and Economic Recovery Act of 2008
(HERA), tax-exempt, multifamily housing revenue bonds can be recycled
to finance new development activity without the need for new private
activity bond volume cap. Under the law, if a loan that was financed by
new volume cap bonds is repaid within 4 years from the original issue
date of the bonds, then a housing finance agency such as HDC has 6
months to recycle the bonds and use the proceeds to make a new loan for
another housing project. Unlike new volume cap bonds, recycled bonds do
not generate 4 percent Housing Credits.
HDC currently issues more than $300M per year in recycled bonds. It is
estimated that the following changes would allow for $100M-$200M more
in recycled bonds in New York State each year. Additionally, these
changes will allow for most, if not all, new volume cap to be used for
multifamily housing (thus generating 4 percent Housing Credits) without
reducing other eligible private activity financings such as industrial
development and single family mortgage revenue bonds:
Permit recycled bonds to finance economic development projects
in addition to multifamily rental housing.
Extend the period during which tax-exempt, multifamily housing
revenue bonds can be recycled from 6 months to 1 year after repayment,
as it is often difficult to close a new project's financing within the
current window.
Allow housing agencies to recycle more than once within the
existing 4-year time limit from original issue.
Permit recycled bonds to be used in conjunction with 9 percent
Housing Credits in order to help finance projects where bank debt is
too expensive.
National Reallocation Pool for Unused Bond Volume Cap
A growing list of states use the entire private activity bond cap
allotted to them every year, leaving shovel ready affordable housing
developments unbuilt. Meanwhile, other states burn off unused bond cap.
Creating a National Reallocation Pool for unused volume cap assures
that critical housing resources are efficiently redeployed to areas
with the most immediate need and capacity for affordable housing
development and preservation efforts.
Under current law, unused private activity bond volume cap either
expires or may be carried forward for just 3 years, after which it
expires. Unused volume cap and carryforward is not available for
projects in other states, and approximately $10B in volume cap is
burned off nationally each year. To induce more private investment to
help meet the growing demand for affordable rental housing, and to more
efficiently and effectively utilize federal resources, we propose
creating a private activity bond cap national reallocation pool for
affordable housing. This pool would allow states and localities with
affordable housing projects in their pipeline to recapture unused cap
from other locations. The reallocation of cap could be similar in
structure to the reallocation of the national pool of unused Low Income
Housing Tax Credit authority and the competitive allocation process for
the Housing Credit dollar amount.
We look forward to partnering with Congress and our housing colleagues
nationwide to pursue these and other innovations that could provide
additional support in addressing the affordable housing crisis.
Importance of Additional Federal Housing Resources
As Congress continues with federal budget negotiations, it is crucial
to note the importance of funding for affordable housing programs of
the Department of Housing and Urban Development (HUD) and the
Department of Agriculture. Without adequate funds for public housing,
rental assistance, HOME Investment Partnerships, rural development and
Community Development Block Grants, we cannot fully address housing
needs across this country. In fact, these programs serve as an
essential complement to the Housing Credit, as most affordable housing
is financed through a combination of HUD program resources and credits.
Asset Management and Oversight
As affordable housing practitioners, we share the Committee's
commitment to transparency and oversight in the Housing Credit Program.
State allocating agencies, syndicators and local housing agencies
already adhere to the strict requirements of the program and, in many
cases, exceed those with even more stringent local standards. We
applaud the work of organizations like the National Council of State
Housing Agencies (NCSHA) in sharing best practices across the industry
to ensure the program is managed properly and all commitments to
affordability are honored throughout the life of the projects under our
purview.
In closing, we again thank the Committee for keeping affordable housing
at the center of ongoing discussions around comprehensive tax reform
and consideration of federal spending commitments in the coming years.
______
Edgar O. Olsen
Department of Economics, University of Virginia,* Charlottesville, VA
---------------------------------------------------------------------------
*This paper reflects the views of its author. It does not
represent the official position of the University of Virginia. The
University does not have an official position on low-income housing
policy. It is a revised version of a paper presented at a conference on
housing affordability at the American Enterprise Institute on April 6,
2017 sponsored by the American Enterprise Institute, Bank of Israel,
Board of Governors of the Federal Reserve System, Tel Aviv University,
and UCLA.
