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  • Written by: Stanley Chang

Incentivizing Developers To Reuse Low Income Housing Tax Credits


The Low-Income Housing Tax Credit (LIHTC) program has been the backbone of new affordable housing construction nationwide for the last 37 years. Developers who receive LIHTC financing are paid twice: they collect a developer fee, and they own the building. They can raise rents to market rate after affordability periods expire. States are unable to leverage any capital gain in the project to develop more housing in the future because those gains have disappeared into the developer’s pockets. 


Existing LIHTC incentives for nonprofits do not ensure that profits are recycled to build more housing, because many nonprofits have other, nonhousing missions. For example, the proceeds of the 2007 sale of one large, nonprofit-owned housing project built in the 1960s in Hawaii were donated to schools and hospitals. Those funds were generated from housing subsidies and could have created hundreds of new affordable homes, but they left the housing sector permanently. 


Incentivizing organizations to use their profits to build more housing will enable LIHTC to create much more housing in the long term. My proposal would amend 26 U.S. Code §42(m)(1)(B)(ii) to ensure each state’s Qualified Allocation Plan gives preference to applicants that are required to use the profits from their development to construct more below-market housing. States and local governments will also receive preference, as they are mission-driven institutions with no incentive to raise rents to market in the future. 


This proposal is based on the Vienna, Austria, housing model. Vienna spends no new taxpayer dollars on housing construction, yet houses 60 percent of its population—all who want it—in well-designed, mixed-income social housing. To produce new social housing, Vienna extends low-interest loans to Limited Profit Housing Associations (LPHAs), corporations that make profits but are required to use them to develop more housing in the future. LPHAs charge tenants an approximately $56,000 buy-in upfront, plus rent. Together, these revenue streams cover the cost of servicing the low-interest loans, enabling each building to be revenue positive, especially after the loan is repaid, and thus allowing the LPHA to build more housing in the future, creating a virtuous, self-sustaining cycle of housing creation.


In lieu of creating a separate, regulated category of business association, the LIHTC program can prioritize entities required to use their profits to construct more housing, such as through restrictions in their organizational documents. 


Recommendation


Congress should

  • Amend 26 U.S. Code §42(m)(1)(B)(ii) to include in its preferences “(iv) entities obligated to use the profits from their development to construct more below market housing” and;

  • Amend 26 U.S. Code §42(m)(1)(C) to include in its selection criteria “(xi) projects that are state- or county owned, in which the state or county is an equity partner, or in which ownership is conveyed to the state or county at a definite time.” 


Because states and counties have no incentive to raise rents to market or to pocket the profits from selling such housing, they would also be better recipients of taxpayer financing than for-profit developers.


Political resistance to this concept has come from two main sources. First, state housing finance agencies (HFAs) that administer LIHTC are reluctant to change processes that have been in place for decades. LIHTC currently allows states wide latitude in how to select developers, and HFAs will resist federal restrictions on that flexibility. Second, current LIHTC developers are reluctant to give up any compensation source, even those many years in the future. These arguments have become less persuasive as LIHTC applications have become much more competitive in recent years. If applicants are unwilling to build LIHTC projects without ownership, they will simply forgo those points in the application, and the current system will continue. But if there are applicants willing to use the new structure, as we have anecdotally heard here in Hawaii would be numerous, they will prove the counterarguments wrong. 


Persuading Congress to adopt these changes may be challenging. Indeed, private developers successfully lobbied Congress to eliminate support for nonprofit and limited profit cooperatives as early as the Housing Act of 1937. Despite many criticisms over the years, LIHTC is one of the few affordable housing programs with bipartisan support, because it both rewards private sector developers and produces housing for the low income. Yet despite the billions that Congress appropriates year after year, America’s housing shortage has gotten worse and worse. If LIHTC funds created projects that recycled their profits into building more housing, LIHTC would create a virtuous cycle to build more and more housing, moving the needle without additional expenditure of taxpayer funds. 


A potential source of support would be the mission-driven nonprofit organizations that would be the beneficiaries of this policy change. As part of their LIHTC applications, they would be very willing to create entities legally required to recycle their profits. They would also likely partner with existing LIHTC developers, who could be paid a fee, to deliver the projects. Existing developers would still be able to profit from producing LIHTC housing, even though they would forgo ownership of the building.

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