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As Congress leaves for the August break, we wanted to bring to your attention a very positive Senate Finance Committee hearing regarding solutions for addressing the affordable housing crisis.  The August 1st hearing was held at the request of our Senate LIHTC champion Maria Cantwell (D-WA), who, along with Finance Committee Chairman Orrin Hatch (R-UT) and Ranking Member Ron Wyden (D-OR), introduced legislation (S. 548) to expand and enhance the affordable housing credit.  We applaud their leadership and thank them for their strong support of the LIHTC program.

We also want to thank their staffs for their hard work in putting together the hearing, and for their commitment to improving and enhancing the affordable housing credit.  We especially want to mention Artie Mandel, Senator Cantwell’s Senior Policy Advisor, who is leaving Capitol Hill for the west coast.  Artie has been an invaluable partner working with the affordable housing industry as we and Senator Cantwell have endeavored to improve the program and increase resources.  While Artie’s tenure in Senator Cantwell’s office is not quite complete, we do want to thank him and wish him well.  We hope he remains involved in affordable housing as he begins anew in California.

The hearing was very positive and featured a panel of witnesses that Chairman Hatch described as “one the best I have seen in all my years on this Committee.”  It included representatives from the Government Accountability Office (GAO); the National Council of State Housing Agencies (NCSHA); the National Association of Home Builders (NAHB); and academia. We are proud to note that HAG member Granger MacDonald represented NAHB at the hearing.

There was an excellent turnout of Finance Committee members including: Chairman Orrin Hatch (R-UT); Ranking Member Ron Wyden (D-OR) and Senators Maria Cantwell (D-WA); Charles Grassley (R-IA); John Cornyn (R-TX); John Thune (R-SD); Johnny Isakson (R-GA); Rob Portman (R-OH); Dean Heller (R-NV); Tim Scott (R-SC); Bill Cassidy (R-LA); Debbie Stabenow (D-MI); Robert Menendez (D-NJ); Ben Cardin (D-MD); Sherrod Brown (D-OH); Bob Casey (D-PA); and Claire McCaskill (D-MO).

It was clear from the Q&A period that there is strong bipartisan support for the LIHTC program and for making it an even more effective tool for addressing the affordable housing crisis.  While there were some suggestions for change in the program and its oversight, the witnesses all agreed that the LIHTC program is an important tool for affordable housing production.  During the hearing, there was discussion about the impact tax reform might have on the LIHTC program, and Ranking Member Ron Wyden asked for suggestions on how the credit could be kept whole in the context of tax reform.  Senator Johnny Isakson, a cosponsor of S. 548, expressed his strong support for the program, and through his questions emphasized that affordable housing would not be built without the credit — a critical point that must be made with every Member of Congress.

In his opening statement, Chairman Hatch noted that the LIHTC was created in the 1986 tax reform effort, and said since then, it has enjoyed bipartisan support.  He reiterated his guiding principles for tax reform – fairness, efficiency, simplicity, and competiveness – and noted their relevance for the affordable housing discussion in that they can help guide improvements to what is currently in the tax code.  Chairman Hatch stated that many households face costs burdens, and said as much as 26 percent of renter households paid more than half of their income in rent in 2015.  He said this is a problem ready for a bipartisan solution, and noted the introduction of bipartisan legislation (S. 548) to address some of the issues.

Ranking Member Ron Wyden thanked Senator Cantwell for her leadership, noting that she has been the “go to person” on the affordable housing issue.  He stated that America’s housing policy needs “an urgent remodel.”  He noted a key housing challenge is increasing supply, and said there are few incentives to build affordable housing near public transit, schools, parks and retail.  Senator Wyden discussed the problems that arise when people do not live near their jobs.  He noted his co-sponsorship of the Cantwell-Hatch bill, and said it “super charges” the LIHTC and builds on the 2015 bill that made permanent the 9 percent minimum credit.  Senator Wyden said S. 548 contains smart ways to address the housing needs that will mean more housing in communities where people want to work and live.  He said he would have additional ideas about how to address the housing challenge — especially with respect to linking transportation to housing.