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Does Housing Affordability Argue for Subsidizing the
Construction of Tax Credit Projects?
The Low-Income Housing Tax Credit (LIHTC) is the largest and fastest
growing low-income housing program. It subsidizes the construction and
renovation of more units each year than all other government programs
combined. The tax credits themselves involved a tax expenditure of
about $6 billion in 2015 and new commitments of about $7.5 billion.
However, these projects receive additional development subsidies from
state and local governments, usually funded through federal
intergovernmental grants, accounting for one-third of total development
subsidies (Cummings and DiPasquale 1999). Therefore, the total
development subsidies associated with the new commitments were about
$11 billion. Furthermore, many tax credit projects involve substantial
renovations of older HUD and USDA housing projects that continue to
receive deep subsidies from the programs involved, and many tax credit
units are occupied by households with tenant-based housing vouchers
that provide owners with additional revenue. GAO (1997) found that
owners of tax-credit projects received subsidies in the form of project
based or tenant-based rental assistance on behalf of 40 percent of
their tenants. More recent evidence for 10 states suggests an even
higher fraction (O'Regan and Horn 2015). To the best of my knowledge,
the magnitude of these subsidies has never been documented. If their
per-unit cost were equal to the per-unit cost of tenant-based housing
vouchers in 2015, they would have added about $7.5 billion a year to
the cost of the tax-credit program. A program of this magnitude merits
much more critical scrutiny than it has received to date.
Proposed legislation in the Senate would greatly expand the tax credit
program, indeed, increase the number of units built or renovated by 50
percent.\1\ This is billed as a solution to a housing affordability
problem described in terms of the many households that devote a large
fraction of their income to housing. The report that attempts to
justify the expansion also argues that the expansion is necessary to
house the homeless who clearly have a housing affordability problem.\2\
Neither argument holds water.
---------------------------------------------------------------------------
\1\ https://www.congress.gov/bill/115th-congress/senate-bill/548.
\2\ https://www.cantwell.senate.gov/imo/media/doc/
Senator%20Cantwell%20LIHTC%20Report
.pdf.
Building new projects is a very expensive solution to the housing
affordability problem described. We don't need to build new housing
projects to help households that spend a large fraction of their income
on housing. They are already housed. If we think that their housing is
unaffordable, the cheapest solution is for the government to pay a part
of the rent. HUD's housing voucher program does just that at a much
---------------------------------------------------------------------------
lower cost than the tax credit program.
Furthermore, it's neither necessary nor desirable to construct new
units to house the homeless. The number of people who are homeless is
far less than the number of vacant units--indeed, far less than the
number of vacant units renting for less than the median. In the entire
country, there are only about 600,000 homeless people on a single night
and more than 3 million vacant units available for rent.\3\ Even if all
homeless people were single, they could easily be accommodated in
vacant existing units, and that would be much less expensive than
building new units for them. The reason that they are homeless is that
they don't have the money to pay the rent for existing vacant units. A
housing voucher would solve that problem. A major HUD-funded random
assignment experiment called the Family Options Study compared the cost
and effectiveness of housing vouchers and subsidized housing projects
for serving the homeless.\4\ Transitional housing projects were far
less effective and much more expensive than short-term housing
vouchers.
---------------------------------------------------------------------------
\3\ https://www.hudexchange.info/resources/documents/2015-AHAR-
Part-1.pdf.
https://fred.stlouisfed.org/series/ERENTUSQ176N.
\4\ https://www.huduser.gov/portal/sites/default/files/pdf/Family-
Options-Study-Full-Report.pdf.
The evidence indicates that the tenant-based housing voucher program is
by far the most cost effective approach to delivering housing
assistance.\5\ The best study of HUD's largest program that subsidized
the construction of privately owned projects indicated the total cost
of providing housing under this program was at least 44 percent greater
than the total cost of providing equally good housing under the housing
voucher program (Wallace and others 1981). This translated into
excessive taxpayer cost of at least 72 percent for the same outcome. It
implies that housing vouchers could have served all the people served
by this program equally well and served at least 72 percent more people
with the same characteristics without any increase in public spending.
