Housing Credit: Increase 60%, Fix Right of First Refusal & More

Legislation | September 13, 2021

On September 12, the House Ways and Means Committee released piece of the $3.5 trillion reconciliation bill related to Low Income Housing Tax Credits and bonds. The bill increases state Housing Credit allocations by 60%, phased in over four years; lowers of the 50% bond financing threshold to 25% for seven years; provides a 50% basis boost and set-aside for serving extremely low income households; authorizes states to provide a 30% basis boost for 4% credit properties, in addition to a 30% basis boost for rural and Native communities if needed for financial feasibility. The bill also addresses an extremely troubling issue for Housing Credit properties: right of first refusal threats to nonprofit owners.

On September 12, the House Ways and Means Committee released piece of the $3.5 trillion reconciliation bill related to Low Income Housing Tax Credits and bonds. The bill increases state Housing Credit allocations by 60%, phased in over four years; lowers of the 50% bond financing threshold to 25% for seven years; provides a 50% basis boost and set-aside for serving extremely low income households; authorizes states to provide a 30% basis boost for 4% credit properties, in addition to a 30% basis boost for rural and Native communities if needed for financial feasibility. The bill also addresses an extremely troubling issue for Housing Credit properties: right of first refusal threats to nonprofit owners.

Increases in State allocations of Low Income Housing Tax Credits. The provision includes a temporary 60% cap state allocation increase phased in at 15% per year over four years (calendar years 2022 to 2025). In years 2026 to 2028, Housing Credit authority would be the amount authorized for 2025 adjusted for inflation. The cap increase would be subject to a 10% set-aside for properties that reserve at least 20% of units for extremely low income (ELI) households with corresponding rent restrictions. The cap increase would sunset after 2028, with Housing Credit authority returning to what it would have otherwise been without the cap increase.

Tax-exempt bond financing requirement. This provision temporarily reduces the 50% requirement to 25%, to enable housing credit deals to unlock more 4% credits. The provision is effective for buildings financed by the proceeds of certain tax-exempt bonds issued in calendar years 2022, 2023, 2024, 2025, 2026, 2027, or 2028 (and not financed by previous bonds issued in tax years 2019-2021) for buildings placed in service in taxable years after December 31, 2021.

Buildings designated to serve extremely low income households. The provision provides a 50% basis boost for LIHTC buildings that designate at least 20% of their occupied units for extremely low-income tenants and limit rent to no more than 30% of the greater of: 30% of area median income or the federal poverty line. The provision is funded by a set-aside equal to 10% of a state’s housing credit allocation (and the set-aside is in addition to this allocation).

Modification and clarification of rights relating to building purchase. The provision changes the right of first refusal safe harbor into an option safe harbor. For existing agreements, the provision clarifies, for purposes of the safe harbor, that the right to acquire the building includes the right to acquire all of the partnership interests relating to the building. It also clarifies that the right to acquire the building includes the right to acquire assets held for the development, operation, or maintenance of the building. Thus, agreements which provide for the right to acquire these partnership interests or building assets do not fail to satisfy the safe harbor.

For existing agreements, the provision also clarifies that the right of first refusal safe harbor may be satisfied by the grant of an option. A right of first refusal may be exercised in response to an offer by a related party; a bona fide third-party offer is not needed. A right of first refusal may be exercised without the approval of any owner of a credit project. Thus, agreements with these terms do not fail to satisfy the safe harbor. Finally, the provision amends the minimum purchase price to exclude exit taxes. Thus, agreements that do not include exit taxes as part of the minimum purchase price do not fail to satisfy the safe harbor. LeadingAge helped sound the alarm about right of first refusal issues and is very pleased with the bill’s inclusion of this language.