[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
                     LOW-INCOME HOUSING TAX CREDIT

=======================================================================

                                HEARINGS

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                        APRIL 23 AND MAY 1, 1997

                               __________

                             Serial 105-82

                               __________

         Printed for the use of the Committee on Ways and Means


                                


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                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of April 14, 1997, announcing the hearing...............     2

                               WITNESSES

U.S. General Accounting Office, James R. White, Associate 
  Director, Tax Policy and Administration Issues, General 
  Government Division; accompanied by Dennis Fricke, Assistant 
  Director, Housing and Community Development; and Ralph F. 
  Block, Assistant Director, Tax Policy and Administration 
  Issues, General Government Division, San Francisco, CA.........    10
Internal Revenue Service, Thomas J. Smith, Assistant Commissioner 
  for Examination................................................    51

                                 ______

Affordable Housing Group, Saperston & Day, Steven J. Weiss.......   162
Affordable Housing Tax Credit Coalition, William E. Haynsworth...   136
Associated Financial Corp., Ronald L. Platt......................   211
Barbolla, Patrick, Rural Rental Housing Association of Texas, 
  Inc............................................................   156
Bon Secours Baltimore Health Corp., Sister Nancy Glynn...........   115
Boston Capital Corp., Herbert F. Collins.........................   200
Boston Financial Group, William E. Haynsworth....................   136
Collins, Herbert F., Boston Capital Corp.........................   200
Connecticut Housing Finance Authority, Gary E. King..............   129
Cooper, Wilfred N., WNC & Associates, Inc., National Association 
  of Home Builders, National Housing Conference, and U.S. Chamber 
  of Commerce, Taxation Committee................................   206
Enterprise Foundation, F. Barton Harvey III......................   181
Glynn, Sister Nancy, Bon Secours Baltimore Health Corp...........   115
Harvey, F. Barton III, Enterprise Foundation.....................   181
Haynsworth, William E., Affordable Housing Tax Credit Coalition, 
  and Boston Financial Group.....................................   136
Hodel, Kathleen, Lake Havasu City Apartment Owners Association...   120
King, Gary E., Connecticut Housing Finance Authority.............   129
Lake Havasu City Apartment Owners Association, Kathleen Hodel....   120
Lewis, Terry, National Cooperative Bank, National Association of 
  Housing Cooperatives, and National Cooperative Business 
  Association....................................................   227
Local Initiatives Support Corp., Benson F. Roberts...............   189
Logue, James L., III, National Council of State Housing Agencies, 
  and Michigan State Housing Development Authority...............    68
Metcalf, Hon. Jack, a Representative in Congress from the State 
  of Washington..................................................   103
Michigan State Housing Development Authority, James L. Logue III.    68
National Association of Home Builders:
    Wilfred N. Cooper............................................   206
    Larry A. Swank...............................................   144
National Association of Housing Cooperatives, Terry Lewis........   227
National Cooperative Bank, Terry Lewis...........................   227
National Cooperative Business Association, Terry Lewis...........   227
National Council of State Housing Agencies, James L. Logue III...    68
National Housing Conference, Wilfred N. Cooper...................   206
Platt, Ronald L., McDermott, Will & Emery, and Associated 
  Financial Corp.................................................   211
Rangel, Hon. Charles B., a Representative in Congress from the 
  State of New York..............................................   107
Roberts, Benson F., Local Initiatives Support Corp...............   189
Rural Rental Housing Association of Texas, Inc., Patrick Barbolla   156
Sterling Group, Larry A. Swank...................................   144
Stevens, Herbert F., Peabody & Brown.............................   217
Swank, Larry A., National Association of Home Builders, and 
  Sterling Group.................................................   144
U.S. Chamber of Commerce, Taxation Committee, Wilfred N. Cooper..   206
Weiss, Steven J., Affordable Housing Group, Saperston & Day......   163
WNC & Associates, Inc., Wilfred N. Cooper........................   206

                       SUBMISSIONS FOR THE RECORD

Clark & Clark, Memphis, TN, William B. Clark, Jr., letter 
  (forwarded by Hon. John S. Tanner, a Representative in Congress 
  from the State of Tennessee)...................................   246
National Apartment Association, and National Multi Housing 
  Council, joint statement.......................................   248
Texas Department of Housing and Community Affairs, Austin, TX, 
  Larry Paul Manley, statement...................................   251



                     LOW-INCOME HOUSING TAX CREDIT

                              ----------                              


                       WEDNESDAY, APRIL 23, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:34 p.m., in 
room B-318, Rayburn House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

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    Chairman Johnson. The hearing will come to order.
    Congresswoman Thurman will be along shortly, but I think 
since I have a longer than usual opening statement, that I will 
start.
    The low-income housing tax credit is currently the largest 
program whose purpose it is to stimulate the production of 
housing for low-income households. According to the Joint 
Committee on Taxation, the revenue loss associated with the 
credit, that is, the cost to the taxpayers, is almost $18 
billion over 5 years. Given the substantial cost of this 
program and its tremendous importance in the lives of people in 
New Britain, my hometown, Bristol and my district and other 
towns and cities throughout my district and the Nation, it is 
imperative that the program be administered effectively and 
that States be accountable for using these key dollars to 
produce the maximum number of high quality units in areas of 
need.
    In July 1995, Chairman Archer asked that the GAO study the 
administration and operation of the credit. Specifically, GAO 
was asked to examine the characteristics of the tenants and the 
properties benefiting from the credit, to make sure the credit 
is helping the right people and the right developments. He also 
asked GAO to evaluate the controls that the Internal Revenue 
Service and the States are using to make sure that, first, 
State priority housing needs are being met, second, housing 
project costs, including tax credit costs, are reasonable and, 
third, States and project owners comply with program 
requirements.
    Since we will be hearing from GAO shortly, I will not 
summarize their major findings and recommendations. However, I 
would like to comment briefly on several findings that are of 
interest to me.
    The credit was originally intended to help the working 
poor. In practice, an estimated three-quarters of the 
households had incomes at or below 50 percent of median area 
incomes, with 50 percent of those benefiting having incomes 
below $15,000 and 80 percent below $20,000. This is truly 
impressive. Yet, it is difficult to examine the credit in 
isolation, because 71 percent of the households benefited 
directly or indirectly from other forms of government 
assistance, including rental assistance, government loans, loan 
subsidies and grants. Are we using the range of Federal housing 
subsidy programs to help the maximum number of our citizens?
    Fully 43 percent of the households in tax credit properties 
were one-person households and another 24 percent were two-
person households. About 29 percent were headed by a person 
aged 55 or older. I expected a larger percentage of the units 
to be rented to families with children. Are States not putting 
a priority on affordable family housing? If not, why not?
    Many States do not appear to be fully using their existing 
tax credit allocations. For each year from 1992 through 1994, 
the value of the tax credits awarded to projects placed in 
service fell substantially short of the total annual per capita 
allocations. In fact, only half of the $315 million allocation 
was awarded in 1992. When I think of the rural and urban needs 
just in my district, I find this hard to understand.
    I am concerned about the amount of money that is going to 
fees. The National Council of State Housing Agencies has 
recommended that developers' fees generally be limited to no 
more than 15 percent of a project's total development costs and 
that fees to builders and related parties be limited to 14 
percent of a project's construction costs. Most of the States 
have followed the NCSHA's guidance with respect to developers' 
fees and about half with respect to builders' fees, but some 
have not. Syndication fees may consume from ten to 27 percent 
of the funds contributed by investors. Is almost 30 percent of 
the money going to developers' and builders' fees reasonable? 
We need to ask that question.
    I am also concerned to read that, according to the IRS' 
Chief Counsel, if the Service determines that a State is not in 
compliance with its qualified allocation plan, the Code does 
not give the IRS the authority to levy sanctions against State 
agencies that would not affect taxpayers who have already 
received credits. The sanction that exists in current law is to 
disallow a State's entire allocation amount for the period of 
noncompliance. Surely, we can respond forcefully, but in a 
targeted fashion, to both gain a higher standard of performance 
and protect good projects from harm due to the actions of 
others.
    Finally, I am surprised to learn that the IRS regulations 
do not require States to make onsite visits to ensure that the 
housing units are habitable. NCSHA, to its credit, has provided 
guidance in this area, but some States have fallen short.
    The low-income housing tax credit has financed many fine 
projects, creating excellent homes for people of all ages. It 
is no secret that I have supported the credit since its 
inception and I am gratified by the overall tone of the GAO's 
findings. However, oversight is about overseeing, so we can 
know how public policy is serving us and how we can improve its 
ability to help us meet critical needs. Nearly every feature of 
our tax law leaves room for improvement and the GAO has 
demonstrated that the credit is no exception. I believe the 
report provides us with an opportunity to strengthen the 
credit, review its goals and ultimately, to understand how it 
interacts with other housing subsidy programs in a more 
realistic way to assure the long-term interests of our 
constituents.
    Today, we will be hearing from the General Accounting 
Office, the Internal Revenue Service and the National Council 
of State Housing Agencies, and on May 1, we will hear from a 
number of other stakeholders. The GAO has given us a good 
starting point, but I am looking forward to suggestions that 
other witnesses may offer us as to how to strengthen 
enforcement and compliance and better utilize this valuable 
program.
    Upon completion of these hearings and the Subcommittee's 
review of the GAO's report, we will be recommending legislation 
to the Full Committee.
    [The opening statement follows:]

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    Chairman Johnson. I would like to recognize my Ranking 
Member today, Congresswoman Thurman, for any opening comments 
that she may have.
    Ms. Thurman. Thank you, Madam Chairman.
    Let me just first state that Representative Coyne has been 
delayed in Pittsburgh and hopefully will be joining us later.
    Today is the Oversight Subcommittee's first day of hearings 
on the effectiveness of the low-income house tax credit. I want 
to personally thank the U.S. General Accounting Office for the 
kind job in providing a comprehensive and thorough review of 
the LIHTC. The low-income housing tax credit is our Nation's 
most important program for funding the development and 
rehabilitation of low-income housing. Thus, it is important 
that the Ways and Means Committee conduct periodic oversight 
review of this program.
    I know we are pleased that the Internal Revenue Service 
supports GAO's administrative recommendations for enhancing the 
IRS' and State's monitoring system. Also importantly, the GAO 
has concluded that all of the States have developed qualified 
programs, allocations plans and that the LIHTC is, in fact, 
providing housing to thousands of working families at the 
lowest income levels.
    Finally, the GAO did not identify any noncompliance 
problems in operation of the LIHTC or recommend any statutory 
changes to the Internal Revenue Code. All those involved in the 
LIHTC should be proud of their participation in the program and 
commitment to providing affordable housing to thousands of low-
income individuals and families. At our second hearing next 
week, we will have the opportunity to discuss the program with 
these experts and to evaluate the success of the LIHTC in more 
detail.
    In short, though, I would also like to state that the LIHTC 
Program is a perfect example of the Federal Government's 
working in concert with the private sector. In a time when 
roughly 100,000 apartments are demolished, abandoned or 
converted to market rate use each year, it is important to give 
the private sector the means to stimulate the low-income 
housing market. In doing so, Congress has created a successful 
program which provides essential housing services to our lower 
income citizens. By administrating tax incentive block grants 
to the States, Congress is also giving the States the 
flexibility they need to meet their individual needs.
    For example, in Florida, following the effects of Hurricane 
Andrew, the Florida Housing Finance Agency was able to refocus 
a substantial number of housing credits to meet the needs of 
those low-income residents whose properties were devastated by 
the hurricane. I would also like to note that I am quite 
impressed with the Florida Housing Finance Agency's oversight 
of the Low-Income Housing Tax Credit Program. Their extensive 
application forms, credit underwriting, record extensive use 
agreements and regular onsite visits surpass many of the 
current IRS regulations which govern low-income housing.
    As a result, since 1987, the housing credit program has 
provided my home State of Florida with 45,692 safe, affordable 
apartment units, housing more than 68,000 people. There is room 
for improvement in any program, but I am encouraged by the 
cooperation between the State housing agencies and the IRS to 
work together to make the needed advances in the housing credit 
program.
    I look forward to the hearing today and to the testimony 
that we are about to receive and certainly in our next week so 
that we can have even more discussion. Thank you.
    Chairman Johnson. Thank you, Congresswoman.
    As we start, let me say that I am not going to use the 5-
minute light. I assume that you will understand there are 
panels to follow you and there is a limited time this 
afternoon. I also want to mention that I do have to leave 
promptly at 5, although I will be back in about 15 minutes. 
Unfortunately, there will be that interruption and the 
Subcommittee will proceed in my absence.
    I have read your testimony. I am looking forward to having 
a chance to question you, along with the rest of the 
Subcommittee. I do want my colleagues to have time to really 
hear your report and to have the time they need to question. I 
am very pleased to have your report. This is an important 
oversight project. So, I am pleased to start this oversight 
review of the low-income housing tax credit with what I think 
is a very thorough report.
    Mr. White.

STATEMENT OF JAMES R. WHITE, ASSOCIATE DIRECTOR, TAX POLICY AND 
   ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, U.S. 
   GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY DENNIS FRICKE, 
  ASSISTANT DIRECTOR, HOUSING AND COMMUNITY DEVELOPMENT; AND 
      RALPH F. BLOCK, ASSISTANT DIRECTOR, TAX POLICY AND 
    ADMINISTRATION ISSUES, GENERAL GOVERNMENT DIVISION, SAN 
                     FRANCISCO, CALIFORNIA

    Mr. White. Thank you. Madam Chairman and Members of the 
Subcommittee, we appreciate being here this afternoon to 
discuss our report entitled ``Tax Credits, Opportunities to 
Improve Oversight of the Low-Income Housing Program.'' I am Jim 
White, Associate Director of GAO's tax issue area. With me is 
Ralph Block, also from tax and Dennis Fricke, from our housing 
issue area. I have a written statement which I would like to 
summarize.
    As you mentioned, Madam Chairman, the tax credit is the 
largest Federal program for funding development of low-income 
rental housing and could cost Federal taxpayers as much as $3 
billion per year. Our report describes the tax credit projects 
and residents and assesses IRS and State controls for insuring 
that State housing needs are met, costs are reasonable and tax 
laws are complied with.
    Our report makes the following four main points. First, the 
households served had income levels considered very low by HUD. 
Second, although States had plans to direct tax credits to 
housing needs, we identified several factors, such as, credits 
not being used that could affect the housing actually 
delivered. Third, all States had cost controls, however, some 
States lacked complete cost and financial data for some 
projects. Last, IRS needs additional information to adequately 
monitor State and taxpayer compliance.
    Our analysis was based on a survey of all State tax credit 
allocating agencies, a random sample of 423 housing projects 
and review of IRS procedures.
    I would like to outline very briefly how the program works. 
Figure 1, this and other figures are attached to my prepared 
statement, is an illustration of a simple case of that. 
Starting in the lower lefthand corner of the figure, developers 
have to finance projects. Under the program, that is done 
partly using private-sector mortgages from lenders, shown above 
the developer and, partly using equity paid into the project by 
investors who receive the tax credits. I won't say anything 
else about the diagram in the interest of time. It is a quick 
outline of how the program works in a simple case.
    What I would like to do now is to describe the housing 
delivered under the program and the tenants served. We 
estimated that about 4100 properties with 172,000 tax credit 
units were placed in service in the United States between 1992 
and 1994. Those were the years of our sample. The average 
annual income in 1996 of the tax credit households was an 
estimated $13,300. The distribution of incomes is shown in 
figure 2.
    About three-fourths of tax credit households met HUD's 
definition of very low income. That is, their incomes were 
below 50 percent of their area's median income. Many household 
benefited from other Federal housing assistance. Tax credit 
households are small. About two-thirds were one or two persons. 
A quarter of the projects were developed to serve the elderly. 
Tax credit properties are located throughout the country. Most 
common is a walkup garden-style building, but properties range 
from rowhouses to elevator buildings. Most projects are newly 
constructed.
    The average monthly rent of a unit was about $450. Figure 3 
shows the per unit costs of tax credits in present value terms. 
For the average unit, the present value of the cost of the 
credit to Federal taxpayers was an estimated $27,300. About 2 
percent of the units had tax credit costs in present value 
terms of over $100,000 per unit.
    Project development costs as opposed to tax credit costs 
are shown in figure 4. We estimated that the average cost of 
developing the units was about $60,000.
    Now, I will discuss the State and IRS controls over the 
program. All the States have developed allocation plans 
required by the Tax Code, to direct tax credits to priority 
housing needs. Most use some sort of point system to rank 
project proposals. However, we identified several factors that 
could affect the housing actually delivered by the program.
    First, nearly all the agencies reserved discretion for 
bypassing their plan. We recognized that discretion can be 
beneficial. It can target unforeseen needs, but it should be 
documented. A second factor affecting housing delivery is 
whether tax credits are used. Data from the States, IRS and HUD 
showed a significant gap between tax credits initially 
allocated and credits awarded the projects when completed. For 
example, projects proposed in 1992 got initial credit 
allocations of $322 million, but by the end of 1994, only about 
half had been used. This raises the question of whether the 
State agencies produced all the housing the Federal Government 
was prepared to fund.
    A third factor affecting housing delivery is the economic 
viability of the tax credit projects after the 15-year 
compliance period. Whether these properties continue to provide 
low-income housing for tenants will depend on such factors as 
the economics of alternative uses and the need for additional 
subsidies.
    Now, I will discuss controls to insure costs are 
reasonable. All States have some cost controls in place. 
However, we identified opportunities for the States to improve 
their controls. Figure 5, shows the aggregate development costs 
and financing for projects placed in service from 1992 through 
1994. The height of the bar represents total development costs 
or the uses of funds. The height also shows the total financing 
needed or the sources of funds. There were three sources, 
equity paid into the project by tax credit investors, 
commercial mortgage loans and concessionary financing providing 
primarily by other Federal housing programs.
    To control costs, many States relied on HUD cost standards 
and most also used competition among developers for credits. To 
determine the reasonableness of private financing, States 
reported that they reviewed projects' rents, operating expenses 
and mortgage terms. To determine the reasonableness of non-tax 
credit public subsidies, States also reported doing reviews. In 
the case of HUD financing, the evaluation is called a subsidy 
layering review.
    Referring back to figure 5 again, the equity paid into 
projects in 1992 through 1994 was about $3.1 billion. This 
equity paid in was generated by about $6.1 billion in tax 
credits payable over 10 years. This works out to a yield of 
about 0.53 cents on the dollar. This tax credit yield or price 
has gone up over time from about 0.45 cents in 1987 to over 
0.60 cents in 1996, according to several major syndicators and 
State allocating agency officials.
    In controlling costs, allocating agencies are largely 
dependent on information submitted by developers. We found some 
control weaknesses in this area. For example, for the years 
1992 through 1994, the scope of independent cost verifications 
varied and about 14 percent of the projects lacked complete 
information on the sources and uses of funds. This leaves 
States vulnerable to providing more or fewer credits than 
needed. Accordingly, we recommended in our report that the 
Commissioner of Internal Revenue establish clear requirements 
for insuring independent verification of the sources and uses 
of funds, information submitted to States by developers.
    Now, I will discuss State and IRS oversight. We found 
several States had not completed their agreed upon monitoring 
of project compliance with rent, income and habitability 
requirements for 1995. Also, IRS did not have the information 
to determine whether States did their monitoring. IRS' 
regulations did not require States to make onsite visits to 
projects and IRS did not have enough information from States 
about noncompliance to be able to determine the tax 
consequences for property owners.
    Accordingly, we recommended that the Commissioner of 
Internal Revenue require, one, that States report sufficient 
information about monitoring inspections so that IRS can 
determine whether States have done their monitoring and, two, 
that States' monitoring provide sufficient information to 
insure the Code's habitability requirements are met. We also 
recommended that IRS explore modifying the form States use to 
report noncompliance, so that it can better determine any tax 
consequences for project owners.
    In late 1995, IRS instituted an audit program to determine 
whether taxpayers are entitled to the credits they claim. IRS 
is relying on the results of its audit initiative to provide 
estimates on the extent and types of noncompliance. However, 
IRS' current audit program is not based on a random sample of 
returns and will not provide statistically reliable compliance 
data.
    With respect to monitoring State use of tax credits, the 
IRS is currently developing a document-matching program, but 
still lacks information on return credits which is necessary 
for determining whether States stay within their ceilings. 
Accordingly, we recommended that the Commissioner of Internal 
Revenue explore alternative ways to, one, develop an estimate 
of tax credit compliance and, two, obtain better information to 
verify that States' allocations do not exceed authorizations.
    Now, I will discuss independent oversight of the tax credit 
program. Unlike most programs operated by State and local 
governments that receive Federal financial assistance, the Low-
Income Housing Tax Credit Program is not subject to independent 
audits under the Single Audit Act. The act, which is an 
important accountability tool for the Federal financial 
assistance administered by State and local governments does not 
apply the tax credits because credits are not considered 
Federal financial assistance by OMB. Subjecting the Low-Income 
Housing Tax Credit Program to the single audit process may be a 
more efficient, effective and less federally intrusive way of 
monitoring State agency controls than other types of 
independent audits.
    Accordingly, we recommended that the Director of OMB 
incorporate the Low-Income Housing Tax Credit Program in the 
definition of Federal financial assistance, so that the program 
would be subject to the Single Audit Act.
    That concludes my prepared statement and I would be pleased 
to answer any questions.
    [The prepared statement follows:]