---------------------------------------------------------------------------
\5\ Olsen (2008, pp. 9-15) summarizes the evidence.
We don't have a cost-effectiveness study of this quality for the LIHTC
program. The best evidence available suggests that tax credit projects
cost 16% more than the voucher program to provide units with the same
number of bedrooms in the same metro area (GAO 2001). This is almost
surely an underestimate because it omits some of the public subsidies
to developers of tax credit projects such as land sold to them by local
governments at below-market prices, local property tax abatements
received by some developers, and later subsidies for renovating the
---------------------------------------------------------------------------
projects.
The best evidence available also indicates that occupants of tax credit
projects capture a small fraction of the subsidies provided to
developers. Burge (2011, p. 91) finds that the present value of the
rent saving to tenants (the difference between the market rent of the
unit and the rent paid by its tenant) is only 35% of the present value
of the tax credits provided to developers. Combining this result with
Cummings and Di Pasquale's finding that tax credits account for about
two-thirds of development subsidies for tax credit projects leads to
the conclusion that tenants capture at most 24% of the development
subsidies.
A recent PBS Frontline documentary called ``Poverty, Politics, and
Profit'' illustrates one of the reasons for this outcome, namely, LIHTC
fraud.\6\ A follow-up piece with NPR, Department of Justice news
releases, and articles in The Miami Herald provide more details.\7\ One
investigation of several developers revealed excess subsidies of $36
million for 14 projects.\8\ Because subsidies are proportional to
development cost, developers have an incentive to overstate them. In
the fraud uncovered in this investigation, the developer who was
awarded tax credits persuaded contractors to provide inflated bids for
their work on the projects combined with kickbacks to the developers.
Due to the difficulty of determining true development cost and lax
enforcement by state housing agencies, developers succeed in greatly
overstating them. Because the fraud involved is difficult to detect,
the few cases uncovered so far are surely the tip of the iceberg.\9\
Recent investigations have uncovered fraud in Los Angeles, New York
City, Dallas, and Maine, and other investigations are underway.\10\
---------------------------------------------------------------------------
\6\ http://www.pbs.org/video/3000723710/.
\7\ http://www.npr.org/2017/05/09/527046451/affordable-housing-
program-costs-more-shelters-less.
https://www.justice.gov/usao-sdfl/pr/seven-defendants-sentenced-
federally-their-role-36-million-fraud-scheme-involving-low.
http://www.miamiherald.com/news/local/community/miami-dade/
article29949909.html.
\8\ https://www.justice.gov/usao-sdfl/pr/seven-defendants-
sentenced-federally-their-role-36-million-fraud-scheme-involving-low.
\9\ Since LIHTC has subsidized the construction and renovation of
more than 40,000 projects, it is reasonable to believe that fraud has
accounted for a substantial sum over the program's history.
\10\ http://www.latimes.com/local/lanow/la-me-ln-housing-
indictment-20160205-story.html.
https://www.justice.gov/usao-edny/pr/real-estate-developer-
sentenced-6-months-imprisonment-soliciting-300000-kickbacks-nyc.
https://www.justice.gov/archive/usao/txn/PressRel10/
DCC_potashnik_brian_cheryl_sen_pr.
html.
http://www.pressherald.com/2016/04/14/maine-man-admits-embezzling-
80000-in-low-income-housing-funds/.
https://www.bizjournals.com/southflorida/news/2017/06/16/federal-
investigation-widens-into-affordable.html.
The reasons for the excess cost of tax credit projects go beyond fraud.
The combination of programs that provide subsidies to them offer excess
profits to honest developers (that is, much larger profits than can be
earned in the unsubsidized market) and distortions in the combination
of inputs used to provide housing (specifically, expensive new
buildings that are built on inexpensive land and poorly maintained).
The excess profits explain why many more developers submit proposals
than can be funded with the tax credits allocated to the state. It's
why developers of tax credit projects spend so much on their proposals.