Daniel Garcia-Diaz (Director, Financial Markets and Community Investment, United States Government Accountability Office) noted that the LIHTC program is the largest source of federal assistance for developing affordable rental housing, and said the Government Accountability Office (GAO) has completed three reviews of the LIHTC program and has a fourth review underway dealing with development costs.  He said IRS has responsibility for administering the program and said the allocating agencies have responsibility for the day-to-day implementation of the program.  He noted that allocating agencies have implemented varying processes to address key federal requirements.  Mr. Garcia-Diaz said the agencies have the responsibility for alerting IRS regarding property noncompliance and said problems with property physical condition are the most common form of noncompliance.  He said allocating agencies vary in when they report noncompliance to the IRS and in what details they report, and noted that IRS does little to assess the reports on noncompliance information that it receives.  He said IRS has no method to know if problems have been resolved or if there is reoccurring noncompliance.  Mr. Garcia-Diaz stated that critical data on noncompliance is not reliable and said IRS oversight of the program has been minimal. He stated that since 1986, IRS has conducted seven audits.  He suggested ways to strengthen oversight and accountability, noting that IRS should clarify when agencies should report noncompliance and evaluate how to improve information.  Mr. Garcia-Diaz suggested that HUD could be a resource to augment IRS’s ability to oversee the program, and cited partnerships that the NMTC and historic rehabilitation programs have with relevant agencies.  He said HUD is well positioned to help monitor areas where IRS has no expertise.  Mr. Garcia-Diaz concluded by stating that the LIHTC program is the most significant federal policy tool in incentivizing affordable housing production.  He said investing in oversight and accountability will ultimately achieve the nation’s goal to provide families with safe and affordable housing.

Grant S. Whitaker (President, National Council of State Housing Agencies) said the credit has strong bipartisan support as do the Cantwell-Hatch and Tiberi-Neal bills.  He stated that the need for affordable housing is great and growing, and noted that nearly half of all renters pay an excessive share of their income for housing.  Mr. Whitaker said there is a severe shortage of affordable housing, and the crisis will get worse unless there is action.  He said by 2025, there will be nearly 15 million cost-burdened households.  Mr. Whitaker said the credit and housing bonds are the most effective response to the affordable housing shortage.  He noted that the programs are administered by state housing agencies that take seriously their responsibilities to meet the needs of low-income families, seniors, veterans, the homeless and the disabled.  He also noted that the LIHTC program contributes to economic growth by creating jobs.  He suggested that Congress should “seize” tax reform or other legislation to make the critical changes proposed in S. 548, and mitigate any unintentional effects of other tax legislation on the LIHTC and housing bonds.

The Honorable Katherine M. O’Regan, (Professor of Public Policy and Planning; Faculty Director, Furman Center for Real Estate and Urban Policy, Robert F. Wagner Graduate School of Public Service, New York University) stated that housing cost burdens are high —  particularly for renters.  She said that over a third of all households in America are cost-burdened, and said housing supply has not kept up with demand.  She noted that rental vacancy rates are at their lowest level in 30 years.  Professor O’Regan said that there are 30 years of experience with the LIHTC program, and it is an opportune time to reform and improve the LIHTC.  She said the flexibility of the credit should be increased to help address current challenges.  She also supported broadening the definition of Difficult Development Areas (DDAs) to include Indian areas.  Professor O’Regan touched on “locational” goals, and said that reforms such as prohibiting local approval and contribution requirements, along with clarifying that states have the authority to determine the definition of community revitalization plans, would be necessary to achieve those goals.  Finally, Professor O’Regan advocated for a permanent 4 percent credit to preserve existing affordable housing and stated her strong support for an increase in credit allocation.

