Historic Housing Credit Expansion Included in House Ways and Means Committee Reconciliation Legislation

Last night the House Ways and Means Committee released its draft of the Infrastructure Financing and Community Development portion of the Build Back Better reconciliation legislation (see bill text and section-by-section), which proposes the most significant expansion of the Housing Credit since the program’s inception, including a 12.5 percent annual allocation increase per year for four years plus annual inflation adjustments through 2028, and reduction of the bond-financing threshold from 50 percent to 25 percent for seven years. These provisions would invest roughly $30 billion into the Housing Credit from 2022 to 2031, according to the Joint Committee on Taxation, and would finance more than 1.38 million additional affordable homes, according to Novogradac and Co.

The majority of the Housing Credit proposals released today originated in the Affordable Housing Credit Improvement Act (AHCIA), which has been the AHTCC’s top legislative priority. The AHTCC played a leading role in building momentum for these proposals, including by generating support for a congressional letter that called on House leadership to advance the AHCIA through reconciliation legislation. The letter was led by House AHCIA Democratic sponsors Reps. Suzan DelBene (D-WA) and Don Beyer (D-VA), who were joined by a majority of the House Democratic caucus (111 in total), including 18 of the 25 Ways and Means Committee Democrats.

The Ways and Means Committee is set to begin consideration of the Infrastructure Financing and Community Development proposal on Tuesday, with the goal of House passage of the bill this month. After passage, the proposal will move to the Senate, where the path forward is less certain considering high-level negotiations over the total cost of the reconciliation package.

• Thanking Democratic Representatives for their support of the Housing Credit and asking that they continue sharing their support with House Speaker Nancy Pelosi (D-CA), and
• Urging Democratic Senators to include key provisions to increase Housing Credit production in the final reconciliation package.

Details of the House Ways and Means Committee Proposal

Housing Credit provisions in the House Ways and Means proposal that originated in the Affordable Housing Credit Improvement Act include:

• Lowering the 50 percent bond financing threshold test to 25 percent for 7 years (2022 to 2028), for buildings placed in service in taxable years after December 31, 2021

• Increasing the annual Housing Credit allocation by 12.5 percent per year for 4 years plus annual inflation adjustments, followed by an additional 3 years of inflation adjustment
  • 2022 to 2025 Phase-In: The allocation increase, which is inclusive of the 12.5 percent temporary allocation increase that is currently set to expire at the end of this year, would be phased in over four years (from 2022 to 2025) with inflation adjustments.
  • 2026 to 2028: The 2025 allocation would continue with an additional inflation adjustment from 2026 to 2028.

• Providing a 50 percent basis boost and 10 percent set-aside for developments serving Extremely Low-Income (ELI) households for 10 years (2022 to 2031)
  • ELI Building Definition: Buildings serving ELI households are defined as buildings in which at least 20 percent of units are restricted for households whose aggregate household income does not exceed the greater of 30 percent of area median gross income or the federal poverty line.
  • Set-Aside: Allocating agencies must allocate a minimum of 10 percent of the annual 9 percent Housing Credit allocation for developments serving ELI households. The higher increase to the Housing Credit allocation beyond the AHCIA’s proposed 50 percent increase is intended to support the provision of these ELI developments.
  • Limitation on Basis Boost: The 50 percent ELI basis boost is available for both the 9 percent and 4 percent Housing Credit, and is available for up to 15 percent of the state’s annual Housing Credit allocation and 10 percent of the state’s annual Private Activity Bond volume cap.

• Allowing allocating agencies to provide a 30 percent basis boost for properties financed with 4 percent Housing Credits and Multifamily Housing Bonds if needed for financial feasibility for 7 years (2022 to 2028)

• Allowing allocating agencies to provide a 30 percent basis boost for developments in rural communities and Indian areas if needed for financial feasibility, effective for buildings placed in service after December 31, 2021, with no end date
  • Rural Definition: Rural communities are defined as any nonmetropolitan counties or any rural areas designated in a state’s qualified action plan and defined by Section 520 of the Housing Act of 1949.
  • Indian Area Definition: Indian Areas are defined in the Native American Housing Assistance and Self Determination Act of 1996. To qualify, buildings must be assisted or financed under the same Act, the project sponsor must be a qualifying Indian tribe or a tribally designated housing entity, or the building must be wholly owned or controlled by a qualifying Indian tribe or tribally designated housing entity.

Additional Housing Credit provisions include:

• Curtailing the use of Qualified Contracts by repealing the option for buildings receiving allocations after January 1, 2022, and, for existing properties, changing the price for the low-income portion of a property to fair market value, determined by the allocating agency taking into account the rent restrictions required to continue to satisfy the minimum set aside requirements.

