Affordable Housing Outlook Cites Concern Over IRS Bond Caps

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At a recent boot camp for affordable housing accountants, we heard several leaders voice concerns and some optimism for the coming year of affordable housing development finance and legislation. 

In California and its biggest cities, there are several new laws put forth to support new construction and rehabilitation of affordable housing, but concerns over lack of available land is dampening some optimism. 

Of biggest concern to CFOs, however, is the current IRS per capita bond cap, which sets a limit on the dollar amount of tax-exempt municipal bonds each state can issue based on population. In 2019, California experienced a high demand for 4% Low Income Housing Tax Credit (LIHTC) bonds, which all but exhausted the 2019 bond allocation. Affordable housing leaders worry that 2020 will demonstrate a similar or higher demand, since 4% LIHTC financing has been historically easier to obtain than the lottery and points-based 9% bond financing. Leaders are hoping that the IRS chooses to raise the cap, but it may not happen in an election year. 

Aside from government finance, developers must seek more traditional finance options, and affordable housing is not as attractive for traditional lenders as market rate housing due to limitations on cash flow. In fact, there are efforts among private investors to purchase properties nearing the end of a compliance period and move toward full market rate housing. Due to current high demand and low housing supply in many metropolitan areas, qualified contract price calculations do not always result in a higher than fair market value price, making qualified contracts a more attractive option for acquiring rehab property in spite of residual government compliance issues. 

Promised Affordable Housing in San Francisco and California

Although much of the current LIHTC financing is going toward acquisition rehabilitation projects, state and local legislation and agency structuring in California, at least, are designed to entice new construction as well as rehab. 

Here are several promising signs for the future of affordable housing: 

  • The Governor of California, Gavin Newsom, focused much of his first months in office on housing affordability, signing multiple bills in 2019 to boost housing production. The bills are designed to, among other things, streamline the permit process, increase units per facility, increase housing for special populations including the homeless, and take a comprehensive inventory of lands and zoning suitable for housing development. 
  • Three state bills that passed both houses include AB 1255, which requires cities and counties to report to the state an inventory of its surplus lands in urbanized areas and provide it as a digitized public inventory; AB 1560 which revises the definition of a “major transit stop” to include bus as well as BART transportation, to ease environmental restrictions on new housing construction; and SB 744, which amends the “No Place Like Home” fund to allocate $2 billion to streamline development of housing that includes supportive mental health services — helping to stabilize vulnerable  populations.
  • For both San Francisco and Los Angeles, the passing of Prop A in their local elections should provide millions  more more bond funding for affordable housing. In addition, San Francisco has a new regional authority, the Bay Area Housing Finance Authority. It is designed to raise, administer and allocate funds for affordable housing preservation, tenant protections and new affordable housing production in the Bay Area. 

Looking at these efforts at the federal, state and local levels, one could foresee a balanced scorecard for the coming year — not too optimistic but also not dismal. For an industry primarily supported in the world of not-for-profit organizations, the affordable housing industry is receiving a great deal of much-needed attention due to the housing crisis in areas of California. We expect it will be a practical priority for cities and states to continue that focus with legislation and funding. As for the IRS bonding cap, that’s anybody’s guess.  
For assistance with your planning, speak to an affordable housing professional at LvHJ. We are a California CPA firm, but we work with owners and developers across the country, with a special focus on accounting standards and taxation compliance issues. Contact Partner S. Scott Seamands, CPA, to learn about our CFO boot camps.


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