Kirk McClure, Ph.D. (Professor, Urban Planning Program, School of Public Policy and Administration, College Of Liberal Arts and Sciences, University of Kansas) stated that the LIHTC program is the nation’s primary affordable housing production program.  He said it is a good program but needs improvements to make it perform better.   Dr. McClure said the LIHTC does not produce units in a price range where there is a shortage, but adds units to market segments already in surplus. He also suggested that the program favors new construction over rehabilitation and does not promote mixed-income housing.  Dr. McClure said state housing agencies should have to justify each allocation by demonstrating a market need, and also suggested that Congress should allow exchanges of tax credit authority for voucher authority.  He advocated allowing the 9 percent credit for rehabilitation and only for new construction if the market is truly tight or the new units are replacing severely deteriorated units.  Otherwise, he recommended that new construction be given the 4 percent credit.  Finally, he suggested that the LIHTC should mandate mixed-income occupancy in most developments.  He concluded by again saying that the LIHTC is an important tool for resolving the nation’s affordability problems, but noted it could be made better.

Granger MacDonald (Chairman of the Board of Directors National Association of Home Builders) said multifamily housing affordability has reached crisis proportions.  He noted that 11.4 million renter households are severely cost-burdened, meaning that they spend more than half their monthly income on rent.  He stated that the first step in solving the crisis is to pass S. 548, the Cantwell-Hatch bipartisan bill that provides additional resources and reforms to promote construction of affordable housing.  Mr. MacDonald said there is inadequate supply to meet growing demand, and Congress should boost allocation by 50 percent, as called for in S. 548.  He also advocated for a permanent 4 percent floor and said it would preserve and develop more units using bonds, and would be helpful with now-aging LIHTC properties.  He said the bill would result in an additional 400,000 units in the next 10 years.  Mr. MacDonald stated that to get to the root of the housing crisis, Congress must look at the challenges facing developers.  He said development costs (regulations, costs of materials, labor shortages and lot shortages) determine what rents are required to make a project viable.  He said increasing supply is financially impossible to do without the credit.  Mr. MacDonald said the program lacks the resources to keep up with demand, and noted demand will continue to increase and exacerbate the current affordability problems.  Mr. MacDonald said affordable housing creates stability for families and revitalizes neighborhoods.  He addressed the criticism that properties are not directed to more high-income areas, noting that the reality is that unless there is a blessing of the local community for an affordable property to be put in a neighborhood, the allocating agency will not award the allocation.  He said in some high-income areas, if the word “affordable” is mentioned, the discussion often turns ugly.  Mr. MacDonald said S. 548 would help with this by prohibiting special local approval for tax credit properties.  He said this provision in the bill will ensure that if zoning allows it, a tax credit property will be treated like any other.  He concluded by saying that there is an opportunity to do something that makes economic sense and uplifts lives, and urged support for S. 548.

Chairman Hatch, during the question and answer session, said he supports the LIHTC program because it keeps decision-making at state and local levels and not with the federal government.  Mr. Whitaker said this approach offers opportunities for industry stakeholders to provide input on how to run the program.  Mr. Whitaker noted that he works with governmental entities and the private sector on how best to use scarce resources to meet specific needs.  Mr. MacDonald said it allows the allocations to be based on what a state needs, and noted that all states’ needs are different.  Chairman Hatch asked Mr. Whitaker about state oversight of the projects to ensure that an allocation is prudently awarded.  Mr. Whitaker said in his state, the allocation process is clear and the best projects are awarded credits, but said he has a team of compliance auditors that look at properties.  He noted that the team more frequently examines properties that have problems.  Mr. Whitaker said they do submit reports to the IRS, and they make sure that that development companies managing the properties know that the reports go to the IRS.