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    Mr. English [presiding]. Thank you, Mr. White.
    The Chair will recognize Dennis Fricke, Assistant Director 
of the Housing and Community Development Program at the U.S. 
GAO for your testimony.
    Mr. White. I have summarized our statement.
    Mr. English. I was misinformed. OK, apparently I have been 
given clearance. [Laughter.]
    Mr. White, I wonder if you could elaborate on the 
difference between the development costs to the housing 
projects and the cost to the Federal Government?
    Mr. White. The cost to the Federal Government is less than 
the costs of the project as a whole. If we refer back to figure 
5, the one on the right there--it is the last figure in the 
testimony. The sources of funds bar, the one on the left, the 
height of that bar shows the total development costs of the 
project and that is the total amount that has to be financed to 
fund project development. Of that, some is coming from 
commercial mortgage loans. So, the middle part of that bar is 
coming from private, commercial mortgage loans. The rest of 
that bar is financed by government assistance and part of that, 
roughly half looking at the bar, is from tax credits. The rest 
is from other housing assistance.
    So, the Federal part of the financing is smaller. What 
matters for Federal costs then is the overall height of the 
bar, holding this other financing constant. If you lower the 
height of the bar, you need fewer credits. What also matters is 
the price you sell the credits for.
    Mr. English. I appreciate you clarifying that distinction, 
following up and recognizing that, later, we are going to be 
hearing from Mr. Logue, on behalf of the National Council of 
State Housing Agencies.
    You have made several recommendations which may have some 
impact on State costs. You recommended that States report 
additional information to the IRS; that States use validated 
cost and financing data when evaluating the financial viability 
of the housing projects and that States subject their 
allocating agency operations to a Single Audit Act coverage, 
which makes a great deal of sense to me.
    Have you assessed the cost of these recommendations and 
specifically, why did you recommend that States be reviewed 
under the Single Audit Act rather than by direct IRS oversight?
    Mr. White. We did try to take costs into account when we 
were making our recommendations. In fact, in the wording of the 
recommendations, we tried to offer some flexibility to the 
States and to the IRS so that if there was a lower cost, a more 
cost-effective way of satisfying the recommendation, that would 
be an option. One example would be in terms of site visits. 
Right now, not all States are making site visits. It may be the 
case that State housing agencies will not necessarily have to 
visit every project. They may be able to get that information 
from other sources, for example, building inspectors. We wanted 
to leave that option open to them.
    The Single Audit Act is another example. The Single Audit 
Act was designed to lower the cost of the independent audits. 
As the name implies, there's a single audit done of Federal 
money going to State programs and we thought that the lowest 
cost way of getting an independent audit done would be to 
include the program under the single audit that is already 
being done for these State housing agencies, because of the 
other Federal money they are getting.
    Mr. English. I have two other questions quickly and then 
I'm going to move this to my colleagues.
    As you contemplate the integration and coordination of 
programs, how do the States control overall Federal costs when 
the tax credits are combined with other Federal subsidies?
    Mr. White. The States are required by the Tax Code to 
review combined Federal costs and all the States reported to us 
that they are doing so. As I mentioned, in the case of HUD 
financing, there is a review called the subsidy layering review 
that is done. Actually, what this means in this case is, there 
is an additional control. Not only does the tax credit program 
require that this review be done, but the other Federal subsidy 
programs also require their own reviews to be done. So, in a 
sense, you have an additional control in this case.
    I do want to make clear, however, we did not audit 
individual housing developments.
    Mr. English. I understand.
    Mr. White. So, the effectiveness of these controls at that 
level is not something we are able to speak to.
    Mr. English. Your point is well taken and I understand the 
scope of your audit. I was encouraged by some of your findings, 
because I think they make a very strong case for the permanence 
of the credit. I wonder in that regard, how great is the 
syndicators' risk in making these investments? I think that is 
very closely tied to the argument for keeping the credit 
permanent.
    Mr. White. There is a risk to the syndicators. We did not 
try to quantify it. It is very difficult to quantify how much 
risk is being transferred to the private investors under this 
program. It is the case that syndicators and investors spend 
resources monitoring and helping manage the program or manage 
individual projects. So, they have staff who visit projects in 
some cases and otherwise help monitor. So, there is money being 
spent, which is an indication that there has been some risk 
transferred.
    As you probably know, credits can be recaptured or denied 
under the program if projects go out of compliance during the 
15-year compliance period.
    Mr. English. Thank you again, Mr. White. This has been very 
enlightening. I would now like to turn this over to my 
colleagues. First, I would like to recognize the distinguished 
gentlelady from Florida, Ms. Thurman, for 5 minutes.
    Ms. Thurman. Thank you, Mr. Chairman.
    Mr. White, in the GAO report you stated that, of the 431 
tenant files reviewed by the GAO, there was evidence of 
ineligible tenant incomes or excessive rent charges. Also, you 
stated that in reviewing 253 project tax returns involving 
about $83.3 million, only 3 projects had overreported credits. 
At the same time, with what I would consider to be fairly high 
compliance, you actually make some recommendations for 
additional IRS oversight and more State reporting.
    What do you think that would accomplish and why would you 
do that? There are other people that would be believed that 
flexibility and, where States are doing very well, that this 
could become cumbersome.
    Mr. White. Our recommendations were not focused on incomes 
or rents. Our recommendations were focused primarily on the 
controls at the State level and the IRS level, over costs and 
overall compliance with the requirements of the Tax Code. We 
tried to make, as I said, tried to leave some flexibility in 
terms of how the States and the IRS could respond to our 
recommendations to keep the costs as low as possible. Clearly, 
there is a cost.
    What we aimed at primarily in our recommendation was 
insuring that there was better information at the State level 
about the cost information that was provided from developers to 
the States, in which the States then used, when making the 
credit allocations. Obviously, without reliable information on 
costs, on the developers' true costs, the States cannot be 
assured of awarding the minimum number of credits.
    Ms. Thurman. Based on that conversation, let me just ask 
you a couple of questions, based on what we are going to hear 
in our next testimony. The National Council of State Housing 
will testify on the next panel and make a series of 
recommendations. Have you had an opportunity to look at any of 
those recommendations?
    Mr. White. I glanced just for a minute. I have not read 
their testimony through.
    Ms. Thurman. If you do not know, that is OK. Does the GAO 
agree that the $1.25 per capita cap should be increased?
    Mr. White. I guess I would respond to that by saying that, 
one of our findings was that it may be the case that right now, 
all the credits are not being used. We looked at data several 
different ways and the consistent finding was, we cannot find 
all the credits being used. In the case of the 1992 credit 
allocation, by the end of 1994 only about half of those credits 
had actually been awarded to projects that were placed in 
service, that is, construction was completed.
    Ms. Thurman. The IRS should be able to share noncompliance 
data with State housing authorities?
    Mr. Block. Actually, that is a taxpayer disclosure issue. I 
do not think we are in a position to answer to that. That is up 
to the Internal Revenue Service.
    Ms. Thurman. Fine. There should be more onsite compliance 
checks?
    Mr. White. We had a recommendation to that end, again, 
allowing some flexibility, so that if there is a more cost-
effective way to do that, they could do that.
    Ms. Thurman. That possible legislation is needed for the 
States to more effectively use the national pool?
    Mr. White. Again, given our finding on the number of 
credits that are being used right now, it is hard to reach a 
conclusion right now about the need for legislation in that 
area.
    Ms. Thurman. Thank you, Mr. English.
    Mr. English. Thank you. The Chair recognizes Mr. Hulshof.
    Mr. Hulshof. Thanks, Mr. Chairman. Mr. White, in your 
prepared statement on page 8, you do make note that all States 
have adopted the required allocution plans for meeting State 
housing priorities. Is that right?
    Mr. White. Yes.
    Mr. Hulshof. Then you go on to talk about the use of 
discretionary judgment and you mention, I think, as anecdotal 
evidence, one State where senior managers overrode a certain 
percentage in those particular cases. What is the spectrum, I 
mean, just an example of the discretion that different States 
use? Can you give us just some examples of this spectrum as far 
as discretion was concerned?
    Mr. White. Yes, but the Texas finding was the result of an 
audit that was done in Texas.
    Dennis, do you want to add to anything across the board on 
that?
    Mr. Fricke. I think, as Jim said, it was a particular State 
where really that issue came up as the result of an internal 
audit finding. For the most part, the States really were 
complying in terms of the allocation of credits with their 
allocation plan. They were not deviating from the thresholds, 
set-asides or points that they used to really focus the program 
on what they have identified as their priority housing needs.
    Mr. White. The point in the Texas case that we wanted to 
make is, that the discretion that was used was not documented.
    Mr. Hulshof. Right.
    Mr. White. There was no documentation. That was the real 
problem there.
    Mr. Hulshof. Let me follow up, because you talk about how 
the public's confidence could be undermined in the absence of 
documentation. What is your recommendation as far as 
documentation is concerned?
    Mr. White. We did not make a recommendation in this case 
partly because the finding here was based on an audit in a 
single State case. We also did not do audit work at the project 
level to know whether the discretion that was being used was 
being used improperly or not.
    Mr. Hulshof. I think in the report, page 58, it talks about 
the Internal Revenue Code and calls on State agencies to 
determine the appropriateness, I think, is the word that is 
used, of a project or local conditions. It really does not talk 
about guidance as to what is appropriate for local conditions.
    Now, keeping in mind that we all believe that States should 
be given the greatest flexibility possible to be creative, to 
be responsive to local needs, do you have a recommendation or 
suggestion as to whether or not the Code should be amended to 
provide greater guidance to States so that we can have more 
accurate information? Do you have any sense on that?
    Mr. White. We do not have a recommendation in this area. We 
recognize that the program delegates authority to award credits 
to the States and that the Code does not define appropriate to 
local conditions. That is left up to the States. It is a value 
judgment there and we do not have a recommendation.
    Mr. Hulshof. As a final generic question, would you 
characterize the low-income housing tax credit as a successful 
program?
    Mr. White. We did not compare the tax credit program to 
other housing programs. So, I cannot characterize it relative 
to other programs. We focused on the cost controls and 
compliance controls of this program alone. Overall, we found 
that the States do have controls in place. We found some 
weaknesses in some States and with respect to some projects.
    Mr. Fricke. I think I would also just add that the program, 
the visits that we did make to projects, basically without 
exception, the program is delivering a good product in the 
sense of quality housing. The price of that housing varies 
considerably. I think as Jim was just alluding to, what the 
study does not do is answer the question, could you build that 
housing cheaper through another government program. That was 
not clearly a part of this study and it would be a study that 
would require really considerable thought, I think, in terms of 
how you would approach it.
    Mr. Hulshof. Thank you, Mr. Chairman. I yield back.
    Mr. English. Thank you. The Chair recognizes Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. White, the GAO recommends inclusion of the low-income 
tax credit in the Federal Government's Single Audit Act. Could 
you explain a little bit more what that act is and what it 
does?
    Mr. White. Yes. The Single Audit Act, as the name implies, 
allows for one audit of agencies, usually at the State level, 
State or local, or nonprofit organizations that receive Federal 
money. And rather than independent audits of every program that 
might be sending money, say, to a State housing agency, the 
Single Audit Act was passed to lower the burden of those 
audits.
    Our thinking was that we would lower the cost of an 
independent audit of the tax credit program if it could be 
included under the single audits that are now being done. 
Again, the State housing agencies are subject to Single Audit 
Act requirements right now because they get Federal money.
    Mr. Coyne. Well, as you know, OMB opposes including the 
Low-Income Housing Tax Credit Program in the Single Audit Act. 
Do you have any idea why they would be opposed to it?
    Mr. White. I do not know that they oppose it. I think they 
had a sense that conceptually this might be a good idea. One of 
their concerns--they did have some concerns. One of their 
concerns was about whether you should focus on a single credit 
and do this for a single credit or do a broader evaluation of 
tax credits generally and make a determination about whether 
you could do something more generally. And we do not object to 
that kind of approach.
    Mr. Coyne. Have they suggested an alternative audit system?
    Mr. White. They have not suggested an alternative. They 
commented on our recommendation.
    Mr. Coyne. OK. You had mentioned that you looked over 400 
low-income housing tax credit projects. Could you comment on 
Pennsylvania's operation, specifically?
    Mr. White. Yes. I think Dennis can in a minute. Let me 
introduce it by saying that our methodology was aimed at giving 
us statistically reliable results for the country as a whole. 
Our sample was not large enough to give us statistically 
reliable results for an individual State.
    Dennis, do you want to say anything more about 
Pennsylvania?
    Mr. Fricke. At least from the standpoint of visiting 
projects, I actually went out to several projects in 
Pennsylvania. Again, as I made the comment earlier, 
Pennsylvania, like other States that I visited, the projects 
were top-quality properties. They were revitalization projects, 
in the case of two properties I visited in Philadelphia, 
another one in Lancaster. All three properties were providing 
very affordable rents to low-income people, and like other 
projects that we describe in the report, costs really varied. 
And I can think of the two in Philadelphia. One project, the 
cost was over $100,000, and the other I believe was somewhere 
around $70,000. We really did get quite a cost variation, and 
also a variation in these two cases in terms of the tenant 
profiles of the people that were being served. The one project 
was serving larger families, and the other project was serving 
younger, smaller families.
    So, again, it just kind of speaks to the program in general 
that we describe in the report. It really serves a lot of 
diversity in terms of needs and incomes.
    Mr. Coyne. Thank you.
    Mr. English. Thank you, Mr. Coyne.
    The Chair recognizes Mr. Weller.
    Mr. Weller. Well, thank you, Mr. Chairman, and I would like 
to direct my question to Mr. White.
    I am interested in exploring the issue of full use of the 
tax credit allocations. Your audit analysis suggests that the 
States now may not be fully utilizing their allocation. In 
fact, data from both the States, the IRS, and a recent HUD 
study would suggest as much as $80 million out of the per year, 
the annual $315 million per capita allocation, are not being 
fully utilized to produce the housing that we hoped to have as 
part of this public-private partnership.
    Number one, do you agree that these allocations are not 
being fully utilized, that they are being underutilized?
    Mr. White. Our conclusion is they may be underutilized. Our 
real conclusion here was we could not reconcile what was being 
awarded initially, what was being allocated initially to 
projects when they were in the proposal stage to what was 
actually being used and awarded when projects were completed. 
There is this large discrepancy, and we cannot account for the 
difference. It looks like credits may not all be used.
    Mr. Weller. If you are not able to account for the 
difference, is there an explanation of why you are unable to 
account for the difference?
    Mr. White. We discovered the difference with the 
methodology we had, once we developed the methodology and 
started sampling. I think to get an answer to that question you 
would probably have to track the credits for an individual 
State over time and, in effect, go back and do a retrospective 
audit, picking one or two States and track every credit in that 
State over several years.
    Mr. Weller. Would you recommend that this sort of tracking 
and reporting system be put in place as part of a better way of 
understanding utilization of the tax credit?
    Mr. White. I guess before thinking about a system, perhaps 
a study to determine if this is, in fact, what is happening. At 
this point we do not know for sure where these credits are 
going.
    Credits can be--developers have 2 years to use the credits. 
If they do not use them within the 2 years, then they lose 
them. The credits can be returned to the States and be 
reallocated. If the 2 years pass, the credits lapse. And right 
now with the data that is available, we do not know how many of 
these credits have lapsed and how many credits have been 
returned to the States and have not been reallocated yet.
    Mr. Weller. Mr. Fricke.
    Mr. Fricke. I think in that regard, too, the question that 
may be appropriate to just pose to the National Council when 
they are here. They do track allocations of credits by year, 
and to really address maybe with them the feasibility of them 
tracking the credits as they are applied to the projects that 
are placed in service over time, at least there will be some 
centralized data source to really track the differences.
    Mr. Weller. I would also like to explore--of course, one of 
the goals of this program is to make sure that affordable 
housing lasts longer than the credit, that quality affordable 
housing is available in every community where it is needed. And 
one of my colleagues on the Subcommittee started asking 
questions regarding the issue of layering of various subsidies, 
other subsidies that would affect those that are able to be 
served by low-income housing tax credit housing. And it is my 
understanding in the report from reading it that 71 percent of 
the households in these projects receive one or more types of 
housing assistance beyond that that is provided by the tax 
credit. With that, what some would call a high ratio of 
additional assistance, is it realistic to believe that this 
credit program, these types of projects can survive beyond the 
life of the credit?
    Mr. White. We do not know the answer to that. We raised the 
question in the report. What is clear is that the tenants 
served by this program have incomes that are so low that the 
rents they can pay are not high enough right now to cover the 
costs of developing and operating these projects. And, in fact, 
the incomes that many of the tenants who are actually being 
served have are so low that they are not high enough to cover 
the costs if the only subsidy the project got was the credit 
subsidy, because the credit only is allowed to cover part of 
the development costs. It does not cover any of the operating 
costs, and it does not even cover all of the development costs. 
And given the income levels served, that is the reason for the 
other subsidies being used.
    Mr. Weller. Mr. Fricke, would you like to comment on that?
    Mr. Fricke. Yes. I think just to make a little distinction, 
the layered subsidies that are used in the program in 
conjunction with the tax credits really make the properties 
themselves more affordable by just reducing the amount of debt 
that is associated with the property. In the report we pointed 
out that the rents in these projects, are generally anywhere 
from 13 to 23 percent below the ceiling imposed by this 
program. So by layering these subsidies, one of the benefits 
you are getting is lower rents, which translates into a lower 
population that is being served.
    Part of the reason that you have the tenant population in 
terms of income being served is not only direct rental 
assistance but also the fact that rents are down, making the 
units more affordable to lower income people.
    I think your other question, the question as far as long-
term viability of these projects, that really gets to an issue 
of in 15 years and out, what the cash flow is going to look 
like for these properties, what kind of capital needs these 
properties are going to have, and do these properties have 
reserves set aside to meet those capital needs or will they 
be--will they have generally a high enough cash flow to borrow 
additional capital that together with any reserves they can 
make the needed repairs? Or will they come back to this program 
and look to it as a way of raising capital to make substantial 
rehabilitation of properties that may have fallen somewhat into 
disrepair. That is an issue that we will not know until 
sometime into the future.
    Mr. Weller. Of course, marketing studies are a way of 
determining long-term viability. Do you think that market study 
should consider the issue of layering to determine long-term 
viability of the project?
    Mr. Fricke. Well, again, layering is more--not so much the 
long-term viability as it is--layering goes more toward 
affordability initially. I mean, if you layer these subsidies 
initially, then you really just do not have to borrow the debt. 
Consequently, the rents basically only have to cover operating 
expenses and whatever debt that you have to borrow. So, again, 
the layering really has not a whole lot to do with the long-
term viability of the property. That is more a function, again, 
of the cash flow of the property in the outyears and the 
reserves and such that have been set aside.
    Mr. Weller. Thank you, Madam Chair. I yield back.
    Chairman Johnson [presiding]. Thank you.
    Mr. Tanner.
    Mr. Tanner. Thank you very much, Madam Chairman. Most of my 
questions have been covered, but I have one for Mr. White.
    Did you all look at the urban-rural mix of the program? And 
is it being utilized in the rural areas to the extent that it 
is constructed?
    Mr. White. It is being used in rural areas. I think we have 
found about half the units are in urban areas, about a quarter 
of the units are in suburban areas, and about a quarter of the 
units are in rural areas right now.
    Dennis, do you want to expand on that?
    Mr. Fricke. That is true. You have more than half the 
properties in rural areas, but because they tend to be smaller, 
they represent, as Jim said, only about a quarter of the units. 
Conversely, only about a third of the projects, I believe, are 
in urban areas, but because they tend to be larger, they 
constitute about half of the units.
    Mr. Tanner. So you did not find any problem with the rural 
areas being able to participate in the program?
    Mr. Fricke. No, we did not.
    Mr. Tanner. Thank you. Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chair, and I thank GAO, Mr. 
White, for your recommendations and your good study. Many of 
the recommendations, of course, are focused on more State 
requirements, and I know you have already talked to Mr. English 
and others about that. My sense is that this Subcommittee will 
probably be putting together some legislation in response to 
your recommendations, and I would hope you would work with us 
to be sure those are as streamlined as possible and we are not 
just creating more bureaucracy at the State level and more red 
tape. I know you indicated your interest in that and, in fact, 
said you already had thought about the unfunded mandate issue. 
I think when you put together these recommendations, we do have 
that point of order on the floor, among other concerns. And I 
think it is important that we not just load up more regulations 
on the State side.
    With that in mind, let me talk to you about the other side, 
which is the IRS. Mr. Coyne and I are very interested in 
looking at IRS restructuring right now on a commission, and one 
of the issues that has come up is low-income housing, how that 
is working. You have not, to my knowledge, really addressed 
that today, nor do you focus on that in your report, how the 
IRS is doing. I know we are going to hear from the IRS in a 
moment, and I am looking forward to that.
    But if you could, just tell us briefly how you think they 
have done, particularly since 1994, 1995. I understand they 
have begun to audit these programs. They have sent out over 200 
lead packages to their field offices recently about particular 
problems they have seen. But how do you think the IRS is doing 
in terms of this program? And do you have any recommendations 
for changing the relationship between the IRS and the State 
agencies?
    Mr. White. The IRS has clearly made a start in terms of 
providing oversight in this program. We have several 
recommendations, however, aimed at providing what we believe is 
sufficient information for the IRS to fulfill their role in 
ensuring compliance with the Tax Code.
    Mr. Portman. So more information will help them do that 
job?
    Mr. White. Yes. One example would be right now they do not 
have a good measure of noncompliance with the program, and 
because of that, they do not have a good ability to allocate 
their compliance resources. They need such a measure to be able 
to allocate compliance resources, obviously.
    Mr. Portman. We hear from Ohio, for instance--of course, 
Ohio's program is perfect. [Laughter.]
    But we hear, as an example, that more interaction with the 
IRS could be helpful, that there may not have been over the 
years, particularly--and, again, this may be changing 
recently--as much focus on the compliance side. Is that the 
sense you got from looking at this?
    Mr. White. I think one thing we heard from the States is 
that the IRS has been doing a better job over time in terms of 
providing some guidance to the States, and the IRS is now 
considering revising the forms on which noncompliance is 
reported to make that process somewhat easier.
    Again, we still have some concerns there about whether they 
will have adequate information.
    Mr. Portman. Because this is a tax credit, it necessarily 
involves the IRS because of the Tax Code. But do you think the 
IRS is the right entity to be, in essence, auditing this and 
monitoring what the State agencies are doing?
    Mr. White. You are raising the question, I think, of 
whether you want a housing program----
    Mr. Portman. We have section 8; we have other housing 
programs that are under HUD. And one of the issues, again, Mr. 
Coyne and I have looked at is the noncore functions of the IRS, 
whether it makes sense for an agency that has as its mission 
the collection of taxes to be focused on, whether it is child 
support or earned income tax credit or low-income housing. Do 
you have any thoughts on that?
    Mr. White. It is certainly the right question to be asking, 
one of the right questions to be asking here. We did not 
compare this program to housing programs operated by HUD, so we 
do not have a conclusion or recommendations on that point.
    Mr. Portman. And in terms of the bang for the buck we are 
getting--and I think others may have questions on this, but 
that is one of the concerns we have from a policy perspective. 
You focus more on how to administer this program and 
compliance. But apparently you did not look at other housing 
programs such as section 8. Are we getting as much bang for the 
buck through the tax credit? I think the average, I am told, 
over the life of the credit in an assisted unit is $27,300 
reduction in Federal revenues. How does that compare to other 
programs? Did you look into that at all?
    Mr. White. We did not do that comparison. One of the 
reasons that comparison is difficult to do is because there are 
very few pure credit projects out there. Most of the tax credit 
projects----
    Mr. Portman. Are mixed.
    Mr. White [continuing]. Are also getting other Federal 
housing money.
    Mr. Portman. OK. Thank you.
    Mr. Fricke. I think if I could just add to that particular 
point that Jim just made, this program, again, delivers 
basically a very new product, either through new construction 
or substantial rehabilitation. section 8 is really aimed at the 
40th percentile in terms of the rental properties in an area. 
So you really are comparing somewhat of an apple and an orange 
in terms of the benefits, the housing benefits conferred on the 
low-income household, whether they receive a section 8 or they 
move into an apartment built under this program.
    Mr. Portman. Your site visits were very helpful to look at 
toward the back of your report. I guess, Mr. Fricke, you were 
involved in that. I would love to have seen also some 
comparison to rents, market rates, that are not part of the 
low-income housing credit. As you say, it is difficult because 
of the layering and because of other programs. But we talk 
about--on page 156, the Grand Rapids, Michigan, study. It is a 
$295 a month rental, and it is just hard for us to look at that 
and know what is the rent subsidy per year on that. How does 
that compare to other rental units? You talked about rents 
going down generally. The cost per unit was $48,800. What is 
the real cost to the Federal Government in terms of the value 
of the tax credit to that?
    These are policy questions. You may not be in a position to 
answer today, but these are the bigger issues that we have to 
grapple with.
    Mr. Fricke. May I in part give you a little context? In 
this report, we talk about the average for the Nation of $453 a 
month, I think. And, again, I am going to generalize and say 
that is probably about a two-bedroom unit because that is about 
the average size in this particular program.
    In mid-1993, I believe the average fair market rent 
nationwide was about $555, so about $100 more. And I think the 
median rent for a two-bedroom unit in the country was about 
$650, about $200 more. If you take just the fair market rent 
and say that if a family were to move into a tax-credit-
supported property and receive section 8 rental assistance, as 
many families were receiving, or they moved into another market 
rate unit in the community that was renting at the fair market 
rent of $555, the government would have an additional $100 a 
month cost to subsidize that family in private rental housing.
    But the government in the tax credit unit has already sunk 
in up front $27,300 in present value cost, and there are also 
some additional costs associated with other programs that may 
have gone into the developing of that particular housing. And, 
again, having said all that, too, the benefits are different to 
the household. Again, the family--I will just say this very 
generally--is, under this program, going to receive more 
housing benefit in terms of quality housing than they generally 
will under a section 8 voucher or certificate program.
    Mr. Portman. Right, which is a whole other issue.
    Mr. Fricke. Right. It is just kind of like context, I 
think, when you start comparing programs to really consider.
    Mr. Portman. Thank you, Madam Chair.
    Chairman Johnson. I would like to follow up on that, 
though. If we know that the tax credit over a 10-year period 
costs us on average $23,000, don't we have any ability to see 
whether over that 10 years we get $27,000 of rent subsidy?
    Mr. White. You have got a couple of issues there. One is: 
for what you have built with whatever amenities it comes with, 
have you done that at a minimum cost?
    Chairman Johnson. Right.
    Mr. White. Then another issue is: Were the amenities that 
are provided with that housing proper? Are you providing too 
many amenities or not? So you have got two aspects to cost 
there.
    We have got some recommendations on the former in terms of 
providing better information to the States about the costs that 
developers actually incurred and are reporting to the States in 
their proposals.
    On the latter, on the issue of the amenities, the program, 
again, has delegated responsibility for making that decision to 
the States, and the States have made the decision to build 
under this program primarily new units, new construction rather 
than rehab. Rehab is generally cheaper than new construction, 
but part of the reason they are going with new construction is 
because of where they are locating the projects. Roughly 25 
percent of the units, again, are in suburban locations where 
there is not a lot of housing typically to rehabilitate. If you 
are going to locate housing there, it is going to necessarily 
have to be new. So the States are making some decisions about 
amenities and location that have implications for costs.
    Chairman Johnson. But, nonetheless, there are some pure tax 
credit projects. There are not a lot. But in those pure tax 
credit projects, where the credit is the sole subsidy provided 
by the taxpayers, are we getting back in rent reduction what we 
are putting in? Taking the average rent, not what the units in 
that complex would go for, because you are right, some of these 
units are associated with more amenities, considerably more 
amenities than a section 8 housing voucher would buy you. But 
ignoring that and looking at what the average rent--what the 
section 8 housing voucher would provide there--are we getting 
back $27,000 over 10 years in buydown of rent costs?
    Mr. White. It is a difficult question to answer 
definitively. Part of the reason is the way this program is 
structured, some of the risk is being transferred to these 
private investors who receive the credits. How much risk is 
being transferred is something that is not easily quantified.
    Chairman Johnson. Still, can't we just do the math on a 
pure tax credit project and see what does it cost us over 10 
years and what do we get for it?
    Mr. White. I think the problem is you have got an apples 
and oranges case, though. You are comparing a tax credit 
project where these private investors have some incentives to 
manage and monitor the project because they have assumed some 
risks. They have got money in it, and they are at risk of 
losing the credits if the project should go out of compliance 
to other projects that serve a different income level and are 
structured differently.
    Chairman Johnson. I would see the risk issue as one reason 
that we would prefer this form of allocating dollars to 
housing; we have somebody onsite who really has a vested 
interest in keeping the property up and making the project run 
right. That is one of, the checks that says you are going to 
spend your housing dollars wisely.
    But I should think that you could take a few of the 
projects that had no other subsidy involved and see what kind 
of subsidy you would have to provide for a family who is 
getting this tax credit in this unit, and what kind of subsidy 
you would have to provide for that same family under other 
housing project programs, and see what are we getting back.
    But what I hear you saying is that it is hard because the 
rent that is being asked is based on the cost of a project that 
would be normally higher than the cost of a project that a 
section 8 voucher would generally support the rent. It seems to 
me you ought to be able to say here is a pure low-income 
housing tax credit project. It is going to cost us $27,000. Is 
this person getting 27,000 dollars' worth of rent subsidy?
    Mr. Fricke. The answer to that, real simply, is no, they 
are not, but the explanation as to why they are not, part of 
what Jim said, is that the government cost being $27,300 on 
average, that part of that cost is transaction cost, the 
syndication----
    Chairman Johnson. Yes, but, see, that is not our problem.
    Mr. Fricke. Right.
    Chairman Johnson. That is their problem, in a sense. What I 
want to know is from the taxpayer's point of view, we are 
investing $27,000. Are we getting $27,000 or are we getting 
less? And what I hear you saying is we are getting less. So the 
benefit we are getting is new units.
    Mr. White. But you have got costs and benefits here. You 
have got both sides. Again, you have structured--the tax credit 
projects are structured differently than others, given our 
sample, the small number of pure tax credit units in our 
sample, and therefore, the very small number in any one market, 
we probably only got a single pure credit project for doing 
this sort of comparison, even if you thought you were comparing 
apples to apples. So we did not do that kind of comparison.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. If you would yield just for a moment, let me 
just take Mr. Fricke's numbers. And I may be missing something 
in terms of the apples to grapefruit to oranges comparison. But 
you said the average rental unit costs for about a two-bedroom 
was $453 per month.
    Mr. Fricke. In our program, the average rent for a tax 
credit unit was $453.
    Mr. Portman. OK. And the average nationally is about $555.
    Mr. Fricke. That was the fair market rent that HUD sets for 
its section 8 certificate program.
    Mr. Portman. OK. So the difference is about $100, roughly.
    Mr. Fricke. Exactly.
    Mr. Portman. Let's take that $100 over a year, and this 
gets to Mrs. Johnson's question. That is $1,200. Multiply that 
by the 15 years, $1,200 by 15 years you get about $18,000.
    Mr. Fricke. Right.
    Mr. Portman. Which is the value of the rent subsidy. It is 
a zero discount rate, just $18,000.
    Mr. Fricke. Right.
    Mr. Portman. Why can't you compare that $18,000 to that 
credit, which is $27,000--$27,300 I think is the number in your 
report. That is a big difference.
    Mr. Fricke. It is a big----
    Mr. Portman. And what you are saying--let me just try to 
characterize what you are saying, and then you can tell me 
where I am wrong. You say there are basically two differences, 
as I understand it. One is transaction costs, which, as Mrs. 
Johnson said, really is not an issue. To the extent that we are 
comparing the public subsidy costs, the taxpayer cost to this, 
it probably should not be an issue we care about. The second is 
that they tend to be newer units. It is newer housing, maybe 
nicer housing, as a result, and, therefore, that would account 
for some of the difference. But we are talking about almost a 
$10,000 difference.
    Mr. White. That is right, and part of the answer to the 
question depends on what happens over time. If the ownership 
structure of this works, it could mean that over time these 
units are better managed than they would be under an 
alternative. That is part of what you are buying with the 
money.
    Chairman Johnson. Right. What you are saying, then, is the 
public benefit is that you buy higher quality housing over a 
longer period of time. But you do not get your money back 
dollar for dollar.
    Mr. White. Well, or that you buy better managed public 
housing over time. That is part of what you are buying here.
    Chairman Johnson. Let me do a follow-on question. It does 
seem to me that if you add up the fees that are charged--the 
syndication fees, the development fees, the construction fees, 
all that--a lot of this money is going to fees. I worry about, 
you know, 47 cents of every dollar not going in a sense 
directly to housing.
    Now, I appreciate that it costs money to syndicate, but 
after all, private developers who compete with these units also 
have syndication fees. I mean, a lot of them finance their 
operations the same way. To what extent do States really look 
at the total number of fees in a project, as opposed to money 
for bricks and mortar and money for rent subsidies, to what 
extent do States really oversee that rigorously? And to what 
extent do States look at gold plating? I mean, are there 
amenities in this that are really not appropriately funded by a 
public program?
    These are hard questions, and from reading your report, I 
do not know whether we just do not have the information or 
whether there is some suggestion that it does not matter. I 
think when only 53 cents of your dollar really goes in a sense 
to the program, that is, the bricks and mortar, I am worried.
    Mr. White. We do not want to leave the impression that this 
does not matter. It clearly matters a great deal. The States 
report that they consider fees and that they have controls, 
standards that they impose on fees. One of the problems we had 
is that when they impose percentage standards on fees, 
different States impose them on different bases. So it is 
difficult to tell.
    We also did not do audits of projects so that at the 
project level we are unable to reach a conclusion about whether 
too much was going to fees or not. I mean, what you might 
imagine doing, if you could do it retroactively somehow, would 
in effect be to rebid the project and see if you can get a 
lower----
    Chairman Johnson. I was truly surprised by the series of 
fees involved--syndication fees, State fees, so on and so 
forth. When you take out all the money that goes in the way of 
fees--and some of it is profit. I mean, I think what they call 
fees in the construction area must be the construction 
company's profits. At least I hope so. I hope that is not over 
and above what we already do at 47 cents on the dollar.
    Do you have any comparison? Is 53 cents a lot? And is the 
remainder a little--for bricks and mortar and subsidies?
    Mr. Fricke. I will just try to answer that real quickly. 
The difficulty, of course, in comparing the 53 cents to the 
dollar is that 53 cents is paid in today, the dollar is a 
government cost over 10 years. So if you discount back that 
dollar over 10 years, it is basically 70 cents. And I think 
when you hear, you know, from the industry, you are going to 
hear that the 53 cents today is more like 60 or 65 cents.
    Having said that, it is still not an apple to apple 
comparison to compare 60 or 65 cents against the 70-cent 
present value cost to the government because that 60 or 65 
cents to the investors is not just for the tax credits, but it 
is for other depreciation that that property throws off.
    The industry may estimate somewhere around 80 percent of 
the pay-in of the 60 or 65 cents is attributable directly to 
the credit.
    Chairman Johnson. OK. Thank you.
    Why do the development costs vary so widely? You say in 
your report they vary from $20,000 to $160,000.
    Mr. White. This gets partly to your gold-plating question. 
Again, it gets back to the decisions that States have made 
about which projects to fund. As I said, new construction costs 
more than rehabilitated housing. Most of the projects are new 
construction. The location of the projects matters. California 
is a very high cost area. Construction in California has to 
meet seismic standards. There are underground parking 
requirements. A number of the high-cost projects in California 
are elevator buildings. Elevator buildings are higher cost 
construction, than garden-style apartment buildings.
    Chairman Johnson. And how much variance is there from State 
to State in the price of a tax credit?
    Mr. White. Again, our sample was not designed for us to be 
able to make estimates on that. There clearly are large 
differences across States. As I just indicated, California is a 
high-cost area to develop any type of housing.
    Chairman Johnson. Do you have any idea what percentage of 
the tax credits have been taken back by States or what the 
primary reasons are?
    Mr. White. We do not have one. We can check. If we have got 
it, we will get it to you.
    Chairman Johnson. Yes, I would be interested in that. I do 
not get any data that these projects are failing and the tax 
credits are being withdrawn. So if you have indication that 
that is the case, I am interested. We need to know the 
dimensions of that problem if it exists.
    Mr. White. Yes. My understanding is it has happened, but 
the magnitude right now, we do not have an answer. If we do, we 
will get it to you.
    Chairman Johnson. And your report does clearly indicate 
that the States conduct fewer site visits or even desk audits 
than their plans require. Do you have any idea why this is?
    Mr. Block. No, we do not have any idea why. It could have 
been resources. There were several States that conducted no 
visits or did no monitoring reviews at all. But we do not know 
the reason for it.
    Chairman Johnson. Did you ask?
    Mr. Block. We did not ask, but I guess we can go back and 
ask them for the information.
    Chairman Johnson. I would be curious, mostly because you 
wonder whether it is because they considered it a less troubled 
program than some of the others, or whether they just have not 
done it and should do it.
    Thank you very much for your testimony today. I appreciate 
it. I am sorry I could not be here for all the questions of my 
colleagues, but I do appreciate your good work, and I thank you 
for coming to brief the Members of this Subcommittee last week. 
That was extremely helpful in our gaining a better grasp of the 
work that you have done.
    Thank you.
    Next we will have Thomas Smith of the IRS, the Assistant 
Commissioner for Examination of the IRS.
    Mr. Smith, please proceed.

   STATEMENT OF THOMAS J. SMITH, ASSISTANT COMMISSIONER FOR 
             EXAMINATION, INTERNAL REVENUE SERVICE

    Mr. Smith. Thank you. Madam Chairman and distinguished 
Members of the Subcommittee, my name is Thomas Smith. I am the 
Assistant Commissioner for Examination of the Internal Revenue 
Service. I am pleased to be here today to discuss the low-
income housing tax credit.
    I wish to commend the General Accounting Office for its 
thorough and comprehensive study of the low-income housing 
program. The Service worked closely with GAO throughout the 
course of their study to provide the necessary information 
regarding the Service's role in administering the credit.
    My testimony today will provide a brief overview of the 
program, including existing compliance monitoring activities. I 
will also briefly discuss GAO's recommendations contained in 
their March 1997 report.
    As you know, the low-income housing credit is available to 
owners of residential rental property which incur certain 
acquisition, construction and rehabilitation costs for property 
that are rented to low-income persons. Each State is authorized 
an annual amount of credit that it allocates to buildings 
throughout the State through its local housing credit agency. 
To be valid, credits must be allocated under a qualified 
allocation plan. The plan must provide: selection criteria that 
set out housing priorities; preferences for projects serving 
the lowest income tenants and those serving tenants for the 
longest period of time; and, procedures that the agency will 
follow in monitoring compliance with the various tax credit 
requirements and for notifying the Internal Revenue Service of 
noncompliance.
    I am going to skip over a lot of the areas that may already 
have been covered by GAO regarding its decisions and try to 
concentrate mostly on our compliance activities which I think 
will be the areas of your concern.
    Chairman Johnson. Thank you, I appreciate that, because I 
am sure we will have lots of questions. Thank you.
    Mr. Smith. Since 1995, the Service has made significant 
progress in its oversight of the program. A special unit at the 
Philadelphia Service Center processes and monitors the receipts 
of the various forms filed by the State agencies. Beginning 
with 1995, filings on Form 8610, which is the Annual Low-Income 
Housing Credit Agency's Report and Form 8609, Low-Income 
Housing Credit Allocation Certification, which are due on 
February 28 of each year are being reconciled to ensure that 
States are not exceeding their current year annual credit 
ceiling.
    In 1993, State agencies began notifying the Internal 
Revenue Service of noncompliance with program requirements 
utilizing Form 8823, Low-Income Housing Credit Notice of 
Noncompliance. Prior to filing this form with the Internal 
Revenue Service, the State agency gives the taxpayer the 
opportunity to correct noncompliance. The nature and severity 
of the noncompliance may result in the disallowance or 
recapture of the tax credit that was claimed by the taxpayer.
    In November 1996, we began utilizing a new letterwriting 
system to notify building owners that the Service had been 
informed by the State agency of their noncompliance with 
certain low-income housing credit procedures and provisions. 
Form 8823 which describes the noncompliant action is reviewed 
by our tax examiners and the type of error is coded into our 
database to use in selecting the appropriate notification to 
the owner. Owners are advised that their noncompliance may 
result in an examination. Form 8823 is used by the agencies to 
also advise the Service when noncompliance no longer exists.
    The form is currently being revised, which is included in 
one of the recommendations by GAO, to incorporate a check block 
section, which should facilitate the agencies in determining 
the type of infractions and classifying those in a simpler 
format than the prior form.
    The owner claiming a low-income housing credit must include 
certain forms as part of their annual filing requirement. 
Service Center return processing, excluding those pertaining to 
flow through entities, are responsible for reviewing the forms 
when tax returns are filed. When forms are missing and the 
dollar amount of the credit is above a certain dollar 
threshold, taxpayers are contacted and their refunds could be 
reduced by the amount of the disallowed credits or balance due 
notices could be sent to taxpayers.
    Bear in mind that, tax returns claiming these credits could 
incorporate both corporations, partnership and individual tax 
returns. An exact report of taxpayers claiming the credit 
should assist us in the process of matching the credits 
allocated by State agencies to amounts claimed on forms by 
owners. We are expecting, hopefully, an accurate run of the 
system to be done in July 1997. At that point, we should be 
able to validate how well we are able to match the credit 
allocations by the States to those actually claimed on tax 
returns.
    We also have another compliance unit located in our 
Pennsylvania District Office. This compliance unit is 
responsible for training and ongoing technical support for our 
field examiners. Training began in July 1995 and was completed 
in April 1996. This unit also provides technical support to 
State agencies, property owners and practitioners to call in 
regarding taxpayer assistance questions relating to the low-
income housing credit. People who participate in our unit in 
Pennsylvania, also attend the annual conferences of the 
National Council of State Housing Agencies and work with them 
on an outreach basis in terms of educating those who are 
involved with the credit.
    We believe our outreach program has had a positive impact. 
For instance, after our initial meetings, we did experience an 
increase in the notifications to the Internal Revenue Service 
on Notices of Noncompliance that were sent to us. Fifteen 
States that had previously not supplied the necessary notices 
of noncompliance to us, did after our attendance and 
participation with the agency. So, we think the outreach 
efforts have had a positive impact.
    As concerns were raised by our own internal audit and 
subsequently by GAO about the potential owner noncompliance, an 
audit program was developed. Beginning with information 
supplied to us by the States on noncompliance through Form 
8823, we prepared 210 lead packages which have been assigned to 
our field examiners. The volume of audit closures at this point 
are relatively small and it is premature to comment on the 
overall compliance level of owners claiming the credit. 
However, early results do not suggest widespread abuse.
    However, I must caution the Subcommittee, it is not really 
prudent to make judgments until we have a significant number of 
cases that have closed out from our audit activities. It is 
entirely possible that those cases with the least problems 
could tend to close out first, and the ones with more 
subsequent problems, could be a more difficult type of 
examination to conduct. They would be closed out at a later 
time.
    In November 1995, our multiagency Low-Income Housing Credit 
Steering Committee was formed. The committee provides 
interagency coordination in the administration of the credit 
program when used with other housing programs. The committee 
includes the Department of Housing and Urban Development, the 
National Park Service, rural housing representatives, the 
National Council of State Housing Agencies and the Internal 
Revenue Service.
    Finally, in its report, the General Accounting Office makes 
certain recommendations for approving the Low-Income Housing 
Tax Credit Program through the regulatory process. Those 
recommendations will be considered as part of the regulatory 
process. Under this process, as you know, the Service would 
consult with the Treasury Department about proposing new or 
amending existing regulations with respect to those areas cited 
in the GAO report. Interested parties and stakeholders would 
have the opportunity to submit written comments on the areas 
under consideration for modification of the regulation.
    After carefully reviewing these comments, we would further 
consult with Treasury on the development of the proposed 
regulations. Any proposed regulations would provide State 
agencies and taxpayers with an additional opportunity for 
comment. Those comments would be taken into account prior to 
issuing any final regulations. This is the normal regulatory 
process that the Service would follow with the Treasury 
Department.
    That concludes my remarks and I will be happy to answer any 
questions that you may have.
    [The prepared statement follows:]

