Housing Finance and Tax Reform Can Expand Affordable Rental Options

by Bill Apgar
Senior Scholar

Today, when more than one in three American households live in rental housing, ongoing erosion in renter incomes combined with ever rising rents has pushed the number of renter households paying excessive shares of income for housing to record levels.  Unfortunately, efforts to expand the supply of affordable rental housing remain mired in congressional wrangling over budget deficits and failure to reach consensus over how best to reform the nation’s housing finance sector. Although proposed changes to the single-family mortgage sector have captured most of the headlines, equally important reforms are now being discussed that will fundamentally alter the regulation of multifamily housing finance, including the operations of the Federal Housing Administration (FHA) and the government-sponsored enterprises (GSEs), as well as tax and subsidy mechanisms to expand affordable rental housing options through the Low Income Housing Tax Credit (LIHTC), public housing, and rental assistance programs.

As I discussed in my recent research brief, The Changing Landscape for Multifamily Finance, tax reform can play an important role in balancing the national budget and reducing the national debt. But in seeking to create a path forward, Congress should be careful not to short circuit tax expenditures that reduce the cost of capital for multifamily rental production and that enable developers to offer units at rents affordable to lower-income households. As one of the nation’s largest corporate tax expenditures, however, LIHTC is vulnerable to elimination or substantial cuts to help pay for lower corporate tax rates or any one of several deficit-reduction proposals now under consideration.

Supporters argue that LIHTC is a premier example of a successful public-private partnership. When combined with housing vouchers or other forms of rental assistance, the tax credit plays an important role in providing decent housing that is affordable to the nation’s poor. Opponents, however, counter that LIHTC’s complex rules scare away many financially-motivated private developers.  Moreover, critics contend that all too often LIHTC’s benefits go to moderate-income, as opposed to the nation’s lowest income, renters.

To improve the program’s ability to assist a broader range of renters, it is important to expand the ability of developers to combine LIHTC resources with housing vouchers or other tenant-based subsidies.  Currently, LIHTC requires developers to meet one of two standards: either 20 percent of units must be rent-restricted and occupied by tenants with incomes less than 50 percent of area median income (AMI).  Alternatively, at least 40 percent must be rent-restricted and occupied by tenants with incomes less than 60 percent of AMI. For this purpose, “rent-restricted” means that the tenant pays no more than 30 percent of their monthly income on rent. 

In practice, these criteria have led to multifamily housing developments that serve a very narrow band of tenants with incomes falling between 40 and 60 percent of AMI.  One proposal to extend the reach of the LIHTC program to serve more of the nation’s lowest income renters would require LIHTC developments to serve a larger share of households with incomes less than 40 percent of AMI while limiting the number of residents earning more than of 80 percent of AMI living in LITHC developments.  Another would award additional project-based housing vouchers to developments that have at least 30 percent of units occupied by tenants with incomes of less than 30 percent of AMI.  

Similarly, efforts to reform FHA and the housing GSEs must link access to government guarantees to requirements that a substantial portion (say, 60 percent) of the total rental housing units in developments are affordable to households earning 80 percent or less of AMI.   Such proposals would encourage developers to more aggressively search out available rental assistance options, and in doing so widen the income band of residents able to affordably live in LIHTC and other rental housing developments. Mixed-income buildings that offer rental housing options serving a broad range of incomes are especially important in low income communities that are being revitalized and/or are located in sparsely populated areas. These proposals could be structured to be revenue neutral, but would be enhanced by increasing the funding for housing vouchers and other rental assistance efforts

In another recent effort to harness private capital to expand the supply of affordable housing, HUD’s Rental Assistance Demonstration (RAD) program was designed to stem the loss of public housing and certain other at-risk, federally assisted properties. The program allows owners to pledge a portion of cash flow derived from existing long-term, project-based Section 8 contracts as collateral to support public and private lending to make much-needed improvements. At a time when the backlog of public housing repairs stands at $25.6 billion and other federally assisted properties have yet to recover fully from the Great Recession, RAD helps both public and private owners of multifamily housing address critical rehabilitation needs by borrowing against their future income streams on the private market. 

Market fundamentals suggest that the multifamily finance sector should remain strong in the near term. Coordination of rules governing utilization of existing long-term, project-based Section 8 contracts with ongoing GSE and tax policy reform efforts could unleash private sector expertise to serve broader segments of today’s renters. This would help turn the energy of the multifamily finance sector toward reducing the rental cost burdens that undermine the well-being of millions of US households.