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Proposed bill would increase tax credit to boost affordable housing

When the 2017 federal tax overhaul reduced banks’ tax rates from 35% to 21%, it also provided less incentive for banks to invest in affordable housing. Now, some lawmakers are proposing legislation aimed at renewing banks’ interest in the tax credits by increasing the amount available for housing developers to sell to investors. 

Here’s how it works: developers sell low-income housing tax credits to investors, including banks, in return for equity that reduces their debt associated with building affordable housing apartments and houses. Banks rely on the credits when determining if an investment in affordable housing is a good financial decision. The lower corporate tax rate means banks have lowered the price they’re willing to pay for the tax credits, thereby lowering the amount of equity they invest in development projects. 

The Affordable Housing Improvement Act of 2019 (S. 1703) would expand and strengthen the Affordable Housing Tax Credit (also known as the Low Income Housing Tax Credit) by increasing certain tax credits 10% each year through 2024. Proponents say it would produce roughly 1.9 million new affordable housing units over the next decade, an increase of more than 550,000 units more than would be built without the legislation.

It would also set a minimum 4% rate used for bond financed projects, which typically refurbish existing homes. This tax credit rate is linked to Treasury bonds and is currently 3.25%. The change could lead to an estimated increase of 23% in equity for these projects.

According to the Urban Institute, nearly 46,000 projects and almost 3 million housing units were built using the tax credits between 1987 and 2015. However, there is currently a shortage of 7 million affordable homes in the U.S., according to the National Low Income Housing Coalition. Novogradac, a national professional services organization that consists of affiliates and divisions providing certified public accounting, valuation and consulting services, reports that over the next 10 years, the proposed tax credit change could compensate for the more than 230,000 potential projects that may have been abandoned as a result of the 2017 tax rate change, and over the next five years add approximately 384,500 rental units by 2029.

“We’re very enthusiastic about this legislation,” said Buzz Roberts, CEO of the National Association of Affordable Housing Lenders, which advocates for banks, lenders, nonprofits and investors. “The bottom line is it would really expand the level of credit for affordable housing projects. That’s more business for our members.” 

While the bill is not expected to pass on its own, it may be inserted into legislation to raise the debt limit or a new omnibus spending deal late in the year.

Read the Bill. 

 

Sources: American Banker, Novogradac

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