Senator Wyden noted that many housing credits are claimed by corporate partners such as banks, and suggested that reducing the corporate tax rate in tax reform could reduce the value of the LIHTC, and thus reduce investor demand.  He asked what should be done to make sure that the credit is kept whole in tax reform.  Mr. Whitaker said they have already seen some impact on investment around the country because of the tax reform discussion.  He indicated this is not such a problem in Utah because of “CRA-hungry” industrial banks.  He added that there is no mechanism in S. 548 to address the concern that lowering rates might reduce investors’ appetites.  Senator Wyden asked for ideas on how to keep the credit whole and said he wants to make sure tax reform does not have an inadvertent impact on affordable housing.  Senator Wyden said he is concerned about constituents living so far away from their jobs and asked for ideas on how to link affordable housing with transportation and services.  Professor O’Regan said the discussion should be about all the costs that “make families’ lives work,” and not just about the housing costs.  She noted that some states give credit for access to transportation.  She said that employers care about their employees and should be part of the conversation and play a role in making sure that resources are used in a way that works well for the whole community.

Senator Grassley thanked GAO for its reports on the LIHTC and noted that GAO found that program data is either not collected or rarely used.  Mr. Garcia-Diaz said the LIHTC program is a very hard program to review because of lack of information at the federal level, and commented that when IRS is asked to provide information, IRS cannot provide it.  He said GAO is concerned that regarding accountability measures, IRS and others in the federal government have no idea what is going on.  He said this does not mean the program is bad, but said there is an expectation for basic accountability.  Senator Grassley asked about the pending review on development costs and asked what GAO is finding.  Mr. Garcia-Diaz said GAO is preparing a data base on development costs for certain LIHTC properties placed in service between 2011-2015.  He noted that the data previously had not existed in a single location and said that it has taken GAO over 1½ years to build the data base.  He said GAO hopes to issue its report early next year and plans to meet with allocating agencies to see if there are ways to build data capacity at the allocating level to help assess reasonableness of costs.  Senator Grassley commented that the affordable housing industry indicates that syndicators provide necessary program oversight because they have a vested interest in ensuring that the program runs effectively.  He asked if this is sufficient oversight.  Mr. Garcia-Diaz said it is important, but not sufficient.  He said syndicators are important players in the program and noted that with past federal affordable housing programs, there has never been an entity that monitors projects and does its own audits to ensure compliance.  But he said this does not relieve the federal government from doing it.  Senator Grassley asked about Dr. McClure’s concerns that state housing agencies are not doing rigorous market analyses to identify where LIHTC properties are most needed.  Mr. Whitaker said in his state, market studies are required with the application.  He also noted that they have some independent market studies performed.

Senator Stabenow stated that she looks forward to sponsoring S. 548 and hopes the bill moves through the process quickly.  She mentioned a concern that some Michigan developers are foreclosing on their own properties to try to avoid affordability requirements under the LIHTC — something not intended by Congress.  She noted that currently the Secretary of Treasury is the only one who can deem a foreclosure illegitimate for LIHTC purposes.  Senator Stabenow said Treasury has not addressed this issue.  She asked Mr. Whitaker if he is aware of other states having an issue with this type of foreclosure.  Mr. Whitaker said he has heard of it, but noted it is not happening in Utah.  He said S. 548 may have some language to help so that allocating entities can make the determination rather than the federal government.  Mr. MacDonald said in Texas, the QAP details designate who could or could not foreclose.  Senator Stabenow asked Mr. MacDonald about the possibility that in tax reform the mortgage interest deduction might be limited, either directly or through an increase in the standard deduction, and inquired about the impact those measures might have.  Mr. MacDonald said the deduction is important to preserve, and noted that it is essential to keep the same amount of funds flowing into housing that are generated under the current tax system.  He said a homeowners’ tax credit or similar incentive could augment the mortgage interest deduction.

