The Affordable Housing Tax Credit Coalition applauds the significant progress announced today on the Biden Administration’s Housing Supply Action plan, which includes new guidance to provide flexibility to the Low-Income Housing Tax Credit (Housing Credit). Two new regulations – a final rule on the average income test and extensions of Housing Credit program deadlines – will make more affordable housing developments financially feasible at a time when the need for affordable housing is skyrocketing.
“The guidance released today will have an immediate impact, allowing stalled affordable housing developments to move forward at a time when rents are skyrocketing,” said AHTCC Chief Executive Oficer Emily Cadik. “We thank the Biden Administration for taking these important steps, and for committing to work with Congress to act to further increase affordable housing supply.”
“Today we saw significant progress on the Administration’s Housing Supply Action Plan that will remove barriers to financing and developing affordable housing,” said Matt Josephs, AHTCC Board President and Senior Vice President for the Local Initiatives Support Corporation. “We applaud the Biden Administration for taking into account feedback from affordable housing practitioners to improve our delivery system and enable us to provide more homes for those in need.”
Average Income Test Regulations
The final regulations released today make significant changes to the October 2020 proposed rule, which was intended to provide clarity around the “income averaging” flexibility enacted in 2018, but instead had the effect of severely limiting utilization of the income averaging option.
The regulations, which go into effect immediately upon publication in the Federal Register (expected in the next few days), will:
- Eliminate the “cliff effect” in which a small number of units out of compliance can threaten recapture for immediate failure to meet the minimum set-aside. The summary of changes notes that in the proposed regulations, a unit losing low-income status could cause the average of the remaining units to rise above 60 percent of area median income, causing the entire project to fail the average income test and therefore fail to be a qualified low-income housing project. Now, the summary notes, the final regulations “limit the impact of one unit’s noncompliance on the ability of a project to satisfy the average income test,” and “create more parallels between the average income test and the 20-50 and 40-60 tests. Under either of those latter tests, when there are more than the minimum number of low-income units, one unit going out of compliance would not cause a project to fail the minimum set-aside test. Similarly, under the final regulations, one unit’s loss of low-income status will not jeopardize the entire project’s status as a qualified low-income housing project subject to the average income test if there are a sufficient number of remaining units that comprise a qualified group of units that satisfy the minimum set-aside.”
- Allow for the average income test to be satisfied if at least 40 percent of a building’s units collectively average 60 percent or less of AMGI; “it is no longer necessary to consider all low-income units in a project for residential rental property when determining whether the average income test is met.”
- Eliminate the mitigating actions that were included in the proposed regulations, noting that “because the final regulations differ from the proposed regulations in a way that avoids that risk, there is no longer a need for mitigating actions.”
- Provide greater flexibility to change unit designations, now including several circumstances in which it is allowed.
The Internal Revenue Service (IRS) also issued some temporary regulations related to reporting requirements on the average income set-aside.
For nearly two years the AHTCC has urged the IRS to once again issue a final rule to make income averaging a viable and widely-used option, including through comments submitted in response to the IRS Notice of Proposed Rulemaking in 2020 and by testifying at a hearing with the IRS in 2021. Additionally, the AHTCC and 30 affordable housing industry partners sent a letter to the IRS and the Treasury Department at the end of 2021 providing our consensus recommendations on a final rule. The AHTCC has also continued urging a final rule through engagement with Administration officials and our congressional champions, including working with our champions on a bipartisan, bicameral letter in support of the consensus recommendations in May 2022, and raising the issue in a recent September 2022 meeting with the White House.
Though we will need to continue our analysis of the final regulations, it appears the majority of our recommendations were adopted in the final rule and that our major concerns were addressed.
Housing Credit Deadline Extensions (Notice 2022-52)
Today the IRS also extended several key Housing Credit program deadlines and flexibilities. The IRS had already provided extensions of the placed in service and other Housing Credit program deadlines in Notices 2020-53, 2021-12 and 2022-05. However, the AHTCC, National Council for State Housing Agencies, and other industry leaders had been calling on the IRS to further extend key deadlines in light of the ongoing delays, disruptions and supply chain shortages. In the letter the AHTCC sent to the IRS and Treasury in September, we noted that “though these deadlines are over a year away, the anticipated continued disruptions are preventing closing on developments in which developers cannot provide a reasonable assurance they will meet the current deadlines. We thus encourage the IRS and Treasury Department to extend these deadlines as soon as possible, to allow critically-needed developments to move forward.” Though the IRS has extended these flexibilities in the past, this is the first time the IRS has done so far in advance of the expiration of the deadlines. The letter called for extensions of the placed in service, casualty loss restoration, and correction period deadlines, all of which were included in today’s guidance.
Specifically, Notice 2022-52:
- Extends the placed in service deadline by one year:
- If the original placed in service deadline was 12/31/2020, the new placed in service deadline is 12/31/2022
- If the original placed in service deadline was 12/31/2021 and original deadline for the 10% test was before 4/1/2020, the new placed in service deadline is 12/31/2023
- If the original placed in service deadline was 12/31/2021 and original deadline for the 10% test was on or after 4/1/2020 and on or before 12/31/2020, the new placed in service deadline is 12/31/2023
- If the original placed in service deadline is 12/31/2022 and original deadline for the 10% test was in 2021, the new placed in service deadline is 12/31/2023
- If the original placed in service deadline is 12/31/2023 and original deadline for the 10% test was in 2022, the new placed in service deadline is 12/31/2024
- Extends the reasonable restoration period in the event of casualty loss by 24 months, an extension we emphasized was needed for areas recovering from natural disasters that have compounded issues caused by the COVID-19 pandemic (e.g. Puerto Rico)
- Extends the correction period by 12 months
- Extends the temporary waiver for compliance monitoring for physical inspections
Additional Affordable Housing Measures
Other regulatory progress on affordable housing announced today includes:
- The Federal Housing Finance Agency making changes to expand the Government-Sponsored Enterprises (GSE) Fannie Mae and Freddie Mac’s Forward Commitment programs to facilitate the creation of more affordable units – specifically allowing each GSE to provide $3 billion in forward commitments per year above and beyond the multifamily purchase cap
- The guidance the Administration released in July to allow the compatibility of State and Local Fiscal Recovery Funds with the Housing Credit
- Building more affordable housing with the Federal Financing Bank Risk Sharing Program
- A new transit-oriented development and affordable housing loan initiative at the Department of Transportation (DOT) called “TIFIA 49”
- $30 million for a DOT and HUD partnership called the Thriving Communities Program to provide technical assistance for improved coordination of housing and transportation planning
- Encouraging transportation projects that increase affordable housing supply through competitive grant programs
- Taking steps to discourage institutional investor purchases of single-family homes
The original Housing Supply Action Plan, released in May 2022, included an endorsement of the Housing Credit production provisions in Build Back Better (including increasing the allocation and lowering the 50% test). The progress report released today continues the call for legislative action to address affordable housing supply, stating “the Administration continues to urge Congress to act on a bipartisan basis to support the construction and preservation of affordable housing this year.” The AHTCC looks forward to working with the Administration and Congress on proposals to increase Housing Credit production, including increasing the Housing Credit allocation and lowering the 50 percent bond financing threshold test.