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    Chairman Johnson. Mr. Smith, in your testimony, you 
mentioned that the certifications are due February 28 and 
through that reconciliation process, you will be able to insure 
that States have not exceeded their annual credit ceiling. What 
actions can the IRS take if a State has exceeded its annual 
credit ceilings?
    Mr. Smith. We would contact the States, obviously. If the 
States exceeded the allocations to taxpayers, we would decrease 
the amount of credit allocations to the States. We have not 
experienced that happening. One State has recently brought a 
small administrative error to our attention. We are in the 
process of making an appropriate response to that State. We are 
more concerned with, obviously, what credits are passing 
through to the ultimate users of those credits and how that 
system is operating.
    Chairman Johnson. Well, it does seem that with the 
disparity between those allocated and actually used, it is 
unlikely that you will find States using more than they have a 
right to use. Are you satisfied that the IRS has the authority 
to deal with that issue by, for instance, the following year 
allocating them fewer credits for any overuse?
    Mr. Smith. Part of the discussion on the unused credits--
there are carryovers of unused credits and credits are returned 
to the Service from the States and they go into the national 
pool. Looking at the size of the national pool over time, the 
national pool has been decreasing. Last year's national pool 
was between $4 and $5 million, relatively small in relation to 
the total size of the program.
    That is not the only reason why you would have unused 
credits. The States themselves could have carryovers of their 
credits. It does suggest that most of the credits are either 
being used or carried over by the States, since they are not 
being returned for redistribution in the national pool.
    Chairman Johnson. Do you see any need to change the law to 
clarify your authority to deal with those situations?
    Mr. Smith. There may be a justification in proposing a 
change in the law to strengthen our ability to deal with that.
    Chairman Johnson. You can think about that over time, as to 
whether you really have the authority you need. It probably is 
not a problem that is large.
    Mr. Smith. Right.
    Chairman Johnson. Nonetheless, we want to be sure that the 
law does give you the ability to do that.
    The other thing that is of concern in the area of 
enforcement is, do you have enough flexibility to deal with an 
individual project where the developer has performed badly as 
opposed to penalizing the whole State program? Is there some 
way, if developers are not doing the kind of job they should be 
doing but can come back into compliance, is it wise to penalize 
the investors and then a year later, make them eligible?
    I am not familiar actually with how those penalties work, 
but I think we need to have the ability to enforce penalties so 
that we get compliance. On the other hand, you do not want the 
penalty to undermine the financial structure of the whole 
development so severely that you lose the housing.
    Mr. Smith. In our exam, when we do take a look at a project 
actually under examination, we will look at generally two 
phases. We take a look at the types of costs when we are 
actually performing an examination of a taxpayer, that are 
allocated to the housing project for credit purposes. For 
instance, syndication costs of syndicating the partnership 
itself should not be allocated to the project for credit 
purposes. We also look at the noncompliance notices that are 
supplied to us by the State. These tend to deal with 
habitation-type issues, some severe, some not as severe.
    The one area----
    Chairman Johnson. You have to deal with those habitation 
issues and not the State?
    Mr. Smith. When we are doing an examination of a taxpayer, 
when we go out actually and examine the taxpayer, we do have--
on the 210 packages that we sent out, we used notifications 
from the States of noncompliance as the basis for selecting 
those examinations. So, we do have information that there were 
noncompliance issues when we did those.
    Chairman Johnson. Does the State have the authority to 
identify noncompliance and work with that developer to regain 
compliance before notifying you?
    Mr. Smith. Yes, they do. The State is required to notify us 
between 90 and 135 days of uncovering the noncompliance. Very 
often, even though they are required to notify us of the 
noncompliance, at the time they are notifying us of the 
noncompliance, the problem has often already been satisfied 
within that period of time, because they have dealt with the 
building owner. So, many times, we will get a notification, 
which they are required to send as a noncompliance event that 
has been satisfied.
    The one area that is--and I am reading into your question a 
little bit--very important for the developers is during the 
initial year, how much of the property is, in fact, low-income 
housing. There is a provision where they can look at the one 
subsequent year. For instance, if the developer does not meet 
the requirement after that period, they cannot correct in 
subsequent years. They lose the credit totally for that 
project.
    So, it is not like in the fourth or fifth year, they can 
now meet the requirements for sufficient number, let us say, of 
low-income housing tenants and go back to the credits. That is 
a significant penalty for noncompliance in that area.
    Chairman Johnson. That is as it should be. At least, it 
appears to me that it is appropriate.
    If they meet the criteria the first year but, say, the 
fifth year are out of compliance, is anybody watching?
    Mr. Smith. Yes, we can through our examination activities. 
And the States, obviously, are getting information from the 
developers.
    Chairman Johnson. Annually?
    Mr. Smith. I do not think it is always annually.
    Chairman Johnson. Are we getting that kind of information 
annually to verify that the number of affordable units are 
being let to people of the proper income?
    Mr. Smith. The States are not required to forward to us the 
results of their monitoring plans.
    Chairman Johnson. How can you tell then?
    Mr. Smith. We can tell if we request that from the State, 
but there is not a requirement. I think that surrounds one of 
the recommendations of GAO, that they be required to forward 
the results of their monitoring plan to the Service. The 
existing regulations do not provide for that.
    Obviously, if we do institute an examination on a 
particular taxpayer, we can review that information during the 
course of the examination.
    Chairman Johnson. The cost of instituting an individual 
examination is high----
    Mr. Smith. That is correct.
    Chairman Johnson [continuing]. And if we are going to have 
a program that works, it does appear to me that you do have to 
have the ability, particularly if they are providing these 
papers every year where there are tax credits, to verify that 
the low-income unit requirements are being met.
    Mr. Smith. Most of the State monitoring plans require a 
validation of percentages, very often, of the requirements. For 
instance, the percentages of the number of people who qualify 
for low-income housing, it is not always a total validation, 
but it is true that they are not required to forward that to 
us.
    Chairman Johnson. Do you feel that the States are enforcing 
this pretty rigorously?
    Mr. Smith. I do not have any information to believe that 
they are not; I do not.
    Chairman Johnson. Do you think more site visits would be a 
good idea?
    Mr. Smith. Many of the States do site visits. Their 
monitoring plans, only one of them requires--one of the types 
of monitoring plans that they can choose requires site visits. 
We do get information on the notifications of noncompliance to 
us that indicate that site visits were made. From a standpoint 
of if more information were given to us, validated by site 
visits, from an administrative standpoint of administering the 
penalty, that certainly would be useful information. I think we 
would probably have to weigh it with how much additional burden 
we are supply----
    Chairman Johnson. Right.
    Mr. Smith [continuing]. Costs involved and so on. So, there 
is a balance there, but when you have more information being 
supplied to us regarding areas of potential noncompliance, it 
can be very useful to us in administering it, yes.
    Chairman Johnson. Thank you. Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Mr. Smith, what are the IRS' and the Treasury's plans and 
timetable for implementing the GAO's recommendations?
    Mr. Smith. We do not have a regulation project formulated 
at this point in time. So, there is not a set timetable that 
would be associated with a reg project. The recommendations 
from GAO are relatively new, as you are aware. We are certainly 
going to be working with our Chief Counsel's Office and 
Treasury in considering the regulatory changes that GAO is 
recommending. At this point, we do not have a regulation 
project.
    Mr. Coyne. Which administrative change recommended by GAO 
in their report would most improve the IRS' oversight of the 
Low-Income Housing Tax Credit Program?
    Mr. Smith. In taking a look at the administrative 
recommendations, I believe the recommendation that GAO is 
making surrounding the change in the noncompliance notification 
form is certainly a good one and one that we are pursuing. GAO 
also makes a recommendation--not one of their final, but it is 
incorporated in their report--about us utilizing a statistical 
sample or a random sample throughout the whole range of 
taxpayers who are claiming the credit to determine the level of 
compliance, as GAO mentioned before in their testimony.
    We have not done that. The way we have chosen to do it is 
to use the information we are getting from the States, based 
upon the noncompliance forms that the State supplies to us in 
selecting returns for examination. If we went with the whole 
random sample, it is certainly true that would be valid in 
projecting the results of that sample to the universe. However, 
it is also, as those of you who are familiar with TCMP know, a 
very costly endeavor when a full random sample is selected on a 
segment population of the taxpayer community.
    I wanted to--it escapes my thoughts right now. I did have 
another area in mind on an administrative change that they 
recommended. The matching of the K-1s, I wanted to comment on 
that just for a moment.
    In July, I believe, of 1995, GAO did a review of the 
Partnership Examination Program of the Internal Revenue 
Service. In that review, they made a recommendation regarding 
the matching of K-1s from a partnership return to the actual 
partner's return. We agreed with that recommendation. That 
recommendation has not been accomplished to this point. They 
also mentioned in their written testimony here that that would 
be a good idea if we could do it, and we agree with that.
    One of the difficulties we are experiencing with that is, 
we have not been able to scan that document. It is a rather 
complex document, if anybody has ever seen a K-1. What we are 
trying to rely on and what we are working on now, is about 
3,000 partnerships comprising about 75 percent of the K-1s that 
are filed with us. So, we are trying to target our efforts 
regarding mag media filing of the K-1s by those folks and then 
subsequently electronic filing by those folks, so that we are 
able to capture the bulk of the unit without doing data entry.
    Right now, we only do data entry of K-1s on approximately 
10 to 15 percent of the ones we receive. If we are able to take 
care of the 75 percent or so using mag media, we could then 
concentrate on the balance using manual methods to input them.
    So, we agree with that administrative recommendation made, 
but we are a ways from being there for other reasons. We do 
agree with it. That would be, certainly, helpful to us.
    Mr. Coyne. OK. Since July 1995, the IRS has received 
approximately 210 statements of noncompliance. Overall, were 
the violations technical, inadvertent errors or intentional 
acts to abuse the low-income housing tax credit, in your 
judgment?
    Mr. Smith. First of all, the volume of notifications we 
receive from the States are considerably in excess of the 210. 
I think what the 210 refers to, is the number of examinations 
that we initiated as a result of receiving the notifications. 
For instance, in the first 6 months of this year, we have 
received approximately 5,300 notifications from the States 
regarding noncompliance or corrections of noncompliance.
    When we look at the areas cited by the States, they run a 
full gamut of very minor areas, dealing with some minor 
habitation issues to very considerable areas, for instance, not 
receiving verification of the income of the tenants who are in 
the low-income housing project, which is a very serious one. 
Some of the minor ones dealing with faulty wiring or exposed 
pipes and things of that sort, not that they are not important 
issues, but very often, those are the types that get corrected 
prior to the expiration of the 90-day corrections period and 
the notification to us.
    Even if they are corrected, the States do send us the 
notification that the noncompliance existed. So, it does run 
the full gamut. I do not believe we will be able to really 
judge which types of notifications have been the most helpful 
to us in determining examination potential of taxpayers until 
we complete many more of the examinations we have selected 
based upon that criteria.
    Mr. Coyne. What is the status of the IRS' two-part action 
plan for the low-income housing tax credit?
    Mr. Smith. The two-part action plans are the ones that I 
mentioned. The first one was the audit activity that we 
instituted starting in mid-1995. So far, we have sent out the 
210 lead packages. At this point, 29 of those have been 
completed. As I mentioned in the written testimony, it is very 
early to make judgments based upon that.
    However, the amount of tax associated with the completed 
examinations amounts to about $340,000 of which about half of 
that is associated with the low-income housing credit. There 
were other issues on some of those examinations that, when we 
reviewed the returns, we did question.
    Projecting that as an indication of compliance or 
noncompliance until we finish many more of those examinations, 
it is just simply too premature.
    The second thing is our matching program that I mentioned. 
Hopefully when we have our runs in July 1997, as a result of 
our efforts at the Philadelphia Service Center, we will be able 
to make a judgment as to how effectively the system that we 
constructed for the matching of the credits is working.
    Mr. Coyne. Relative to the Federal Manager's Financial 
Integrity Act, will the IRS' actions over the past 2 years 
result in the low-income housing tax credit being excluded from 
the Integrity Act report as a material weakness----
    Mr. Smith. I certainly hope it will. Obviously, one of the 
things we put on as a condition for that, in reporting 
internally, to our management was having a successful way of 
doing the matching. So, hopefully, in July 1997, we will know 
how that turns out.
    The 1998 report on material weaknesses is required to be 
submitted by the Service at the end of 1998. I am certainly 
hopeful that we would be able to remove the----
    Mr. Coyne. At the end of 1998?
    Mr. Smith. Yes.
    Mr. Coyne. At the end of 1998?
    Mr. Smith. That is when that report--I am hopeful that we 
will be able to remove it as a material weakness internally, in 
our monitoring process and say we have this problem solved. The 
reporting for 1998, I believe, takes place at the end of the 
fiscal year. So, I thought your question was on that reporting 
for 1998. I am certainly hopeful that it will be off as a 
material weakness.
    Mr. Coyne. Thank you.
    Chairman Johnson. Thank you, Mr. Coyne.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chair. Thank you, Mr. Smith. 
You have a lot of expertise in this.
    Exams is the area where the low-income housing tax credit 
is really audited and where you keep track of it, I guess. 
Otherwise, you would not have all this knowledge. The Chief 
Counsel's Office handles the pooling of the credits. Who else 
is involved at the IRS? How do you organize it?
    Mr. Smith. The way we have it organized, the Chief 
Counsel's Office is responsible for reporting the pooling of 
the credit and a notice goes out twice during the year, one for 
the original allocation based upon the $1.25 of the population 
within the State, and one for any subsequent distribution of 
the national pool.
    Within my office on the Commissioner's side of the house, 
the administration of the credit falls into two principal 
areas. One is at the Service Center, involving the processing 
of the forms received from the States: the 8609s, the 8610s and 
the 8823s. Then there is also the examination area. I have 
approximately 50 examiners who were trained during 1995 and 
1996, spread throughout the country, who are handling the 
examinations. So that falls under my direct responsibility as 
the Assistant Commissioner for Examination.
    Mr. Portman. How much time are you putting in, say, as a 
percentage of your time?
    Mr. Smith. During the past week or in weeks past? 
[Laughter.]
    Mr. Portman. Certainly, during the last 24 hours, you have 
put a lot of time against it.
    Mr. Smith. Right, I have.
    Mr. Portman. Over a year's period of time, forget the 
filing season, just generally?
    Mr. Smith. Right. It is a fairly significant issue for us 
in exam, much more so----
    Mr. Portman. Twenty percent of your time?
    Mr. Smith. Oh, no, not 20 percent. I handle the entire 
examination function for the Internal Revenue Service.
    Mr. Portman. Ten percent?
    Mr. Smith. I would say maybe a little less than 5. I do not 
think there is any program I spend more than 5 percent with, 
because there are so many, including the Coordinated 
Examination Program and all the others that I know you are 
familiar with.
    I get regular briefings on what is happening regarding the 
low-income housing credit. I also am the person who has to go 
before our senior management controls because of the material 
weakness and report to the Deputy Commissioner as to the 
progress we are making in taking care of the material weakness 
that was identified. So, for those two reasons, it shows up on 
my radar screen with a fair degree of regularity.
    Mr. Portman. One specific question now, because your 
testimony was interesting in this regard. Of those 53 
examiners, you said that they were trained in Philadelphia, I 
guess at the Service Center. You indicated the training took 
place over--it sounded like a year's period of time.
    Mr. Smith. There were three training classes.
    Mr. Portman. Are we to believe that there is not ongoing 
training?
    Mr. Smith. There is ongoing support for those--I have the 
unit in the Pennsylvania District that supplies ongoing 
technical support for the examiners who were trained during 
that 1-year period. There were three training classes that were 
conducted, similar classes, different geographic locations, 
different parts of the country, but the training was the same. 
The Pennsylvania District unit that I have established there, 
not only are they responsible for assisting the States, 
practitioners and taxpayers, but also serving as a technical 
recourse for our field examiners.
    We have also issued, under our Market Segment 
Specialization Program, audit technique guidelines specifically 
geared toward the low-income housing credit issue. So, we do 
have guidelines for the examiners to follow and that is 
incorporated into the MSSP Program or the Market Segment 
Specialization Program. So, it is an ongoing type of 
educational guidance. They do not----
    Mr. Portman. This is not really on point here and I 
apologize for getting a little off track.
    Mr. Smith. That is OK.
    Mr. Portman. I would assume that you have ongoing training 
and not just guidance provided when someone has a question. If 
you have 53 people, you are bringing new people in. You are 
working people out of other areas, I assume, into exam on this 
area. It was just interesting.
    One of the criticisms that many have leveled recently on 
the training side is that it is not consistent district to 
district or even region to region and sometimes there is not an 
adequate commitment to it. I would hope that, in this area, we 
are getting lots of training. Since you are, under GAO's 
recommendations, taking on all sorts of new responsibilities, 
you are going to be delving deeper into it. You are not going 
to be just relying on the State data, it sounds like and it 
sounds like you want to do that. You are going to be matching 
the K-1s. Mr. Coyne and I are going to give you the electronic 
transfer to be able to do that more easily, right? [Laughter.]
    Mr. Portman. I think it is, one, interesting for this 
hearing to bring out the fact that this is a major project at 
the IRS and, two, question whether these kinds of resources, 
the 53 examiners, the service centers, your time, even though 
it is 5 percent or less, whether that is an appropriate program 
to be within the Service.
    I assume those examiners, particularly as you begin to 
delve more deeply, which is what I think you are suggesting is 
appropriate--certainly, GAO did--will have to become more 
expert on housing issues generally. In terms of auditing what 
the developers are doing, are they keeping to the guidelines, 
the goldplated issue that Mrs. Johnson raised earlier? Is that 
true that those examiners are going to have to develop an 
expertise and be trained on housing issues that they may or may 
not have been trained on as an examiner?
    Mr. Smith. Absolutely and that is one of the reasons we 
chose to formulate the MSSP guideline for them. Many of our 
examiners are generalists. They handle a wide range of 
businesses that they are responsible for examining. Not all 
businesses or industries have the same type of intricacies or 
methodologies of doing business and so on. The MSSP guidelines 
also incorporate the very things that you are mentioning. So, 
before they actually start the examination, they can get an 
idea of how that industry operates, how the low-income 
housing--so when they start asking questions of the taxpayer, 
they are asking questions that make sense based on other 
people's experience who developed the MSSP guideline and also--
--
    Mr. Portman. Which is going to require a lot of training 
and, to the extent that we are asking the States to do more and 
provide more information, you are going to have to have the 
analysts there to be able to analyze that information. 
Otherwise, we are just putting another unfunded mandate on the 
States that is not really useful. So, it is going to involve, I 
would guess, even more resources.
    Mr. Smith. It very well could, especially depending upon 
the results of the examinations--if we do see noncompliance in 
those areas, obviously we would be applying more resources to 
them.
    We are continuing to send out additional cases for 
examination. We just did not want to leave the impression that 
they were all sent out at the time of the training and we have 
not sent out additional cases since then. Based upon 
information that we continue to receive from the States 
regarding noncompliance, we do look at the potential for 
examination for some of those. I think most recently, we sent 
out an additional 18 cases to our field examiners to examine. 
One of the primary source documents that we used on selecting 
those cases were the notifications that we received from the 
States.
    Mr. Portman. One general question and then I will let 
others have a turn. Given all your various responsibilities as 
the Assistant Commissioner for Examinations and all the other 
areas that you get involved in, do you think that this program 
properly fits into the Internal Revenue Service or do you think 
that, particularly given the level of expertise that probably 
needs to be developed to properly audit it, it might be better 
placed in another department, at least, to do the more indepth 
analysis and examination?
    Mr. Smith. That becomes difficult because you do have the 
direct credit issue that we must handle on the tax returns. 
That is one of the primary focuses that we do handle. Is it 
appropriate for the taxpayers to be taking those credits? So, 
that portion, obviously, would have to stay with the Service.
    Mr. Portman. Right.
    Mr. Smith. If we looked at some of the other oversight--I 
am not sure if oversight is correct--but other responsibilities 
regarding the program, could they be shifted to somebody else, 
another agency, I would imagine that potential exists. We would 
have to be able to insure in considering that potential that we 
are able to segregate the tax return information----
    Mr. Portman. 6103?
    Mr. Smith. 6103, things like that, to insure that we are in 
compliance with the requirements of 6103 when we introduce 
another responsible agency into the----
    Mr. Portman. Is this something that should be outsourced to 
the private sector?
    Mr. Smith. I do not believe the examinations should be 
outsourced to the private sector, no.
    Mr. Portman. OK.
    Mr. Smith. I have not seen any data regarding outsourcing 
of examination activities. I am only personally aware of one 
that has been engaged in and, I believe, that was in Florida. 
It dealt with use in sales taxes.
    Mr. Portman. Yes.
    Mr. Smith. The information I have read there----
    Mr. Portman. It was on the audit function.
    Mr. Smith [continuing]. Did not convince me that it was 
more effective to outsource that because of the costs 
associated with it.
    Mr. Portman. I will just make the general comment that, as 
we talk about are we getting our bang for our buck with this 
program, we talked about the 9,000 or 10,000 discrepancy with 
our GAO friends. There is another cost, of course, to the 
taxpayer and to the system and to the IRS which is 
administering this. It sounds like we are heading down the road 
toward more complexity, more focus and more resources.
    Mr. Smith. There is absolutely a cost for the Service to 
administer it, no question, sir.
    Mr. Portman. Thank you, Madam Chair.
    Chairman Johnson. Thank you very much. Mr. Weller.
    Mr. Weller. Thank you, Madam Chairman. And good afternoon. 
I had just a couple of quick questions. A lot of what I was 
anxious to ask has already been covered.
    In the GAO recommendations they included some thoughts 
regarding improving compliance monitoring. And I just wanted to 
get a feel from you, do you at the Service plan to institute 
any changes to improve compliance monitoring?
    Mr. Smith. The changes that we have instituted regarding 
the processing of the State forms that we receive in our 
Philadelphia Service Center is an effort that we've 
incorporated to improve compliance monitoring. That's one that 
we have ongoing.
    If the question is referenced to the regulatory 
recommendations that GAO has mentioned, and there are three 
principal ones. Some of those involve compliance, for instance, 
requiring the States to do onsite visits and so on. As I 
mentioned, we're certainly willing to work with Treasury 
regarding those. I think we do have to balance those with how 
much burden is associated with additional regulatory 
requirements, the costs associated with that, and so on.
    The two things we're certainly--well, I don't want to 
repeat myself. With respect to the one that we've already 
started, hopefully by July 1997 we'll know the results of our 
matching with compliance efforts.
    And it will be beyond that when we know the results of the 
actual audit activities, so that we can judge on the 
effectiveness of the notification to us from the States of 
noncompliance, and how that actually translates down into 
credit disallowances or the appropriateness of the credits on 
tax returns.
    Mr. Weller. I found your conversation with Representative 
Portman very helpful, just getting a better understanding of 
how you go about doing your job. And you mentioned costs and 
burdens of improving compliance along the lines of GAO's 
recommendations.
    Can you share with us what the impact would be on the 
Service, the cost of improving compliance, or the burden, as 
you use that word?
    Mr. Smith. Well, the burden that I was referring to was the 
burden to the taxpayer or the States to comply. The costs for 
the Service surround the necessary processing cost, and the 
coverage cost from an examination standpoint.
    As you probably know, we do have certain coverage levels on 
groups of returns, whether they be corporate or individual 
returns. Hopefully the examinations that we're now conducting 
will be able to provide some information on examinations, 
although GAO is certainly correct that those results could not 
be projected to the universe. So we may know how the universe 
is performing from the standpoint of compliance with the tax 
credits.
    But we should have a much, much better idea how those 
taxpayers, where a notice of noncompliance has been received 
from the State, are performing on their tax returns relating to 
that credit.
    Mr. Weller. Finally, on the cost to your agency, do you 
feel that with the staff resources and budget that you have to 
do your job that you'd be able to improve compliance monitoring 
with the resources you currently have?
    Mr. Smith. Certainly I do not intend on removing resources 
from the program, from the examination program until we have a 
much better picture as to the compliance levels and the 
conclusion of those examinations.
    But in all fairness, as you know, the size of the 
examination activity at the Service is contracting. We have to 
make more intelligent choices as to where to apply our 
traditional enforcement resources, and attempt to apply those 
in the areas where there is the greatest noncompliance needs.
    If we are contracting, unless this program shows itself to 
be a significant area of noncompliance, obviously I would be 
shifting resources to other areas as I think is the expectation 
of our taxpayers and, I believe, the Committee also.
    So as examination contracts vis-a-vis its budgets, we do 
have to make choices on areas of where to apply them. This will 
be incorporated into those choices, and, hopefully, be well 
guided by the results to indicate what is the level of 
noncompliance or compliance.
    I don't want to just refer to it in a negative sense. 
Sometimes I do talk noncompliance, but I also want to include 
compliance levels, and make those judgments based on that.
    Mr. Weller. Thank you, Madam Chair.
    Chairman Johnson. Thank you. We'll look forward to working 
with you, Mr. Smith, in the weeks ahead to assure that we make 
certain that we get the right information at the least cost to 
everybody, both the least cost to the providers of the 
information, and the least cost to the reviewers of that 
information.
    But we do want to make sure that we get accurate and 
precise information that go to the public policy issues, 
whether or not there is compliance with the overall goals of 
the program to provide affordable housing, and whether we are 
doing that in a cost-effective manner.
    In your experience, do you believe the syndicators in this 
program are rewarded any better, more than in other programs?
    Mr. Smith. I don't have any information on which to base an 
answer.
    Chairman Johnson. Is the administration of this tax credit 
any more complicated than some of our other tax credits? And is 
this uniquely complicated?
    Mr. Smith. Well, it's certainly not a refundable credit, 
which is a----
    Chairman Johnson. A blessing. I understand.
    Mr. Smith. But from administering, obviously that's a 
choice in the law whether it's refundable. And I say that 
strictly from a standpoint of administering it. So in that 
sense, it's easier.
    It's not a simple area of the tax law. There is complexity 
involved with it.
    Chairman Johnson. But, for instance, we have education tax 
credits, we have R&D tax credits. We have a number of other 
significant credit programs in the law. Is this any more or 
less complicated than they are?
    Mr. Smith. Not in administering them, I don't believe. 
Especially as compared to a refundable.
    Chairman Johnson. Thank you very much. It's a pleasure to 
have you with us.
    Mr. Logue, the executive director of the Michigan State 
Housing Development Authority, on behalf of the National 
Council of State Housing Agencies. Welcome.

 STATEMENT OF JAMES L. LOGUE III, EXECUTIVE DIRECTOR, MICHIGAN 
 STATE HOUSING DEVELOPMENT AUTHORITY; AND PRESIDENT, NATIONAL 
               COUNCIL OF STATE HOUSING AGENCIES