Senator Cantwell thanked Chairman Hatch for holding the hearing, and noted she went to him because of the great work in Utah to help drive down the number of homeless veterans.  Senator Cantwell displayed charts describing the magnitude of the housing crisis and noted it will only get worse if nothing is done.  She stated that the witnesses illuminated for the Committee that the crisis is both a rural and urban problem.  She stated that she has heard 90 percent of affordable housing units are built with the tax credit, and noted that if the tax credit is not increased it will be impossible to get out of the crisis.  She noted that the discussion of tax reform has suppressed the amount of capital going into the production of affordable housing, which will lead to less production of affordable housing right at the moment we need it most.  Mr. MacDonald said after the November election, the tax reform discussion had an extreme impact on credit prices, mainly because of the fear of the unknown.  He noted that credits fell in price, and said at one point investors did not purchase credits at all.  He said that now, after more tax reform discussion, the anxiety regarding how low rates might be reduced has eased, and some recovery in prices has occurred.  Mr. MacDonald said fixing the 4 percent rate is a perfect way to fix the problems because it puts money back in the program even if credit prices do not recover.  Senator Cantwell asked if the LIHTC is the proper tool to fix the crisis.  Professor O’Regan said that it is, but said there needs to be a mechanism that will produce affordable housing along a range of price points to relieve pressure at the low end of the market.  She suggested some of the reforms in S. 548 would be helpful.  Senator Cantwell said the crisis has spread across the country and noted that states are trying to help seniors and veterans populations, among others.  She asked how Utah helped the veterans.  Mr. Whitaker said Utah addressed the situation through developments such as a particular 9 percent property that included a set aside for the homeless.  He said that this property is unique and now is much appreciated.  He said many of the residents are veterans who were formerly homeless.  He noted that service providers appreciate having a single place to help a lot of people in one spot.

Senator Isakson asked Mr. MacDonald if he would have built his 4700 units without the LIHTC, and Mr. MacDonald said without the credit, he could not have raised the capital to build affordable housing.  Senator Isakson said the program has to be attractive or investors’ money will go somewhere else.  Senator Isakson noted that there have been attacks on the program’s validity.  He said we do have to ensure the integrity of the program, but noted that it is an attractive program and is the only way to incentivize the private sector to build affordable housing rather than having the federal government do it.  He said it is a solid program that incentivizes developers and owners to take care of the properties.  Mr. MacDonald noted that he is regularly examined by his lenders, syndicators, and state agencies, all making sure that the properties are in compliance.  In response to a question from Senator Isakson, Mr. MacDonald stated that 25 percent of his costs per unit goes to regulatory costs.  Senator Isakson said one way to make it easier to bring a project to fruition is by lowering regulatory burdens on developers.  The Senator stated that the LIHTC program is a great way to provide affordable housing, and said he is a big supporter, noting that it is a program that has passed the test of time.  He said that he knows of no other way to get private capital flowing to produce the necessary housing for the American people.

Senator Menendez discussed the affordable housing crisis in New Jersey and suggested it would be even more acute if the President’s FY 2018 budget is adopted.  He noted that the budget cuts vouchers and eliminates the HOME and CDBG programs, and said the budget is not in tune with the housing crisis.  Mr. Whitaker said the HOME program provides gap funding where units are rented to extremely low-income renters.  Professor O’Regan said there is an overlap between the units that HUD funds and developments that also use the LIHTC.  She noted that HUD programs and the LIHTC may be separate with respect to the budget, but said that on the “ground” they are tools that work well together to address needs.  Senator Menendez expressed concerns about the housing needs of extremely low-income renters, and said the LIHTC alone is not enough to ensure they are served.  Professor O’Regan said the allocating agencies use a patchwork of programs to help provide affordable housing for these renters and said HUD budget changes will hamper the effort.

Senator Scott discussed a bill that he has introduced with Senator Mark Warner (D-VA) to help GSEs update their credit scoring models.  Mr. MacDonald said it is important to have a transparent system that shows how to work toward having good credit.  Senator Scott asked GAO about the high financing costs of manufactured housing.  Mr. Garcia-Diaz responded that GAO had produced work on financing costs and the affordability of manufactured homes, and would provide information to the Senator.  Senator Scott asked about the struggles home builders face to fill jobs with skilled workers.  He noted his interest in an apprenticeship program to ensure that more workers are ready for high-paying skilled labor jobs.  Mr. MacDonald said there should be trade and technical education in high schools, and that students should be told that it is okay not to go to college.

