On Friday October 7, 2022, the Biden Administration announced its progress toward the implementation of the Housing Supply Action Plan previously announced earlier this year. The plan outlined goals aimed at closing the housing supply shortfall in five years, beginning with the creation and preservation of thousands of affordable housing units in the next three years. The plan will assist renters struggling with high rental costs and will focus on developing and preserving housing for low- and moderate-income families. In the October 7th announcement, the Administration provided an update on implementation of the Housing Supply Action Plan and announced new steps that the Federal government has taken to achieve the plan’s commitments.
This document provides a high-level overview of the recently announced steps, which include finalizing the Low-Income Housing Tax Credit (LIHTC) income averaging rule, extending LIHTC deadlines to ensure the continued building of affordable housing projects, expanding certain Fannie Mae and Freddie Mac programs, continuing to promote more housing options near transit and other modes of transportation and rewarding jurisdictions that have removed barriers to housing development.
Finalizing LIHTC income averaging rule.
The Department of Treasury and the Internal Revenue Service (IRS) released final and temporary regulations to amend the LIHTC income averaging rule (final rule). The LIHTC program is the largest federal incentive for creating affordable housing. The recently released final and temporary regulations set forth guidance on the average income test for LIHTCs.
Generally, under existing guidance in Section 42 of the IRS Code (the Code), an eligible project under LIHTC must satisfy a minimum set-aside test relating to the income of tenants in applicable LIHTC units. The Code provided for two minimum set-aside tests that a taxpayer could elect: the 20-50 test and the 40-60 test. For example, 20% of the units were rent-restricted to residents making no more than 50% of the area gross median income (AMGI). The Consolidated Appropriations Act of 2018 (the Act) introduced the concept of income averaging to allow certain units and residents to exceed the set-aside tests. The Act permitted a project to be eligible for LIHTC if “at least 40% of the residential units in the project are both rent-restricted and occupied by tenants whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit.” In addition, the average of the residential income limitations must not be greater than 60% of the applicable AMGI in order to qualify for a tax credit. However, the final rule notice posits that “many commenters disagreed with the adequacy” of the IRS proposed rule to implement the Act’s application of the average income test, and would have penalized projects for a single unit’s losing of its low-income status by removing that unit’s imputed income limitation from the computation of the average without impacting the low-income status of any other units, thereby making it more difficult for the project to qualify for the credit.
Following receipt of multiple comments to that effect, including those submitted by NAA and NMHC, the Treasury Department and the IRS revised their interpretation of the proposed rule so that it is no longer necessary to consider all low-income units in a project for residential rental property when determining whether the average income test is met. In the final rule, for projects electing the average income test, a project for residential rental property meets the requirements if the taxpayer’s project contains a qualified group of units that constitutes 40% or more of the residential units in the project. A qualified group of units is defined as being one where the individual units comprising the group of units satisfy the criteria to qualify as a low-income unit, are rent-restricted, are occupied by individuals who meet the income limitation for the unit, and where the average of the designated imputed income limitations of the units in the group does not exceed 60% of AMGI.
The IRS’s proposed rule also provided an approach to identifying an applicable fraction used when determining compliance with the average income requirement, by using the same group of low-income units for both satisfying the minimum set-aside requirement and determining the applicable fraction. The final rule, however, directs taxpayers to identify a qualified group of units that is no smaller than the statutory minimum of 40%, including the low-income units identified for the average income test and any other residential units that qualify as low-income units that are part of a group of units where the average imputed income limitation is less than 60% of AMGI. Once a qualified group is identified, the rule directs that the applicable fraction for each building in the project be computed using the units that are both in the qualified group and the building at issue. The rule notes that this method of determining a building’s applicable fraction applies both for ascertaining low-income housing credits and for complying with the extended use requirement.
In addition, the final rule includes a revision which addresses concerns regarding the credit period applied for multiple building projects where individual buildings in the project have different lease finalization dates, thereby being applied different credit periods. The final rule requires a designation of the imputed income limitation used when calculating adherence to the criteria of the tax credit prior to the date a unit is first occupied of a low-income unit, as opposed to being dependent on the lease date of the building. The rule also allows conversion of a market-rate unit to low-income status, with designation of an income limitation occurring any time before it is first occupied as a low-income unit. This allows taxpayers additional flexibility when determining tax credit applicability for multiple building projects.
The final rule will allow developers to qualify for the credits through the average income of households in rent-restricted units, rather than requiring units to meet differing thresholds based on the specific unit. Further, the rule limits the impact of one unit’s noncompliance on a project’s ability to satisfy the average income test. As the White House notes in its press release, this rule will create more financially stable mixed-income projects with the help of federal subsidies and allow for additional affordable units for extremely low-income tenants by permitting cross-subsidization of projects. The regulation will go into effect upon publication in the Federal Register on October 12, 2022.
