Proposals to Strengthen the Low-Income Housing Tax Credit

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1 s to Strengthen the Low-Income Housing Tax Credit October 2015 The Low-Income Housing Tax Credit (Housing Credit) is the most successful affordable rental housing production and preservation program in our nation s history, financing nearly 2.8 million affordable rental homes since 1986 by leveraging nearly $100 billion in private equity investment. In a typical year, the Housing Credit adds nearly 96,000 jobs and approximately $3.5 billion in taxes and other revenues to local economies, according to the National Association of Home Builders. Housing Bonds used in conjunction with 4 percent Housing Credits finance more than 40 percent of annual Housing Credit production, providing affordable homes to nearly 1 million families over the past three decades. The Housing Credit was created as part of the Tax Reform Act of As the program nears its 30 year anniversary, it is important to reflect on its strong track record and consider how the program could be fine-tuned to make it an even more effective tool for meeting the nation s current affordable housing needs and priorities. One of the most critically needed improvements is an increase in Housing Credit resources. Our nation s affordable housing needs are vast and growing, with over 11 million low-income renters paying more than 50 percent of their income towards rent. The Housing Credit is essentially the only way to substantially expand our affordable housing supply to help address this crisis. By increasing the annual Housing Credit allocation to states and/or allowing states to convert unused private activity bond cap authority into Housing Credits, Congress could help stem the growing gap between the number of lowincome renters and the number of affordable apartments available to them. In addition, the following policy changes would further strengthen the program by streamlining unnecessarily complex requirements and improving overall functionality: Strengthen state administration through flexibility and simplification Establish permanent minimum Housing Credit rates in order to provide more predictability and flexibility in Housing Credit financing. Promote broader income-mixing within Housing Credit developments in order to preserve rigorous targeting while providing more flexibility and responsiveness to local needs. Simplify the Housing Credit Student Rule by aligning it more closely with the HUD student rule, which better achieves the intended targeting. Clarify the ability to claim Housing Credits after casualty losses so that owners have a reasonable amount of time to repair and reoccupy properties after damage, regardless of whether it results from a major disaster. Exempt state Housing Credits from federal taxation in order to allow states to administer these programs more effectively and expand their supply of p. 3 p. 4 p. 4 p. 6 p. 7

2 affordable housing. Support the preservation of existing affordable housing Provide flexibility around existing tenant income eligibility in order to eliminate tension between allowing existing tenants to stay in their homes and recapitalizing Housing Credit properties. Replace the right of first refusal with a purchase option to facilitate the ability of non-profits to maintain Housing Credit affordability beyond year 15. Modify the 10 Year Rule by replacing it with a limit on the acquisition basis of Housing Credit properties if last placed in service in the prior 10 years, thus supporting the preservation of properties in need of rehabilitation. Include relocation expenses in eligible basis, consistent with the treatment of other indirect costs, in order to avoid adding unnecessary costs or sacrificing resident safety during rehabilitation. p. 8 p. 9 p. 10 p. 11 Facilitate Housing Credit development in challenging markets Encourage the development of affordable housing in Native American communities by creating a selection criteria for Indian housing, exempting NAHASDA grants from the eligible basis disallowance rule and treating qualifying Indian housing developments as Difficult to Development Areas. Standardize rural income limit rules to facilitate more rural Housing Credit development. Repeal the QCT population cap, enabling properties in more areas to receive a basis boost and thus become more financially feasible. p. 12 p. 13 p. 13 2