    Mr. Logue. Thank you. I am Jim Logue, president of the 
National Council of State Housing Agencies, the national 
nonprofit organization which represents the 53 State agencies 
which administer the low-income housing tax credit.
    I am also executive director under Governor John Engler of 
the Michigan State Housing Development Authority. My authority 
allocates the housing credit in Michigan.
    I appreciate the opportunity to testify today on behalf of 
the States to which Congress has committed the high trust of 
administering the housing credit. We are deeply grateful for 
the support this Committee and the Congress have so 
overwhelmingly given the housing credit since Congress and 
President Reagan created it in 1986.
    The housing credit represents a remarkable approach to 
dealing with the low-income housing shortages which afflict 
almost all parts of our country. Rather than another 
traditional one-size-fits-all Washington-based program, top 
heavy with bureaucracy, Congress specified that the housing 
credit would be overseen by the Internal Revenue Service, but 
administered by the States.
    Though State-based, the housing credit is one of the most 
thoroughly regulated and tightly overseen tax provisions ever 
created. For example, housing credits are awarded only to 
developments selected by the State in accordance with a 
comprehensive housing needs plan.
    Housing credits cannot be claimed until the State has 
thoroughly reviewed the finances of the proposed development, 
carefully rationed the housing credit to the minimum amount 
needed to make the development financially feasible, and 
checked to make sure that it is completed according to the plan 
the State has approved.
    Even then, the Service can recapture housing credits from 
any property which the State finds out of compliance with 
Federal income targeting, rent restrictions, or housing quality 
standards through its required annual monitoring.
    Before Congress finally made the housing credit permanent 
in 1993, the stop-start history of the credit under a series of 
sunset deadlines discouraged many developers and investors from 
making the long-term commitments necessary for housing credit 
development.
    The bill that led to housing credit permanence had 
bipartisan support. Two-thirds or more of both Republicans and 
Democrats in Congress cosponsored the Housing Credit Permanence 
Bill.
    Eighteen months ago, Ways and Means Committee Chairman 
Archer asked the General Accounting Office to review the 
housing credit. That study took more than a year. It was a 
broad and extensive investigation, and now the results are in.
    The facts that the GAO reported about the housing credit 
clearly show that the housing credit has exceeded the goals 
Congress expected of it. Let's look at the success story that 
the GAO found.
    The average housing credit renter earns only 37 percent of 
the local median income. More than three out of every four 
housing credit renters have incomes below 50 percent of their 
area's median income.
    Average housing credit apartment rents are well below 
market rents. They average as much as 23 percent below the 
maximum rents the housing credit allows. States are giving 
preference to apartments dedicated to serving low-income 
tenants much longer than the law requires.
    Housing credit apartment development costs are reasonable. 
They average less than $60,000 per unit.
    The States have developed best practices for housing credit 
administration. They include limitations on developer and 
builder fees.
    GAO found almost no evidence of ineligible tenant incomes 
or excessive rent charges. And GAO reported that each of the 
properties it visited was in good condition and well 
maintained.
    The report showcases how this unique Federal-State 
partnership has worked to produce needed, decent, affordable 
apartments for American working families, the elderly, and 
other low-income people with special needs, such as those with 
developmental disabilities.
    We believe this success story makes clear the need to 
increase the volume limit on housing credit apartment 
production, which has not been increased since the program was 
created in 1986.
    As Congress transfers more housing responsibility to the 
States, the decade-old cap on housing credit volume is 
strangling State capacity to help millions of Americans who 
still have no decent, safe, affordable place to live.
    The ability of States to tailor their housing credit 
programs to their own needs and priorities is an essential part 
of the housing credit success story. In my own State of 
Michigan, where Governor Engler's welfare reform efforts have 
proven so successful, housing credits have been integrated into 
programs designed to help people achieve self-sufficiency. 
Housing credits have been awarded to developments from Detroit 
to Kalamazoo that deal with the problems and needs of low-
income families beyond housing.
    Madam Chairman, we pledge to you our full expertise and 
energies to help this Committee shape any changes it deems 
necessary to housing credit administration.
    Last fall, NCSHA assembled an informal housing credit 
commission, including representatives of all sectors of the 
housing credit community. The commission includes State 
allocating agencies, private homebuilders, nonprofit 
developers, housing credit syndicators, urban experts, 
accountants and attorneys. A list of its members is attached to 
my testimony.
    The Commission's purpose is to help Congress strengthen 
housing credit administration and oversight based on the five 
principles the Congress has already embedded in it. They are 
State, not Federal administration, private-sector discipline, 
targeting to low-income and area needs, assured compliance, and 
maximum practical safeguards to maintain program integrity.
    The Commission reviewed the GAO report and its 
recommendations after their release. The Commission, like NCSHA 
itself, agrees with the thrust of the four recommendations GAO 
has made regarding housing credit administration.
    We have formulated proposals to strengthen housing credit 
enforcement, oversight, and compliance monitoring which go 
beyond GAO's recommendations. I have attached to this testimony 
a copy of the letter the Commission has sent to you, Madam 
Chairman, summarizing the changes we unanimously suggest this 
Committee consider.
    The Commission's report also deals with actions the States 
and the private sector are undertaking in important areas in 
which further legislation or regulation is neither needed nor 
useful. Those changes will reduce costs and enhance the 
opportunity for smaller developers to participate more broadly 
in housing credit production.
    In addition, States pledge to continue our efforts, which 
the GAO has so often favorably cited in its report, to develop 
best practices for the States to follow in administering the 
housing credit. We believe best practice development and 
simplification of housing credit procedures are best undertaken 
by the States, working where appropriate with the private 
sector.
    The housing credit process ought not be frozen in statute 
or regulation when the States show that they can do the job 
themselves.
    In summary, Madam Chairman, State housing agencies and 
NCSHA's Housing Credit Commission are committed to work with 
Congress in developing any legislative and regulatory changes 
Congress wants to consider.
    In light of the strong bill of health the GAO report gives 
the housing credit, however, we urge that any changes be made 
only with considerable cause, deliberation and caution.
    Madam Chairman, I welcome your questions.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much. Thank you for your 
help as we've been working through this subject for the last 
year, and we appreciate your testimony today, and look forward 
to working with you as we improve this legislation.
    I was very surprised at the GAO report's data that two 
thirds of the households in Tax Code properties were one- or 
two-person households.
    Do you have an explanation for that?
    Mr. Logue. I think the information suggests that that's 
where the market is and where the need is. And certainly market 
analyses that have been performed at the State level suggest 
that one- and two-person households--and I think even national 
statistics show this--represent about 60 percent of the 
households that are low and moderate income and eligible for 
this type of a program.
    So it's not surprising that the size of units and the 
households that would be occupying them would be of that 
nature. We in Michigan typically find a lot of our developments 
are occupied by single parents with children who may be in a 
situation where their income isn't sufficient to support the 
type of housing that's otherwise available.
    Chairman Johnson. I guess I wonder whether that is really 
where the need is. I mean, we'd have to look back to the State 
plans and see where their priorities are, or whether this is 
where the market is. This is the kind of project the market 
would like to build because it's easy to manage: a combination 
of adults and older people, and then in order to qualify, a few 
families.
    So I really need to know, and I'd be interested in knowing 
whether States really don't have affordable family housing at 
the top of their priority list, or whether they do, but they 
can't get projects to come forward that are primarily family 
units.
    I mean, it's harder to run family housing. No question 
about it. It's harder to manage it. You want to manage it over 
10 years and get tax credits and so on. Is this just not a deal 
that syndicators will do?
    Mr. Logue. I don't think that's the case in general. I 
think certainly in Michigan we give highest priority to 
projects that serve larger families in our allocation system. 
So projects that come in with a number of units allocated or 
designed for large families would get a higher point score in 
that category than any other competing project.
    I think the other information we need to look at is what is 
most recently happening in the credit program with regard to 
those types of priorities. The data the GAO used is from a 
period of time, 3 to 5 years ago.
    Chairman Johnson. Right.
    Mr. Logue. And I think that you will see in many of the 
State allocation plans, which have developed over time, which 
have more definitively targeted and identified the need, have 
made efforts to give priority to projects that have larger 
families.
    Chairman Johnson. Is it fair to say, Mr. Logue, that 
actually the State plans have become more precise and targeted 
in the last 3 years?
    Mr. Logue. I don't think there's any question about it. I 
think they get better every year.
    Chairman Johnson. I think we do need better information on 
the relationship between the States' top three priorities. 
What's their top priority, their second top priority, and the 
third top priority, and what kind of units are we building in 
this program? If you would help us with that, I'd appreciate 
it.
    Mr. Logue. We'd be happy to do that.
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    Chairman Johnson. Then what is the range of application 
fees among States that developers have to pay to a State 
industry. And what does the developer get?
    Mr. Logue. Application fees, I believe, are fairly 
consistent across the country. I'll give you ours, which I 
think is fairly typical. At the start of our process, we 
charge, I think, a relatively modest $100 plus $5 per unit, and 
the maximum is $850. That's basically to do the initial review 
of the project.
    And that, I can tell you, probably does not even cover the 
costs we incur in reviewing and analyzing a project through the 
allocation process.
    Once a project has received an allocation, we generally 
stage fee payments through the final allocation process, and 
those generally are computed as a percentage of 1 year's worth 
of credit--and it's a total of 4 percent of 1 year's worth of 
credit, 2 percent at the initial, and 2 percent at the final.
    Chairman Johnson. Does that about cover your costs then for 
the follow-on parts of the application process?
    Mr. Logue. It covers the costs we have in the initial 
process of allocation. That does not cover compliance 
monitoring, long-term compliance monitoring. We charge a 
separate, one-time fee for that of $175 per credit unit.
    I am certain that will not be sufficient to cover the costs 
we will incur over the low-income occupancy required period for 
compliance monitoring. We do not look at the program as a----
    Chairman Johnson. A cash cow?
    Mr. Logue [continuing]. As a cash cow for certain. 
Especially given the level of training we are providing now at 
low or no cost to the managers and owners of our properties for 
compliance monitoring. We have flown in at our expense national 
experts on compliance monitoring to give seminars to all of the 
managers and owners of our projects, and do that on a regular 
basis.
    And I know that those costs are probably now getting in 
excess of fees we collect to administer the program.
    Chairman Johnson. That's very interesting. It's also true 
that the National Council of State Housing Agencies has made 
recommendations about developer fees and building fees and 
consultant and professional fees. And these are often exceeded.
    Do you think we need to be tougher? Do you think those need 
to be in law?
    Mr. Logue. I would suggest they do not. I think if you 
look, again, at the averages, and if you look even back at the 
cost of the overall program, the total development costs of 
projects financed with the housing credit you'll see that 
they're about $60,000.
    If you look at comparable market rental units, the National 
Home Builders projects those costs, the average cost at about 
$82,000, and interestingly, new public housing units have an 
average cost of about $83,000.
    So we're about 40 percent below market rental housing. 
We're similarly about 40 percent below newly constructed public 
housing. So in the context of overall costs, of which developer 
and builder fees are part of that cost, I would say we are 
quite in line. In fact, much more efficient in that regard in 
the question of costs which include development fees.
    Chairman Johnson. One last question. I was surprised, 
actually, that not all the State agencies required good market 
studies. We are, in my part of the country, running into a 
surplus of affordable rental housing, even to the extent where 
there is some effort to reduce public housing units.
    To what do you attribute the lack of interest in good 
market studies?
    Mr. Logue. Well, again, I think in the GAO analysis, they 
found that virtually all States perform some market analysis, 
that there was a range of ways in which States approached 
market analysis. I think virtually all States do require some 
form of market analysis, whether it is an independent, project 
specific market analysis commissioned by the agency, or the 
submission of market data by the developer which is then 
reviewed by the agency.
    Market is one of the key responsibilities allocating 
agencies believe they have to perform. And to the extent that 
there is greater need to do that or need for greater 
refinement, I think that is a concern we can address within the 
industry, within the allocating agency community.
    And I don't think there is any disagreement from any State 
agency that market analysis is a key and critical part of the 
responsibility of the allocating agency.
    Chairman Johnson. Thank you. Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. Mr. Logue, in your 
testimony you indicate that the Council generally supports the 
recommendations for improved administrative oversight of the 
program by the IRS and the States.
    What specific types of low-income housing tax credit 
information do you propose that the IRS obtain from the parties 
involved that they're not currently receiving?
    Mr. Logue. I do not believe it's a matter of the 
information that they obtain. I think it's a matter of how we 
can work more effectively and efficiently with the IRS in 
sharing some of that information.
    We have had excellent relationships with the IRS staff in 
working with this program over the 10 years it's been in 
existence. We have had some issues which they believe they 
cannot address the way we would like to because of matters of 
confidentiality for the taxpayer, which then puts us in the 
position as the parties responsible for monitoring compliance 
of the projects in our States, of often not knowing the 
outcome, for instance, of information we have sent to the IRS 
with regard to compliance problems we have identified, because 
IRS is unable to share with us the outcomes or even what 
actions they are taking.
    I think it is a process problem. If we could find a 
resolution it would be helpful in sharing information back and 
forth.
    To the extent that there is other information the IRS would 
find of value that they don't currently get, I think from the 
perspective of allocations and compliance monitoring they get 
quite a good bit of information, both in how much credit we 
allocate to a project, how much credit we allocate on an annual 
basis, statewide, and, again, compliance monitoring problems 
and issues we find.
    I think it's the communication back and forth that could be 
improved and that would improve the overall program, taking 
into account the constraints they have right now on sharing 
that information.
    Mr. Coyne. Do you have any proposals for smaller 
developments, any more information that you would want relative 
to smaller developments?
    Mr. Logue. I think smaller developments are projects we 
have to look at very carefully in any kind of administrative 
oversight reform, because they are uniquely unable to bear high 
cost compliance requirements.
    And I think States have done a good job in trying, for 
instance, in the area of cost verification, final cost 
verification, of looking at smaller projects in a different way 
than they would larger projects, recognizing they could not 
bear the cost of a $5,000 or $6,000 cost certification at the 
end of a development process. It just would be infeasible.
    A look at alternative ways to deal with smaller developers 
and developments is important so that the administrative 
burdens don't become so weighty that they can't afford to do 
it.
    Mr. Coyne. So you don't have any recommendations that the 
IRS should independently verify any information?
    Mr. Logue. No. I would recommend that there are certain 
things that States, as contained in the GAO report, could have 
more formal cause verification procedures for, and that the 
appropriate place for that process would be at the State level.
    Mr. Coyne. What do States contribute to this program 
relative to the Federal Government? That's the first part of 
the question, and could you tell us what your agency's budget 
is for selection and compliance of credit projects, less the 
fees you take in related to project applications and the title?
    Mr. Logue. Let me try and start with the first part of the 
question, what the agencies contribute to the Federal process. 
I think, again, as I noted in my comments, this is a unique 
Federal-State relationship. When you consider that the staff--
and I used to work at HUD in Washington, so I'm familiar with 
the Federal housing bureaucracy. When you look at the level of 
administrative support for HUD housing programs, and look then 
at Federal oversight of this program, you're really talking 
about the IRS in the context of the Federal involvement in the 
process--which I think is a positive attribute of the program.
    The States have the primary responsibility for carrying out 
the allocation and administration of the process with IRS 
oversight and IRS ability to enforce sanctions when compliance 
with the tax credit requirements is not followed.
    I think States are able since the resources are used 
locally to meet local State needs, it is a much more 
effectively used resource as a result of that. It's closer to 
meeting the needs in the State and in the various localities 
within the State.
    So I think overall, from any which way you looked at it, 
it's a much more effective and efficient way to handle Federal 
programs than what we might consider the common or typical 
process of Federal management and bureaucracy.
    I think the States add a tremendous amount to it, and I 
think as the GAO report shows, States have taken the role 
they've been given very seriously, and while I'm a firm 
believer in continuous improvement in every program--we can 
certainly continue to improve this program overall--I think 
we've found this to be a very effective and efficient and well 
regulated and overseen program.
    Now, the second part dealing with the costs to my agency?
    Mr. Coyne. Yes.
    Mr. Logue. As I said, we do charge what amounts to about--
for any project that receives credit allocation, an amount 
equal to about 4 percent of 1 year's credit for that project.
    With that, we have a staff in my agency of about ten people 
who work specifically on the housing credit program. Some of 
them deal with compliance monitoring. Others oversee the 
allocation process.
    We do our site visits through that office. On the basis of 
the revenue we take in, and, again, this does not include 
compliance monitoring, but the revenue we take in through the 
fees versus our overhead and direct costs, we are at about 
break even.
    The total amount? I will get you the specific figures. I 
want to say it's probably in the vicinity of about $350,000 a 
year.
    Mr. Logue. But that includes costs you wouldn't normally 
consider, for instance, in a normal administrative process. We, 
through, for instance, our qualified allocation plan, we must 
hold public hearings every time we change the plan.
    The cost of just publishing the notices for a public 
hearing can run into the $5,000 or $6,000 or $7,000 range, and 
that's a regular, ongoing cost we have.
    But I can assure you, we are just about, on the allocation 
side, at about break even.
    Mr. Coyne. You had put ten additional recommendations in 
the back of your testimony. And one of them was increasing the 
$1.25 per capital cap, which started at the beginning of the 
program. Do you have any idea what an appropriate cap would be, 
or would you like to say what an appropriate cap would be?
    Mr. Logue. I would probably rather defer that. I don't 
think we as an organization have come up with a specific 
recommendation on what an appropriate cap should be. And we are 
cognizant that that is really not the topic for your 
consideration at this point.
    But we do propose that the cap, just through inflation, has 
been eroded over time, 10 years' worth of time, and that its 
value today is not what it was 10 years ago, and that as other 
aspects of the Tax Code are indexed for inflation, indexing the 
tax credit for inflation or some other mechanism for 
recognizing its eroding value over time would be probably a 
place to start.
    Mr. Coyne. Thank you very much.
    Chairman Johnson. Thank you. Mr. Portman has yielded to Mr. 
Hulshof, who must leave.
    Mr. Hulshof. Thank you, Madam Chairman. Thank you, Mr. 
Portman.
    Mr. Logue, I think each one of us could probably supply 
some anecdotal evidence of onsite visits that we've done. I've 
certainly been extraordinarily impressed with some of the low-
income housing developments that have worked, I believe, in the 
Ninth Congressional District of Missouri.
    It seems that we have a lot of single-parent families with 
children, and some of the amenities that were talked about with 
GAO, some of those amenities often provide additional safety 
features and things like that.
    So I've been impressed. But I do have a couple of 
questions. Earlier with the GAO panel I did ask this question, 
and I know you were here, and I would like to ask your comment 
as well.
    Mr. White talked about the discretion that has been 
provided to the States, and while they don't talk about an 
abuse of discretion, he did indicate in his testimony, the lack 
of documentation, and that this might be a way to close a 
loophole, if you will.
    What comments would you have to that recommended by GAO?
    Mr. Logue. We would concur with the position that 
discretion should be used only in a way that is consistent with 
the plan. Discretion is typically the ability for an allocating 
agency to have some discretion in decisions. It should be a 
formal part of the plan subject to public comment.
    We believe that the exercise of any discretion, and, in 
fact, we recommend, our Commission recommends, that 
discretionary practices on the part of allocating agencies 
should be a matter available to the public, that there be clear 
reasons and rationales for the exercise of such discretion, and 
that it should be done in the full light of an open process.
    But we do believe that discretion is a vital component to 
have in our process. It is a complicated program. It is an 
evolving program. The needs of each State evolve from year to 
year.
    So the ability to assure that we, for administrative 
straightjacket reasons, are not able to make good and 
appropriate decisions on specific cases that are meritorious 
would be a harm to the program.
    Mr. Hulshof. I agree that a one-size-fits-all probably is 
not the direction in which we want to go. The last question 
with an accompanying comment, in that same earlier panel, Mr. 
Tanner inquired about the affordability of low-income housing 
in rural area across the country.
    And I note that in your recommendations as far as 
strengthening the enforcement mechanisms, what I am about to 
ask you about wasn't in there. So I preface my question with 
that. I think perhaps you know Mr. Gross, Richard Gross from 
our State.
    Mr. Logue. He's a close friend and a great director.
    Mr. Hulshof. And I think that he also provided you in 
advance a copy of a letter that he sent to me. There is a 
perceived problem, and I'd like to get your comment as 
president of the association, that the low-income housing tax 
credit is unable to assist in the development of affordable 
housing in many rural communities, not only in Missouri, but 
nationally, says Mr. Gross, because median incomes in rural 
counties and the corresponding rents are too low financially to 
support a development.
    And he suggests that perhaps statutory changes should be 
made to the program to allow housing finance agencies to use a 
statewide average median family income as opposed to a rural 
median family income, which in the State of Missouri's 
instance, I think, goes from about approximately $32,000 is the 
rural median income to almost $42,000 for the statewide, which 
is a $10,000 difference.
    Do you have, as president of the association, a 
recommendation regarding that problem and possible solution?
    Mr. Logue. We have discussed this with our tax credit 
commission, and I think even though it wasn't quite in line 
with the specific issues we were addressing here today, it was 
discussed, and I think that it's safe to say that there is a 
general recognition of the problem, particularly in those 
States that have rural areas that present the same problem that 
Missouri has.
    And I think we would be very supportive of any changes that 
would accommodate that particular problem in a legislative 
format.
    Mr. Hulshof. OK. Thank you, Madam Chairman.
    Chairman Johnson. Thank you.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chairman. Mr. Logue, thanks 
for all your comments. I had to miss some of your testimony. I 
apologize for that, but I've been looking through it, and 
certainly can't argue with the general principles of your 
group, that you now are president of the council and also your 
commission's work has been very helpful, as we work through 
this. I know you're going to work with us, if there's an 
appropriate legislative response, and certainly on the 
regulatory side.
    You also were at HUD, as Deputy Assistant Secretary, I saw, 
in the Bush administration, so you've seen other Federal 
programs in the housing area. So I've got to give you a chance 
to respond to what GAO probably didn't respond to in a way that 
was satisfactory to you, because they were focused more on the 
compliance issues.
    And that is how do you justify the cost differential, just 
that little calculation I did, which simply relates to the GAO 
numbers of a $453 per month average rent under the program, 
versus $555 per month, figuring that out over a year period of 
time, multiplying it by the 15-year period, and you get about 
an $18,000 value of the rent subsidy. And that's a zero 
discount rate, just $18,000.
    And then the credit, the average credit subsidy, and we 
know it can go far higher, and sometimes lower, but the average 
credit subsidy is $27,300. GAO gives a couple of thoughts. They 
said that it was difficult to compare because of the 
overlapping programs, which I suppose there's some legitimacy 
to that. But we're really focused on this program today.
    And if there are other subsidies, maybe it even exacerbates 
the disparity. They talked about transaction costs, which is 
fine. But again, that shouldn't be our concern. And you've 
talked, in response to Mr. Coyne's questions about the 
transaction costs. And you've said that your fees, for example, 
don't even cover your costs on the application side. You said 
you about break even on the fees here.
    Then they mentioned that public housing that was done under 
the credit they thought was better managed, and, finally, that 
it tends to be newer construction. What can you add to that? I 
know you feel strongly, you're a big booster of the program.
    Mr. Logue. Certainly if the question is, is the Federal 
Government getting value out of the tax credit, I would say 
unequivocally yes. Because the value can't only be determined 
in comparing what is effectively a new construction capital 
program, which the tax credit is, to a program such as section 
8 vouchers and certificates, which is a rental subsidy program, 
which doesn't really attack at all the problem that the tax 
credit was primarily targeted for, the development of new, 
affordable rental units in areas where affordable rental units 
are needed, and do not now exist.
    So we've got to start off with the premise that these are, 
again, looking at the only other comparable rental assistance 
program out there today, which is the section 8 voucher and 
certificate program, meeting different needs.
    Mr. Portman. Take off your HUD parameters, and just look at 
it in terms of the perfect world. Because this is a rare 
opportunity here. We have this report. This Subcommittee is 
going to look at the whole program and come up with the blue 
sky solution. I mean, take that $9,000, $10,000.
    And you talk a lot in here about giving it to the States 
rather than the Feds, and all the red tape and bureaucracy. I'm 
very interested in that approach. I think the private-sector 
discipline is great, the targeting and all that.
    But to the extent there is a big subsidy here that exceeds 
perhaps some of the other Federal programs even, if you compare 
it to section 8 or public housing construction, then why not 
give that money either to the individuals or to the States? Why 
connect it to the tax credit, through the developers through 
the fees? Why not, if we can get more bang for the buck by 
giving you the money directly, as we do in so many other 
Federal programs now, let you go out and decide what your needs 
are in your communities. Hopefully you would then put it down 
to the community level in Detroit and other places.
    Mr. Logue. Which we do.
    Mr. Portman. But why not go that route?
    Mr. Logue. I think we have to start with the underlying 
premise, and I think the example you used, looking at the 
credit and the cost to the program over a 10- or 15-year 
period.
    Mr. Portman. Fifteen-year period we used.
    Mr. Logue. That may be I think the appropriate thing to 
look at as far as the tax credit is concerned, is the real 
extended--the low-income use for that project, which nearly 
always is at least 30 years now, and in States like California 
is 55 years. And that has not put any damper on the demand for 
the credit.
     So from the perspective of the initial premise, I would 
suggest----
    Mr. Portman. The 15-year period is not----
    Mr. Logue. The 15-year period is not the appropriate 
period.
    Mr. Portman. Not a fair period.
    Mr. Logue. I would say not, because all of our projects now 
are at least 30 years, and many are much longer than that, as 
far as how much affordability commitment they've given for 
their project.
    Mr. Portman. Do you feel comfortable with regard to 
Michigan's programs, that 30 years will not require additional 
subsidies?
    Mr. Logue. I would be, I think, irresponsible to say that I 
know what's going to happen in 30 years with all these 
developments, but I am comfortable with what we know now about 
the properties we have financed with the tax credit.
    They are quality projects. You talked about some of the 
other virtues that we might look at or compare, like just 
giving the State the funding as opposed to maybe involving the 
private sector. We would engage the private development 
community with whatever resources we had much like we do with 
the tax credit to develop that housing.
    We believe private ownership of housing provides a better 
product, particularly rental housing. We've seen that time and 
time again in comparing other Federal programs, particularly 
public housing to programs like the tax credit.
    The private-sector discipline, combined with the 
enforcement ability that we have by virtue of this being a 
program administered by the IRS or overseen by the IRS, 
presents a very powerful way of making sure that the proper 
incentives are there to keep the developers who get the benefit 
of a tax credit interested and involved in the long-term 
operator and ownership of these developments.
    I wish when I was at HUD--when I got to HUD we were dealing 
with things like the coinsurance problem, which was a 
disastrous program that cost the Federal Government millions of 
dollars which essentially allowed private-sector individuals to 
use the Federal insurance authority to do deals, and then 
essentially walk away scot-free--we had the enforcement 
authority the IRS has over the housing credit.
    You don't have that in the tax credit. Nobody who is 
investing in a tax credit project is going to walk away if they 
are not in compliance with the program parameters. I wish I had 
the enforcement of the IRS when I was at HUD that the tax 
credit program has.
    Mr. Portman. So you like running it through the Tax Code 
because basically businesses are going to comply with the IRS?
    Mr. Logue. I think so.
    Mr. Portman. We use the Tax Code for this and so many other 
things because this is primarily a business issue.
    Mr. Logue. It certainly is.
    Mr. Portman. Because the passive loss rules for individuals 
really aren't that involved in that.
    Mr. Logue. Right.
    Mr. Portman. And businesses comply for the most part, 
because they're larger businesses.
    Mr. Logue. We have found the industry's interest in 
assuring compliance, that is, the syndicators and the other 
investors in these projects, in the tax credits, to be very 
helpful. So it's a reciprocal relationship. They're concerned. 
They have their own due diligence and review process to make 
sure that their investors are protected.
    We have an independent yet comparable responsibility for 
making sure as allocators that the properties are well 
maintained and in compliance with the Tax Code. So you've got 
without any Federal bureaucracy structured around it a very 
powerful enforcement mechanism for properties that are financed 
by this.
    That's why I have a lot of confidence in the long-term for 
this program, and I think that's why the GAO study has come out 
with really a consistently well performing program.
    Mr. Portman. A recommendation for more bureaucracy.
    Mr. Logue. Well, I think----
    Mr. Portman. Well, we just heard from the IRS, they're 
going to need to get more examiners up to speed, and have more 
information coming in, more analysis, more matching of K-1s.
    Mr. Logue. Yes. Can't argue with that.
    Mr. Portman. That's cost to the taxpayer, and it's more 
bureaucracy, and it's in an area where we've already got a lot 
of growth.
    Anyway, we've probably spent too much time on the blue sky 
stuff, and I know you're a big booster of the program, and I 
think you make a lot of good points. But it is an interesting 
opportunity for us, although the credit is permanent, to look 
at does this really make sense, or would it be better to come 
up with a program that meets all the criteria that you lay out 
in terms of using the private sector, the nonprofit sector, 
States rights and having State flexibility and so on.
    Why do it through the Tax Code? Does that make any sense? 
And, of course, this Subcommittee would lose jurisdiction. I 
guess that's one bad part about it. [Laughter.]
    But coming down to Earth for a second, because you 
mentioned something that interested me in terms of the 
administrative costs. You said on some of the smaller projects 
there might be an argument to have fewer administrative 
burdens.
    Do you have a recommendation in that regard? I think you 
said there's a $5,000 to $6,000 cost, typically, associated, 
and maybe for a smaller project there should be some carve-out, 
or special provisions. How would you go about that?
    Mr. Logue. Well, that really gets to one of the GAO 
recommendations. It gets to sources and uses verification, 
which really is making sure that the costs that the developer 
represents to the allocating agency are, in fact, real costs, 
both in the application process and in the completion process.
    So that, in fact, what the developer submits to the 
allocating agency really reflects the true costs and they're 
not padding costs or adding costs that really are not there to 
get more credit.
    We concur with that specific recommendation in principle, 
that the GAO has made, in that independent cost verification 
should be required for sources and uses of funds.
    And in the case of smaller projects, we only note that when 
you get to projects--we have projects literally of one unit in 
our State and I know other States do--and we're probably 
talking of projects of one to 25 units in size--there are 
alternative ways of, for instance, certifying costs at the 
completion of construction to what would be considered in the 
industry a formal cost certification, which would still provide 
a review, but wouldn't require the developer to pay again the 
$5,000 or $6,000 cost of a formal cost certification.
    There are other mechanisms. We think we have some. We'd 
like to explore the opportunity for others that would provide 
us the comfort level we need to make sure we're making good 
allocation decisions, and yet not overburdening the small 
developer.
    Mr. Portman. Thank you.
    Chairman Johnson. Thank you, Mr. Logue. We've talked to 
people who are going to testify at the next hearing. We aren't 
limiting ourselves just to the review of the current program, 
which was the task of GAO. We are interested in how one would 
go about making this a more powerful program, and adjusting it 
so that smaller developers could take part, allow rural 
companies to do some of the building in their own hometowns, 
which I think often isn't the case now.
    So any ideas you have to help us with that, any changes you 
think we should make in the law, or that we should suggest in 
the regulations to be able to have the program deal more 
effectively with small developers would be appreciated.
    I just want to ask you two things in closing. Why doesn't 
this program rehab urban housing?
    Mr. Logue. Well, that's an interesting question, and I 
think the GAO responded to that in one way. I would respond to 
it another way. They basically said that rehab costs less than 
new construction.
    I can tell you, being in housing development for almost 20 
years, that is the exception rather than the rule. 
Rehabilitation, particularly in urban centers, other than those 
with unusually high intrinsic property values, like New York or 
maybe Los Angeles or San Francisco, the cost of 
rehabilitation--particularly in a State like mine, Michigan, 
where the housing costs are relatively low when compared to 
national averages--the costs of rehabilitation often in our 
experience is often much greater than new construction.
    You also often end up with, in rehabilitation, if it was 
originally not a residential structure, but you're converting, 
say, a warehouse or some other industrial facility or a school, 
just staggering costs, particularly when you don't know what 
you're getting into, and you never know completely until you 
actually start construction or rehabilitation of a facility.
    Chairman Johnson. I'd like you and your membership to give 
a little more consideration to this. I was just at the 
unveiling yesterday of a rehab project in Hartford, 
Connecticut, and what was different about it as you walked 
through was the flexibility. They could make a little nicety 
here, a little nicety there that developed character in a way 
that is normally not possible under appropriated housing rehab 
programs or housing construction programs, and really tailor 
the housing to the needs of the community, at the same time 
reclaiming in a very dramatic way most of a couple block area.
    So it does distress me that so little of this money is used 
for rehab. I was born and raised in Chicago. When you drive 
around the neighborhoods of Chicago, what we have to do is 
rehab.
    So I would appreciate any thoughts you have on that in the 
time ahead. Also why is it that it costs $83,000 on average to 
build public housing units and $60,000 to build units under the 
tax credit program?
    Those are quite startling averages that you gave us.
    Mr. Logue. Actually they were interesting to me. I do not 
know the----
    Chairman Johnson. Where do they come from?
    Mr. Logue. Well, the public housing figures came from HUD. 
They came from HUD. Those are HUD's own figures.
    Chairman Johnson. The LIHTC is from the GAO report?
    Mr. Logue. From the GAO study.
    On the question of rehab, just getting back to that for a 
minute, 40 percent of the units financed with the tax credit in 
1996 were rehabs.
    Chairman Johnson. OK. I missed that. We've had a lot of 
testimony today saying new construction, new construction.
    Mr. Logue. And that was for last year.
    Chairman Johnson. That was for last year?
    Mr. Logue. Yes.
    Chairman Johnson. OK. Well, we'll try to get more 
information about what type of rehabs those were.
    Mr. Logue. Sure. We'd be happy to work with you on that.
    Chairman Johnson. But, you know, the GAO said most were new 
construction. Did they only mean 60 percent? OK. Thanks. I 
appreciate that.
    And then on the $82,000 versus $60,000?
    Mr. Logue. I would say that I would only be speculating as 
to why the public housing costs were what they are. Certainly I 
would know most public housing units are located, and the type 
of reconfiguration required in these mostly urban areas with 
probably higher labor costs than you would find in nonurban 
areas. That probably accounts for some of it.
    I don't know if there are other issues that they have to 
contend with in those sites, such as environmental issues that 
you might find in urban areas that might have to be dealt with.
    Chairman Johnson. Yes. You really are fishing. I think 
maybe Davis-Bacon might be a significant factor, as well.
    Mr. Logue. I would imagine it would.
    Chairman Johnson. It's hard to believe 20 percent. And I 
think we need to know that.
    Let me just say in conclusion that I appreciate your 
testimony. As you think about the discussions you've heard 
today, I think we're all in agreement that we like a lot of 
what we see in the Low-Income Housing Tax Credit Program, and 
that we want to respond to some of the information that GAO has 
developed.
    But we also want to look at in what ways could this program 
be strengthened and broadened. So any ideas that you have, we 
do actually believe in the blue sky approach.
    Mr. Logue. Well, we appreciate that comment, and you have 
my full assurance and ours that we will work with you on all 
those. And we have ideas, some of which we've included in our 
letter to you from the Commission.
    And we're very happy to work with you on any form of 
improvement.
    There was one point that the GAO made that if I had just a 
minute, maybe I could help clarify, as far as the so-called 
lost credit that I think was discussed when GAO was here, or 
unaccounted for credit.
    The years that they looked at in their study, particularly 
1992-1993, were quite unique and anomalous years for the tax 
credit program. That was a period of time when the credit was 
only available for 6 months of the year. It was a very strange 
year, because it was sunsetted--the authority for the credit to 
be allocated. It was an odd year.
    And the demand in that year--that's the year I think that 
probably accounted for some of this return credit.
    Chairman Johnson. That's a very good comment, and very 
relevant. If you run a program only periodically, you get 
periodic data.
    Mr. Logue. And the other point is that last year, 1996, 
only $46 million of credit was returned. That's less than half 
of what was unaccounted for in 1992.
    And I think it's important to note that there will always 
be some credit returned each year because credit agencies have 
the responsibility for making sure no more than is necessary 
goes into each credit project.
    And if the State agencies are doing their job, they are 
going to reduce the credit from what it was originally 
allocated for, because they would review the actual costs and 
reduce the credit.
    So if you saw a situation where there was not credit 
returned, I would be concerned.
    Chairman Johnson. But what I hear you saying is that the 
implication that the program is underutilized really reflects a 
lack of authorization during some months of one of the years 
considered?
    Mr. Logue. I believe, and I think if we could work in 
getting to the bottom of that, and find out that was probably a 
major reason for the relatively high amount that was 
unaccounted for.
    Chairman Johnson. Thank you very much for your 
participation. I appreciate it.
    Mr. Logue. Thank you.
    Chairman Johnson. The Subcommittee is adjourned.
    [Whereupon, at 4:25 p.m., the hearing was adjourned.]