Extending deadlines for placed-in-service rules for LIHTC projects.
In addition, the IRS issued IRS Notice 2022-52, which extended certain deadlines for LIHTC projects. In response to labor and supply-chain disruptions, the notice extended deadlines for when an affordable housing project seeking LIHTCs must be placed-in-service. The below chart sets forth the extended deadlines:
LIHTC-Related Requirement |
Original Deadline (not including prior extensions) |
Extended Deadline |
Placement in service of the low-income building |
December 31, 2020 | December 31, 2022 |
| December 31, 2021 (subject to differing deadlines based on certain situations/fact patterns) | December 31, 2023 | |
| December 31, 2021 (subject to differing deadlines based on certain situations/fact patterns) | December 31, 2023 | |
| December 31, 2022 | December 31, 2024 | |
| December 31, 2023 | December 31, 2024 | |
Reasonable period for restoration or replacement following a casualty |
On or after April 1, 2020 | Earlier of the original deadline plus 24 months and December 31, 2023 |
Correction time period |
On or after April 1, 2020 but prior to December 31, 2022 | Earlier of the original deadline plus one year and December 31, 2023 |
Reforming government-sponsored enterprises’ Forward Commitment programs.
The Federal Housing Finance Agency (FHFA) expanded government-sponsored enterprises (GSE) Fannie Mae’s and Freddie Mac’s Forward Commitment programs, providing more financing flexibility to housing developers. The forward commitments are agreements to purchase loans at a later date with certain financing terms locked in, allowing developers to secure financing to pay off construction loans when construction has been completed and the project has been approved for occupancy. FHFA previously set the annual cap for the GSE’s forward commitments at $78 billion but will now exempt $3 billion of forward commitments from that cap. FHFA also lifted Freddie Mac’s $500 million cap on forward commitments for properties that do not receive LIHTCs, requiring that financed projects are at least 20% affordable over the applicable loan term. According to a statement by Freddie Mac, the changes grant the GSEs flexibility to execute forwards for affordable and workforce housing. The White House statement also indicated that such projects often align with other state and local incentives to create affordability without additional federal subsidies.
Promoting transit-oriented development and rewarding jurisdictions that have reformed zoning and land-use policies.
Expanding federal financing for transit-oriented development and affordable housing.
Through the Transportation Infrastructure Finance and Innovation Act (TIFIA) program, the Department of Transportation (DOT) provides low-cost, long-term financing of infrastructure projects to close funding gaps. Last Tuesday, DOT announced TIFIA 49, a new initiative that authorizes sponsors creating transit-oriented development projects (including public housing) to borrow up to 49% of eligible project costs, an increase from the original 33%. Transit-oriented projects are projects to improve or construct public infrastructure that are either located within approximately half a mile of a transit location, or for economic development, including commercial and residential development. Projects must be at least $10 million in size in order to be eligible. The loans include low interest rates (Treasury rates), up to a 35 year repayment period, deferrable for five years after substantial project completion and no-prepayment penalty.
Providing $30 million in planning and project development funding.
DOT and the Department of Housing and Urban Development (HUD) partnered together to launch the Thriving Communities Program. The initiative will provide $30 million in technical assistance to under-resourced communities to identify, develop, and deliver comprehensive transportation, housing, and community revitalization activities. According to DOT, the program will prioritize communities that are working to advance projects to reduce housing and transportation cost burdens and improve housing conditions, amongst other priorities. DOT released a Notice of Funding Opportunity (NOFO) for capacity builders interested in supporting disadvantaged communities and also shall issue a call for letters of interest from communities interested in receiving Thriving Communities technical assistance.
Increasing transportation funding investments.
Earlier this year, DOT announced competitive grant programs totaling funds of nearly $6 billion. These programs awarded jurisdictions that have adopted land-use policies to promote density and rural main street revitalization. DOT has begun awarding grants for some of the programs, including grant recipients for projects where local governments are improving their transportation infrastructure and promoting a range of policy goals.
The October 7, 2022 announcement by the White House furthers the Administration’s Housing Supply Action Plan. While there is forward momentum in achieving the five-year plan to ease the burden of housing costs, the Administration is also urging Congress to support the construction and preservation of affordable housing this year. Specifically, the Administration urges Congress to expand rental assistance, assist aspiring homeowners with down payment assistance, and help create a more equitable housing market.
If you have questions or would like to discuss these issues further, please contact Cindy Chetti, NMHC’s SVP of Government Affairs at [email protected].