3 Strengthen State Administration through Flexibility and Simplification Establish permanent minimum Housing Credit rates When the Housing Credit was created, Congress set the credit rates (part of the formula that establishes the amount of tax credit allocation that can be assigned to a particular project) at 9 percent for new construction and substantial rehabilitation and 4 percent for the acquisition of affordable housing and for federally subsidized properties, which is how the 9 percent and 4 percent credit labels were derived. However, in practice Housing Credit rates fluctuate according to a formula related to federal borrowing rates, which now yields much lower credit rates (approximately 7.5 and 3.2 percent, respectively) as a result of historically low interest rates. As a result, in today s interest rate environment there is 15 to 20 percent less Housing Credit equity available for any given affordable housing development than the original rates provided. Recognizing the impact of declining rates on the program, Congress temporarily enacted a minimum 9 percent credit rate in 2008, which expired at the end of 2014 despite strong bipartisan support for its extension. Congressional action is needed in order to create permanent minimum credit rates that allow states to allocate credits more effectively and enable more worthy developments to be financially feasible. To fill the financing gap that results from use of the floating rate, states have limited options. They can attempt to fill some of the gap with other financing sources, such as the HOME Investment Partnerships Program or Community Development Block Grants. Alternatively, they can underwrite the property assuming owners will charge rents at levels that allow for higher levels of debt service, meaning the apartments must be targeted to the higher end of the eligible income spectrum and are less affordable to the lowest income households. Although in some circumstances, states can provide for up to a 30% basis boost, this option is not always available and in any case, some developments require both the minimum credit rate and the basis boost in order to be feasible and to provide the desired income targeting. Because gap financing sources are becoming increasingly scarce as a result of federal budget cuts, developers are finding it more and more difficult to reach very- and extremely-low income families while making projects financially feasible. This unfortunate outcome conflicts with the congressionally mandated preference for properties which serve the lowest-income residents for the longest period. Establish a permanent minimum 9 percent credit rate for new construction and substantial rehabilitation, as well as a minimum 4 percent rate for acquisition and for credits used in Housing Bondfinanced developments. This program modification would provide more predictability and flexibility in 3

4 Housing Credit financing, allowing developers to target more units to very- and extremely-low income households at rents they could afford and make more types of properties financially feasible. Promote broader income mixing in Housing Credit developments Under current law, Housing Credit apartments serve renters with incomes up to 60 percent of area median income (AMI) and rents are comparably restricted. Section 42 encourages states to give preference to developments that set aside units affordable to the lowest-income populations. In some areas of the country it is especially difficult to make such developments financial feasible. The challenges are especially acute in: (1) sparsely populated rural areas with very low median incomes, where the effective market range is too narrow under current law; (2) economically depressed communities pursuing mixed-income revitalization strategies; and (3) high-cost markets, where it is extremely difficult to target apartments to the lowest-income tenants without significant additional subsidy. Allow the 60 percent of AMI ceiling to apply to the average of all apartments within a property rather than to every individual Housing Credit apartment. The maximum income to qualify for any Housing Credit apartment would be limited to 80 percent of AMI, consistent with long-standing federal affordable housing policies with regards to who is considered low-income. For example, a unit restricted to households earning 40 percent of AMI could be paired with another for a household earning 80 percent of AMI. Depending on market conditions, the higher rents that households with incomes above 60 percent of AMI could afford have the potential to offset the lower rents that households below 40 or 30 percent of AMI could afford, allowing developments to maintain financial feasibility while providing a deeper level of affordability. Income averaging would thus preserve rigorous targeting to low-income households while providing more flexibility and responsiveness to local needs. Simplify the Housing Credit student rule When Congress created the Housing Credit, it sought to ensure that tax credits were not used to develop dormitory or other housing for full-time students. To accomplish that objective, Section 42 included a student rule, which in general bars households comprised entirely of full-time students, regardless of age and educational institution, from residing in Housing Credit-financed units, as well as multifamily Housing Bond-financed units. So, for example, elementary school students are considered full-time students for purposes of this rule. In practice, the Housing Credit student rule is unnecessarily complicated to understand and administer, onerous to enforce, and prevents some needy households from accessing Housing Credit housing. 4