                     LOW-INCOME HOUSING TAX CREDIT

                              ----------                              


                         THURSDAY, MAY 1, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:25 a.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    Chairman Johnson. The hearing will come to order.
    I regret that we are getting a little bit later start 
because of the vote, but we will call the hearing to order.
    It has been said that a taxpayer is someone who works for 
the government without having to take a civil service 
examination. As the Ways and Means Subcommittee on Oversight, 
it is our job to help make sure that tax dollars, or in the 
case of the low-income housing tax credit, which is revenue 
foregone, accomplish the goals established by the Congress.
    This morning, we begin our second hearing on the 
administration of the low-income housing tax credit, the 
largest Federal program to stimulate the production of housing 
for low-income households.
    Last week, we received testimony from the U.S. General 
Accounting Office about its study of the administration and 
operation of the credit. We also heard from the Internal 
Revenue Service and the National Council of State Housing 
Agencies, and learned that the credit has helped finance the 
construction and rehabilitation of a significant amount of 
housing for low-income Americans.
    But we also learned that there are several opportunities to 
improve the administration of the credit.
    Today, we will be hearing from two of our colleagues, Mr. 
Metcalf and Mr. Rangel. Mr. Rangel of course is our Committee's 
Ranking Democrat, and is one of the leading proponents of the 
low-income housing tax credit.
    Mr. Metcalf will appear on behalf of the Republican Housing 
Opportunity Caucus.
    We will also hear from a number of stakeholders, men and 
women who work with the credit, day in and day out.
    As I mentioned last week, the GAO has given us a good 
starting point. But I am looking forward to suggestions that 
our witnesses may offer today about how to strengthen 
enforcement and compliance, and to how better utilize this 
valuable program.
    Because we have a number of witnesses today, it will be 
necessary to adhere to the 5-minute rule, and I would like to 
begin by recognizing our Ranking Member, Representative Coyne 
of Pennsylvania.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Over the next several hours, the Oversight Subcommittee 
will have the opportunity to hear from those committed to 
ensuring that the low-income housing credit works effectively 
and efficiently as intended by the Congress.
    The housing credit is the country's premier program for 
developing and providing affordable housing to millions of 
individuals and families. As confirmed by the U.S. General 
Accounting Office in its report to the Subcommittee last month, 
the housing credit has been utilized in most impressive ways, 
and has an outstanding track record of compliance.
    Today's hearing will provide the Subcommittee with the 
perspectives of those critical to the continued success of the 
housing credit.
    I look forward to the testimony here today and suggestions 
for improving oversight of the program, and particularly to 
hear from our Ranking Member, Mr. Rangel, and our colleague, 
Mr. Metcalf.
    Thank you, Madam Chairman.
    Chairman Johnson. Are there any other statements Members 
would like to make?
    Mr. Weller.
    Mr. Weller. Thank you, Madam Chairman.
    First, I want to applaud you for holding these hearings to 
examine the GAO study of the Low-Income Housing Tax Credit 
Program. I appreciate the leadership you have given in the past 
as well as with these hearings in regard to improving this tax 
credit program.
    I look forward to working with you to develop solutions 
that will strengthen the successful public/private partnership 
that is a model program for all Federal programs.
    As a fellow Member of the Republican Housing Opportunity 
Caucus, Madam Chairwoman, you know what a vital role the tax 
credit program plays in meeting our needs for affordable 
housing.
    Ninety-five percent of the affordable housing being built 
today is dependent upon this tax credit. The construction of 
70,000 to 100,000 new affordable units result directly from use 
of the credit.
    Additionally, the credit program provides a critical 
incentive for private investment and rehabilitation of over 
50,000 rental units, annually.
    As a result of its successes, the integrity of the tax 
credit program must be protected. True, we must continue to 
exercise diligent oversight to ensure that the taxpayers' 
investment is protected. But I cannot say this in strong enough 
words. I believe that we must maintain the tax credit's 
permanent nature. We can review and improve the program without 
calling into question the Federal Government's commitment to 
foster the development of affordable housing across the Nation.
    Without the backing of the Federal Government, the 
investment pool which provides the capital to develop 
affordable housing will dry up. Our witnesses today can attest 
to that. They were on the frontlines the last time there was a 
threat on the credit's permanence, and I look forward to their 
testimony on the importance of the credit to the development of 
affordable housing and the effect of losing permanence in the 
efforts to raise capital from private investors.
    Thank you, Madam Chairwoman.
    Chairman Johnson. Thank you.
    Mr. Metcalf, would you please come forward. Mr. Rangel will 
join us in a moment. As Ranking Democrat on the Committee, he 
is visiting with the President.
    Mr. Metcalf.

 STATEMENT OF HON. JACK METCALF, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WASHINGTON

    Mr. Metcalf. Thank you very much, Madam Chairwoman.
    I would like to thank you for the opportunity to testify 
before the Oversight Subcommittee.
    Since this is a synopsis of my written testimony, I ask 
permission that my written testimony be entered in the record.
    Chairman Johnson. So ordered, Mr. Metcalf.
    Mr. Metcalf. As Chairman of the Republican Housing 
Opportunity Caucus, the RHOC, I want to express support for the 
low-income housing tax credit. The mission of our Caucus is to 
give Members of Congress interested in housing policies an 
opportunity to discuss their concerns, get all the new ideas 
possible, and coordinate a response.
    The RHOC is committed to identifying alternative and 
innovative solutions to housing needs by promoting policies 
that encourage the construction, rehabilitation and 
preservation of affordable housing.
    Additionally, we are committed to increasing home 
ownership, especially for first-time buyers, expanding local 
flexibility and fostering greater personal responsibility.
    Over the past 3 years, I have visited housing projects 
financed by the tax credit. Two years ago, I attended the grand 
reopening of Whispering Pines, a 240 unit apartment complex in 
Lynnwood, Washington, just outside my district, which had 
fallen into complete disrepair.
    Prior to rehabilitation with the tax credit, Whispering 
Pines was the community center for drug trafficking, and it was 
nearly abandoned.
    Today, it provides affordable housing to low-income 
families. The transformation of Whispering Pines from a 
neighborhood of crime to a neighborhood for families could only 
be possible through the private financing that the low-income 
housing tax credit encourages.
    The tax credit does not just provide a roof over your head, 
but a place you can call home, a place of your own. We can 
restore hope in inner cities and rural areas by rebuilding 
communities in need of an infusion of private financing. We can 
achieve this goal, not with yet another Federal program 
operated in Washington, DC, but with a private/public 
partnership with local communities, developers, and investors.
    We can achieve this goal, not with Federal mandates, but 
with flexibility at the local level.
    As this Subcommittee begins reviewing ways to improve the 
tax credit, I would like to make a few recommendations. First, 
we need to preserve the permanency of the program. I cannot 
stress the importance of the role that permanency plays in 
attracting private investors. Returning to a stop/start status 
to which the tax credit was subjected before 1993 will disrupt 
the program just when it is reaching peak efficiency.
    Investors are much more willing to invest capital and 
resources, if they are assured that the tax credit's long-term 
status will not change.
    In fact this competition for tax dollars has generated 28 
percent more equity now than before permanency. That is, 
investors are paying more for tax credit dollars, which 
increases the total number of affordable housing units 
available in our communities.
    Even with a tax credit cap, which has not been indexed for 
inflation since its inception, the demand for tax credit 
dollars has increased as a direct result of permanency.
    Second, we need to improve administrative oversight and 
compliance of the tax credit while retaining as much 
flexibility as possible. We need better oversight. But too much 
oversight will hinder the effectiveness of the program.
    Third, we need to assure that small developers as well as 
large developers have access to tax credits. With increased 
competition for tax credit dollars, small developers may not be 
able to compete with larger developers who have adequate staff 
and resources to understand the intricacies of the tax credit 
program.
    Additionally, we need to encourage construction of small 
projects. As you know, small projects of 20 or less require 
substantially higher equity to compensate for the loss of 
economies of scale associated with these properties.
    This problem is further exacerbated in rural and inner-city 
areas whose household incomes are low, which results in 
extremely low tax credit rents.
    Last, I believe we need to require a market study before 
constructing a project. The purpose of this market study is to 
determine the feasibility of a proposed project at a location 
specific, and in a market, and the viability of the project 
after the tax credit expires.
    In conclusion, I want to offer the Housing Opportunities 
Caucus assistance in helping this Subcommittee find ways to 
improve the tax credit. Again, I thank you for this opportunity 
to speak before the Subcommittee.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Mr. Metcalf, and 
welcome, Mr. Rangel. You have been a long and strong advocate 
of the low-income housing tax credit for all the years you have 
been on this Committee, and I welcome you as our Ranking 
Democrat to our Subcommittee hearing.

   STATEMENT OF HON. CHARLES B. RANGEL, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF NEW YORK

    Mr. Rangel. Thank you, Madam Chairlady, and the Members of 
the Oversight Subcommittee.
    I asked you earlier to be gentle. I am not used to being on 
this side of the mike.
    Chairman Johnson. With you? Why? [Laughter.]
    Mr. Rangel. I think that the analysis that was given by the 
General Accounting Office sort of takes care of the serious 
questions we may have about the effectiveness of this program. 
I came to Congress to close loopholes. Seeing that it is so 
difficult to get funding for those things that are so important 
to Americans, this credit has now become an incentive which I 
strongly support.
    I ask unanimous consent that my full statement be placed in 
the record.
    Chairman Johnson. So ordered.
    Mr. Rangel. And just would like to say that I am not 
certain whether shelter was included as a constitutional right, 
but I am thoroughly convinced that poor folks that cannot find 
a place to live, cannot find a place to prepare to go to work, 
cannot find a decent place to study, or have to be kept up 
because of rodents and leaks, it really is a factor that 
disturbs a whole person's life.
    The number of people that I see that are homeless, and they 
look like they are illiterate and unemployable--but in talking 
with them, these are people that just missed a paycheck. They 
missed paying their rent. They found themselves in the street. 
They lost their job. There is no place to go to pick up the 
pieces.
    The loss of pride sometimes forces them to leave their 
families because they cannot produce, and when they are called 
ne'er-do-wells, that is what they have become.
    And shelter, a home that is affordable, for so many people 
is the beginning, a turnaround in life. For a long time I never 
owned anything, but when I did buy a home, I think that was the 
zenith--the biggest capital investment I ever dreamed of. But 
just running from room to room, to be able to show my wife and 
my kids that I have provided a decent place for them to live, 
was one of the highest points in my life.
    It is not different when someone finds a decent apartment, 
especially a new apartment. The difference in character, 
integrity, the sense of belonging. The fact that neighbors 
screen neighbors to come into these buildings. The fact that 
stores begin to blossom around where responsible working people 
are. The sense of pride that just comes through the community, 
and knowing that if they fix one block, that the next block 
surely would be more eligible to receive this type of 
treatment.
    And the conservatives say that the overall administrative 
costs, because it takes the bureaucracy out of it, allows this 
to come in at the lowest per cost unit. It is my understanding 
that most of the affordable housing that is built in the United 
States, where the rental is $500 or less, comes under the low-
income housing credit.
    It works well for those who make the investment. It works 
well for those communities that do not find the funding on the 
local and State level. It reduces our Federal spending 
commitment as relates to the housing programs. But I really 
truly believe that if the General Accounting Office could 
follow some of the families, they would see that they made 
productive a lot of people that were about to give up, and lose 
hope that they could regain their positions in society.
    Right now, we are negotiating a budget agreement which 
should include some pretty heavy tax cuts, a commitment to 
balance the budget, and therefore, a reduction in the moneys 
that will be available for a lot of programs.
    I would have thought that the Taxwriting Committee would be 
involved in the tax portion of whatever came up in the Budget 
Committee. But I am under the impression, unless you know 
somebody in a negotiation, that this Committee is out of it.
    Having said that, they have no problem in telling us what 
they want us to do in terms of raising taxes, or finding 
revenue raisers. And while I hope, Madam Chairlady, that it is 
only a rumor, I hear that we are on the list of tax provisions 
to be sunsetted.
    I do not know whether there is a more popular piece of 
legislation we have in the House in terms of sponsors, but the 
process that we are going through, both Democrats and 
Republicans, does not lend itself to allowing our views to be 
expressed and we just may have to vote up and down on a 
reconciliation bill.
    So I hope that the Members of this Committee that support 
the housing credit, that has been so successful, might be able, 
if you know anybody that is involved in making the decisions, 
then I will give a call to Senator Lott, to tell them, please 
do not rape what works in order to get the tax cut.
    Thank you, Madam Chairlady.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Mr. Rangel.
    I do know that our Chairman has fought very long and hard 
to have this Committee have numbers, goals that it has to 
reach, and leave to our Committee the responsibility as to how 
we reach those, with the exception of committing to the 
President to address some of the special problems in higher 
education and the great need of our students for better support 
in managing college costs.
    Now the agreement is not final. Actually, you may know more 
about this from your recent conversation, but I am optimistic 
that this Committee will be able to make the decisions as to 
how we achieve our goals, and I share your enthusiasm for the 
quality of the study that the GAO did.
    I am also impressed with the lack of significant problems 
in it as a major Federal program. It is the intention of this 
Subcommittee, I think it is fair to say, on both the part of 
Mr. Coyne and me, to address some of the problems that they did 
identify, working carefully with both the States and the 
private sector, so that we do not overkill on this issue of 
administrative change as Mr. Metcalf so responsibly pointed 
out.
    We need to also look and see--are there ways that we can 
strengthen this program by better inclusion of the smaller 
developers and smaller projects? But also in its inner-city 
use. We are going to have very good panels today. I invite 
either of you who would like to join us for any part of our two 
panels, because I think the two panels will give us a lot of 
insight into some of the new ways this credit is being used. 
Most of the audience knows, and you may know, that Mr. Lazio 
and I have talked at some length about looking at the power of 
appropriated dollars in housing versus the power of these tax 
credit dollars, because we may find that tax expenditures are 
actually more effective in developing the quality housing we 
need, in the places we need it.
    So we do have a long agenda in this area. There is, I 
think, broad and deep interest in this credit, and it will be 
the Committee's responsibility to achieve its goals in a 
responsible fashion.
    Mr. Rangel. Let me thank you for the support that you have 
given over the years.
    Chairman Johnson. Thank you.
    Are there any questions of our colleagues? Yes?
    Mr. English. Thank you, Madam Chair.
    Mr. Metcalf, I very much appreciate your being here and 
your testimony. You have been one of the strongest defenders, 
in the last Congress, of the low-income housing tax credit, and 
I want to credit you for organizing support on the Republican 
side 2 years ago to make this credit permanent. I think it was 
your letter, and your effort that played a very significant 
role in building support, long term, for the permanency of the 
credit within the Republican Conference, and I want to salute 
you, and I also am a Member of the Republican Housing 
Opportunity Caucus, and am delighted at your leadership.
    Mr. Rangel, you are a Member with enormous stature in this 
Congress, and for you to be here in support of the credit means 
that there is very strong support in this Congress, and on your 
side of the aisle for maintaining the permanence, which I also 
am supportive of.
    My hope is that we can work together on a bipartisan basis 
within the Ways and Means Committee, and do so flexibility, on 
both sides, to find a solution to keep the credit permanent, if 
at all possible, and I think that will require flexibility on 
both sides.
    If there is a budget deal, if there is a budget that gives 
us some tax relief to work with, I believe we will be under a 
lot of pressure to find the right mix of credits, permanent and 
temporary, and I think we both recognize that there are some 
credits right now that are temporary, that should be permanent 
as this credit is permanent, and let's find a way to get it 
done.
    I appreciate your effort, sir, and your participation on 
this panel. Thank you, Madam Chair.
    Mr. Rangel. Thank you.
    Mr. Metcalf. Thank you.
    Chairman Johnson. Thank you.
    Are there other questions?
    I do want to mention, since Charlie, you gave us your 
thoughts, but you did not read your testimony, which is not 
unusual. But your testimony does point out a project, Gabriel 
House, in which low-income housing tax credits have enabled the 
creation of 30 units that serve AIDS patients and recovering 
substance abusers, and that in fact there are 3,500 units in 
New York City that serve the mentally ill, substance abusers, 
seniors, formerly homeless, and other special needs 
individuals, that have been constructed through the low-income 
housing tax credits.
    I think one of the things we do not think about very often 
is how this program has helped inner cities address very 
difficult housing problems.
    Mr. Rangel. I was at the opening, Madam Chairlady, and 
people that were hopeless, and they really needed more than 
shelter. The concept that was built around, with a church-
sponsored group, is that not only was there housing involved, 
but there was training involved for people who have fallen into 
alcoholism and drugs, and young kids that had grown older but 
had children before their time. And educators and social 
workers, and the excitement of the people in finding a home 
that was affordable, was almost a spiritual thing. Because it 
is very emotional when you're coming out off the streets, and 
you have known a better quality of life, and you fall into the 
bottom. And so instead of just a beautiful apartment, you have 
people to help you get back on your feet, to restore the self-
worth that you thought you had lost.
    I just had to get out of there because it was just too 
moving an experience.
    Chairman Johnson. Mr. Tanner.
    Mr. Tanner. Thank you, Madam Chairlady.
    I, too, would like to state my support for Mr. Rangel and 
his support for this program. I think that his leadership on 
this issue has meant a lot, not only to this country but to the 
people affected directly.
    I have never understood the thought that anything the 
government may do to help people who live in this country, work 
in this country, pay taxes in this country and contribute to 
our country's well-being, that there is something evil about 
the government trying to help these people.
    A partnership with private enterprise that results in what 
the GAO said--almost no evidence of ineligible tenant incomes 
or excess rent charges, ought to be something we should be 
proud of.
    This is a program that is working, according to the GAO. It 
is making our country stronger, not only in urban areas, but 
also in the rural areas like my district, and I just want to 
say that this GAO report has given me great hope that there are 
programs that help people who live in this country, and who are 
citizens here, gain a better way of life, and I want to thank 
you for your leadership on this issue. I hope we can make this 
permanent.
    Mr. Rangel. Thank you.
    Mr. Metcalf. Thank you.
    Chairman Johnson. Yes. Mr. Watkins.
    Mr. Watkins. Thank you, Madam Chair.
    I would like to just add a couple of comments from personal 
experience.
    I want to say thanks to my good friend, Hon. Charlie 
Rangel, and also Hon. Jack Metcalf, for your testimony.
    And from a personal standpoint, I used to be a homebuilder 
in real depressed areas of Oklahoma. In order to maintain that 
home-building operation, I had to build in probably eight or 
nine different counties just in order to try to serve those 
areas.
    I built a lot of homes for low-income individuals, and I 
watched these people. They are good people, many of them 
struggle for that basic shelter. There are a couple of things I 
noticed when I was able to build a home for a family, and they 
were able to move into, say, a little brick home. A lot of them 
left just lean-to shacks.
    One, I found that on several occasions, the spouse, the 
wife, would make sure she kicked that guy out and he went on to 
work, because they knew they needed to make the payment on that 
shelter, and it was the best living conditions they had ever 
had, and it was the best she had ever had for her children.
    And I found that there was pride that was developed. Not 
only did I notice that in the social situation, but I noticed 
also, the best of my knowledge, it also brought a different 
type of, if I could say, relationship.
    There were young people coming to date the children, that 
were from a little different income level. I do not know of 
anyone--and I watched a lot of these families very closely and 
in a very personal way--that literally married down. They moved 
up. And many times that lean-to house in that rural depressed 
area did not attract some folks to come there. But when they 
were able to get a little bit better living condition, it 
brought a different income level, a different group of people, 
different social group, and allowed them to be more, and a 
better part of society.
    And these were good people. But as a builder, you know, I 
had a feeling that I was making a contribution to a social 
level of improving a quality of life, that I would not have had 
the opportunity to do, and they had such pride, especially when 
they had their piece of property, their grass, their 
opportunity to be a family.
    So I just want to say I think it has been one of the best 
social movements we could ever have, to allow people to have 
this basic thing of quality shelter.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you, Congressman Watkins.
    Congresswoman Thurman.
    Mrs. Thurman. Thank you, Madam Chairman.
    I just want to associate my remarks with Mr. Tanner but 
also to lend my support to Mr. Rangel and Mr. Metcalf for their 
support for this program. In talking with my State housing 
program folks, they love this program, and on top of that, they 
have been able to build within the State and leverage these 
funds by, you know, putting some of their own programs out 
there that have targeted some low-income and some special needs 
that we have had.
    To sunset this I think would be--I just do not think that 
is the right thing to do. We have a program the GAO has 
basically said is good. We are working well. Maybe what we 
ought to be doing is look at this as a model of how we can look 
at some other programs instead of trying to tear something down 
that is providing the services that it was intended to. So from 
my State, and as a representative, I just want to say thank you 
for the work that you have put into this and the testimony that 
you have given today, and I hope that the message is sent, loud 
and clear, that we should not be messing with something that is 
working.
    Chairman Johnson. I thank the Members for their comments, 
and Mr. Rangel and Mr. Metcalf for their testimony.
    I think the significance of their being a housing caucus on 
the Republican side, with Mr. Metcalf as its Chairman, and Mr. 
Weller as the Chairman of the Subcommittee on this particular 
subject, does tell us that we are hearing this subject in a 
different context than we might have a few years ago.
    It is interesting to me, Mr. Rangel, to hear you say that 
you came opposing tax credits, and now you support them. I 
think we may end up supporting them because they turn out to be 
a more flexible and powerful vehicle as opposed to an 
appropriated program.
    So I thank everybody for their comments. I would 
particularly like to comment that between Mr. Rangel's comments 
and Wes Watkins' comments, it does remind the public that we 
are in the business of politics because we think it is 
important, spiritually. Thank you.
    Will the next panel come forward, please; this is the 
schedule we are going to follow.
    I know that the Republicans have a conference at 11 
o'clock. Unfortunately, we cannot adjourn for that. If Members 
want to go, they are certainly welcome to do that, and return.
    We do have two long panels. We need to try to finish 
slightly before 1, if possible, so I do not intend to break for 
lunch unless we break between about a quarter of 1 and 1:30.
    But for that reason, we are going to observe the 5-minute 
rule. Both panels' testimony will be entered into the record in 
its completeness. But if you will please keep your statements 
to 5 minutes, that will maximize our time for questions.
    We will start with Sister Nancy Glynn, president of Bon 
Secours Baltimore Health Corp.
    Mr. Coyne. Madam Chairwoman.
    Chairman Johnson. Yes.
    Mr. Coyne. I just want to point out to Sister Glynn that 
Representative Cardin intends to be here. He is on his way over 
to greet you as a constituent, and certainly welcomes your 
testimony here today.
    Chairman Johnson. We have had many smart and able voices 
from Baltimore, and from your State, because you are a leader 
in so many areas.
    Sister Glynn.

    STATEMENT OF SISTER NANCY GLYNN, PRESIDENT, BON SECOURS 
                     BALTIMORE HEALTH CORP.

    Sister Glynn. Thank you, Madam Chair, and Members of the 
Ways and Means Subcommittee.
    It is a real privilege to be here this morning to discuss 
the low-income housing tax credit, and the way that it has made 
such a major contribution to our work, which extends beyond 
health care to community revitalization and stabilization in 
our West Baltimore neighborhood.
    Bon Secours has been in West Baltimore for over 100 years, 
and we have made a very conscious commitment to remain, because 
we are so needed.
    We serve a struggling urban neighborhood with many low-
income residents, and want to ensure not only the health of 
individuals, but the health of our community.
    The hospital is an anchor, and is the major employer for 
our neighborhood. We work collaboratively with neighborhood 
organizations to create a healthier community through housing, 
education, job training, recreational opportunities, crime 
prevention, and general neighborhood improvements.
    We have launched an initiative called Operation ReachOut 
for that purpose. And one of the first goals is to improve the 
housing stock in the neighborhood, to provide attractive, 
affordable housing, to not only our own employees but to 
neighborhood residents, in general, who are now living in 
substandard housing.
    The project I want to talk to you about today is Bon 
Secours Apartments, and it has been made possible by the low-
income housing tax credit.
    I am not, by any means, a housing expert, but I do know 
that we would not have been able to go forward with this 
venture without the housing credit. It is a good example of a 
Federal program that really works.
    It encourages public/private partnerships, and provides 
not-for-profit-based housing developers with the resources to 
produce affordable homes for people who do not have a lot of 
income.
    Private-sector corporations do not have much incentive to 
invest in our neighborhood, but the housing credit gives them 
that incentive.
    We found that new housing makes a real impact in 
impoverished neighborhoods, not only economically and 
physically, but even psychologically and spiritually. It is a 
visible sign that things are turning around.
    Lenders for Bon Secours Apartments include the city of 
Baltimore, the State of Maryland, and Crestar Bank. The Federal 
Home Loan Bank of Atlanta has made a grant to the apartments 
that allows us to offer lower rents.
    In our first phase, we are renovating 30 units which will 
go to people earning between 40 and 49 percent of the area 
median income. Rents will range from $300 to $420 a month.
    Construction started in January 1997, and our first tenants 
will move in within a month. Housing is just one aspect of 
Operation ReachOut. The other part of it involves working with 
community-based organizations to provide a range of social 
services that will help to improve the quality of life for our 
neighbors.
    They include a literacy program, a Head Start Program, 
health outreach, a family support center, and a jobs skills 
bank that has already hired neighborhood residents to 
participate in the construction of the project.
    Many people ask us why is a hospital getting into the 
housing business, and I think the answer is clear. That Bon 
Secours is not about just the health of individuals, but the 
health of our community, which so affects families and 
children.
    Decent affordable housing, like decent affordable health 
care, is a requirement for success. In a neighborhood like 
ours, we cannot get housing developed without not-for-profits, 
and without a program like the low-income housing tax credit.
    For all the reasons we have talked about, this kind of 
investment needs to be encouraged. It is one of the few tools 
available to attract capital to economically depressed 
neighborhoods.
    In closing, I know that the housing credit is making a 
significant difference in our neighborhood, because it makes a 
lot of other things possible. And I want to thank you for the 
privilege of being here.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Sister, and Ms. 
Hodel.

   STATEMENT OF KATHLEEN HODEL, PRESIDENT, LAKE HAVASU CITY 
       APARTMENT OWNERS ASSOCIATION, LAKE HAVASU CITY, AZ

    Ms. Hodel. I am Kathleen Hodel, a small apartment owner 
from Lake Havasu City, Arizona. This is a summary of my 
testimony.
    The Low-Income Housing Program has negatively impacted 
local communities and threatened livelihoods. In 1986, Members 
of Congress were correct when they argued that giving tax 
credits to developers would not benefit the poor.
    Tenants that are evicted from their apartments because they 
cannot afford the rent are not being helped by this program. I 
have seen it myself.
    If the tenants that live in our city's so-called low-income 
housing can afford to own RVs, boats, and new cars, then why is 
the taxpayer subsidizing their apartment buildings. We are not 
helping the poor.
    The developers are lured to these programs because it has 
made them millionaires. The danger is the program has become so 
popular, the developers have become dependent upon receiving 
tax credits. This has disrupted the rental market.
    Congress cannot continue to allow the rental market to be 
flooded with low-income housing projects without analyzing the 
results this program has on the private sector.
    Where is the report analyzing how this program affects the 
private rental market? Where is it? Unfortunately, I understand 
there is none.
    The IRS has placed itself in direct competition with the 
private sector by targeting the same customers we target.
    Tenants earning 60 percent of the medium income rent from 
us. The IRS is taking tenants away from us, causing our 
property values to decline, and discouraging future 
development. You cannot even give a residential income lot away 
in our town.
    Our city's population is only 40,000, yet we have received 
a real education on the results of this program.
    Ten years ago, a 42-unit low-income tax credit program was 
built. In 1995, an 84-unit project was completed with plans for 
another 38-unit project proposed in our city last year.
    Our vacancies have been high during the past year, from 18 
to 20 percent, with rents as low as $350 for a nice 2-bedroom 
apartment. In 1995, the 84-unit low-income project was allowed 
to be built with rents equal to or higher than our rents.
    The real joke is the 84-unit project ended up costing the 
taxpayers $72,000 per unit. I could build a really nice 
apartment building in Lake Havasu for $30,000 per unit--really 
nice--and yet this program costed $72,000 per unit. That was a 
joke in our community.
    The so-called low-income 84-unit complex offers a swimming 
pool, RV and boat parking, a recreation room, patios, new full-
size dishwashers with free cable TV and free rent as incentives 
to move into their apartments.
    The results of this program on our city's rental market has 
been disastrous. When the 84-unit was built, our vacancies 
jumped to 30 percent. The lure of extra amenities made it 
impossible for us to compete.
    So what is the answer? Conducting market studies to 
determine the demand for low-income housing? In the last 
decade, we have had numerous market studies, the results 
depending on who was paying for the survey.
    At one time a developer hired an appraiser to determine our 
city's vacancy rate. His conclusion was zero vacancies. At the 
same time, our association conducted a study--I worked really 
hard on that study--I came up with 29.2 percent.
    The major problem is to define comparable units fairly. We 
have tried it and I will tell you--it takes a miracle. Plus 
vacancies vary rapidly, especially in a community like ours.
    Banks have already informed us that if the vacancy rate is 
10 percent or higher, loans will not be made to construct or 
remodel apartment buildings. Therefore, because our vacancy 
rate is high, we cannot build or remodel. But the banks have a 
hard time saying no to developers with millions of dollars' 
worth of tax credits in their pockets. Plus it is easy to steal 
tenants away from older buildings with less amenities.
    Trying to administer this complex program at the local 
level has been a nightmare. Someone has to, here, look at the 
local level. Someone here has to look at what is happening at 
the local level.
    Our city officials were intimidated by Federal programs, 
and powerful Washington, DC, lawyers hired by the developer. 
Our mayor and city council were told that they would be sued 
under the Fair Housing Act, and we would lose our Federal 
grants if they did not approve the 84 units.
    Our city established requirements for future tax credit 
housing projects. It took us 5 years to try to figure out some 
requirements for our city, which ended up to be illegal and 
violate the Fair Housing Act, if they try to implement it, it 
would be illegal.
    If this program is allowed to continue, local governments 
need expert legal advice, which is going to cost everybody. 
Cost us even more.
    One of the requirements the 84 units was to provide was 
security. That was one of the requirements they were supposed 
to provide. Yet 166 police reports were reported in just over a 
year. This is an example in a small town, where we have very 
little crime. In just over a year, we have 166 police events. 
That is the highest, by far, of police events.
    A police event is when the police go out and physically 
visit the location. That is the highest in the history of Lake 
Havasu City. There is no procedure for the public to report 
noncompliances.
    So I, in a little town in the middle of the desert, had to 
make up my own noncompliance report, and send it to the IRS and 
to the State, because there was no procedure for me to say, 
``Hey, something is going on here, they said they were going to 
provide security and they did not do it.'' And I am still 
waiting to hear back from the IRS.
    Apartment owners can receive tax credits for remodeling. I 
can, right now, receive tax credits for remodeling, but after 
we penciled it all out and investigated the economics, we 
concluded it will only benefit very large complexes and major 
renovations. It is not for the small folks.
    The solution to this problem is to abolish this program and 
stop subsidizing wealthy developers. It would be less expensive 
to subsidize the tenants. Congress has already discussed giving 
vouchers to low-income tenants. This plan would enable tenants 
to find their own apartments, thus encouraging mixed-income 
apartment complexes, which HUD has already stated, it has been 
very successful.
    I was a social worker in Watts. I know what it is like to 
have a concentration of people in projects. It is much better 
to give them money, vouchers, and let them go find their own 
housing. In that way, you do not have the problems with 
numerous police reports.
    If the tax credit program is allowed to continue, it needs 
to be amended to read--this is so important, please hear this. 
It should be amended to read: The low-income housing tax credit 
project cannot disrupt the local market.
    Finally, after years of discussion this phrase was added to 
our State. We worked 5 years on that phrase. And finally the 
State of Arizona has put that in there. I would appreciate it 
if you would consider amending this program and adding the 
phrase, it is so important that this program does not disrupt 
the local market.
    Surely the intent of Congress when they enacted this 
program was not to have people with ordinary incomes live in 
quarters with fewer amenities than low-income people. I am sure 
your intentions are to help the truly needy, and not to 
endanger the livelihoods of people like myself.
    Remember, we have to live with these projects. They don't 
go away. You build them, and they are there for our whole 
lives. And we have to look at them and deal with them every 
single day.
    Please consider that when you vote. Also, if you would just 
turn to Attachment One, this is just an example of the 
newspaper ads that we see every day in our newspaper. We can 
afford little, tiny two-liners, and we have to see this every 
day, because the taxpayers pay for these ads.
    [The prepared statement and attachments follow:]

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    Chairman Johnson. Thank you very much, Ms. Hodel. We 
appreciate your testimony and your experience.
    Mr. King, it's a pleasure to welcome you down to Washington 
here again, the head of the Connecticut Housing Finance 
Authority, and I welcome your testimony.

