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Federal Tax Credit Legislation Recognizes Housing Crisis and Provides Platform for Additional Reform

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Against a backdrop of rising rents nationwide and a lack of housing supply in major cities, suburbs, and rural areas, leaders in Washington, DC are devoting significant time and attention to addressing the affordable housing crisis. President Biden, in his March 7th State of the Union address, called for Congress to enact his plan to “build and renovate two million affordable homes and bring…rents down.” Four days later, the Biden administration released its Fiscal Year 2025 Budget, which, among other proposals, would expand the Low Income Housing Tax Credit (LIHTC), fund a new Neighborhood Homes Tax Credit and incentivize the creation of additional housing supply by setting aside $20 billion for competitive grants to fund the development pipeline. Furthermore, consistent with the message of the President’s State of the Union address, on Jan. 31, 2024, the United States House of Representatives voted to pass the Tax Relief for American Families and Workers Act of 2024 (the Act). The component of the Act that has received the most attention in the media is the expansion of the Child Tax Credit; however, there are two components of the Act that would be vital to the production and preservation of Affordable Housing units:

1.   A temporary reduction, for 2024 and 2025, of the Private Activity Bond (PAB) financing threshold, reducing the so-called “50 percent Test” (the requirement that at least 50 percent of a project’s qualified development costs be financed with PABs) to 30 percent; and

2. The restoration of an annual increase in the volume of nine percent LIHTC over and above the base allocation of nine percent LIHTC already provided to states by the federal government.

While the Act faces an uncertain future in the Senate, these provisions in the version of the Act passed by the House are significant. The accounting firm Novogradac estimates that the Act would provide or preserve more than 200,000 affordable rental units nationwide. (See Proposed Changes Would Help Meet Demand, March 2024 Tax Credit Advisor.) The reduction of the 50 percent test to a 30 percent test (which represents a 40 percent reduction in the percentage of a project’s qualified development costs that must be financed with PABs) will allow housing finance agencies (HFAs) that are already constrained by a federal cap on the volume of PABs that states can issue, to stretch each dollar of PABs further and to finance more affordable housing projects that will be tax-credit eligible. The additional nine percent tax credits will be a vital tool for HFAs, since the demand for nine percent tax credits already substantially outstrips supply.

Even if it is adopted by both chambers of Congress and signed into law, the Act will represent only an incremental step toward addressing the challenge of persistently high rents, particularly in large American cities. Increasing the supply of affordable units alone addresses only part of the problem. Because housing scarcity drives up rent, every credible proposal for addressing the crisis of housing affordability recognizes the need to increase housing supply at all income levels. State and local governments can follow Congress’s lead by using the tools at their disposal to increase the supply of housing across a range of incomes.

There are several policy reforms that state and local governments can pursue to build on the Act, including:

1.   Adjusting Zoning Laws to Allow Denser Development: For decades, exclusionary zoning laws have prevented the construction of multifamily projects in certain neighborhoods. Multifamily housing is significantly cheaper to build and therefore cheaper for tenants to rent or purchasers to buy. And upzoning transit-rich neighborhoods would have the dual benefit of both creating additional housing supply and reducing carbon emissions.

2.   Modernizing Environmental Laws and Other Laws That Increase Housing Development Costs: In many states and localities, environmental laws have been weaponized by opponents of housing production to slow down, and—in some cases entirely prevent—new development. Some state environmental law regimes allow housing opponents to tie developers up in litigation for months or years, which significantly raises the development costs of those projects and scares other developers off entirely. Additionally, many jurisdictions have outdated housing and building codes that slow down the pace of development and increase development costs because compliance with those codes is difficult, time-consuming, and expensive. States and localities could increase housing supply by reforming their environmental laws and building codes to allow multifamily projects to be approved using an accelerated review and evaluation process.

3.   Supplying Incentives that are Structured to Increase Housing Production: Because of the increased cost of inputs—including land, labor and materials—as well as higher interest rates, many multifamily projects simply do not pencil out in the current economic environment without some form of government support. State and local governments can supply different sources of assistance to correct that problem. One good example of an effective program that incentivized multifamily development in a high-real estate tax environment is the 421-a program in New York City, which expired in 2022. 421-a led directly to the production of thousands of multifamily units—both affordable and market-rate—and the failure of the New York State Legislature to renew it is having a catastrophic effect on both multifamily development and the residential vacancy rate in New York City, which recently hit its lowest level in more than 50 years. State and local governments can also offer support to multifamily projects in the form of low-interest financing that lowers those projects’ debt service obligations and makes the payment of development costs more feasible. California voters’ recent approval of Proposition 1, which includes a nearly $6.5 billion Behavioral Health Infrastructure Bond, of which almost $2 billion will be set aside for loans and grants to develop supportive housing, represents an innovative use of state funding to increase housing supply for a highly vulnerable community.

The enactment of the Tax Relief for American Families and Workers Act of 2024 would notch a significant win for greater housing affordability; however, the Act is not a complete solution to the crisis of persistently high rents because it is focused primarily on increasing the supply of affordable units. Only a smart and thoughtful set of policy reforms enacted at the federal, state and local level, with an emphasis on spurring additional housing production across all income levels, can begin to create greater levels of affordability.   

Ken Lore is a Partner at Katten Muchin Rosenman LLP. He has developed a nationally recognized real estate finance practice based upon his representation of owners, developers, investors and lenders by creating complex equity, debt financing structures and insolvency/workout matters.
Charlie Metzger is an Associate at Katten Muchin Rosenman LLP. He represents commercial real estate lenders and equity clients, as well as Affordable Housing developers and investors, in sophisticated real estate transactions, including acquisitions, dispositions, financings, joint ventures and affordable multifamily housing transactions.
Glenn Miller is a Partner and Co-Chair, Affordable Housing and Community Development Practice at Katten Muchin Rosenman LLP. He brings a creative approach to tax issues present in a wide range of domestic and international transactions.