5 One reason for this complexity is that the Housing Credit student rule applies to individuals who were students during any part of at least five months of the property owner s taxable year, even after they are no longer a student and even if the months in which one was a student need were not consecutive or complete. Another reason for the administrative complexity is the growing list of exceptions Congress has enacted to the Housing Credit student rule over the life of the program, including ones for individuals who are married and entitled to file a joint tax return, single with dependent children, receiving assistance under the Temporary Assistance for Needy Families (TANF) program, enrolled in certain job training programs, and former foster children. In recent Congresses, members have introduced legislation seeking additional exceptions to the student rule for formerly homeless youth and formerly homeless veterans. While well intended, each new exception makes the student rule more unwieldy to administer. HUD programs are subject to a student rule that seeks to prevent certain college students from receiving HUD rental assistance. However, the two student rules differ substantially, with the HUD student rule far less complicated to administer and enforce than the Housing Credit student rule. The HUD student rule is targeted only to traditional college students who are under the age of 24, attending institutions of higher education, and whose parents are not income eligible for Section 8 assistance; whereas the Housing Credit student rule applies to all students regardless of age, the type of educational institution attended, and their parents income level. There are exceptions to the HUD student rule for students who are married, have a dependent child, or are veterans. Importantly, the HUD student rule does not apply to those who are no longer students, even if that individual was a student for any part of the year prior to occupancy. Many properties are financed with both the Housing Credit and HUD funding sources. In these instances households must satisfy both the Housing Credit and the HUD student rule in order to qualify. Though the HUD student rule is generally less complicated than the Housing Credit student rule, it has some drawbacks. First, the HUD student rule applies to both part-time and full-time students, whereas the Housing Credit student rule applies only to full-time students. In addition, under the HUD student rule, households in which any individual qualifies as a student are ineligible for assistance, whereas all household members must be students in order for the household to be ineligible under the Housing Credit student rule. Replace the current Housing Credit student rule with a new Housing Credit student rule that makes households composed entirely of adult students under the age of 24 who are enrolled full-time at an institution(s) of higher education ineligible to reside in a Housing Credit unit. Exceptions would be made for students who are married, veterans, those with one or more dependent children, and those who are income eligible under Housing Credit income limits and can show they are financially independent of their parents and guardians, as are those aging out of foster care and formerly homeless youth. The new Housing Credit student rule would apply to the multifamily Housing Bond program as well. 5

6 This modification would simplify program administration and improve targeting, while aligning the requirements of the Housing Credit student rule with the HUD student rule, making it easier to ensure compliance in properties receiving both Housing Credit and HUD funding. Under this proposal, properties that are financed with both Housing Credits and HUD funding would be subject to the HUD student rule as it currently exists; properties that are financed with Housing Credits but not HUD funding would be subject to the new Housing Credit student rule as outlined above, which mostly mirrors the HUD rule, with the exceptions that it not apply to part-time students and that all household members would need to be ineligible full-time students in order for the household to be ineligible. Clarify the ability to claim Housing Credits after casualty losses If the qualified basis of a building (the development costs eligible to receive Housing Credit equity) decreases from the end of one year to the end of the following year, Section 42 requires a recapture of Housing Credits from the investor(s). This means that if a Housing Credit property suffers a casualty loss causing residents to temporarily vacate affected apartments while the property is restored, the owner must have the property back in service by December 31 of that year regardless of when the loss occurred in order to avoid recapture of Housing Credits. This policy becomes particularly problematic when the casualty loss occurs near the end of the calendar year. For example, if a property suffers a fire in December that causes some or all of the apartments to be unavailable for occupancy as of the end of the calendar year, the owner will lose that year s Housing Credit allocation with respect to the out-of-service units, even though the property was in service for the majority of the year. Conversely, if a property suffers a fire in January and the units are unavailable for most of the year, but back in service by December 31, the owner would not suffer a loss of Housing Credits under current IRS policy. IRS policy provides an exception to this rule if the casualty is in an area that has been declared a Major Disaster Area by the President. In these circumstances, the state Housing Credit agency must determine a reasonable restoration period, not to exceed 25 months from the month of the disaster declaration. If the building is restored within that period, there is no recapture of Housing Credits and the owner may also continue to claim Housing Credits during the restoration period. An owner should not be penalized by losing the ability to claim Housing Credits during a restoration period because the loss to their property was not the result of a major disaster declaration. It is arbitrary to determine whether Housing Credits are recaptured based on a property s status on a specific date. Amend Section 42(j)(4)(E) to clarify that there is no recapture and no loss of the ability to claim Housing Credits during a restoration period that results from any casualty (irrespective of whether the damaged building is in a Major Disaster Area), provided that the building is restored within a reasonable period as 6

