Enterprise and National Partners Applaud Bipartisan Legislation to Prevent Premature Loss of Housing Credit Properties
Today legislators introduced a bipartisan bill, The Save Affordable Housing Act of 2019, that would make a crucial correction to the Qualified Contract (QC) provision in Section 42 of the Internal Revenue Code and save thousands of Low-Income Housing Tax Credit (Housing Credit) properties from prematurely converting to market rate.
The Save Affordable Housing Act of 2019 was introduced with bipartisan support in both the Senate and the House. The Senate bill (S.1956) was introduced by Senators Ron Wyden (D-WA) and Todd Young (R-IN), with Senators Ben Cardin (D-MD) and Sherrod Brown (D-OH) as original co-sponsors, and the House bill (H.R.3479) was introduced by Representative Joe Neguse (D-CO-02), Don Beyer (D-VA-08), and Jackie Walorski (R-IN-02).
Enterprise strongly supports The Save Affordable Housing Act of 2019 and applauds its bipartisan champions for their commitment to strengthening the Housing Credit program and ensuring that Housing Credit properties remain affordable for at least 30 years as Congress intended.
The Housing Credit is our nation’s most successful tool for financing the production and preservation of affordable rental housing. Since its creation in 1986, it has financed approximately 3.2 million affordable apartments, providing homes to roughly 7.4 million low-income households.
By correcting the QC provision, The Save Affordable Housing Act of 2019 would ensure that both current and future affordable housing properties financed by the Housing Credit fulfill the program’s 30-year affordability commitment. Correcting the QC provision would close an unintended loophole in the Housing Credit program and permit the program to provide its full benefits to communities nationwide in dire need of more affordable housing.
About Qualified Contracts
Housing Credit properties are subject to a minimum 30-year affordability commitment: a 15-year initial compliance period enforced by the IRS through tax credit recapture rules, and a minimum 15-year “extended use” period enforced by state administration of the program and a deed restriction recorded against the property. A number of states either require or incentivize even longer affordability periods.
There are two exceptions to the requirement that Housing Credit properties remain affordable for 30 years:
- In the case of foreclosure; and
- Where a “qualified contract” (QC) is presented to the state Housing Credit agency.
Under the QC provision, an owner of a Housing Credit property may, after Year 14, approach the Housing Credit allocating agency to request a QC. This request begins a one-year period during which the allocating agency seeks a qualified buyer to purchase the property and maintain it as affordable for the duration of the extended use period.
The required purchase price for a QC is stipulated by Section 42 and was designed to prevent windfalls to owners and investors by limiting them to an inflation-adjusted return on the original equity contribution.
While the original intent of this provision was to create a limited return and some liquidity for investors at a time when the Housing Credit was an unproven program, it has come to function as a loophole that allows a nearly automatic affordability op-out after just 15 years of affordability. This is because the QC formula price in nearly all cases significantly exceeds the market value of the property as affordable housing.
As a result, it is extremely rare for the allocating agency to find a buyer willing to pay the QC price. If the allocating agency fails to identify a qualified buyer within one year, the property is released from the affordability requirements of the Housing Credit program. At that point, the owner is free to either sell the property at market value without any deed restriction or the owner may continue to own and manage the property charging market rents.
What is the Extent of the Problem, and Why Now?
In recent years, many rental markets have heated up considerably. According to the U.S. Census Bureau, on average apartment rents have climbed by over 42 percent in the last decade. This means that in many markets, Housing Credit properties could demand far higher rents if they did not have the deed restrictions required by the program.
This creates an incentive for owners to seek a way to lift the affordability restrictions on their properties even though such action was not contemplated when the property was originally financed with Housing Credit subsidies. Housing Credit properties located in high opportunity areas or areas that have gentrified since the property was placed in service are most at risk. These neighborhoods are often the most difficult to develop new affordable housing in and/or are experiencing high rates of displacement of low-income households, so preserving existing units is extremely important.
More owners are using qualified contracts as a strategy to flip Housing Credit properties to market—and thus capitalize on the differential between affordable and market rents—after only 15 years of affordability, a far shorter affordability period than Congress intended. Recent analyses from the National Council of State Housing Agencies indicate that the QC process is resulting in the premature loss of well over 10,000 low-income units annually. As of 2017, approximately 50,000 units nationwide have already been lost, and in that year alone, owners served notice to state allocating agencies that they wanted to begin the QC process on additional properties comprising approximately 18,000 units.