   STATEMENT OF GARY E. KING, PRESIDENT, CONNECTICUT HOUSING 
           FINANCE AUTHORITY, ROCKY HILL, CONNECTICUT

    Mr. King. Thank you, Madam Chairman, and Members of the 
Subcommittee. I am Gary King. I'm the president of the 
Connecticut Housing Finance Authority, and I've been with the 
authority for 11 years, and since 1992 its president.
    Prior to working at the Connecticut Housing Finance 
Authority, I was the undersecretary for the State's OMB agency, 
and responsible for comprehensive planning and policy program 
activities.
     It is from these experiences and perspectives that I come 
here to address you today, and I really thank you for the 
opportunity to testify on the tax credit program, and I guess 
I'm following Ms. Hodel's comments to indicate that the Nation 
is a diverse place. Because our experience in Connecticut could 
not be further from her experience in Arizona.
    CHFA in Connecticut has had experience with virtually every 
major Federal housing program in the last 27 years. In my 
experience, and in the experience of the authority, this 
program, the tax credit program, has worked more efficiently 
and achieved more of its objectives than any other program with 
which we've had experience.
    It's basically done so for four major reasons. The first, 
the credit enables States to meet diverse needs across the 
country without excessive guidance from Washington.
    Second, and this is very important, the credit very 
effectively can bring the benefits of private investment 
incentives, ownership and management into public housing to 
meet clearly defined public needs. But, that private investment 
and management is tempered by public oversight and balanced 
with accountability to the public.
    Third, the program is a very effective leverager of other 
resources. Unlike a direct expenditure program, it brings many 
resources to bear to work on agreed upon housing policies and 
priorities.
    The fourth major reason has come up today. Since 1993, this 
program has been permanent. This is very, very important. 
Permanent authorization has created a stability which the 
development community, the private financial markets, and the 
State and local policy agencies can rely upon when planning the 
development of affordable housing and the rehabilitation of 
communities and neighborhoods everybody in Connecticut knows 
that this program is there and will be there to work 
effectively to leverage development and private investment in 
that development.
    Permanent authorization also, as has been indicated, has 
improved tremendously the efficiently of the credit. The 
improvement has been 28 percent. Credits back prior to 1993 
generated 50 to 55 cents in equity investment in the housing 
for tax credit dollar. Now, the investment is approaching over 
70 cents on the dollar, which is a very, very effective and 
appropriate result.
    My concern is that if the program is not permanent, we will 
lose these advantages.
    I was gratified to see that my perspectives and opinions 
were confirmed by the GAO study.
    Frankly, the major problem in Connecticut is that we don't 
have enough credits to support all the appropriate project 
proposals which we receive. In the last 2 years alone, we have 
had to reject three-quarters of the projects seeking credits 
because of inadequate credit availability. We've received three 
times the applications that we could fund.
    In summary I wish to communicate to you my strong belief 
that the Connecticut housing community would strongly support a 
positive agenda by the Subcommittee that would address the 
administrative and technical issues raised by the GAO study. It 
would also support an agenda to increase the availability of 
these housing tax credits in Connecticut. I do not believe that 
it would support an agenda to significantly alter the credit 
program. I also believe that the Connecticut housing community 
would with unanimity strongly oppose any effort to ``sunset'' 
the program.
    That being said, I think that if you merely do the things 
the GAO study suggests, you will be very effective in fine 
tuning the tool that you have entrusted to us to use on behalf 
of the Federal Government to very effectively produce 
affordable housing in Connecticut and the Nation.
    Finally, I have heard that there are a couple of questions 
that are on Committee Members' minds, and I would like to 
briefly address a few of those.
    First, in terms of needs and priorities, in Connecticut we 
use existing housing State policy plans and studies that are 
actually formally adopted by our State legislature to determine 
where the developments should be built, what types of housing 
should be built, and for whom it should be built.
    Our State faces basically a housing problem with two 
dynamics. First, in our urban areas, we are facing significant 
abandonment and blight, and need to improve the quality of the 
housing in these areas. Conversely, suburban and rural areas 
have too little affordable rental housing.
    I've also been told there are questions and issues 
concerning costs. I'm here to say that the evidence indicates 
that the housing credit has turned out to be very effective in 
producing housing at less cost than other rental housing 
produced by the private sector. I know that there also is 
concern about the number of bedrooms in units. I'm here to say 
that in Connecticut the experience is that we're meeting the 
housing needs and priorities of our State, and that over a 
third of the apartments we have produced have three or more 
bedrooms.
    We've also effectively accomplished rehabilitation. 
Seventy-five percent of our housing goes for rehabilitation of 
existing housing.
    The other issue I would like to address is the concern 
about IRS oversight and the potential interest for substituting 
or developing potential role for HUD, I think essentially the 
Connecticut agency and the State housing agencies in general 
play or fulfill any role that HUD might fulfill, in terms of 
compliance monitoring, oversight administration planning, or 
reporting.
    I thank you for the opportunity to address the 
Subcommittee.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Mr. King.
    Mr. Haynsworth.

  STATEMENT OF WILLIAM E. HAYNSWORTH, SENIOR VICE PRESIDENT, 
 BOSTON FINANCIAL GROUP, BOSTON, MASSACHUSETTS; AND PRESIDENT, 
            AFFORDABLE HOUSING TAX CREDIT COALITION

    Mr. Haynsworth. Yes, ma'am. Madam Chairman, and Members of 
the Subcommittee, my name is Bill Haynsworth. I'm senior vice 
president of Boston Financial Group, a syndication firm in 
Boston, Massachusetts, and president of the Affordable Housing 
Tax Credit Coalition on whose behalf I testify.
    Many of you are familiar with the role of syndicators in 
the tax credit business, which primarily is to raise private 
capital that will ultimately pay for 50 to 60 percent of total 
development costs in a particular project.
    Now, you may not realize that as part of our 
responsibilities we perform a very extensive watchdog role in 
making sure that the properties are properly constructed, that 
they're properly designed, and that they are operated on a 
financially sound and capable basis over the full compliance 
period.
    We obviously have an economic incentive to do that, because 
we are raising money from investors who expect a certain yield 
brought about by the credits and other tax benefits provided by 
the projects. And if the projects fail in any manner, their 
yield is impacted, our reputation is impacted adversely, and 
basically we're going to be out of business if we don't do a 
good job.
    Now, as you probably know, we form limited partnerships 
that raise money from corporations. These limited partnerships 
can be quite large. They may be $50 to $100 million in size, 
and they may involve the investment in from 20 to 40 separate 
properties.
    The properties average around $2.5-$3 million of equity per 
property.
    The syndication field has become highly competitive. There 
are at least 20 major national syndicators who compete 
vigorously to purchase properties, and a number of major 
corporate investors who invest directly.
    As a result of this rigorous competition, and the fact that 
the tax credit was made permanent in 1993, as we all know the 
pricing has gone up significantly since that time.
    I would be concerned, very concerned that this trend would 
be reversed if we were to face another sunset.
    Now, what do we do apart from raising money? When we look 
at a project, we give it extensive due diligence. We look at 
all the legal documentation to determine that the project is 
eligible for the credit under the State guidelines.
    We look very carefully at the plans and specifications. We 
have our engineers look at the project. During the construction 
phase, we may advance from 60 to 80 percent of our equity, 
because that's needed to build the project, and for that 
reason, we're at risk for that.
    We may have engineers go out and look at the project when 
appropriate to make sure that it's being properly constructed. 
The developer will present us with a market study, but we do 
our own to make sure that we agree with the rents, and that we 
have confidence in the pro formas that we prepare.
    We look very carefully at the development and construction 
phase. We review all aspects of the tax credit award. And also, 
and most importantly, we negotiate the deal with the developer. 
And the developer, as you know, does get a development fee, but 
that development fee is withheld and only paid out as he 
performs.
    The first portion of the developer fee is usually paid upon 
successful completion of the project, but then it's further 
advanced when he successfully operates the project, for example 
when he reaches break even, or achieves some sort of a debt 
service coverage.
    We also are very interested to make sure that there are no 
compliance issues with the project. We have our own staff of 
asset managers, 18 in all, who make site visits, who review all 
the financial reports, send them to investors, review tenant 
files to make sure that eligible tenants are in the projects, 
and that the tax regulations are being adhered to.
    From all of the above, you can see that we play a role, a 
very vital role in oversight on the tax credit projects, and 
this is at no cost to the Federal Government.
    As a concluding thought, the Coalition makes three annual 
tax credit excellence awards, three of them annually, to the 
best urban, rural and special needs projects as part of a 
competition.
    Anyone reviewing this year's applications must be impressed 
by the quality of the tax credit projects, their ability to 
provide special services to tenants to meet the needs of the 
handicapped, AIDS victims and the elderly, and their overall 
contribution to the life of the tenants.
    Indeed, we're very proud to have you, Madam Chairwoman, as 
one of the presenters of an award last year to the San Pablo 
Hotel in Oakland, California, an outstanding rehabilitation 
project, supplying many special tenant services.
    Thank you, Madam Chairman.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you, Mr. Haynsworth.
    Mr. Swank.

  STATEMENT OF LARRY A. SWANK, PRESIDENT AND CHIEF EXECUTIVE 
   OFFICER, STERLING GROUP, NAPPANEE, INDIANA; AND CHAIRMAN, 
             NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Swank. Madam Chairman, and Members of the Subcommittee, 
my name is Larry Swank, and I am president and chief executive 
officer of the Sterling Group, Nappanee, Indiana. I'm also the 
chairman of the Housing Credit Group at the National 
Association of Home Builders.
    The Sterling Group is comprised of a construction and 
development company and a management company.
    Madam Chairman, on behalf of the 190,000 members of NAHB, I 
want to thank you for the opportunity to testify before the 
Oversight Subcommittee today regarding the low-income housing 
tax credit.
    At the on set, let me state that NAHB is a strong supporter 
of the credit, are its continued permanence. We are 
particularly appreciative, Madam Chairwoman, of your 
longstanding support and dedication over the years to providing 
affordable housing.
    Madam Chairman, I am extremely distressed, to have learned 
late last night that Chairman Archer has decided to recommend 
sunsetting the low-income housing tax credit as a means of 
raising revenue in the budget agreement.
    Threats to sunset the credit upset the investment community 
confidence and development community confidence in the 
continuation of the credit. Madam Chairman, as you know, the 
NAHB adamantly opposes sunsetting the credit. We believe that 
the credit is essential to providing adequate affordable 
housing to America.
    Every American should have the opportunity to live in 
decent, safe and affordable homes. With our Nation's growing 
Federal deficit concerns, the private sector should be used as 
the primary mechanism for meeting the demands for housing.
    The credit does just that by enabling States to leverage 
more than $12 billion in private investment to provide decent 
housing. Implementing housing policy through a tax credit 
provides strong incentives to the private sector, and requires 
no elaborate government bureaucracy.
    The principal tax incentive for the production of rental 
housing is contained in the low-income housing tax credit. The 
credit must be maintained and preserved as a permanent means to 
encourage investment in affordable housing.
    Without the housing credit, thousands of low-income 
families would still be living in substandard housing and 
paying exorbitant rents.
    In addition to creating affordable housing, the credit also 
generates jobs. An attachment to my written testimony breaks 
out the jobs created by the credit by State.
    The integrity of the low-income housing tax credit should 
be protected against individual abuses that threaten the 
continued existence of the program. Threats to sunset the 
program must be eliminated, however, because they discourage 
participation in the program and reduce program efficiency.
    It is imperative to affordable housing that the credit 
remain permanent. NAHB sees the issuing of the GAO report and 
its findings as a positive opportunity to take what we believe 
is a good program and make it better.
    American taxpayers should have the security of knowing our 
government is using their dollars wisely and on well managed 
programs. One of the issues the GAO reported on is what 
controls exist to assure that projects' costs are reasonable.
    Two of the components contained in the projects' costs are 
developers and builders fees. Let me explain briefly 
developers' fees to you, and if you would like we can discuss 
them in more detail during questions.
    Developers fees compensate the developer for risks and 
costs that he or she incurs in the process of developing a 
project. The fee is set by the market, and depends not only 
upon risks and anticipated overhead expenses, but also on 
unreimbursed development costs that the developer will incur.
    To calculate net development fee, the amount permitted by 
the allocating agency must be reduced by the developer's 
equity, working capital and other reserves, developer's 
overhead that's not reimbursed and other costs that are not 
reimbursed.
    These fees are being properly controlled, and are not 
excessive. The GAO report indicates the gross development fees 
permitted by agencies ranging from 10 to 23 percent with most 
at approximately 15 percent.
    Frankly, Madam Chairman, after all the costs are subtracted 
out, a developer walks away with 4 to 5 percent pretax.
    Madam Chairman, there is a desperate shortage of affordable 
housing that the market demands, but can't provide on its own 
without credit. Over the last decade, the gap between low-
income renters and low rent units have grown consistently due 
to the delivery of fewer low-income units and the growth in the 
number of low-income families.
    Only yesterday I was in Holland, Michigan, less than 5 
miles from where your mother lives, by the way. And I was 
cutting the ribbon at a ground breaking of a project that we 
are building in Holland, Michigan at the present time.
    There was a family that applied for housing there some time 
ago. I'm going to talk for a moment about that family. Their 
names are Bill and Kathy Wells. They moved there from Chicago. 
Bill saw an advertisement in the Chicago Tribune, and went 
applied for a job at the Prince Corp., he was accepted. All of 
a sudden he couldn't find affordable housing.
    He looked, and after several weeks found Falcon Woods, our 
apartment community, applied, and because of his income, was 
just under the amount necessary to qualify. He was able to move 
there, move his family, obtain the job, and now resides in 
Holland, Michigan.
    That's an example of what the Low-Income Housing Tax Credit 
Program is all about. Housing projects used in the credit are 
benefiting those that are intended to be benefited, households 
with very low incomes.
    It only makes good business sense to continue rental 
housing incentives, like the low-income housing tax credit, 
with an eye toward program improvements to improve efficiency.
    NAHB believes that independent verification of key 
information should be required for sources and uses of funds. 
NAHB also supports the submission of a comprehensive and timely 
market study for the proposed project prepared by neutral or 
third party commissioned by the developer and reviewed by the 
housing agencies.
    Third, NAHB recommends that HUD housing quality standards 
be used for determining units suitable for occupancy and that 
housing credit agencies be required to conduct onsite 
inspections for at least one third of the projects each year 
for compliance with these standards.
    Madam Chairman, thank you for the opportunity to share 
NAHB's views with regard to the credit today. I would like to 
reiterate in my closing that NAHB opposes any efforts to subset 
the credit.
    Thank you. I look forward to your questions.
    [The prepared statement and attachments follow:]

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    Chairman Johnson. Thank you.
    Mr. Barbolla.

  STATEMENT OF PATRICK BARBOLLA, FIRST VICE PRESIDENT, RURAL 
     RENTAL HOUSING ASSOCIATION OF TEXAS, INC., TEMPLE, TX

    Mr. Barbolla. Chairman Johnson, Ranking Minority Member 
Coyne, and Members of the Committee, my name is Patrick 
Barbolla, and I am a developer of affordable rural multifamily 
housing from Fort Worth, Texas.
    It is my pleasure to appear on behalf of the Rural Rental 
Housing Association of Texas, the country's largest State 
association dedicated to affordable rural rental housing.
    In the interests of time, I would merely highly a few of 
the issues raised in our written statement. Low-income housing 
tax credits are necessary and vital for providing affordable 
rural housing.
    Without the availability of tax credits, few if any 
affordable units would be produced in rural Texas. Without a 
permanent tax credit program, thousands of rural Americans are 
doomed to their existing conditions of substandard housing or 
homelessness.
    Again, with the increasing demands for credits, we do have 
several suggestions to insure that rural America remains a part 
of this very successful program. Each State allocates tax 
credits according to an allocation plan.
    According to legislative history, Congress intended that 
any allocation procedure give a balanced consideration to the 
low-income housing needs of the entire State. While most States 
have made provision for rural areas, we recommend that Congress 
specifically require that the rural areas of each State receive 
a reasonable allocation of credits based on low-income 
population, or some other measure, giving due consideration to 
the affordable housing needs of the entire State.
    Next, affordable rural housing is extremely difficult to 
produce without coupling the tax credits with other financing 
sources, especially Federal. Texas has recently formally 
recognized this necessary coupling and set aside a portion of 
its rural credits for properties either to be constructed or 
rehabilitated with Federal financing. In prior years, many 
properties that had received a comment for Rural Housing 
Service financing had been unable to receive a tax credit 
allocation. section 42 should be amended to require a tax 
credit allocation to properties financed by RHS or other 
Federal rural affordable housing programs.
    Such a requirement would be consistent with the 
preferential treatment given to federally assisted housing 
under section 42(d). Once a Federal agency commits to provide 
financing for a rural complex, it is counterproductive and 
inconsistent with the concept of a Federal/State partnership 
for a State to withhold Federal tax credits necessary for the 
project to be viable.
    Next: in times of limited resources for affordable housing, 
the rehabilitation of existing units should be seriously 
considered as a means of stretching tax credits. Our 
association does not recommend that rehabilitation properties 
be given any preferential treatment over new construction, 
merely that rehabilitation, especially in rural areas, be 
placed on parity with new construction for tax credit 
allocations.
    Rehabilitation, where appropriate, allows a greater number 
of units to remain in or become affordable housing. 
Unfortunately, there is an increasing trend among many States 
to prefer new construction over rehabilitation. At the same 
time, where rehabilitation may be allowed, there is a trend to 
prefer vacant complexes over occupied. It is more cost 
efficiency to rehabilitate a complex in the early years of its 
deterioration rather than wait until it is uninhabitable. 
Statutory direction should be given to the States precluding 
any preferential treatment of new construction over 
rehabilitation, or one form of rehabilitation over another.
    Our association agrees with the advisability of periodic 
unit inspections, including the use of inspection reports 
conducted by local governmental agencies. In addition, the 
States should be authorized and encouraged to enter into 
memorandums of understanding with both RHS and HUD to receive 
physical inspection reports performed by such agencies. This 
would allow the States to fulfill their duties without undue 
burden or expense.
    Development costs should be certified by an independent 
CPA. States should, however, coordinate the cost certification 
format with any Federal agency providing financing, in order to 
avoid unnecessary duplication of effort or expense.
    Again, we must emphasize to the Subcommittee our desire and 
request that the tax credit program remain permanent, because 
it is the only way that we are going to provide affordable 
housing in rural areas.
    I thank you for your time, and would be pleased to answer 
any questions that you have.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you.
    Mr. Weiss.

  STATEMENT OF STEVEN J. WEISS, CHAIRMAN, AFFORDABLE HOUSING 
           GROUP, SAPERSTON & DAY, BUFFALO, NEW YORK

    Mr. Weiss. Thank you, Madam Chairman, and distinguished 
Members of the Ways and Means Oversight Subcommittee. My name 
is Steven Weiss, and I'm an attorney with the law firm of 
Saperston & Day in Buffalo, New York. I am the chairman of our 
firm's affordable housing group, and my practice focuses on 
representing small to midsized developers and institutional 
investors and lenders in low-income housing tax credit 
transactions throughout New York and in other States.
    I will summarize a couple of points from my written 
testimony in response to the GAO study.
    First, most State agencies reserve discretion for 
overriding or bypassing the allocation process. The GAO report 
concluded that even though each State allocating agency has 
adopted a qualified allocation plan, for the allocation of 
Federal tax credits based on each State's housing priorities, 
most States reserve discretion to override or bypass the 
allocation process.
    While GAO appears to approve the use of discretion in 
instances where target needs are missed during the allocation 
process, or to address needs resulting from unforeseen 
circumstances, GAO also states that unless the use of 
discretion by State allocating agencies is well documented and 
made public, the allocation process would be undermined and 
would lose credibility.
    The State allocating agencies should have the flexibility 
to respond to their particular local needs by adopting 
qualified allocation plans that award tax credits on the basis 
of the State's housing priorities.
    Such housing priorities should be well defined and 
communicated openly to potential applicants.
    The use of discretion on the part of State allocating 
agencies to override or bypass the allocation process should be 
permitted on a very limited basis, and should only be done with 
complete documentation and full disclosure.
    Second, State allocating agencies give preference to 
projects that serve the lowest income tenants. The legislative 
history for section 42 of the Code indicates that the original 
intent of the tax credit program was to provide an incentive to 
developers and investors for the development and ownership of 
affordable rental housing for households whose income is that 
or below specified income levels.
    The Code indicates that the specified income levels are 50 
and 60 percent of the area median income in which a project is 
located. These individuals are deemed to be low income or the 
working poor. Since the GAO report concluded that about 75 
percent of the households examined had incomes in 1996 that 
were less than 50 percent of their area median income, and that 
according to the standards established by HUD these households 
met HUD's definition of very low income, the question is 
whether the intended population is being served.
    Based on the data reported by GAO, it would appear that 
very low-income households as opposed to low-income or working 
poor households are being served. If the tax credit program 
which was originally intended to serve the working poor is 
serving the very low income, then under what program will 
housing for the working poor be built?
    In our view, this is another reason for expanding the tax 
credit program to provide for the original intended 
beneficiaries.
    The third point is that the GAO reported that the State 
allocating agencies may distribute $1.25 in Federal credits per 
capita. The GAO reported that the amount of credit available to 
each State allocating agency is calculated by multiplying $1.25 
per capita.
    This approach effectively treats the rich and poor 
residents in each State equally, despite the fact that only 
residents whose income is less than or equal to 60 percent of 
the median income are eligible to participate in the tax credit 
program.
    One technical suggestion would be to base the number of 
credits that a State may allocate on the population of 
individuals at or below 60 percent of the median income.
    That way, if a State has a growing population of demand for 
affordable housing, the program will automatically provide such 
States with additional credits.
    The GAO reported that overall about 54 percent of 
applicants were not successful in competing for credits in 
1995. In addition, some States, like New York, are seeing as 
many as $10 in applications for each dollar in available tax 
credits.
    Furthermore, since the intended population of working poor 
are not being served by the tax credit program, we are in favor 
of an increase in the inflation adjusted figure on which a 
State's allotment of credits is based.
    This would permit States to address the excessive demand 
for credits, reserve an amount of credits for the original 
intended beneficiaries, the working poor, and continuing to 
providing housing for the very low-income households.
    Thank you.
    [The prepared statement and attachment follow:]