7 determined by the state Housing Credit agency, but not to exceed 25 months from the date of the casualty. Exempt state Housing Credits from federal taxation Sixteen states have created state Housing Credit programs that supplement the federal Housing Credit program. The efficacy of state credits, however, is significantly undermined because the federal government taxes the value of the state tax credit. This reduces the value of the state Housing Credit by the tax imposed by the federal government, so a dollar of state credit is only worth 65 cents to an investor at the 35 percent marginal rate. Due to this federal tax treatment, state Housing Credit programs, are far less efficient than the federal Housing Credit program. It also means that state Housing Credits are treated differently than state loans, grants, and rental assistance, which are not subject to federal taxation. Exempt state Housing Credits from federal income tax liability. This proposal would increase pricing of state Housing Credits, allowing states to administer these programs more effectively and expand their supply of affordable housing. 7

8 Support the Preservation of Existing Affordable Housing Protect existing Housing Credit tenants in properties that are recapitalized The Housing Credit is the primary tool for recapitalizing and preserving older, at-risk federally, state and locally-subsidized housing in need of rehabilitation; roughly 30 percent of all Housing Credits each year are used for this purpose. One pervasive obstacle to using the Housing Credit to preserve affordable housing is the issue of existing tenants who were income eligible when they moved in, but now have incomes above the Housing Credit income limits. For buildings that were originally financed by Housing Credits that have reached the end of their 15-year compliance period and are in need of recapitalization, the Internal Revenue Service s (IRS) Guide for Completing Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition (8823 Guide) allows apartments with existing tenants to remain qualified low-income units as long as it can be documented that the tenants were income-qualified when they moved into the building. It should be noted that this guidance does not have the force of law. This IRS guidance does not apply to other federally assisted buildings, such as HUD-assisted and USDAassisted buildings, or buildings with similar state or local assistance. When the Housing Credit is used to recapitalize these properties, all existing tenants must be income certified. Those tenants whose incomes have risen above the Housing Credit limits are no longer qualified for assistance, so their units are not included in the building s qualified basis. If those over-income tenants wish to remain in their units, it can jeopardize the entire rehabilitation project, as it reduces the amount of Housing Credit equity for which the property is eligible. Allow tenants to be considered low-income for purposes of determining Housing Credit eligibility if: the tenant met the Housing Credit income requirement upon initial occupancy in a unit that at that time was subject to a federal, state, or local government income restriction; and Housing Credits are subsequently awarded for the acquisition or rehabilitation of the building that includes their unit. This proposal would codify existing guidance for Housing Credit properties and help finance the preservation of other federally and state-assisted properties. It would also eliminate any tension between allowing existing tenants to stay in their homes and recapitalizing the property. 8