• Making several modifications to the Right of First Refusal (ROFR) by (i) converting the right to a purchase option for agreements entered into after passage, (ii) allowing the inclusion of partnership assets related to the building in the definition of property; (iii) allowing the option holder to exercise the right of first refusal without requiring the approval of an investor or requiring a bona fide third party offer; and (iv) changing the purchase price to only debt and not debt plus exit taxes. The changes are not intended to change any express provision in an existing agreement.

Other affordable housing proposals include:

• Authorizing a new Neighborhood Homes Tax Credit to incentivize the rehabilitation of deteriorated homes in distressed communities
  • Details: Neighborhood Homes Investment Act (NHIA) tax credit authority would be provided to states on a per-capita basis and awarded through a competitive process. NHIA tax credits would be used to cover the gap between development costs and sales prices, up to 35 percent of eligible development costs. Rehabilitated homes must be owner-occupied for investors to receive the credits. Homeowners must be below certain income limitations, sales prices are capped, and qualifying neighborhoods must have elevated poverty rates, lower incomes, and modest home values.

• Permanently extending the New Markets Tax Credit
  • Additional Allocation: An additional $2 billion is provided for the 2022 allocation round, and an additional $1 billion is provided for the 2023 allocation round. The allocation is set at $5 billion beginning in 2024 with inflation adjustments.

• Modifying the Historic Tax Credit (HTC)
  • Elimination of Credit Adjustment: Effective for properties placed in service in 2023 and after, the depreciable basis adjustment would be changed from 100 percent to zero, eliminating the requirement that the HTC be deducted from a building’s basis at the time of transfer and making the HTC easier to use with the Housing Credit.
  • Additional Changes: Additional changes include increasing the HTC credit percentage from 20 to 30 percent temporarily (and permanently for small projects), modifying the definition of ‘substantially rehabilitated,’ modifying the disqualifying lease rules, and changing tax-exempt rules for public schools.

Energy tax credit proposals related to affordable housing include:

• Providing an additional 20 percent credit for the solar Investment Tax Credit if the solar facility is placed in service in connection with a qualifying low-income residential building project, or an additional 10 percent credit if the facility is located in a low-income community

• Ensuring that Investment Tax Credits taken on a property will no longer reduce the eligible basis for the Housing Credit

House Financial Services Committee Proposal

Last week, the House Financial Services Committee also released details of its portion of the reconciliation bill that includes historic investments in housing programs, for a total of nearly $330 billion, including $90 billion for rental assistance ($75 billion for Housing Choice Vouchers and $15 billion for Project-Based Rental Assistance), $80 billion for public housing, $37 billion for the National Housing Trust Fund, and $35 billion for the HOME Investment Partnerships Program. Markup of the House Financial Services Committee reconciliation bill will begin in the committee on Monday.

The Road Ahead

The reconciliation bill is part of the second track along which infrastructure and economic recovery legislation is advancing. The first track, a bipartisan infrastructure package (see text and outline), passed the Senate in August and is currently awaiting consideration in the House. The bipartisan bill would provide $550 billion in additional funding for ‘traditional’ infrastructure, but does not include any housing provisions.

To advance the second, ‘human’ infrastructure package, Democrats will take advantage of the budget reconciliation process. This will allow the legislation to advance if all 50 Senate Democrats vote for passage, rather than the typical 60 votes required under the regular legislative process. The Democrat-only reconciliation legislation can total up to $3.5 trillion, per the budget resolution (see text and memo) passed in August.

The House Ways and Means Committee is expected to consider the infrastructure financing and community development portion of the reconciliation bill, along with other tax proposals and revenue raisers, on Tuesday and Wednesday, with the goal of passing final legislation out of committee on Wednesday. House leadership is attempting to adhere to an ambitious timeline, with the goal of passing both the reconciliation bill and the bipartisan infrastructure package by the end of the month. Prior to passage, the House, Senate and White House are engaging in “pre-conference” negotiations, which could impact the legislation before it reaches the House floor for a vote.

At this point it is not clear whether the Senate will go through the traditional committee markup process or bring the House bill to the floor and substitute it with their own reconciliation bill to expedite the process – a decision that will be impacted by the success of pre-conference negotiations. Regardless of the process, the total size of the bill is likely to be negotiated downward to appease moderate Democrats, several of whom have indicated unwillingness to pass a bill totaling $3.5 trillion.

Advocacy Needed

In the coming weeks, it will be essential to continue emphasizing to Democratic House members, Senators, and congressional leadership, the need to pass key Housing Credit production provisions through budget reconciliation. The AHTCC will continue to advocate Democratic members of Congress and to work with our affordable housing champions in Congress to advance the Housing Credit at every possibility.

• Thanking Democratic House members for their support of the Housing Credit and asking that they contact House Speaker Pelosi to share their support for the House Ways and Means Infrastructure Financing and Community Development legislation, and
• Urging Democratic Senators to include key provisions to increase Housing Credit production in the final reconciliation package by emphasizing the urgent need for affordable housing production and the potential impact of a Housing Credit expansion in their state.