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    Chairman Johnson. Thank you, Mr. Weiss, and I thank the 
panel for their testimony. I'd like to hear you address Ms. 
Hodel's comments a little more directly. There are suggestions 
in the GAO report that the market studies be more independent, 
that they independent, that they not be done by developers who 
have an interest in the outcome.
    As this program is permanent for a longer and longer period 
of time, and if we do expand it to reach more people, the 
issues she raises are very serious. And as we do more and 
more--as we get tougher and tougher about code standards, and 
lead paint removal and things like that, we make it almost 
impossible to rehabilitate an existing unit, and therefore 
preference the tax credit program toward new construction.
    So looking at the larger picture, what she says is very 
serious. It's a very big problem. I don't how you see it in 
your experience, but I'd like to hear you answer it more 
directly. She deserves a more direct answer. The Subcommittee 
needs a more direct answer.
    Mr. King.
    Mr. King. In Connecticut, we think in terms of best 
practices. A number of years ago, we established a process 
where any type of market study or appraisal must be performed 
by a company from a list of effective, verified quality firms. 
We established that list. We check them out. We monitor the 
quality of their work to make sure it's adequate for our needs.
    We select them. The developer pays for them, but we select 
them, and we control the process. So the types of things that 
Ms. Hodel was alluding to which may be occurring in Arizona 
don't happen in Connecticut.
    Chairman Johnson. Specifically, Mr. King, who analyzes the 
market to see whether there is a need? Does the State do it, in 
setting your plan? Does the developer do it? Who does the 
market study, and who evaluates whether it's real or not.
    Because my belief is from what Ms. Hodel said if somebody 
had done that in her area, they would see that these units, 
because they were nicer for the same rent, were going to drain 
tenants.
    Mr. King. I understand and agree. In Connecticut we employ 
a three stage process. We start with the State's policies and 
priorities and extensive needs assessments. We use these to 
identify where the market needs affordable housing on a general 
basis.
    We then establish a class system to categorize projects 
based on need. The projects which meet the greatest need 
receive an absolute priority for housing credits. Those towns 
which don't have rental housing and those cities which have the 
greatest need for the rehabilitation of their housing stock get 
the first priority for the credit. Credits are allocated in 
that this fashion, and if there is not a need for the credits, 
we don't allocate them in the community.
    So in Connecticut housing credits are allocated on a 
comprehensive, ongoing basis, based on documented need 
determined in conjunction with the State agencies and the 
legislature. We prioritize the need of towns and housing 
markets for housing credit apartments. This is why in 
Connecticut we have a heavy emphasis for rehabilitation in the 
urban areas. This is our major documented need and this is why 
the credits are flowing there.
    We have a preference and a priority need for special needs 
housing for the homeless and people with AIDS or mental 
disabilities. This is why the funds flow there.
    We work very hard to determine up front that there is not 
the market competition with the housing developed solely by the 
private market. I would say that under past programs, when the 
housing tax benefits were not targeted and not administered 
directly by State agencies such as ours and not administered in 
the manner that the housing program is now. We did have some 
experience, actually in some communities in your district, 
where there was some unnecessary competition because of an 
overproduction of the supply of affordable or market rate 
rental housing. We had a couple of properties that got into 
trouble because of this. However those lessons have been 
learned. Those errors have been eliminated from the 
administration of the housing tax credit program.
    After we have established the need for a particular type of 
rental housing in a particular market in general, we get down 
to the specifics on a particular project. To do this we conduct 
an intensive market study, following the process I indicated. 
We also determine the project's appraised value, factored in 
the market demand for the project.
    We have actually not proceeded in cases where projects 
would have added to the rental stock and basically exacerbated 
the competition with the private sector.
    So it's really an ongoing, multistage process to establish 
need and prevent inappropriate or unnecessary competition in 
the market. The control and the responsibility is a partnership 
between our quasi-independent agency, the private sector, and 
our State policy and housing planning and needs assessment 
agencies and the legislature.
    Ms. Hodel. May I respond please?
    Chairman Johnson. Yes.
    Ms. Hodel. I have found that, in talking to the city 
council, that even if we decide that the city council picks the 
person that's going to take the survey, and the developer ends 
up paying for it--I've discussed this over 5 years now, trying 
to debate this--and let's say we do have an independent type of 
person to take the survey, then the second problem that we 
faced was the definition of comparable units.
    For instance, I have a little seven unit apartment 
building. And the developer is going to come in with a big 
hundred unit apartment building, and surveyor is going to say, 
well, yours is too small. We're not going to include yours in 
the study, or we've seen what appraisers use as comparable 
units.
    Are we going to include other affordable units, government 
subsidized units in the survey? Does the property have a 
manager, does it have a pool, does it have this, on and on and 
on. Trying to define comparables ends up leaving us, the small 
little guys out of it.
    If you're going to compare all those amenities, and so 
forth, like the normal appraiser do, then you leave the little 
apartment owners that are spread out throughout this country 
out.
    Chairman Johnson. May I get this straight? When the survey 
is done, because is requires looking at comparable units, that 
the units have to have comparable amenities?
    Ms. Hodel. That's what they're saying. When an appraiser 
comes, I have seen it. I have seen the definition of what 
appraisers used for comparable units.
    Chairman Johnson. I'll tell you, if that's true, we need to 
be clear about that. Because in most of the small communities 
there are no places with swimming pools. They didn't build them 
that way 10 years ago.
    And the issue is not are there units of that rent that have 
dishwashers. The question is are there units of that rent, 
period.
    Ms. Hodel. Thank you very much. I have argued that for the 
last 5 years. Thank you.
    Chairman Johnson. Now, we do need to get this clear, and we 
will pursue this, but if any of you want to comment, you're 
welcome to.
    Mr. King. One followup comment. I am talking about whether 
there is a need for affordable housing in the area at that 
rent. That's the issue for us.
    Chairman Johnson. And so you look at the rent for the 
space, not whether the space is comparable in the sense of 
quality and amenities.
    Mr. King. Correct. We don't want to build an apartment 
building down the road that has more luxurious amenities, and 
then have the people move out of the apartment here and move up 
the road. It's unconscionable to do that. CHFA has financed 
18,000 rental housing units across the State. We would be 
undercutting ourselves financially if we did that. We have a 
vested, fiduciary interest in not letting that happen.
    Chairman Johnson. Anyone else have any comment on this?
    Mr. Swank. Yes, if I may comment, Madam Chairman.
    Chairman Johnson. Yes.
    Mr. Swank. Representing the development community here this 
morning, I would say that what I have found in our Subcommittee 
on low-income housing tax credit within NAHB, the developers 
that I know across this country, and have met with and do 
business with, and myself being a developer from the Midwest, 
the market study being ordered by the developer I think is 
imperative, because of the fact that we want to know what's in 
that particular market.
    And if it's ordered by the State agency or ordered by the 
community, not necessarily will the same information be 
requested that we as the developers want to know.
    We want to know several things: one, we want to know if 
what we're risking is, is the market there, and the market, 
when we go into a particular area, we want to know every 
community, whether it's six units in size or six hundred units 
in size. We want to know when it was built. We want to know the 
occupancy levels, not only now, but what the occupancy levels 
have been, and the trend of occupancy within that community.
    If there's not a need, the development community typically 
will not go into that community.
    I don't know what the lady down here was referring to 
earlier when she said that the market study isn't including the 
small properties. I don't know what happens in her State. I can 
only speak to the States that we work in, that developers that 
I know, and in my testimony we have supported the GAO report 
asking for market studies by third parties.
    And the third parties could come from a list supported by 
the State agency, of which we can select from, but certainly 
the development community with all the onerous responsibility 
they have for producing the housing, and for the rent up, and 
for the continuation of all the eligibility of all the 
residents in there, don't take that lightly.
    And I think we're talking about one other issue, and that's 
quality of life. Just because an apartment community was built 
40 years ago doesn't necessarily mean that it still has the 
same quality of life offered to the residents in that apartment 
community, as does one being built today.
    But conversely, it can be the other way around. Many old 
apartments that have been rehabbed are much, much nicer than 
new ones we can build for the same price today.
    Chairman Johnson. I do think it's difficult for us to get 
into the quality of life issue beyond sort of basic shelter 
concerns, and code compliance and stuff like that.
    I want to recognize Mr. Cardin who has been able to join 
us.
    Mr. Cardin. Thank you, Madam Chairman. I appreciate you 
recognizing me out of order, so I can welcome Sister Nancy to 
our Committee room.
    Bon Secours is a wonderful facility that we have in 
Baltimore, and I was very impressed by not only your leadership 
of Bon Secours but the statement that you have made that you're 
interested not only in the health of the individuals as far as 
their medical needs, but also the community at large.
    And I think that speaks well for the priorities that you 
have brought. I am familiar with the work that you're doing on 
West Baltimore Street, on the renovation of the housing there. 
I know first hand that that could not be done without the low-
income housing tax credit assistance.
    And I would hope, I want to make clear that the statement 
that you have made is part of our record of how you and 
Baltimore have used the housing tax credits for partnerships to 
develop more affordable housing for the people of that 
community.
    You are making a major difference in West Baltimore, and I 
just want you to know that we notice that, and very much 
appreciate your testimony today.
    Sister Glynn. Thank you, Congressman Cardin. And thank you 
for your continued support.
    Chairman Johnson. We do have a vote going on. I am going to 
recognize Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairman. Mr. King, I wonder if 
you could comment for us on the effectiveness of the program, 
if we revert to a stop and start permanency aspect of the 
program that existed before 1993.
    What impediments does that put up relative to getting these 
projects going?
    Mr. King. Well, it takes a long time and some money for a 
developer to come up with an idea, development proposal, and 
application to respond to a particular housing need. Pull 
together the plans, make the investments, do the preparatory 
work.
    So there's a lot of lead time required to develop housing. 
It could take a year or two, or more.
    What we saw when the program was not permanent is that 
developers didn't pursue investing in the priority areas of 
housing need as much as the State of Connecticut would have 
liked.
    In our State system we rank projects according to whether 
or not it is a class one, class two, class three priority 
project. If you ranked projects prior to 1993, we saw that the 
applications arrayed in a descending order of importance like a 
pyramid.
    Also, we did not have a situation where we had more 
applications chasing credits than there were credits to 
allocate. Since permanence, in response to the priorities we 
have clearly established, we are seeing two to three times the 
applications coming in than credits are available. Also these 
applications are for projects which respond to the top 
priorities in the State of Connecticut; our class one needs.
    For the last 2 years we have essentially been able to only 
fund the class one projects. This is because the development 
community knows that the credits are there, if they try to 
build the housing for the State's priorities. They know if they 
invest their time, energy and resources, they have a high 
probability of getting funded, as long as they comply with the 
housing credit program's rules.
    The second thing we have seen since 1993 is that the 
credits have been leveraged very effectively. Prior to 1993, 
because of the uncertainties of the investment community about 
the continuity of the housing credit program, we were getting 
50 cents on the dollar essentially for every dollar allocated 
of credits. Now we're getting over 70 cents on every dollar. 
The investment market has became extraordinarily effective and 
efficient because of the program's stability.
    So, permanence has provided the program much bigger impact 
in terms of enabling us to reach the priority needs of the 
State. My concern is that without permanence, without that 
stability, the message to the development community and the 
investment community will be that you have greater risk, 
uncertainty. My concern is that without permanence the message 
to the public local and State agencies will be that you cannot 
count on and will not see the types of projects in the volume 
and of the quality and with the efficiency that we need to meet 
those pressing urban and other needs in Connecticut and in the 
Nation.
    Mr. Coyne. Does any of the other panelists have a differing 
view of that relative to permanency? Thank you.
    Chairman Johnson. I want to ask you--Mr. Weller went to 
vote, and he's coming back, so he'll continue while we go to 
vote. But I want to ask you the following question: on the data 
developed by the GAO, 43 percent of units are occupied by one 
person; 24 percent by two people.
    This suggests a lot of this is elderly housing. Only 17 
percent by 3 people, 11 percent by 4 people, 6 percent by 5 or 
more. In other words, almost 75 percent, at least 70 percent of 
this housing is occupied by one or two people.
    Now, it is not my understanding as a Representative that 
that's the big need in our Nation. I'd have to say that. The 
States have been pretty good at senior housing and so on.
    Why? I know, off the top, I'd say because this is easier 
housing to provide. It's easier to manage. When you're looking 
15 years, you can assume upkeep. But this wasn't my idea of 
what we were doing here. Where are your priorities?
    Mr. King.
    Mr. King. Well, in Connecticut, and I think it's also true 
across the country, there's a lot of use of the tax credit to 
build housing for populations with special needs. About one 
third of the credits allocated in the last 2 years in 
Connecticut went to people who were in transition, homeless, 
suffering from substance abuse, or other health problems.
    Basically, we have learned that this type of development 
requires efficiencies or one bedroom apartment developments. So 
if you're pursuing a special needs population, which is a 
critical issue and housing need in most States, you should 
expect small units with few bedrooms, because that's the 
appropriate type of housing for that constituency.
    In Connecticut it's one third of the units produced.
    Chairman Johnson. But this is the biggest--this is an $18 
billion program. And we now have 4 minutes left. So we may have 
to come back to this. But one more minute.
    Mr. King. The second explanation for this GAO finding is 
that a high proportion of the families, or 60 percent of the 
families in the country are seeking or require one or two 
bedrooms apartment situations. We have a high divorce rate. We 
have single family heads of household, mothers with children.
    Chairman Johnson. So you would say that many of those two-
person households are parent/child?
    Mr. King. Yes. That type of thing also partially explains 
the funding. Also, please note. The GAO study focused on the 
period 1992 to 1994. In 1995-96, you're seeing at least one 
third of the units funded through the housing credit program 
nationwide have three bedrooms or more. This proportion was 
also confirmed recently in Connecticut also.
    Chairman Johnson. OK. I must go vote. When Mr. Weller comes 
back, he will pick up and go forward.
    The other thing I think you need to think about, another 
question we need to get this panel to answer, is this issue of 
stacking of subsidies. And if we don't, we certainly will talk 
about it more with the next panel.
    Seventy-one percent of these units have more than a low-
income housing tax credit subsidy. Now, what does that say 
about how we're using public moneys to leverage unit 
availability?
    So I'm going to excuse myself, and Mr. Weller will continue 
as soon as he returns. And if no one is back when he finishes 
his questions, he'll dismiss this panel and go on to the next 
one.
    Thank you.
    [Recess.]
    Mr. Weller [presiding]. We can resume the hearing here, 
while people are running to vote.
    I want to direct my questions I think first to the private-
sector representatives on the panel. You know, my community, I 
represent a very diverse district. The south suburbs of Chicago 
as well as the South Side of the city of Chicago. And many of 
these are older communities, in need of affordable housing, as 
the area changes, and, of course, also grows.
    But the low-income housing tax credit frankly initiated a 
just recently, we announced a public/private partnership 
between the private sector as well as the local community for 
redevelopment of Joliet Catholic High School, which currently, 
the former building, which is a historical building, in a 
community that's 85 percent Catholic, it's a project heavily 
supported by the community, but redeveloping Joliet Catholic 
High School for senior citizen housing, affordable housing 
project, overwhelmingly supported by the community, and greatly 
anticipated by community.
    And I consider it to be one of the successes of the Low-
Income Housing Tax Credit Program.
    I would like, I think, initially to direct my first 
question to Mr. Swank, representing the homebuilders today.
    It's been suggested in the past, and of course there was a 
successful effort in 1993 to make permanent the low-income 
housing tax credit and since that permanency was established 
some have suggested perhaps making it a temporary tax credit 
again, restoring the temporary status, sunsetting the tax 
credit.
    And you alluded to that issue in your testimony. From your 
perspective as a private builder, as someone who invests in the 
construction of affordable housing, should the tax credit be 
sunsetted, what would be the impact from your point of view as 
a businessperson considering investing in affordable housing?
    Mr. Swank. I think there are a couple of main points that I 
would like to make. First of all, the uncertainty of the 
continuation of the permanency of the credit program would 
certainly make the private community look hard at continuing to 
invest in finding the properties, finding the locations, 
seeking out the qualified allocation plan to determine where 
the targeting was being done within the State that they were 
doing business in.
    Our company happens to do business in the States of 
Illinois, Michigan and Indiana. If that were to become a sunset 
provision, where we only had 2 or 3 years left in the program, 
we would look at those qualified plans and determine the areas 
in which the States were targeting that.
    Second, we would not go as far out as trying to determine 2 
years from now where we'll be building at, and the process we 
have to go through on zoning, the acquisition or optioning of 
property, dealing with local advocates of housing, the local 
council people, and various groups of that nature in all the 
communities that we build in.
    The third is the credit value itself. If you recall, in 
1993, 1992, the credit value was somewhere around 46 to 51 
cents. Once it was made permanent, and everyone got comfortable 
with that, all of a sudden the credit value now is up over 70 
cents for every credit dollar.
    So there's a larger bang for the dollar, if you will, 
because people have confidence in the credit, and the 
continuation of that credit. And the corporate community, 
that's the investment partners in most of these properties, I 
would fear would again revert back to a concern about what's 
going to happen, and the confidence in the government and what 
will happen with the credits that they buy, and they may 
disappear and go to some other avenue for investment.
    Mr. Weller. You know, it's projected that the tax credits 
are responsible for about 95 percent of the affordable housing 
that was constructed and made available last year throughout 
the Nation, about 100,000 units resulted from the tax credit.
    Do you have any idea, if it was sunsetted, say, 2 or 3 
years from now, because of that lack of certainty, what impact 
that would have on the amount of units that might be produced?
    Mr. Swank. Congressman Weller, right now, if it were not 
for the low-income housing tax credit I dare say there would be 
less than 25 percent of that housing stock being built, because 
we'd be relying on CDBG funds, home funds and other avenues 
within the local communities and State communities without 
having the tax credit available.
    And perhaps that percentage is much lower than 25 percent 
of what we're currently building.
    Mr. Weller. So you would project a 75-percent reduction.
    Mr. Swank. Yes.
    Mr. Weller. In the construction, in the amount of 
affordable housing that would be available in the future as a 
result of that?
    Mr. Swank. Yes.
    Mr. Weller. Mr. Haynsworth, as a syndicator, someone who 
puts together the financing package, when it comes to the 
potential for sunsetting the tax credit, changing the status of 
what currently is permanent, what do you see as the impact of 
that on those you call upon to make decisions on where to 
invest their dollars?
    Mr. Haynsworth. Well, what is happening in the investment 
marketplace is that investors come in, and then they get their 
fill of tax credits and they leave. And to give you an example 
of how long it took to educate investors when the program first 
started in 1987, we could not interest corporations in 
investing in this product. It took them 4 years before we did 
our first fund.
    And it takes a lot of time, a lot of education, a lot of 
resources applied to understanding the program to get these 
investors interested.
    And we need to recycle and find new investors at all times. 
For example, in our last fund, we had ten investors, seven of 
which were new investors to the program. Older investors lose 
interest, because either yields are going down or their yield 
thresholds have been exceeded.
    So we have to find these new investors. You're not going to 
be able to find them, because they're just not going to spend 
the time and effort to understand the program in the event 
there is a sunset provision out there.
    Mr. Weller. Mr. Swank had indicated that from his 
perspective he could potentially see a 75 percent drop in the 
amount of affordable housing that would be produced as a result 
of the tax credit were it sunsetted, because of lack of 
certainty.
    Would you agree with that figure?
    Mr. Haynsworth. Yes. I would think so. In fact, I would 
think it would be even more than that, because the credit 
program is really the driver of all affordable housing. And 
there's no other viable substitute that's out there.
    Mr. Weller. Let me ask if there are other members of the 
panel that would like to address the permanency. Mr. Barbolla, 
as a homebuilder in primarily rural areas, would you like to 
address this question?
    Mr. Barbolla. I think it's tremendously important to rural 
areas to have the permanency of the program. Without tax 
credits, we could see in rural Texas probably a drop, 95 
percent decrease in affordable rural housing in the rural areas 
of Texas.
    And I might still be on the high side. We might still be 
able to produce 5 percent. Because there's an additional 
problem, I think, not only the ones they've mentioned about 
investors.
    The people outside of Washington probably don't understand 
the message of permanency. But I remember back in 1986, if you 
take away, tell investors here that we're not going to have, 
the program is no longer going to be permanent, then investors 
get worried, wait a minute, I'm making an investment for 
dollars today for 10 years of tax credit.
    What is going to keep government from taking away the tax 
credit 2 and 3 years away? There are many alternative 
investments. I think if we remove permanency, we're going to 
create a scare in the market, and the price is going to go 
down, and we're going to be able to create less units, even in 
this 2 or 3 year interim period, because of the uncertainty in 
the market.
    So not only will a lack of permanency affect us 2 or 3 
years from now, I think it may immediately affect us with the 
uncertainty in the marketplace.
    Mr. Weller. What do you think, from the rural perspective, 
about attracting those willing to invest in affordable housing 
in rural areas as compared to more urban areas? Is there a 
difference? Is it more difficult to attract private investors 
in the rural areas?
    Mr. Barbolla. Basically I rely upon syndication firms, such 
as Boston Capital, Boston Financial, to find the investors for 
us. I know of very few developers in rural areas who go out and 
try to find their own investors. They all use syndication 
firms.
    On actually what types of investors? I'm not sure. My 
recent properties, we've been using more corporate investors, 
looking at who actually signs off on the limited partnership 
agreement.
    Mr. Haynsworth, maybe it would be better for you to address 
that from the syndication standpoint.
    Mr. Haynsworth. Is the question is it more difficult to 
raise capital for rural housing? Not necessarily. I mean, if 
you have a project that really is a good project, we will 
certainly invest in it. They are much smaller, and they're much 
less efficient, and they're sort of harder to find, so that 
there's less incentive to invest, truthfully, in a smaller 
project.
    However, we're all seeking volume. We're trying to generate 
as much volume as possible. So we look at every particular 
project, and we've done many rural projects.
    Mr. Barbolla. Mr. Weller, if I could go back to that issue. 
I didn't realize you were looking at how it affects rural 
developers. Some of our prices are lower, because if your 
average project is, say, 24 units, obviously a syndicator would 
rather do one 300 complex, or a 200 unit complex than do, what, 
ten 24 unit complexes.
    There is an economy of scale with the larger complexes that 
are lost in the rural areas. So in a way, it is more costly for 
the syndicator to actually perform the deal. So our, quote, net 
price that we have equity available is lower.
    Mr. Weller. Mr. Weiss, do you have a comment on the 
permanency versus sunsetting, potential sunsetting of the tax 
credit on how it impacts?
    Mr. Weiss. Yes, thank you. I would just add that from the 
developers perspective, the costs involved in developing a 
project are significant. And the time required is also very 
lengthy. So that the zoning process, getting the property under 
control, and all the predevelopment and preconstruction 
processes that take place are all very expensive.
    And for a developer to have the confidence to continue to 
do this kind of development, and at the same time have the 
threat that the program will be sunsetted I think would drive 
developers away from this kind of development and into 
something else.
    So part of it, I think, lies in how long the sunset period 
would be, but also just the mere threat of it would drive 
developers away from this.
    Mr. Weller. What is the turn around time? When someone 
decides to put together a project as proposed, going through 
the permitting process, the zoning, do you have a perspective 
about what amount of time it usually takes for a project to get 
from idea to actual construction and development and being made 
available?
    Mr. Weiss. I would say, that it depends on the locality--
but it's probably somewhere between 9 and 12 months.
    But if you add on top of that the period for the 
application and approval process it could be as much as a year 
and a half. So it's a significant investment on the part of 
developers and an investment where the risk increases 
tremendously if the sunset is even threatened.
    Mr. Weller. Mr. Swank, do you agree with that period of 
time?
    Mr. Swank. Yes, I do. But I would expand that a little bit. 
I have had one go as far as 3 years through the zoning process 
before the ability to proceed status in the State that I was 
working in before I was even eligible to submit an application.
    The application first round was not approved. The second 
round 5 months later it was approved. So that took 
approximately 9 months after the first application submittal, 
in addition to almost 20 months of zoning process.
    It was almost 3 years before we could actually close and 
start construction.
    Mr. Weller. Thank you, Mr. Swank. I see our Chair has 
returned, and my time is basically up, my 5 minutes. But, Mr. 
King, as someone who administers the tax credit in your State, 
working with the syndicators and the developers and those who 
need affordable housing, particularly the working poor--
permanency versus sunsetting.
    How would that impact the development of affordable housing 
in Connecticut? Would you see continued development, or would 
you see a drop off, as some of the other panelists have 
suggested?
    Mr. King. I think you would see a drop off. I don't know 
the precise numbers, but it clearly would alter the quality and 
response of the developing community to the priorities, the 
difficult priorities and problems facing Connecticut.
    It's difficult to build the type of housing that is a 
priority in Connecticut. It takes a long lead time, and 
overcoming and facing a lot of risks. Developers, when you have 
the start and stop situation, like in the past, will not 
respond to our needs with the same level that they have since 
permanency.
    Mr. Weller. There's a need for affordable housing, and what 
I was--in comparing the period between 1987 and 1993, when it 
was stop and go, in 1993 it was made permanent. Did you see a 
significant difference in the interest of the private sector in 
investing in affordable housing as a result of that permanent 
status versus stop and go?
    Mr. King. Four to five times more interest since 
permanency.
    Mr. Weller. Thank you. I know my time is up. I want to 
thank the panel, and I'll turn the chair back over to the 
Chairman. Thank you.
    Chairman Johnson. We do have to move on to the next panel, 
but I know you didn't discuss stacking of subsidies, and any 
thoughts you have on that--we'll talk about that with the next 
panel--but any thoughts you have on that, we'd like to hear 
from you.
    I mean, we have to think about how many different subsidies 
from the public level, Federal and State does it take to make 
something affordable, and is that the best way to use that 
money? Or should we be focusing our dollars where one set of 
subsidies is sufficient to accomplish our goal, rather than a 
series of subsidies.
    I can see how in special needs housing you might need a 
series, but I am concerned that it's very hard for us to 
document the power of the low-income housing tax credit, 
because 71 percent of the units have some additional subsidy, 
either section 8 rental, or rural housing, or State grants or 
something.
    And we do not have from the GAO report good information 
about the depth of subsidy stacking over these projects, and 
therefore it's very hard to evaluate the public benefit. I ask 
you to think about that and get back to us on that, any of you 
who care to.
    The other thing I would like to know--what I see in my 
hometown are a lot of owners of affordable units that would 
love to modernize their units. They can't afford to, and they 
can't let the building inspector come in, because if they do, 
there are little code violations and so on and so forth, and 
the rents can't take it.
    And so they'll never get their money out of it if they put 
$5,000 into that building. And I think you ought to begin 
thinking about what is that consortium of small landlords in 
small cities that you could back to upgrade all of their 
properties, so there's a competitive equality here, but would 
address the neighborhood issue that the Sister is talking 
about, and that, frankly, all of us face at home.
    In my hometown, we have a surplus of affordable units, but 
what we really need is to be able to upgrade those units. Those 
landlords can't even apply for lead paint removal money. Why? 
Because the building inspector will come in, and they'll have 
to do this to code and that to code, and if it gets over a 
certain amount of money they'll have to put an elevator in. 
This is hopeless.
    If we're going to keep this out there as one of our most 
powerful tools for developing affordable housing, and high 
quality affordable housing, which it clearly does, you need to 
help us think through how do we help a consortium of landlords.
    We did this in health care, remember. We got small 
businesses the right to get together so they could get into 
lower cost plans. Now, you have to start thinking about this. I 
know this is harder for people to invest in, because you can't 
oversee the project to make sure the construction is right, and 
make sure that over 15 years it's going to be well managed. I 
understand that.
    But those are all solvable problems. So I leave you with 
that challenge, and with that thank you very much for your 
testimony. We really are compelled to go ahead to the next 
panel.
    F. Barton Harvey, the chairman and chief executive officer 
of the Enterprise Foundation, Washington, DC; Benson Roberts, 
vice president for policy, Local Initiatives Support Corp. of 
Washington; Herb Collins, chairman of Boston Capital Corp.; 
Wilfred Cooper, chairman of WNC & Associates, Costa Mesa, 
California; Ron Platt, legislative director, McDermott, Will 
and Emery, Washington, DC; Herb Stevens, Peabody & Brown; Terry 
Lewis, former chairman of the National Cooperative Bank.
    With that, I'd like to yield to Mr. Cardin.
    Mr. Cardin. Thank you, Madam Chairman. This seems to be my 
day for people from Baltimore. I want to welcome Bart Harvey. 
Mr. Harvey recently received an article in the Baltimore 
Magazine that is flattering and true.
    We no longer have Jim Rouse that we can call upon for his 
visionary leadership in housing, but we have his disciple, Bart 
Harvey, and we are very appreciative of it.
    The article starts with Bart Harvey gave up a life of 
privilege to follow Jim Rouse's vision of housing the poor. 
That's certainly been true. And then it says that Mr. Harvey is 
largely responsible for selling Congress on the Low-Income 
Housing Tax Credit Program.
    Madam Chairman, we are very fortunate to have a person of 
Mr. Harvey's commitment and experience here, and I look forward 
to his testimony.
    Chairman Johnson. Thank you, Mr. Cardin. I must say that 
Baltimore has a lot that is progressive in it, but you have an 
incredible Member of Congress, too.
    Mr. Harvey.

STATEMENT OF F. BARTON HARVEY III, CHAIRMAN AND CHIEF EXECUTIVE 
         OFFICER, ENTERPRISE FOUNDATION, WASHINGTON, DC

    Mr. Harvey. Thank you, Madam Chairman and thank you very 
much, Congressman Cardin for those remarks, and to other 
Members of the Committee. I'm delighted to be testifying before 
you.
    I follow in big footsteps, Jim Rouse's footsteps, who was 
the founder, with Patty Rouse, of the Enterprise Foundation.
    And we have been involved in the low-income housing tax 
credit from its very start. In fact, we worked with Senator 
Packwood on it in 1986, when it was first being conceived.
    The Enterprise Foundation, and LISC, have also developed 
the corporate market in the low-income housing tax credit. Let 
me just take 1 minute to explain what the Enterprise Foundation 
does.
    It works in 153 cities with 700 nonprofit groups that are 
all providing the opportunity for decent, affordable housing, 
and a path up and out of poverty. And it's both of those. It's 
using housing as a platform to changing lives and putting 
people back into the mainstream.
    We've invested over the last 15 years almost $2 billion in 
distressed inner-city areas through loans, through grants and 
principally through the use of the low-income housing tax 
credit. And we have further commitments on the tax credit to be 
invested of another $500 million. And they all come from 
corporations.
    We were very deeply involved in the GAO report. The GAO 
came to us, asked us to share data. We don't have a lot of 
people. We have to raise funds ourselves, but we did commit 
over the past 2 years significant manpower and resources to 
make sure you had all of our data, that you saw the projects, 
the GAO saw the projects, and that there was a fair report.
    And we think that the report that came back says this 
program works. And I'd like to just comment on a couple of the 
items.
    And, Madam Chairman, you have wondered about the incomes 
served, which are well below the required number, and it's an 
average that's in the GAO report, of $13,300 of income for each 
household.
    And I'm just speaking for the Enterprise Foundation and our 
use. That average is really two different populations that are 
being served by the Enterprise Foundation. The country is 
changing radically from a manufacturing base to a service base.
    And over 30 percent of those employed in the country today 
make $8 an hour or less. Thirty percent of everyone employed, 
that's $20,000 or less annually. This low-income housing tax 
credit serves that population.
    The other major population that we serve are those with 
special needs, those that were formerly homeless, those that 
were mentally ill but can independently live, those that have 
some other special need--frail elderly are a perfect example.
    I was with Congressman Rangel at the opening of Gabriel 
House, and I wish all of you on this Committee could have been 
there, because it's an extraordinary program for recovering 
addicts to get back into the mainstream of life.
    Representative Lazio was also to be there. Unfortunately, 
he was pulled away at the last minute to tour the parts of this 
country devastated by the flood.
    But the comparable numbers for this special needs 
population in New York are $113,000 a year to put somebody into 
a psychiatric hospital. And we have people who have come out of 
psychiatric hospitals that can, with help, live in the 
community in a decent way.
    If people don't get some place to live, $60,000 a year for 
jail right now. Those are the costs in New York, $20,000 a year 
for a shelter.
    And for an overall cost, this GAO report of $60,000--that's 
3 years of being in a shelter--you get provided a decent place 
to live, and outside help from other nonprofit agencies, and a 
helping hand to get back into the mainstream. That's 3 years of 
costs for a unit.
    Let me also say how we administer this program. We go out 
and check our property every year. We have asset managers. We 
do not have a single default in everything that we've done, and 
that's by design, and that's because we also work in 
partnership with local governments and with banks and other 
investors in this program.
    Another benefit that comes from the way that Enterprise 
works with this project is that the work is done through small 
contractors. We have high minority participation, participation 
by professionals who are the architects, who are doing the 
drawings, who are lawyers, and so forth, as well as small 
subcontractors that recycle this work back into communities and 
into the urban areas that so desperately need those jobs.
    Let me just comment--I see the red light--and I'd like to 
comment on a couple of issues that you had about program 
efficiency. If you take the tax credit the way it comes in, 
which is over 10 years, and you were to discount it back using 
the Federal rate, saying it was as safe as buying a bond, that 
dollar would turn into 71 cents.
    And right now the credit is getting 66 cents. It's up from 
that 53 cents. So if an investor says this inner-city holding 
for 15 years with penalties is riskier than a bond, you very 
quickly approach that 66 cents.
    There's very little leakage from this program at the 
current time. It's become a very efficient program because it's 
been allowed to work competitively in the market.
    As far as subsidy stacking goes, in most parts of the 
country the tax credit alone will not work in and of itself. 
Because you have capped rents and you have certain costs that 
you have to meet.
    And so inevitably from local governments you will get 
another small layer of subsidy which is through the community 
development block grant or the home program or some other 
program to make it work. If you want to get to special needs 
population, you need larger subsidies, because you're really 
getting no payment back from that population, or very little 
payment back from that population.
    Chairman Johnson. Thank you, Mr. Harvey. I'm sorry. We do 
have to try to stick with the lights, and then during the 
discussion----
    Mr. Harvey. Thank you. Can I just end with one last thing, 
which is to say that the GAO report which we worked so hard 
on--this is our life blood--has come out and given it very high 
marks, and any approach to sunset it would seem to be--would 
mystify us as far as what's coming out of it.
    Chairman Johnson. Look, don't get all riled up about 
rumors. You know, this is a difficult time, and we are 
compelled as a legislative body to balance the budget, and 
we're going to do that.
    There is no way--I think this is probably a sentiment 
shared on both sides of the aisle--there is no way that one 
cannot change the tax structure for 7 years, looking at the 
burden on families at this time.
    So there will be tax cuts. In the course of that, working 
with Members, all of whom want to increase spending, and the 
President, who included a lot of increased spending in his 
budget, sometimes people say, ``Look at all this that we have 
to do, we have to cut taxes, we have to cut spending, we have 
to increase spending, and where is it all going to come from?''
    So there are long lists of things. Any one of you who have 
followed our struggle to reform the R&D tax credit will know 
that we only got that extended 9 months. So there's a lot of 
things on the table.
    We are keenly aware of the quality of this program, and the 
study has shown no big problems with it. There are changes that 
can be made. So let's stick to our business here, and our 
business is to see what went wrong with this program, what can 
be improved about it, how can it be more powerful, and then it 
has to be able to hold its own with competing interests. That's 
the way all programs have always had to do it.
    It's the job of the members who support it and the 
advocates to make sure we hold our own.
    So, it's not bad to have a rumor like that. Maybe all of 
you will realize this isn't going to be rolling off a log. 
Nothing is rolling off a log up here any more, not an 
appropriated program, not a tax expenditure program.
    So fine, get out there. Now, let's go on.
    Mr. Harvey. Thank you.
    [The prepared statement follows:]

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    Chairman Johnson. Mr. Roberts.

  STATEMENT OF BENSON F. ROBERTS, VICE PRESIDENT FOR POLICY, 
        LOCAL INITIATIVES SUPPORT CORP., WASHINGTON, DC

    Mr. Roberts. Thank you, Madam Chairman. My name is Benson 
Roberts, and I'm vice president for policy at the Local 
Initiatives Support Corp. LISC is a national nonprofit that 
brings private capital to the revival of low-income 
neighborhoods and distressed rural areas as well.
    We work exclusively through nonprofit community 
organizations, governed by the residents of those communities, 
with a broad rebuilding strategy that includes not only 
housing, but also employment, crime reduction, child care and a 
range of other community needs as well.
    We've been in business about 17 years now. We operate in 37 
parts of the country, including Connecticut, and we are about 
to establish a program in Western Pennsylvania.
    Our affiliate, the National Equity Fund, has been the 
largest user of the low-income housing tax credit, over the 10 
years of its existence--about $2 billion we have raised from 
about 130 corporations, many of them Fortune 500 corporations.
    And we provide about $350-$400 million of equity through 
these community organizations a year.
    Let me give you a sense of the kinds of projects these are. 
These are overwhelmingly urban projects, about 90 percent, and 
85 percent of them are in low-income neighborhoods. They are 
very much like the Whispering Pines project that Congressman 
Metcalf described, and the Nelson Street project in Hartford 
that I believe you may have visited recently.
    This is housing that's intended to rebuild the community.
    We stress the importance of long-term management of these 
properties, so that they continue to be strong assets for the 
community. We work very hard to build the capacity of the 
community sponsors in this process. Unless this housing works 
for the long term, it serves no one's interest.
    And we're very pleased, by the way, that that is happening. 
We believe the credit, in fact, is fueling a remarkable revival 
in urban neighborhoods around the country. Not yet widely 
recognized, but along with the many devastated neighborhoods, a 
surprising number are really coming back now.
    They've got an increased tax base, lower crime, greater 
reinvestment all around. And the housing credit is stimulating 
those other effects. Last week David Broder had a column on 
this in Chicago.
    GAO's findings were not terribly surprising to us, because 
of the way the credit is designed. It's designed to promote the 
right kind of behavior by all participants in the process.
    Very briefly, pay for performance: because the credit is a 
pay for performance program, everyone in the process has to 
make sure that the program delivers. That is the most important 
single element, and you just can't do that with a spending 
program, as important as spending programs are, and we do 
support them.
    That's not something that can be done outside the Tax Code.
    Second, flexibility. Responsiveness to local needs is one 
of the great hallmarks of this program. It helps develop 
apartments, single family homes, town homes, facilities for the 
formerly homeless and the disabled, and the like.
    It also provides a bridge to home ownership. In places like 
Cleveland and the Twin Cities, the credit has been used to 
really help move tenants into home ownership.
    State administration has been a very important part of this 
process. The States do an outstanding job on the whole, and we 
certainly believe they do a much finer job than a Federal 
agency could.
    But most important, again, it's the right incentives. The 
sponsors, in order to win allocations, must address State 
priorities. Investors must provide as much equity as possible 
in order to win the right to participate in the housing 
development.
    Everybody's got to build and operate this housing on time. 
They have to build it well. They have to build it to last. They 
have to operate it responsibly, or the investors aren't going 
to be able to get their credits. You have to keep qualified 
tenants in place, at qualified rents, or, again, you don't get 
the flow of credits.
    So the government doesn't pay for failure here. It only 
pays for success. That's unique.
    Just very briefly, on the importance of permanent status, I 
agree with the comments made in the last panel. Permanence has 
encouraged everybody to invest more in this program, not just 
invest more dollars, but invest in the systems that are going 
to keep the program strong.
    The efficiency has gone up because of permanency, and I 
think it goes without saying that if there were any disruption, 
for any reason, in this program, it would be less efficient. 
And I think the industry as a whole would believe that there 
would be no chance that the program would come back, were any 
sunset established.
    Thank you.
    [The prepared statement and attachment follow:]

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    Chairman Johnson. Thank you, Mr. Roberts.
    Mr. Collins.

STATEMENT OF HERBERT F. COLLINS, CHAIRMAN, BOSTON CAPITAL CORP.

    Mr. Collins. Thank you, Madam Chairman, and Members of the 
Subcommittee. My name is Herb Collins. I'm the chairman of the 
Boston Capital Corp., which has been in the business of 
affordable housing development, management and financing since 
its inception 23 years ago.
    I might date myself, and say I've been involved in the 
business since 1971, both on a personal as well as a 
professional basis. Again, I do look forward to working with 
you and your staff on the legislative reforms designed to 
strengthen compliance and enforcement of the Low-Income Housing 
Tax Credit Program.
    In the interest of time, I have shortened my testimony. I 
have filed a statement for the record. I would like to leave 
more time for questions, which I found to be very, very 
informative.
    Although we in the real estate industry are aware of the 
tremendous success of the program, the GAO report clearly 
demonstrates that the low-income housing tax credit should 
remain a permanent part of the Tax Code, and is an excellent 
public-private partnership for providing affordable housing for 
working families, their children, and senior citizens.
    The secret to the success of the credit is that it relies 
on local control and requires minimal involvement by the 
Federal Government. The program works because it provides 
incentives to the private sector to build the housing, which 
actually would not have been constructed but for the credit.
    The GAO report recommends four initiatives. Most, if not 
all, of these recommendations would, in my estimation, 
strengthen the program, and help ensure its continued success.
    I am particularly supportive of the recommendation 
regarding independent verification of sources and uses of funds 
submitted by developers. I also believe that requiring onsite 
inspections on the part of the State housing agencies is an 
important addition to the compliance structure.
    As you know, Madam Chairman, and Members of the 
Subcommittee, we in the private sector also have been working 
on ways to improve compliance and enforcement. Some of these 
recommendations were offered last week, and merit your serious 
consideration.
    I am particularly supportive of the recommendation to 
criminalize false material statements, or representations on 
any documents relating to housing credit applications. I also 
think that allowing State housing agencies to establish a safe 
harbor cure period for small and inadvertent errors of 
noncompliance would streamline the program.
    With my remaining time I would like to highlight some of 
the points made by Mr. Haynsworth regarding the role of the 
syndicator, and how we in the private sector fit into the 
compliance and enforcement mechanism. Due to the excellent 
testimony presented to you last week by the GAO, Internal 
Revenue Service, and the National Council of State Housing 
Agencies, the Subcommittee is now aware of the joint Federal/
State oversight system.
    Although their role is not as formal as that of the IRS, 
and the State housing agencies, investors, lenders and 
syndicators play a unique role in ensuring compliance with the 
requirements of the tax credit program.
    Syndicators have a fiduciary responsibility to insure that 
investors receive their full complement of tax credits over the 
designated period. To do this, we must be involved in every 
stage of the application, construction and management process.
    Even before the developer has applied to the State housing 
agency for a credit allocation, Boston Capital commissions its 
own market study to ensure that the proposed project is viable, 
given rent, income levels, vacancy rates and other market 
conditions.
    In fact, we have three levels of market studies. One is 
done by the developer. We also retain an outside consultant to 
conduct a market study. And we ourselves, within our own staff, 
conduct a market study to be sure it meets our requirements.
    As a point of interest, we have a portfolio of over 80,000 
affordable units, of which 50,000 are tax credit units. Our 
properties have an average occupancy of 95 percent which 
clearly demonstrates that there is a demand that is being met 
and that the units are being built where needed.
    Before construction begins, we analyze the construction 
quality to assure that individual capital goes into the 
building through an architectural and engineering review.
    We continually monitor the property during construction, 
the lease up period, and throughout the life of the investment. 
Our monitoring includes a constant review of construction 
draws, rent rolls, occupancy reports, income and expenses, tax 
returns, audited financial statements, and the tax compliance 
work sheet.
    We also visit the property on a regular basis to check the 
physical plant as well as tenant compliance.
    This, then, is the role of the syndicator. Our investors 
rely on us to insure the validity of the costs, and very, very 
important, the long-term viability of the property, and the 
need in each specific market for affordable housing.
    In short, to provide good, sound underwriting.
    There has been discussion of some fees for the developer 
and the syndicator. Let me assure the Chairman and the Members 
of the Subcommittee that our syndication fees have been 
significantly reduced as a result of the permanence and other 
efficiencies.
    As of today, a greater percent of the investor dollar goes 
to the property as equity capital.
    Let me conclude, Madam Chairman, by again thanking you for 
allowing me to be here, and for the opportunity to work with 
you and your staff in developing improvements to the compliance 
and enforcement system for this very, very important program.
    I would be glad to answer any questions at the end of this 
discussion.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Mr. Collins.
    Mr. Cooper.