Affordable housing advocates are deeply concerned that unless the QC process is corrected, the number of Housing Credit properties lost before fulfilling their intended 30-year affordability period will continue to grow at an accelerating rate.
How The Save Affordable Housing Act Would Correct the Qualified Contracts Problem
While some states have or are in the process of implementing policies to mitigate as best they can the loss of affordable housing associated with QCs through their Qualified Allocation Plans, federal legislation is required to correct the QC provision in Section 42.
The Save Affordable Housing Act of 2019 would simply:
- Repeal the qualified contract option in Section 42 for future developments (after December 31, 2018), thus eliminating the qualified contract provision being used as an opt-out for properties awarded credits or bonds beginning in 2019; and
- Correct the statutory price for purchase of existing properties so that it is based on fair market value of the property as affordable housing.
The repeal of the QC provision would only apply to future developments and would not disrupt the Housing Credit industry. Lenders and investors are very willing to finance Housing Credit properties in states where a QC is not an option.
States with QC waivers and other anti-QC provisions in their state Qualified Allocation Plans have not experienced any downturn in investor interest or Housing Credit utilization.
Under the legislation, owners of existing properties would retain the option to pursue a QC; the only change is that the statutory price would become its fair market value as affordable housing.
By correcting the statute’s pricing formula for existing properties, state Housing Credit agencies would be far more likely to secure a qualified buyer. A Housing Credit property owner could still opt-out of owning and managing the property and there would be far greater likelihood that a qualified buyer could maintain the property’s affordability, thereby not disrupting the housing security and affordability for its existing tenants.
National Organizations Support The Save Affordable Housing Act of 2019
Affordable housing practitioners and advocates agree that it is imperative that Congress correct the QC loophole to ensure that the Housing Credit can fulfill its intended program goal of financing at least 30 years of affordability for low-income residents.
Enterprise is joined in supporting The Save Affordable Housing Act of 2019 with other national partners including Housing Partnership Network, Local Initiatives Support Corporation/National Equity Fund, Low Income Investment Fund, National Association of Affordable Housing Lenders, National Association of State and Local Equity Funds, National Council of State Housing Agencies, National Housing Conference, National Housing Law Project, National Housing Trust, National Low Income Housing Coalition, and Stewards of Affordable Housing for the Future.
“Enterprise strongly supports The Save Affordable Housing Act and applauds Senators Wyden and Young and Representatives Neguse, Beyer, and Walorski for their commitment to strengthening the Housing Credit program and ensuring that Housing Credit properties remain affordable for at least 30 years as Congress intended. The Housing Credit is our nation’s most successful tool for financing the production and preservation of affordable rental housing and The Save Affordable Housing Act would prevent the premature loss of critical affordable homes by closing the Qualified Contract loophole. This important proposal would strengthen how the Housing Credit serves communities nationwide in dire need of affordable housing.” – Scott Hoekman, President and CEO, Enterprise Housing Credit Investments
“The Local Initiatives Support Corporation applauds the introduction of The Save Affordable Housing Act. There is currently an affordable housing crisis in this country. More than 11 million renter households spend over half of their income on rent, and only one in four renter households eligible for housing subsidies receives them. The Housing Credit is the premier federal program for the development of affordable housing, and one of its enduring strengths is that it requires that the housing remain available and affordable to low-income families for a minimum of thirty years. The Save Affordable Housing Act will help ensure that state housing finance agencies have the tools needed to guarantee that this obligation is being met.” – Matt Josephs, Senior Vice President for Policy, LISC
“The National Council of State Housing Agencies commends Senators Wyden and Young and Representatives Neguse, Beyer, and Walorski for their leadership in preventing the premature termination of Housing Credit affordability requirements. Our country is faced with a severe shortage of affordable housing, and we cannot allow developments that have received federal resources, and in exchange pledged to remain affordable for at least 30 years, to be lost before the end of their commitments.” – Stockton Williams, Executive Director, National Council of State Housing Agencies
“The National Housing Trust strongly supports The Save Affordable Housing Act, an essential piece of legislation to preserve irreplaceable affordable rental housing serving low-income families. We are thrilled that Senators Wyden and Young and Representatives Neguse, Beyer, and Walorski are introducing this bill, which will ensure that properties financed with the Low-Income Housing Tax Credit remain affordable for at least 30 years. Correcting the qualified contract price will allow mission-driven nonprofits to maintain the affordability of Housing Credit properties for the long-term as Congress intended. Preserving existing affordable housing is cost-effective and critically important given the nation’s rental housing affordability crisis.” – Priya Jayachandran, President and CEO, National Housing Trust