Expanding the affordable housing tax credit
The Affordable Housing Credit Improvement Act of 2019 isn’t a new piece of legislation but a revised version of the Affordable Housing Tax Credit (alternatively known as the Low Income Housing Tax Credit). Since developers naturally welcome tax breaks, it is no surprise that since its appearance over three decades ago, the Affordable Housing Tax Credit has resulted in the creation of more than three million units of affordable housing.
The Affordable Housing Credit Improvement Act of 2019 hopes to entrench three key changes to the existing Act. First, the Act is proposing to promote new affordable housing construction by expanding the amount of credit available to developers by 50 percent. Second, the tax credit offered to developers will be fixed at 4 percent--this change is designed to help developers more easily calculate costs and associated risks. Finally, and most notably, the Act will permit the recycling of multifamily housing bonds. In many respects, it is the third and final tweak to the current Affordable Housing Tax Credit that arguably holds the most potential to stimulate the creation of new affordable housing units over time.
Bond recycling
Tax-exempt bonds or Private Activity Bonds are a key driver of affordable housing in the United States. In essence, the Federal Government permits states to issue bonds to investors and to use any revenues to offer loans to private parties who agree to build affordable housing. But there are two problems with the existing Affordable Housing Tax Credit legislation. First, there is a cap on the number of tax-exempt bonds that can be issued annually (the caps are based on the state’s population), and second, only the construction of multifamily rental housing units are eligible to take full advantage of the 4% tax credit.
To deal with the cap, the proposed Affordable Housing Credit Improvement Act of 2019 will expand the conditions under which one can recycle tax-exempt bonds. For example, if a developer seeks short-term financing, the Act will make it easier for the bond to be reissued to support a new project. Theoretically, this change will expand the number of affordable housing projects underway in any given state at any time. Second, the revised Act will enable developers to use the recycled bonds to create single-family projects. While this specific revision may not have a huge impact on New York City where single-family homes have long been a luxury, it will have implications for the millions of Americans who live outside high-density urban centers, including people living in other parts of New York State.
What New York City renters and developers have to gain
It’s not often that a proposed piece of housing legislation has something to make both renters and developers happy, but the Affordable Housing Credit Improvement Act of 2019 could represent a rare win-win situation. If passed, the Act is expected to result in the creation of close to two million new affordable housing units. While not all of the promised units will be developed in New York City, there is no question that if the Act gains approval, it will offer a strong incentive for local developers to build more affordable housing units between now and 2030. The bond recycling provision will also enable the state to do more with its existing bonds. Both of these changes should offer good news for local renters as more affordable units come on to the market.
Mark Willis, the Senior Policy Fellow at the NYU Furman Center, and Luis Hernandez, a Master of Urban Planning candidate at NYU, appear to agree that bond recycling, in particular, has a lot to offer local renters and the local economy. As they emphasized in a recent publication, “LIHTC allocation plans must play an important role in increasing the share of affordable housing units in lower poverty neighborhoods, and New York City’s experience provides some on-the-ground examples.” As evidence of the impact tax-exempt bonds have already had on local housing, Willis and Hernandez point to 2495 Broadway on the Upper West Side, which is just one of the many developments that have benefited from recycled private activity bonds (PABs) in recent years. “Given the magnitude of the affordability crisis, state and local governments need as many creative financing options as possible to meet the need for homes affordable to low- and moderate-income households,” write Willis and Hernandez. They add, “tweaking the tax code to expand the recycling of Private Activity Bonds…is a clear step in the right direction.”
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