Senator Brown said the LIHTC should be protected and expanded regardless of whether tax reform goes forward.  He noted that families that are burdened by high housing costs have fewer funds to meet other needs such as food and medicine.  He asked about the benefit of safe housing in improving the health of children, and asked what steps Congress and HUD should take to address the needs of rent-burdened families.  Professor O’Regan said the need for resources for affordable housing is broad, and the hit on the HUD budget will be felt across the country.  She said additional flexibility in the LIHTC could help fill the gap as HUD funding goes away.  She noted a HUD study showed the benefits of stable affordable housing on outcomes for children.

Senator Cassidy suggested that some of the testimony seemed to point in different directions.  He noted that some witnesses shared research that shows segregating low-income families into specific areas which are often lacking good transportation and schools is a negative, while other witnesses pointed out that there are increased costs associated with building in more affluent areas.  He asked how to reconcile the two.  Mr. McClure said the current program is a one-size-fits-all tax credit program with little flexibility built into it.  He said that an entire industry of developers, builders, and non-profits has found ways to build subsidy upon subsidy to come up with impressive results and said that if the LIHTC was more flexible, they could reward the types of developments that would better serve those low-income households.  Professor O’Regan pointed to research on the effect of creating low-income housing in higher poverty neighborhoods, and said there were robust findings that the investment paid off.  Responding to a comment from Senator Cassidy regarding rehabilitation in New Orleans, Mr. MacDonald said that the 4 percent credit provision in S. 548 will aid that rehabilitation.  He also mentioned that there are older units that need work and said that something needs to be done to revitalize these neighborhoods.  Commenting on Senator Cassidy’s initial question, Mr. MacDonald agreed that in a perfect world, they would try to build in more affluent areas, but added that the costs of doing so would reduce the number of units they could build.  He said it should be left as a state issue because they know what is best for their local communities.

Senator Cardin thanked Senators Hatch and Cantwell for their leadership.  He said providing affordable housing is more challenging than ever and stronger tools are needed to address needs.  He noted that one tool can’t solve all affordable housing needs, but said the LIHTC is the most important tool and strengthening it would be the best thing that Congress could do.  But he said the historic tax credit and the NMTC are important tools that are combined many times with the LIHTC, and said energy efficiency incentives also help deal with needs.  He suggested that as the LIHTC is looked at for improvement, there should also be consideration given to strengthening these other tools.  He said production of affordable housing would not be possible without participation from the private sector, which takes incredible risks.

Senator Thune said affordable housing is an important issue for all.  He noted that South Dakota has a low unemployment rate but it still has families that have a hard time finding affordable housing.  He said tax reform offers an opportunity to look at tax incentives to make sure that they are working effectively and efficiently.  Senator Thune stated that many Members of Congress are looking at the important role that cost recovery can play in ensuring economic growth.  He noted that depreciation is a significant component of the financing of affordable housing properties, and asked about the impact on affordable housing of a shorter recovery period for residential real estate or acceleration of the depreciation deductions.  Mr. MacDonald said those proposals would bring down the price and reduce the cost of producing affordable housing.  Senator Thune said there is a need for affordable housing in rural areas, but said smaller housing properties might be needed in those areas, which might not be as financially feasible.  He suggested there may need to be enhancements to the LIHTC to encourage rural affordable housing production.  Mr. MacDonald noted that S. 548 includes a number of provisions that would help rural areas, including income averaging, and the ability to adjust DDAs.  Professor O’Regan noted that changing the income definitions would also help.

Chairman Hatch said Senator Cantwell deserves credit for the hearing, and she applauded his leadership as well.  In her final comments, Senator Cantwell suggested that providing affordable housing for the homeless is more cost effective than doing nothing.  She noted that it is more costly to take care of the homeless, particularly with respect to health care costs.  Mr. Whitaker noted that in Utah, health insurers are investing in LIHTC projects because they believe it will help drive down costs of health insurance.  Chairman Hatch concluded the hearing noting that the panel was one of the best he had seen in all his years on the Committee.