It's why almost all commit all of the units in their buildings to the
tax credit program. It's why some pay bribes to get their projects
approved. The layering of subsidies on tax credit projects makes it
---------------------------------------------------------------------------
particularly difficult to prevent excess profits.
Clearly, Congress should not authorize the expansion of the tax credit
program unless existing evidence on the cost-effectiveness of the tax
credit program is far from the mark. If Congress wants to serve
additional households, it should expand the much more cost-effective
housing voucher program. Furthermore, given the large current public
spending on tax credit projects, Congress should insist on, and
appropriate the money for, independent analyses of the highest quality
that compare the cost-effectiveness of housing vouchers with the
various types of tax credit projects, including ones that renovate
private and public housing projects built under HUD and USDA programs.
The cost of these studies would be trivial compared with public
spending on tax credit projects.
It's often argued that the large expense of subsidizing the
construction of new tax credit projects is justified by low vacancy
rates that prevent potential recipients from using housing vouchers.
Table 1 shows that the location of new tax credit projects is
inconsistent with this justification. The construction of tax credit
projects is not focused on metro areas with low vacancy rates. Over the
past decade, the majority of tax credit units were built in metro areas
with vacancy rates in excess of 8%. Almost 40% of all tax credit units
were built in metro areas with vacancy rates in excess of 10%. The
location of tax credit projects indicates that market tightness is not
a serious argument for the tax credit program.
Table 1. Tax Credit Units v. Vacancy Rates
75 largest metro areas, HVS vacancy rates, 2005-2014
------------------------------------------------------------------------
Vacancy Rate Tax Credit Units Placed in Tax Credit Units as % of
(%) Service Occupied Rental Units
------------------------------------------------------------------------
2.0-3.9 13,931 0.24
4.0-5.9 117,729 0.20
6.0-7.9 145,076 0.27
8.0-9.9 84,894 0.21
10.0- 223,220 0.25
------------------------------------------------------------------------
Total 584,850 0.24
------------------------------------------------------------------------
Note: Each observation refers to a single metro area in one year.
Sources: Vacancy rates, https://www.census.gov/housing/hvs/data/
ann15ind.html.
Tax credit units placed in service, https://www.huduser.gov/portal/
datasets/lihtc.html.
Occupied rental units, http://factfinder.census.gov/faces/nav/jsf/pages/
index.xhtml.
Furthermore, there are good reasons to expect that subsidized
construction will work poorly in tight housing markets because it
crowds out unsubsidized construction to a considerable extent. When
vacancy rates are low in a market, rents will be high. This is when
unsubsidized construction will be most profitable. In the absence of
subsidized construction, unsubsidized construction would be high, and
unemployment among construction workers and equipment would be low.
Subsidized construction would divert workers and equipment from
unsubsidized construction.
The evidence indicates that subsidized construction largely crowds out
the unsubsidized housing stock to a considerable extent (Murray 1983,
1999, Malpezzi and Vandell 2002, Sinai and Waldfogel 2005, and Eriksen
and Rosenthal 2010). In tight markets, it mainly crowds out
unsubsidized construction. In markets with high vacancy rates, it
mainly results in the withdrawal of existing units from the housing
stock.
It's reasonable to believe that all subsidized housing programs lead to
some increase in the number of dwelling units by increasing the demand
for distinct units. The offer of housing assistance of any type induces
some individuals and families living with others to live in their own
units. Abt et al. (2006, pp. 23, 76) indicate that about 26 percent of
the families on the housing voucher waiting list were living with
friends or relatives and 2 percent were living in a homeless shelter or
transitional housing, and voucher usage resulted in corresponding
decreases in these numbers. Since doubling up and homelessness are more
common among the poorest households, the programs that serve the
poorest households will have the greatest net effect on the number of
housing units. The voucher program serves somewhat poorer households
than public housing and much poorer households than privately owned
subsidized projects as judged by per-capita household income (Picture
of Subsidized Households).\11\ Consistent with this explanation, Sinai
and Waldfogel (2005) find that tenant-based vouchers lead to a larger
increase in the housing stock than construction programs. This
phenomenon also explains Eriksen and Rosenthal's finding of almost
complete crowd out for the LIHTC. This program serves families with
much higher incomes than the other programs.
