Americans in search of affordable homes for their families are facing long odds—and it’s only getting worse. Even before the pandemic, the United States faced a shortfall of more than 7 million affordable housing units. On average, only 36 affordable homes were available for every 100 families that needed them. As we enter the fall with an estimated 30 to 40 million experiencing housing insecurity, the lack of high-quality, affordable homes in our communities has become an unquestionable national crisis.
In the affordable housing industry, we are at a crossroads. Impact-focused developers are eager to answer the call and make a significant dent in the nation’s housing deficit—but we need access to new resources and regulatory reforms to do so.
Lawmakers seem to agree. As our nation charts a course for a pandemic recovery, a consensus has emerged in Congress on the need to invest in affordable homes. Recently, the House Ways and Means Committee included within its portion of the budget reconciliation bill several key provisions that would usher in one of the most comprehensive affordable housing reforms in decades. These regulatory changes—many borrowed directly from the previously proposed Affordable Housing Credit Improvement Act (AHCIA)—would drive the changes that our industry needs to build and rehabilitate more affordable housing and provide safe, high-quality homes in communities across the country.
The House Ways and Means Committee’s portion of the budget reconciliation bill would significantly streamline affordable housing finance in the United States by addressing longtime challenges with both the 9% and 4% low-income housing tax credits (LIHTCs), which developers rely on to build and preserve affordable housing. Construction-ready developments and rehabilitations—many in the communities that need them most—are too often shelved due to the limited availability of 9% credits or the financial obstacles of working on 4% tax credit projects. By addressing these challenges, industry researchers project that over the next decade, the bill could create nearly 1.4 million affordable homes to house more than 3.2 million people.
The proposed changes include increasing the allocation of 9% tax credits used for the development of new construction affordable projects and creating several basis boost opportunities for both 9% and 4% tax credit projects. Basis boosts are instrumental tools that allow financially unfeasible affordable projects to become feasible by increasing a property’s LIHTC allocation, which in turn allows developers to access more LIHTC equity. Novogradac found that these regulatory reforms alone could account for more than 380,000 of the nearly 1.4 million units the legislation is expected to create.
Another major component of the legislation would provisionally reform a federal law, known informally as the 50-percent test, that has hampered progress on affordable housing development for years—thus paving the way for an expansion of the nation’s affordable housing stock. Under the current regulation, affordable housing developments must draw at least 50 percent of their funding for land and building costs from private activity bonds (PABs) to qualify for 4% tax credits. With construction costs continuing to rise and cap rates continuing to lower across the country, this test has been increasingly challenging to meet. Caps on the number of PABs that public agencies can issue during a single fiscal year often result in demand for PABs quickly exceeding supply, leaving developers unable to meet the 50 percent threshold to qualify for tax credits. Homes that are ready to be built remain blueprints.
The House Ways and Means Committee reconciliation legislation would address this constraint by lowering the 50 percent PAB threshold to 25 percent from 2022-2028. With this change, developers would need a lower percentage of PABs to secure tax credits, allowing housing authorities to fund a greater number of developments. Of the 1.4 million total affordable homes this legislation is anticipated to create, lowering the PAB threshold alone could generate nearly 1 million affordable units over the next seven years, according to researchers.
The reconciliation bill would not only spur the creation and preservation of more affordable homes; it could also set the stage for greener homes. Mission-driven developers have increasingly prioritized equipping units with advanced sustainability features. This legislation could help set important industry standards for sustainability and be an impactful part of the nation’s response to the climate crisis.
With negotiations over the size and scope of the package still ongoing in the House and Senate, it is critical that Congressional leaders recognize the indispensable impact that these reforms would have on our nation’s social and economic health by creating affordable homes, establishing jobs, and strengthening our communities. As we look towards recovery from the pandemic, this is the moment for lawmakers to place renewed importance on expanding America’s affordable housing stock and empowering developers to help lead the charge. This is more than just an investment in affordable properties—it’s an investment in the futures of millions of American families.
Jeremy Bronfman is the Chief Executive Officer of Lincoln Avenue Capital.