9 Facilitate ability of nonprofit housing organizations to maintain Housing Credit properties by replacing the right of first refusal with a purchase option As Housing Credit properties reach the end of their initial 15-year compliance period, investors in the property s original limited partnership have the option to sell their share in the project and exit the partnership, and the nonprofit sponsors (the general partners) may seek to gain full control of the property in order to maintain the affordable housing use restrictions. However, the transfer of properties to nonprofits has caused conflicts between investors and nonprofit sponsors in some instances. The Housing Credit statute does not provide nonprofit sponsors the explicit ability to contractually purchase the property at the end of the compliance period. Instead, nonprofit sponsors are able to obtain ownership indirectly through Section 42(i)(7) of the Internal Revenue Code, which permits a right-of-first-refusal ( ROFR ) held by the tenants, a resident management corporation, government agency, or a qualified nonprofit organization to repurchase the property for a price that is at least the minimum purchase price. The minimum purchase price is calculated by adding the outstanding debt on the property and any taxes attributable to that sale ( exit taxes ). Housing Credit limited partnership agreements where nonprofits serve as the general partner typically include the ROFR language as specified in Section 42(i)(7). The objective of the ROFR provision is to provide a vehicle for qualified purchasers, such as nonprofits, to repurchase financially viable properties at a price below fair market value while continuing to operate them as affordable housing in order to continue serving the community. However, the provision has not worked as intended and in some cases nonprofits have been unable to exercise the ROFR. For example: A purchase under the ROFR provision is for the property only. It does not include the cash reserves held by the partnership, intended to be used for upkeep of the affordable housing units through the extended use period. Instead, the cash reserves are partnership assets distributable to the partners upon liquidation of the partnership subsequent to the ROFR purchase. Some investor limited partners are making claim to these reserves. These reserves should remain with the property, as they are critical to the preservation of the affordable housing and in many cases are the only source for recapitalizing the property after the 15 year compliance period. To trigger a ROFR, technically there must first be a bona fide offer to purchase the property by a third party. This is an unnecessary step in a process intended to enable nonprofits to maintain ownership at a predetermined price. Additionally, in some cases investors take the position that any offer from a third party less than fair market value is not a bona fide offer, thereby allowing them to withhold their consent to a ROFR at the minimum purchase price. This allows the investor limited partner to claim cash reserves or continue to hold an ongoing interest in the partnership for continued tax benefits and/or eventual proceeds from a refinance or other capital event. 9

10 In effect, investors are able to force affordable housing properties operated by nonprofit organizations to forfeit cash assets that can be critical to the long-term viability of the property. This problem becomes of greater concern as more and more properties reach year 15. Regardless of the contractual issues that arise in these disputes, the efforts by some investors to demand a residual return in excess of the agreed upon return on tax credits and losses via the Housing Credit is contrary to the intent of the program and at odds with the understanding of the parties when the partnership was created. Amend Section 42(i)(7) to replace the right of first refusal with a purchase option that permits tenants, a resident management corporation, government agency, or a qualified nonprofit organization to purchase either the property or the investor s partnership interest at the same minimum purchase price as defined in current law. Modify the 10 Year Rule to support the preservation of properties in need of rehabilitation Under Section 42(d)(2)(B)(ii), acquisition Housing Credits are not available for properties last placed in service during the prior ten year period (the 10 Year Rule ). This rule dates back to the original enactment of the Housing Credit in 1986, at a time when Congress was concerned about churning real estate to take advantage of the property appreciation due to the accelerated depreciation rules enacted in Nearly 30 years later, the objective that the 10 Year Rule was intended to address has no relevance considering the longer depreciation periods now in effect. The rule unnecessarily limits the properties that would otherwise be eligible for preservation with the Housing Credit. To address this concern, as part of the Housing and Economic Recovery Act of 2008 (HERA), Congress provided an exception to the 10 Year Rule for certain federally or state-assisted buildings. However, the IRS has not issued regulations with respect to this HERA change, and accordingly, few transactions have attempted to utilize this new exception. Replace the 10 Year Rule with a limit on the acquisition basis of the building, equal to the lowest price paid for the building during the last ten years (with an adjustment for the cost of living) plus any capital improvements that are reflected in the sellers basis, if the building had been placed in service during the prior 10 years. This would allow Housing Credits to be used to preserve more properties in need of rehabilitation, while eliminating the possibility of taking advantage of any real appreciation through recent property transfers. 10