---------------------------------------------------------------------------
\11\ https://www.huduser.gov/portal/datasets/assthsg.html.
Contrary to popular perceptions, housing vouchers work reasonably well
in tight housing markets. Many families offered vouchers already occupy
apartments meeting the program's standards. We don't need vacant
apartments for these families. They can participate without moving.
Other families offered vouchers live in housing that doesn't meet
program's minimum housing standards, but their landlords are willing to
repair them to meet the standards. Similarly, vacant apartments that do
not initially meet the program's standards can be upgraded to meet
them. About half of the units occupied by voucher recipients were
repaired to meet the program's minimum housing standards (Kennedy and
Finkel 1994). The tenant-based voucher program substantially increases
the supply of apartments meeting minimum housing standards without
---------------------------------------------------------------------------
building new units for the households involved.
The Housing Assistance Supply Experiment of the Experimental Housing
Allowance Program (EHAP) provides additional evidence on the ability of
tenant-based vouchers to increase the supply of apartments meeting
minimum housing standards even in tight housing markets.\12\ The Supply
Experiment involved operating an entitlement tenant-based housing
allowance program in two metropolitan areas for 10 years. During the
first 5 years of the experiment, about 11,000 dwellings were repaired
or improved to meet program standards entirely in response to tenant-
based assistance (Lowry 1983, p. 24). This represented more than a 9
percent increase in the supply of apartments meeting minimum housing
standards.
---------------------------------------------------------------------------
\12\ Olsen and Zabel (2015, pp. 903-904) provide a brief account of
the experiment and its main results.
Given the available evidence on program performance, we should
certainly not expand the tax credit program. The existing evidence
argues for terminating it or phasing it out. If we want to serve
additional households, we should expand the much more cost-effective
housing voucher program. lf the tax credit program is retained,
Congress should insist on independent analyses of the highest quality
that compare the cost-effectiveness of housing vouchers with the
various types of low-
---------------------------------------------------------------------------
income housing tax credit projects.
References
A bt Associates Inc. 2006. Effects of Housing Vouchers on Welfare
Families. Washington, DC: U.S. Department of Housing and Urban
Development, Office of Policy Development and Research.
B urge, Gregory S. 2011. ``Do Tenants Capture the Benefits From the
Low-Income Housing Tax Credit Programs?'' Real Estate Economics 39(1):
71-96.
C ummings, Jean L., and Denise DiPasquale. 1999. ``The Low-Income
Housing Tax Credit: An Analysis of the First Ten Years.'' Housing
Policy Debate 10: 251-307.
E riksen, Michael D., and Stuart S. Rosenthal. 2010. ``Crowdout Effects
of Place-Based Subsidized Rental Housing: New Evidence from the LIHTC
Program.'' Journal of Public Economics 94 (11-12): 953-966.
K ennedy, Stephen D., and Meryl Finkel. 1994. Section 8 Rental Voucher
and Rental Certificate Utilization Study, Washington, DC: Office of
Policy Development and Research, U.S. Department of Housing and Urban
Development.
L owry, Ira S., ed. 1983. Experimenting With Housing Allowances: The
Final Report of the Housing Assistance Supply Experiment, Cambridge,
MA: Oelgeschlager, Gunn, and Hain.
M alpezzi, Stephen, and Kerry Vandell. 2002. ``Does the Low-Income
Housing Tax Credit Increase the Supply of Housing?'' Journal of Housing
Economics 11(4): 360-380.
M urray, Michael P. 1983. ``Subsidized and Unsubsidized Housing Starts:
1961-1977.'' The Review of Economics and Statistics 65(4): 590-597.
-- ------. 1999. ``Subsidized and Unsubsidized Housing Stocks 1935 to
1987: Crowding Out and Cointegration.'' Journal of Real Estate Finance
and Economics 18(1): 107-124.
O lsen, Edgar O. 2008. ``Getting More From Low-Income Housing
Assistance,'' The Brookings Institution, Hamilton Project, Discussion
Paper 2008-13. http://www.brookings.edu/papers/2008/
09_low_income_housing_olsen.aspx.
