At a time when access to affordable homes was already extremely challenging (as described in
this recent report
by the California Housing Partnership), COVID-19 has devastated California's low-income communities by taking away incomes and mobility and in some cases, health. The California Housing Partnership thanks Congress for the critical supports provided in the
March 25th CARES Act and the Governor and Legislature for their emergency assistance to ensure that households are not at risk of immediate eviction and that communities have more resources to temporarily house those who are homeless. However, the few housing-related provisions of CARES (summarized in detail by the
National Low Income Housing Coalition) are still far from inadequate in the context of the damage that has been done -- and is still being done -- in California.
1. Provide $10 billion to States to Ensure that Tenants Can Remain in Existing Affordable Homes.
The Problem
. Many California landlords and lenders have halted evictions under either direction from their local governments or as a result of the federal moratorium imposed by CARES. While essential in the short-term to avoid the displacement of tens of thousands of low-income households through no fault of their own, the missed payments will eventually have to be made up, which may not be feasible for a large number of households that have lost jobs and wages that will likely take months or even years to be replaced.
In addition, as missed payments add up, providers of affordable housing will be forced to draw on very limited reserves (typically lasting less than three months) to pay expenses. After exhausting their reserves, the properties will go into default, requiring the parent organization to come out of pocket to cover the deficit. Given that most housing organizations own and operate multiple and sometimes dozens of properties, the financial pressure of this situation will quickly cascade and potentially lead to the parent organization having to give up control of its properties to the investors and lenders through foreclosure and possibly file for bankruptcy. Foreclosure wipes out all affordability restrictions on a property.
While the CARES Act provides funding to ensure that low-income tenants living in homes supported by Section 8 and other forms of federal rent assistance, this assistance will only help people living in a small portion of California's existing affordable housing. There are approximately 300,000 existing rent-restricted homes created through the federal Low Income Housing Tax Credit program without rent subsidies of any kind where the impact of lost tenant rent revenues will have the cascading effects leading to loss of control of properties and possible bankruptcies described above. The federal and state government have already invested approximately $100 billion in creating these 300,000 homes, which house California's lowest income, most vulnerable populations, many of whom would become homeless if they lost access to this precious housing. Foreclosure could also wipe out this $100 billion public investment in these properties.
The Solution.
$10 billion allocated specifically to states for the purpose of keeping affordable housing developments at breakeven cash flow would ensure that no one will be evicted or become homeless and that no properties or housing providers will go bankrupt. Thanks to Governor Newsom for supporting this request in his April 8 letter to Speaker Pelosi.
2. Reconstitute the Tax Credit Exchange Program for Continued Production of Affordable Homes.
The Problem
. The California Housing Partnership has compiled evidence that the economic impacts of COVID-19 on the national and state economies is leading banks that have traditionally been the largest purchasers of California's $3 billion in annual Low Income Housing Tax Credits (LIHTC) to pull back from making new investments. This recalcitrance to invest is threatening to derail the production of thousands of new affordable homes at a time when we can least afford any delays, let alone the death of planned new affordable housing.
The Solution
. Reconstitute the
Tax Credit Exchange Program created by ARRA in 2009
to allow state agencies to approve the conversion of LIHTC allocations to soft loans during 2020-21 when there is evidence investors are not available at reasonable rate of return. This is an essential guaranty of tax credit value at a time of financial market uncertainty and investor pullback.
3. Maintain access to tax-exempt bonds and 4% LIHTC.
The Problem
. California like a dozen other states is currently suffering from an acute oversubscription of federal tax-exempt bond financing authority, which as the gateway to 4% LIHTC equity is critical to the financial feasibility of thousands of shovel-ready affordable rental homes. This shortage of tax-exempt bonds is now being worsened by delays in construction caused by COVID-19 limitations that is driving up the cost of this construction work on a daily basis, requiring more bonds for each home produced.
The Solution
. Reduce the current tax-exempt bond 50% test to 25% permanently as we proposed to Congressional leaders in 2019. Alternatively, exempt 100% affordable housing from requiring an allocation of tax-exempt bonds to access 4% Low Income Housing Tax Credits for the calendar years 2020-21. Thanks to Governor Newsom for supporting this request in his April 8 letter to Speaker Pelosi.
4. Establish a minimum rate for the 4% LIHTC.
Problem
. Historic low interest rates have reduced the value of the 4% LIHTC, which is determined monthly based on a formula that is heavily dependent on interest rates. March's rate reached historic lows of 3.12%, meaning the effective impact of the 4% credit is now 22% below its intended value.
Solution
. Set the floor for the LIHTC 4% rate at 4% now before the rate drops any further than it already has to shore up the financial feasibility of tens of thousands of affordable homes in the pipeline.
5. Fix an unintended consequence of the 2017 Tax Act that is undermining the value of LIHTCs.
Problem
. The Balanced Budget Act of 2015 eliminated most partnerships' ability to file amended tax returns starting in 2018. Instead, they are only able to file Administrative Adjustment Requests (AAR) with the IRS. As a result, LIHTC partnerships can no longer claim tax credits for prior years by filing amended returns once 8609s are issued. Because 8609s are typically issued 1-2 years after the placed-in-service year, LIHTC's for those early years may now only be claimed in the year in which the AAR is filed. This will significantly delay the stream of tax credit delivery when compared to the timelines on which the credits were originally projected and could otherwise have been claimed. This will result in significant reduce equity payments in many cases, jeopardizing project financing.
Solution
. Allow limited partnerships to estimate LIHTC and amend returns when 8609s are issued to avoid maximize tax credit pricing and equity.
6. Extend Statutory LIHTC Deadlines that LIHTC developers are unable to meet due to COVID-19.
Problem. Section 42 of the Internal Revenue Code sets three deadlines for LIHTC developments to meet: (1) expending at least 10 percent of the anticipated basis within a year of the allocation, (2) placing the buildings in service by the end of the second year after the calendar year of allocation, and (3) placing in service rehabilitation expenditures within 24 months. Many LIHTC developments are in jeopardy of missing these deadlines due to delays in construction and/or financing caused by COVID-19 impacts.
Solution
. Extend LIHTC deadlines as follows
: (1) Amend Section 42 to temporarily extend the placed in service deadline to the end of the third year after the calendar year of allocation for properties that received Housing Credit allocations between December 31, 2016 and January 1, 2022; (2) Amend Section 42 to temporarily extend the 10 percent rule to be met within the second year of the allocation for properties that received Housing Credit allocations between December 31, 2016 and January 1, 2022; and (3) Amend Section 42 to temporarily extend the rehabilitation expenditures deadline to be met at the close of any 36-month period.