11 Include relocation expenses in eligible basis When an occupied building is acquired with the intent to rehabilitate the property, the rehabilitation is often safer, more expedient, and more efficient if tenants are relocated while the work is being done. In some cases, the tenants are provided an allowance towards the cost of their relocation costs; in other cases, the owner pays the tenant for the cost of temporary relocation. Recently, the IRS has taken the position that all relocation costs, including those that are associated with the rehabilitation of an occupied building, are to be expensed instead of capitalized as part of the rehabilitation. This position was incorporated into Appendix C of the Audit Technique Guide, for Section 42, Low-Income Housing Tax Credit, published in August However, this position is contrary to Internal Revenue Code Section 263A, which requires taxpayers to capitalize all indirect costs. The costs of relocating tenants during rehabilitation is an indirect cost, and should be allocated to the cost of the rehabilitation. To the extent that a building is vacated for rehabilitation, it is unlikely that relocation costs could be expensed, since the partnership would not be producing income at that time. The result is that the relocation costs, which are in some cases mandatory, but in other cases incurred voluntarily for the benefit and safety of the tenants, would be excluded from basis and be non-deductible. The prohibition on including relocation costs in basis could make the rehabilitation of some properties far more difficult and time consuming, potentially adding unnecessary costs while sacrificing resident safety. In some instances, these obstacles will make the rehabilitation untenable. Allow for relocation costs incurred in connection with a rehabilitation of a building to be capitalized as part of the cost of the rehabilitation. For these purposes, a building would be considered to be rehabilitated based on the criteria established in Revenue Procedure Relocation costs would include compensation or allowances paid to tenants (regardless of income), as well as payments to third parties for relocation services and temporary housing during the rehabilitation period. 11

12 Facilitate Housing Credit Development in Challenging Markets Encourage the development of affordable housing in Native American communities Native Americans face a particularly acute affordable housing crisis, yet it has been difficult in some areas of the country for tribes to access Housing Credits. The following proposals would encourage greater utilization of the Housing Credit for affordable housing that serves Native American populations. s a. Create a selection criteria for Indian housing Require that Housing Credit allocating agencies Qualified Allocation Plans (QAP) include selection criteria that would require states to take into consideration the affordable housing needs of Native Americans within the state. Under Section 42(m) of the Code, each state Housing Credit allocating agency must include a set of predetermined selection criteria in their QAP. The proposed new selection criteria would increase focus on the needs of Native Americans. b. Exempt NAHASDA grants from the eligible basis disallowance rule Native American Housing and Self Determination Act (NAHASDA) NAHASDA funds are a substantial source of funding for Native American Housing. NAHASDA funds are often paired with the Housing Credit, providing capital to meet the gap between total project costs and the portion of those costs funded by the Housing Credit. Currently, this pairing can be difficult because Internal Revenue Code Section 42(d)(5)(A) requires the owner to reduce eligible basis by the amount of federal grants used for the development of the project. This reduction results in fewer Housing Credits and a bigger financing gap to be filled. To avoid this result, NAHASDA funding can be structured as a loan. However, this is not always a practical solution. If the project is located on tribal land with deeply affordable rents, the owner s ability to demonstrate that the loan is repayable which is a requirement if the loan is to be considered true debt and therefore includible in basis may be very limited. A better option would be to discontinue treating NAHASDA funds as federal grants for tax purposes. This change would allow the NAHASDA funds to be granted to the project without a reduction in Housing Credit basis. c. Treat qualifying Indian housing developments as Difficult to Development Areas 12