O lsen, Edgar O., and Jeff Zabel. 2015. ``U.S. Housing Policy,'' in
Giles Duranton, J., Vernon Henderson, and William Strange (eds.),
Handbook of Regional and Urban Economics, Volume 5. Amsterdam: North-
Holland.
O 'Regan, Katherine M., and Keren Horn. 2013. ``What Can We Learn About
the Low-Income Housing Tax Credit Program by Looking at the Tenants?''
Housing Policy Debate 23(3): 597-613.
S inai, Todd, and Joel Waldfogel. 2005. ``Do Low-Income Housing
Subsidies Increase the Occupied Housing Stock?'', Journal of Public
Economics 89(11-12): 2137-2164.
U .S. General Accounting Office (GAO). 1997. ``Tax Credits:
Opportunities to Improve Oversight of the Low-Income Housing Program,''
GGD/RCED-97-55. Washington, DC: GAO.
-- ------. 2001. ``Federal Housing Programs: What They Cost and What
They Provide,'' GA0-01-901R, Washington, DC: GAO (July 18).
W allace, James E., Susan Philipson Bloom, William L Holshouser,
Shirley Mansfield, and Daniel H. Weinberg. 1981. Participation and
Benefits in the Urban Section 8 Program: New Construction and Existing
Housing, Vol. 1 and 2. Cambridge, MA: Abt Associates Inc. (January).
______
Winkler Development Corporation
210 S.W. Morrison, Suite 600
Portland, OR 97204-3150
Tel: 503-225-0701 FAX: 503-273-8591
On behalf of Winkler Development Corporation, a developer of affordable
housing in Oregon, we ask that you prioritize the Low-Income Housing
Tax Credit (LIHTC) and tax-exempt multifamily Housing Bonds as Congress
considers comprehensive tax reform and investments in our nation's
infrastructure.
Our firm has developed numerous award-winning affordable housing
projects that measurably improve the lives of our community members,
and we aim to continue building affordable housing that serves both
families and seniors. However, from our vantage points as developers,
LIHTC and similar programs have become increasingly difficult to
implement as construction and other costs have increased while the
value of the tax credits have declined. Additional policy measures are
necessary to produce enough affordable housing supported by LIHTC.
Every state in our country faces an affordable rental housing crisis.
In Oregon, more than 10 percent of households (164,000) spend more than
half of their monthly income on rent, leaving too little for other
necessities like food, medical care, and transportation.
The Housing Credit has financed nearly 3 million apartments nationwide
since 1986, which have provided roughly 6.7 million low-income
families, seniors, veterans, and people with disabilities homes they
can afford. It has provided affordable housing to all 50 states and all
types of communities, including urban, suburban, and rural. More than
one million of these apartments were financed using tax-
exempt multifamily Housing Bonds.
As the 115th Congress and the new Administration consider tax reform
and infrastructure investments, we call on Congress to: (1) ensure that
the Housing Credit and Housing Bonds are held up as positive examples
of the power of the tax code to improve communities by maintaining
their viability under tax reform; and (2) expand and strengthen the
Housing Credit to increase the availability of safe and affordable
housing and revitalize local economies.
The Housing Credit enjoys bipartisan support nationwide because of its
proven ability to effectively and efficiently build affordable rental
homes for low-income households. For 30 years, it has been a model
public-private partnership program, bringing to bear private sector
resources, market forces, and state-level administration in order to
give low-income families, seniors, veterans, and people with
disabilities access to homes they can afford.
The Housing Credit has been so successful that Oregon Housing and
Community Service, as well as housing agencies in other states, must
turn down viable and sorely needed Housing Credit developments each
year because the cap on Housing Credit authority is far too low to
support the demand.
For the families paying more than half of their income towards
housing--choosing between paying the rent or their medical bills,
making repairs to their cars, or enrolling in job training classes--
your support of the Housing Credit and Housing Bonds is critical.
Sincerely,
Julia Winkler
Winkler Development Corporation, Principal
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