13 While some projects in Indian areas may qualify as DDAs and be eligible for the 30 percent basis boost, many do not qualify because of the nationwide 20 percent limitation on DDAs. Modifying the definition of DDAs to automatically include projects located in an Indian area would help ensure that these developments can access the equity needed to make them financially feasible. This change would also provide that such Indian area projects are not subject to the 20 percent DDA limitation in current law. Indian areas would be defined as ones meeting the criteria in Section 4(11) of NAHASDA. Eligible developments would be ones receiving funding under NAHASDA, or ones in which the sponsor of the entity applying to receive the Housing Credits is either: a) an Indian tribe or tribally designated housing entity, or b) wholly owned or controlled by an Indian tribe or tribally designated housing entity. Standardize rural income limit rules to facilitate more rural Housing Credit development Under current law, there is a discrepancy in the application of income limits for Housing Credit properties located in rural areas (as defined in 520 of the Housing Act of 1949) based on whether or not the property is financed with tax-exempt bonds. Housing Credit projects located in rural areas that do not use tax-exempt bond financing base income limits for these projects on the greater of the area median gross income (AMGI) or the national nonmetropolitan median income. Standardize tenant income limit rules for Housing Credit projects in rural areas by establishing income limits for all rural Housing Credit projects based on the greater of AMGI or the national nonmetropolitan median income. This would make bond-financed Housing Credit projects more feasible in rural areas while streamlining program rules. Repeal the QCT population cap Under Section 42 of the Internal Revenue Code, certain areas and developments are eligible to receive up to a 30 percent basis boost (resulting in more Housing Credit equity) if the state Housing Credit allocating agency determines the boost is needed to make development financially feasible. There are three circumstances under which properties are eligible for the basis boost: 1. Difficult Development Areas (DDAs): Properties located in areas designated by HUD as DDAs are eligible for the basis boost. DDAs are areas where the HUD-determined Fair Market Rent (FMR) is high relative to area median incomes. These areas are generally high cost areas. No 13

14 more than 20 percent of the nation s population may be in located in DDAs. 2. Qualified Census Tracts (QCTs): Properties located in areas designated by HUD as QCTs are eligible for the basis boost. QCTs are census tracts where 50 percent or more of the households have median incomes at or below 60 percent of the area median income, or tracts with at least 25 percent poverty rates. These areas are generally high poverty areas. However, only census tracts comprising the poorest 20 percent of the population of any given metropolitan area are able to receive the QCT designation, even if additional census tracts within that metropolitan area would otherwise qualify based on the QCT income standard. 3. State-Designated Areas or Developments: Each state Housing Credit allocating agency may designate certain areas or developments within their state as eligible for the basis boost. This ability only applies to properties receiving an allocation from the state s Housing Credit volume cap, and not to Housing Credit developments financed with tax-exempt private activity Housing Bonds. Under this system there is some overlap between DDAs and QCTs, as some poor areas qualifying as QCTs are part of Metropolitan Statistical Areas (MSA) that qualifies as a DDAs. Currently, HUD designates 35 MSAs as DDAs. However, in 2016, HUD intends to change its methodology for determining DDAs to better align fair market rents in its tenant voucher program. Rather than considering entire MSAs for DDA status, it will determine DDA status according to the zip code geography level. These new, zip code level DDAs are referred to as Small Area DDAs, or SADDAs. The new DDA methodology will still employ the 20 percent nationwide population cap on DDAs. According to HUD, if this change were implemented today, 233 MSAs will have at least one SADDA within their borders. The new DDA methodology will likely eliminate most of the overlap between DDAs and QCTs. Some areas that lose their DDA status under the new SADDA methodology will continue to qualify due to their QCT status. However, other areas those that currently qualify solely on the basis of DDA status no longer will be eligible for the basis boost once HUD switches to the SADDA methodology. Many of these areas have median incomes low enough to qualify as QCTs, but do not receive that designation due to the 20 percent cap on QCTs. Properties in these areas which no longer qualify as DDAs under the new methodology and are ineligible to qualify as QCTs due to the QCT population cap will no longer be eligible for the additional Housing Credit equity provided by the basis boost. Remove the aggregate QCT population cap, enabling properties in more areas to receive the 30 percent basis boost. This would make the production and preservation of more affordable housing properties in low-income communities financially feasible. 14

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