  STATEMENT OF WILFRED N. COOPER, FOUNDER AND CHAIRMAN, WNC & 
   ASSOCIATES, INC., DIRECTOR, NATIONAL ASSOCIATION OF HOME 
 BUILDERS, DIRECTOR, NATIONAL HOUSING CONFERENCE, AND MEMBER, 
    EXECUTIVE COMMITTEE, U.S. CHAMBER OF COMMERCE, TAXATION 
                           COMMITTEE

    Mr. Cooper. Thank you, Madam Chairman. I very much 
appreciate the opportunity to present this testimony on the 
Low-Income Housing Tax Credit Program today. I am Will Cooper, 
founder and chairman of WNC & Associates, of Cosa Mesa, 
California. We also have offices in Portland, Oregon, Houston, 
Texas, and Washington, DC.
    For over 25 consecutive years, WNC has provided the equity 
capital through syndication for affordable housing for working 
families and the elderly in rural areas, the suburbs and 
metropolitan areas all across the country.
    WNC has sponsored over 100 investment funds, and has over 
11,000 investors, including Fortune 500 companies and 
individuals. As an investment sponsor, WNC acts in the capacity 
of a watchdog for low-income housing tax credit individual and 
corporate investors.
    This oversight role includes thorough underwriting and due 
diligence of all the affordable properties in which we invest, 
similar to what Mr. Collins was just talking about.
    In this capacity, we perform individual property market 
studies to verify that the properties are targeted to local 
tenant demand. We also review, among other things, the plans 
and specifications and the environmental impact of each 
property.
    After we decide to invest in a tax credit qualified 
property, WNC conducts a thorough review of each tenant file to 
ensure that they are within compliance of section 42 
guidelines.
    In 1986, when Congress and President Reagan created the 
low-income housing tax credit, most of us, to say the least, 
were nervous about how well the program would work. It has 
turned out to be the Nation's foremost housing production 
program, and perhaps the best example of Federal/State, public/
private partnerships.
    Subsequent to 1986, Congress, the State allocating 
agencies, and the affordable housing industry realized that 
some refinements in the Low-Income Housing Tax Credit Program 
could make it work even more efficiently and those changes were 
made.
    We have the same opportunity this year working from the 
recommendations the GAO made to you, and the additional 
suggestions from the commission formed by the National Council 
of State Housing Agencies, and the National Association of Home 
Builders.
    I have several comments and observations I would like to 
share today with you. As the GAO noted last week, since the tax 
credit was made permanent in 1993, developer and investor 
confidence has been bolstered. This has provided greater 
competition for the credits, ultimately allowing a 
significantly higher amount of tax credit dollar to go back 
into low-income properties.
    I want to stress what has already been said: permanence has 
greatly increased the efficiency of the credit, assured that 
there are adequate investors, and guaranteed quality and 
experienced developers. We are also seeing affordable and 
quality developments designed to last well beyond the initial 
15 year period.
    Most States require extended use agreements that require 
those properties to be held affordable well beyond the 
statutory 15 minimum. Some of the early Farmer's Home 
properties we syndicated are now more than 20 years old, and 
with proper care they are still fully occupied and in very good 
condition.
    We have no reason to believe that the low-income housing 
tax credit properties will be any different.
    There was discussion last week about usage of the State by 
State tax credit allocations. The per capita cap of $1.25 has 
not been raised since 1986. There may be a State or two for 
whatever reason that has not always used its full allocation.
    But our experience is that the need and the demand for 
affordable housing far exceeds the available credits. As I 
indicated, more equity is going into the properties, developers 
have become very creative in using other sources of funds to 
keep rents as affordable as possible. This is clear in the 
GAO's finding that the average median income of tenants living 
in low-income housing tax credit properties is $13,000.
    While the strength of the Low-Income Housing Tax Credit 
Program is flexibility of States to structure their own 
programs, more consistency in administration would benefit all.
    The GAO should be commended for the most professional job 
it did in responding to Chairman Archer's mandate last year. 
The study demonstrates the success of the program, and I think 
makes a strong case for continued permanence. I think it is 
fair to say that each year since the program was established, 
we have all learned how it can be made more efficient and cost 
effective.
    If enacted, the recommendations of the GAO and the National 
Council of State Housing Agency Commission will continue the 
positive track record of improving the program, as we go 
forward.
    The credit responds to the marketplace, and is not 
corporate welfare, nor does it create properties that resemble 
public housing. On the contrary, it is a program designed to 
encourage the private sector to build, manage and own quality 
housing for working Americans.
    It gives that little extra boost to families and the 
elderly that is so badly needed in our country today.
    The commitment to a low-income housing tax credit property 
is much longer in most instances than the minimum 15 year 
compliance period. Many States encourage properties to be 
maintained as affordable for at least 30 years.
    In my home State of California, we have a 55 year 
obligation to keep a low-income housing property affordable. 
The extended compliance period has serious implications for our 
investors, but that is a topic for another time.
    As a point of clarification, figure 1 in the GAO report 
speaks of tax credits and deductions, quote, unquote, as being 
the same or equal tax benefits for corporations and 
individuals. Since individual taxpayers are subject to the 
passive loss section 469 rules, their tax deductions are not 
the same benefits that corporations receive.
    In summary, Madam Chairman, WNC is committed to work with 
Congress in developing any legislative and regulatory change 
Congress will be considering. WNC's experience in affordable 
rental housing over the last 25 years, including the tax credit 
experience of the last 10 years, is available to share with you 
and your staff to make any changes or reforms that will serve 
to improve the program.
    Thank you.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you, Mr. Cooper.
    Mr. Platt. We're going to hear Mr. Platt, and probably Mr. 
Stevens, and then we're going to have to go vote. Perhaps some 
of the other Members will be back, but we're going to have to 
go through another one of these rotations.

STATEMENT OF RONALD L. PLATT, LEGISLATIVE DIRECTOR, McDERMOTT, 
    WILL & EMERY, WASHINGTON, DC, ON BEHALF OF BRUCE ROZET, 
CHAIRMAN OF THE BOARD, ASSOCIATED FINANCIAL CORP., LOS ANGELES, 
                               CA

    Mr. Platt. Thank you, Madam Chairman, and Mr. Coyne, and 
Members of the Subcommittee for allowing me to testify today on 
the low-income housing tax credit. I am Ron Platt with the law 
firm of McDermott, Will & Emery, testifying on behalf of Bruce 
Rozet, chairman of the board of Associated Financial Corp.
    Since the inception of the low-income housing tax credit, 
Associated Financial has raised over $150 million in private 
capital for low-income housing tax credit transactions, 
primarily for the rehabilitation of older HUD properties.
    As we think of national housing policy, particularly in 
light of current budget realities, I think we have to start 
with some hard and very realistic guiding principles.
    First and foremost, the government can no longer afford to 
subsidize the building of new housing for very low-income 
families. At costs ranging up to $150,000 per housing unit, 
rental or ownership, the cost of government financial 
assistance to meet the need of families with incomes below 60 
percent of the median income is prohibitively expensive.
    The family with an income of $20,000 a year can only afford 
housing with a capital cost of $20,000-$25,000 per year, unless 
we're going to apply substantial other subsidies.
    Since 1987, the Federal Government has allocated over $20 
billion to the low-income housing tax credit to develop new and 
rehabilitated housing for families with incomes below 60 
percent of median. It's perhaps timely to question its 
effectiveness, as part of the Federal role in supporting the 
development of affordable housing.
    As noted, the program results in the development of new 
housing in many States at a cost of over $150,000 per rental 
housing unit. Since normal market economics can only support an 
investment of less than $25,000 per unit for families below 60 
percent of median, the Low-Income Housing Tax Credit Program is 
directly and indirectly providing a Federal subsidy of $50,000 
to more than $125,000 per housing unit built.
    As a point of reference, it should be noted that the RTC, 
FDIC, HUD and banks with problem real estate have been dumping 
housing into the open market in recent years at $10,000 to 
$20,000 per unit.
    By establishing realistic ceilings or limits for government 
assistance, the cost to the government will be reduced, and 
prospective housing projects will be more realistically made to 
conform to market conditions.
    The use of the low-income housing tax credit should be 
limited to projects involving a total cost no greater than a 
market oriented standard, such as, for example, $40,000 per 
unit or less, with exceptions, of course, for those projects 
for special needs.
    This is consistent with Congress's present efforts to mark 
section 8 rents to market, so that the subsidy does not exceed 
the market rate. This will result in directing the tax credits 
more toward rehabilitation and preservation of existing 
affordable housing stock, and away from expensive new 
construction, particularly in our inner cities, and still allow 
new construction in rural and non-inner-city areas.
    Utilizing the low-income housing tax credit primarily for 
rehabilitation of existing housing would result in protecting a 
greater number of housing units from being lost to free market 
rent increases, condominium conversions, and, particularly, 
deterioration.
    We lose far more housing to these forces every year than 
are produced by any program of new construction. The recent GAO 
study found that 71 percent of the tax credit unit households 
also benefited directly or indirectly from one or more other 
types of housing assistance.
    The failure to insure long-term affordability is also one 
of the major flaws in the existing program. The current tax 
laws require owners to maintain affordability for families at 
or below 60 percent of median income for only 15 years.
     A simple modification in the program could protect future 
affordability, and advance the important national housing 
objective of home ownership. Owners could be given the option 
to convert their properties to resident ownership, in return 
for forgiveness of any tax obligation that might be due on 
sale. The conversion option could be available between the 10th 
and 15th year, and owners who converted to resident ownership, 
as either condominiums or tenant cooperatives would pay tax 
only on the cash they receive.
    Those not electing this option on a prospective basis would 
be required to maintain their properties affordable for 
families at or below the 60 percent median for a minimum of 30 
years.
    Government is subsidizing the construction.
    Thank you very much.
    [The prepared statement follows:]

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    Chairman Johnson. Thank you very much, Mr. Platt. That 
long-term affordability issue is a big problem in some of the 
current programs as you well know.
    Mr. Stevens, I'm going to go over to vote. Mr. Coyne is 
going to stay a while, and then vote, and Mr. Portman will be 
back. Thank you for your testimony.

  STATEMENT OF HERBERT F. STEVENS, PARTNER, PEABODY & BROWN, 
                         WASHINGTON, DC

    Mr. Stevens. Thank you, Madam Chairman. Thank you, Mr. 
Coyne. I'd like to address a few of the questions that you've 
had in this hearing and the prior hearing.
    The first one that the speaker before me raised was the 
issue of the cost of housing, and the question of whether or 
not we should have a national policy to control that cost.
    I think we have a national policy to control that cost. 
It's in every State's qualified allocation plan. We have over 
50 policies that make the cost responsive to more local needs. 
It would be a mistake for any witness here to attempt to 
substitute a dollar amount for the State's judgment as to what 
they need in their locality. I think that's an important part 
of this program, and an important strength is the ability of 
the States to pick the kind of housing.
    In addition, the Federal mandate in section 42 already 
requires States to build housing at the lowest cost, and to 
serve the lowest possible tenant population.
    Second, Mrs. Johnson asked about other Federal subsidies. 
And I think there was an interesting statistic in the GAO 
report. The GAO said that without any other Federal subsidies, 
the average income for the households that would be served is 
45 percent of median income. That's not bad.
    With Federal subsidies, the average income served was 25 
percent. That's terrific. But we can't get to 25 percent of 
median income without other Federal subsidies.
    The beauty of the credit program is that it is flexible. 
There are, I think, according to the GAO report, 398 percent of 
the households were being served in stand alone projects, stand 
alone meaning no other Federal subsidies.
    Those were still at 45 percent of median income. That's a 
very low-income level, far below the 60 percent which is the 
maximum tax credit level. And it's something we should be proud 
of, even for those projects.
    In addition, we have a lot of people with more special 
needs and with even lower incomes. And the credit program is 
good because it can allow those income level families to be 
served as well.
    Third, Mrs. Johnson suggested that the type of properties 
being served, one and two per unit, was perhaps not 
representative of the country as a whole. I think that misses 
the issue. I think the issue is whether or not the types of 
units being served meet the needs of the population that the 
States have at low income.
    I don't think necessarily the population of the country as 
a whole is the answer.
    Fourth, I think that we have brought up in many different 
ways the need for extended use. And I think that it's important 
when you talk about extended use to talk about economic 
viability as well.
    It does no good to say what a property costs initially if 
it's built too cheaply to last for 40 or 50 years. I think that 
that is an important aspect of the tax credit program, that it 
allows States to look at costs, and also the costs to develop.
    Finally, I think that Congress should strengthen the hands 
of States in requiring market studies and requiring other 
engineering studies that they can use to make sure the 
properties truly are viable.
    Thank you very much.
    [The prepared statement and attachment follow:]

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    Mr. Portman [presiding]. Thank you, Mr. Stevens.
    Ms. Lewis.

 STATEMENT OF TERRY LEWIS, NATIONAL COOPERATIVE BANK, NATIONAL 
 ASSOCIATION OF HOUSING COOPERATIVES, AND NATIONAL COOPERATIVE 
                      BUSINESS ASSOCIATION

    Ms. Lewis. Thank you very much. Mr. Portman, other Members 
of the Subcommittee, I thank you very much for the opportunity 
to testify on behalf of cooperative housing, specifically in 
this case the National Cooperative Bank, the National 
Association of Housing Cooperatives, and the National 
Cooperative Business Association.
    We work very closely with low-income housing, much of it 
cooperatively owned, and we're very gratified that the GAO 
study documents the success of the tax credit at reaching 
exceptionally low-income families.
    But with a minor change we have the opportunity to open it 
up to ownership rather than simply rental. There's a good 
reason why Congressman Metcalf placed first on the priorities 
of the Republican Housing Opportunity Coalition home ownership. 
That is because home ownership provides very well understood 
benefits to the communities in which it occurs.
    With the degree of control, responsibility and the pride of 
ownership that comes from home ownership, residents carefully 
maintain their property, they reject unwanted behaviors on the 
part of their coresidents, they participate in their 
communities to a much higher percent, and they raise their 
children with a real sense of citizenship.
    The use of existing housing programs in the past by 
cooperative home ownership has resulted in a long-term 
retention of affordable housing stock, and superior financial 
performance.
    Cooperative housing also provides lowered cost of 
operations, as compared to comparable rental properties managed 
by the same management company.
    In addition, cooperative housing offers stability and 
affordability that single family home ownership can't match for 
very low-income families.
    Finally, with the kind of limited equity cooperative 
ownership that we propose, the acquisition costs will be well 
within the reach of very low-income families, but they'll be 
able to have some modest appreciation of their equity 
investment over the term of their ownership.
    We believe that our proposal will have little or no revenue 
impact. It has been submitted for budget scoring by Senator 
D'Amato. It will act on a par with rental use of the tax 
credit, and we expect that there will be no budget costs. So 
this minor change should not have any revenue impact.
    We propose to make the change by adding permissive rather 
than mandatory language to section 42, that would allow the 
recognition and use of the program with what we call section 42 
cooperatives.
    The bulk of our proposed changes deals with sections of the 
Tax Code that deal with cooperatives and cooperative housing, 
not section 42 at all. And that's section 216, which defines a 
cooperative housing corporation, and subchapter T that deals 
with the comprehensive taxation of cooperatives of all types.
    You ought to know, or I think I ought to tell you, what a 
limited equity cooperative is. A housing cooperative is a 
corporation that is composed of stockholders who are the 
residents of the property. There is an absolute identity 
between ownership of the corporation and occupancy of the 
property. Only residents can own stock. Only stockholders can 
reside.
    The equity limitations mean that there is a control over 
the resale of the cooperative interest. In the case of the low-
income housing tax credit, that control would mean that the 
cooperative interests could only be resold to eligible 
families, and that it could only be sold at a price that 
reflected a very small appreciation, the same that exists under 
the Mortgage Revenue Bond Funding Act.
    Finally, we know that there is some use of the tax credit 
as it currently exists to create leasing cooperatives, but 
these cooperatives do not in fact provide a real sense of home 
ownership, or any of the benefits that come from home ownership 
to the residents of the property.
    Typically they're run very much like any other rental 
property, with an option to purchase that may or may not be 
realized at the end of the tax credit period.
    Our proposed legislation would provide an exit strategy at 
a very affordable price and at a time certain that would allow 
the cooperative to buy out the tax credit investors who would 
be a second class of stockholders in the corporation.
    We have had a study commissioned by Abt Associates, and 
they estimate that about 1,600 families per year over a growth 
period of about 5 years would be served by an ownership rather 
than a rental model, unless someone really became a strong 
advocate of cooperative housing.
    That's about 3 percent of the units produced over the 3-
year period that was in the GAO study. We think that that 3 
percent could be a wonderful model, of highest and best use of 
the tax credit, and a real leveraging of the tax credit to the 
social benefits of anchoring communities and providing 
stability and creating a better sense of citizenship that the 
LIHTC Program seeks to produce.
    Thank you very much.
    [The prepared statement follows:]

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    Mr. Portman. Thank you, Ms. Lewis, and I thank all the 
witnesses here. I'm sorry that I had to run in and out, but 
such is our schedule with the votes and other commitments on a 
busy day when we're balancing the budget and doing all these 
other things.
    But I really do appreciate the testimony, and all of your 
comments, including those we will have now in our dialog, are a 
part of the record and will be helpful as we try to put 
together the best way to proceed with regard to the low-income 
housing tax credit.
    So this is not in vain. I am honored to be able to sit here 
and ask this group of experts all these questions. I have a lot 
of them, but not all I'll be able to get to today. I'd like to 
start with some of the questions that I pursued at the last 
hearing, a week ago, where I know some of you were in 
attendance. Mr. Roberts and I spoke at that hearing.
    It goes to the issue of the subsidy, some of the stacking 
issues, rents and so on. The first question I would have, and I 
will open it up to any of you, because you've all had 
experience in these projects. Most of you, I understand, have 
probably had some experience in a mix, where you have some 
credit units, and you also have some units that would be market 
rate.
    If that is the case, if you've had that kind of experience 
if you could tell the Subcommittee how much greater the rents 
are in the unsubsidized units than on the credit eligible 
units. Give us some sense of what the gap is, with regard to 
specific projects you've been involved in. Mr. Roberts, could 
you start out?
    Mr. Roberts. Well, Congressman, I think the GAO found, and 
our experience has been that virtually all of this housing is 
100 percent housing credit eligible housing. There are some 
mixed income projects, but they are very much the minority.
    Mr. Portman. Would that be Mr. Collins' answer as well?
    Mr. Collins. Yes. Although, Massachusetts has undertaken 
some major efforts focusing on mixed income properties, the 
Shaw program for example. I can't give you the details on the 
experience they've had, but I'm not sure it's been a positive 
one.
    But I've seen that there is a differential in some of the 
rents between 10 to 20 percent. And in some cases, they might 
be very similar.
    Mr. Portman. I think the numbers that GAO came up with, as 
I recall in its report, was about a $100 difference. I think 
the average rent for low-income housing tax credit units was 
$453. Is that right?
    And they came up with the $555 number. Do any of you 
dispute that number, the $555 number for nonsubsidized?
    Mr. Stevens. That's probably correct.
    Mr. Portman. That's probably correct?
    Mr. Stevens. That's probably correct. It's important to 
understand, however, that the tax credit subsidy did not go to 
subsidize those units paying the higher rent. In any mixed 
income property, this program, unlike the prior tax programs, 
only subsidizes the units at or below 60 percent of median.
    So many areas are trying mixed income properties as a way 
of integrating people in the community. But frequently it's 
done in a transparent way, so that the tax credit units might 
be intermixed, and even the tenants wouldn't know. They 
wouldn't look any different than the other units.
    But yet they would be owned separately by the tax credit 
partnership.
    Mr. Portman. Any other comments with regard to the 
comparison of rents? Is there any dissention from the GAO 
figures of $555, or roughly $100 more for nonsubsidized units?
    Mr. Stevens. There is definitely a difference. It's 
important in the underwriting that there be a market for these 
units, so that they not compete directly with the market rate 
units.
    Most private-sector underwriters, including investors and 
lenders, like to see at least a 10 percent difference if not 
more between the market rate rents and the tax credit rents.
    Mr. Portman. OK. With regard to the stacking issue, 
quickly, the GAO report documents a lot of positive results of 
credit projects serving low-income households, and yet they 
find that 71 percent of the credit units benefited from 
additional subsidies of one kind or another, and some of those 
were rental assistance, of course, section 8 type. Some were 
construction.
    From your experience, could you estimate for us the portion 
of the positive result that flows from the credit as opposed to 
these other subsidies, given the 71 percent figure?
    I guess what I'm really asking is what is the incremental 
benefit that the credit provides?
    Mr. Harvey. That's a difficult one to answer directly 
because it depends on the subsidy and how many subsidies you're 
using, and what the purpose is. A lot of what the Enterprise 
Foundation has done, special needs housing, where the tax 
credit alone could not reach down to the people that you're 
serving, whether it's mentally ill or whether it's somebody 
that's off of the homeless roll, and so forth, and just has 
public assistance before they get into jobs.
    And so you really arrive at it the other way in your 
underwriting. You underwrite, you figure out what is your base 
level that you're going to be serving, and then you start with 
the tax credits and then you say what additional--working 
typically with the city--what additional subsidies does it take 
to get down to this level that you're serving. What are the 
resources that are available?
    Typically it's a community development block grant, home 
program, and or some other special subsidy for special needs 
population. And you work it out. It's all reviewed by the 
State, to make sure that there isn't too much subsidy in it, 
and that it makes sense on an overall basis.
    So it's hard to say--and it will also vary dramatically 
around the country. There are some areas and cities that are 
high cost, but have low median income. That directly affects 
where you can set the rent at a maximum, and then what is your 
cost of getting there.
    And that varies all across the country.
    Mr. Portman. Such as some of the larger urban areas on the 
coasts?
    Mr. Harvey. Yes. It's also out West. I mean, out West is 
very--they're very high cost. And some of them are lower median 
areas.
    Mr. Portman. Mr. Roberts.
    Mr. Roberts. A question that would lead from your line of 
inquiry, sir, is whether in fact it makes sense to subsidize 
construction, or perhaps whether it would be wiser just to 
subsidize rental assistance.
    And the question is, so why do we need to build this 
housing?
    Mr. Portman. I'm glad you asked that question, Mr. Roberts.
    Mr. Roberts. And the answer is----
    Mr. Portman. You and I have talked about this, and I raised 
some of these questions at the last hearing, and it would be 
helpful if you all have thoughts on that.
    Mr. Roberts. There are specific circumstances where rental 
assistance just can't get the job done. But more important, 
that construction----
    Mr. Portman. Because there's not adequate housing 
available?
    Mr. Roberts. That's one example. There are some tight 
markets that just don't adjust fast, and any housing that is 
built will be absorbed at upper- or middle-income levels, and 
so won't reach down, ever filter down to the low-income levels.
    In urban neighborhoods, for instance, an objective is 
really to rebuild the neighborhood, to stabilize surrounding 
properties, encourage additional investment and the like. You 
need to have an investment strategy to accomplish that.
    If you have existing stock that you're trying to conserve, 
that, again, requires an investment strategy in order to 
preserve that property, and special needs housing where it's 
much more efficient to serve populations within a specific 
site. A rental assistance program can't accomplish that.
    There are different tools for different purposes.
    Mr. Portman. Let me just pursue that for a moment, and, 
again, others should feel free to jump in. Let's assume, for a 
moment, since you took us down this line of questioning, and I 
was trying to be more specific on some of the information we 
need for the record, and will continue on that.
    But if the subsidy was provided, let's say as an example, 
through section 8, or, for that matter, through a block grant 
to the State agencies, the State agencies determined who was 
eligible, and it was at the same level, let's say, as the tax 
credit subsidy--and there can be, as you know, some dispute 
over the level of that subsidy--then isn't there some level at 
which the individual would have the market power to be able to 
have the market work for him or her to find units, even in 
those urban areas?
    In other words, is the housing market so different from 
other markets around this country where when you empower 
somebody by giving them the tools to be able to go and demand 
housing by providing more in section 8, or more in block 
grants, that the housing just would not be built, and so you 
wouldn't have these advantages that you are talking about in 
terms of communities being rebuilt, and therefore attracting 
more capital?
    Is there no number at which that would happen?
    Mr. Roberts. Yes, sir. But it is a very high number. I 
mean----
    Mr. Portman. You say it would be a higher number than the 
low-income housing tax credit subsidy?
    Mr. Roberts. In order to stimulate the capital investment, 
it would need to approximate the rent subsidies that were 
present in the section 8 production program, which was a 
project-based subsidy program which the Congress is now trying 
to figure out how to sustain.
    So you can do it that way. You don't have to provide just a 
direct construction subsidy. You can do it through a rent 
subsidy, but it has to be project-based, and it has to be high 
enough to support a mortgage to carry the construction costs.
    Ms. Lewis. And it has to be certain. Speaking from the 
point of view of a national lender, if you don't know 3 years 
ahead of time that that equity investment is going to be there, 
either provided by the low-income housing tax credit or by a 
project-based set aside of section 8, then you might as well 
not do your feasibility studies. You might as well not begin to 
option the property, begin to work with your zoning board, 
because you're really planning for 3 years down the road.
    Mr. Portman. That's a good point. And, as you know, nothing 
is certain up here, and even entitlements tend to change, as 
again as was mentioned earlier with the negotiations going on 
today.
    But certainly if one looks at the effect that permanence 
had on applications, one would see that there is in fact a 
longer term planning process here, because applications 
obviously increase when you get into permanence.
    Whatever permanence means around here. So I don't argue 
with that.
    Is that all that different from an annual appropriation, 
or, for that matter, something even more certain, I suppose, 
which would be some kind of a mandatory spending item? Mr. 
Stevens.
    Mr. Stevens. At the hearing last week, the GAO actually 
stated that the comparison should have been about $200 between 
average median rent and the tax credit rent. If you took that 
$200 between median rents for the areas and the tax credit 
rents that were actually charged, and multiplied that times 
your approximately 30 years, you'd end up with a cost to the 
government of about $72,000 per unit, compared to the $27,000 
that the GAO found.
    So even doing what we might call an incremental subsidy, it 
would still be more expensive. And I'd like actually to have 
the GAO confirm that. It would be useful for the Committee.
    But using their testimony last week, doing the math, it 
comes out to be about twice or more, the cost to the 
government, to use a rental subsidy as to use the tax credit.
    Mr. Portman. That's interesting. I'd love to see those 
figures, too, because you could take the GAO numbers also and 
assume $100 difference given the average that they used, and 
take that over 12 months, and you end up with a significant 
difference going the other way.
    Mr. Stevens. Right.
    Mr. Portman. If you'd simply take $100, that'd be $1,200 
per year, take it out of 10, now 15 years of the program, let's 
say 15 years. I know California has a longer period. You end up 
at a zero discount rate of about $18,000 as the value of the 
rent subsidy, as compared to $27,300.
    Mr. Stevens. Right.
    Mr. Portman. You're saying that those numbers are not 
accurate, because----
    Mr. Stevens. For two reasons.
    Mr. Portman. OK. I'll let you say it.
    Mr. Stevens. One is the incremental cost, as the GAO said 
in their testimony last week, was about $200 difference.
    Mr. Portman. Not $100?
    Mr. Stevens. Not $100. And, second, you can't really use 15 
years when the tax credit is producing housing that's going to 
last at least 30 or more.
    Mr. Portman. But there's not commitment to provide it to 
low-income individuals after the 15 years, is there?
    Mr. Stevens. There is in most States.
    Mr. Portman. I know different States have different 
requirements.
    Ms. Lewis. The market is bidding that commitment up.
    Mr. Portman. What do you all think of, is it 55 in 
California?
    Mr. Cooper. Fifty-five.
    Mr. Portman. That seems like a long time. What do you all 
think of that?
    Ms. Lewis. It depends on the availability of additional 
subsidies. Frankly speaking, without the availability of the 
ongoing subsidy----
    Mr. Portman. It would be difficult to attract investors.
    Ms. Lewis [continuing]. To deal with operating costs, 
you're going to be in a situation where the property will not 
be able to rehab, will begin to defer maintenance, where it 
will begin to experience vacancies because the target 
population will not be able to afford the rents.
    You really need that additional rental subsidy to extend 
beyond the 15 year compliance period.
    When I look at it from the point of view of the residents 
becoming owners, at the end of the current period, the proposal 
that Mr. Platt made, absent an operating subsidy in the form of 
some sort of rental subsidy, it becomes very iffy for the 
cooperative or for the residents with that low-income level to 
take on the obligation of maintaining affordability.
    With an ongoing subsidy, contingent on that ongoing 
subsidy, it becomes practically a sure thing.
    Mr. Harvey. The real difference between this and a rental 
program is this is place-based, and the permanence in it is 
you're getting--you're really writing down most of the capital 
at the beginning.
    Whatever can be financed will be financed from there on. 
That's very difficult from getting something that is based upon 
the rent that's coming in, the certainty of the rent that's 
coming in, and the period of time you'll be receiving the rent.
    If it's like the programs of today, which are getting 
changed every 5 years, you can't finance it. We can't find 
banks to finance something without knowing that they've got a 
rent stream to amortize down their cost over a period of time.
    This program really is good because it takes that certainty 
and puts it up front. It's really a capital write down approach 
to whatever we're doing.
    Mr. Portman. Mr. Roberts, though, talked about the project-
based subsidies. Wouldn't that solve some of that problem for 
you? Because they attach to the building, not to the low 
income----
    Mr. Harvey. Yes. But again, what you're basing off of that 
is a 15 year certainty, or some period certainty against which 
you will get x amount of debt, and then that either makes it 
work or not work.
    Those 15 years are being challenged right now, so that 
there's a discount that the capital markets will put on the 
certainty that it will be there for all 15 years and you'll get 
rent adjustments on it.
    That's a problem in housing, there seems to be no certainty 
that these contracts really are going to be there over a period 
of time. If you take care of it up front, you know you've got 
your costs carried up front.
    Mr. Portman. I have one more follow up question of Mr. 
Stevens, and I'm going to allow Mr. Weller a chance to ask some 
questions. What number do you use? You mentioned the two 
differences, the $200 and the time period.
    Do you use 30 years rather than 15 years, or what figure?
    Mr. Stevens. I think you should use 30 years, because the 
Federal law requires----
    Mr. Portman. So your 30 years is where you get the--what 
did you say, $72,000?
    Mr. Stevens. $72,000. Yes.
    Mr. Portman. OK.
    Mr. Stevens. So if you did 15 years at that, it would be 
$36,000. It would still be higher than the tax credit cost.
    Mr. Portman. OK. Doesn't GAO use present value to come up 
with its $27,000 figure?
    Mr. Stevens. Yes.
    Mr. Portman. OK. So how do you compare yours to that? They, 
as I recall, say it's $27,300 based on present value. So you 
should calculate yours on present value, as well, to compare 
the two?
    Mr. Stevens. Yes. So it would be lower.
    Mr. Portman. What discount rate are you going to use?
    Mr. Stevens. Using the GAO's rate, it was probably the 
Federal rate, about 7 percent. That would be for 15 years, that 
would be about half, using the 7 percent discount rate, it 
would be about half. So that would be, instead of $36,000, it 
would be $18,000.
    Mr. Portman. OK. What do investors in your projects 
typically use? Their cash flow? Seven?
    Mr. Stevens. Yes. For cash flow discounting?
    Mr. Portman. Yes.
    Mr. Stevens. Well, comparing apples and apples, you'd take 
the same discount rate the GAO used for the tax credit and 
apply that.
    Mr. Portman. So instead of $72,000, what's your number?
    Mr. Stevens. That would be probably more like 20.
    Mr. Roberts. We don't have the calculator here to do this, 
but I would guess it would be somewhere in the high $40,000 
range, $200 a month discounted at 7 percent over 30 years.
    Mr. Portman. I just think it's important that we all are 
using the same basis upon which to make these comparisons. I 
know it's difficult in this area to compare. We talked about 
apples and grapefruits and oranges at the last hearing.
    With that, let me turn it over to Mr. Weller, and if you 
all are willing we'll ask some more follow up questions.
    Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. I'd like to direct my 
first question to Ms. Lewis. In your testimony, you discussed 
the National Cooperative Bank's proposal regarding the home 
ownership initiative proposal, the cooperative program.
    And I was wondering to what extent are some States already 
doing this?
    Ms. Lewis. Well, the tax credit program as it currently 
stands prohibits home ownership. It is strictly a rental 
program. Given the benefit that has been created through the 
use of prior rental programs by a cooperative home ownership 
model, we think that that's very short sighted.
    The closest you can get under the current program is what 
we call a leasing cooperative, under section 42, and generally 
it is cooperation in name only. This program would open it up 
to allow the sponsor to allocate real management 
responsibility, less than or within the framework of the tax 
credit, which the investor would clearly want to maintain, but 
ongoing property management decisions are in fact made very 
efficiently and effectively by well informed coop boards.
    I mean, it's very clear that a well managed coop with the 
same property managers, same property configuration will end up 
with lower operating costs than a rental. Because cooperative 
owners make efficient decisions.
    They look at the value of an investment over time, they are 
more willing to upgrade their window system, they are more 
willing to install more efficient furnaces as a replacement 
unit than any rental owner would be, because they know what the 
pay off is going to be.
    And if they're individually metered, they really cut down 
their utility costs as well.
    So cooperatives really work effectively to reduce operating 
costs if they are given the management authority that they 
would be allowed to have under this program, plus they would 
have the real investment that home ownership brings.
    I work with limited equity cooperatives now who sell their 
cooperative interests for a very limited price to a very 
limited group of people, low-income families, and maybe, say, 
$2,500 is the maximum transfer value of that cooperative 
interest.
    Well, you should see what people do with their units, in 
terms of improvements and maintenance, in order to maximize 
that little tiny $2,500 value.
    And in a lot of places in the country, that $2,500 is all 
that's necessary to, with PMI, move into a single family home 
as your income level increases. Now, that's not the case all 
over. It really depends on your market.
    But that little tiny bit of incentive and that little tiny 
bit of equity appreciation can have a huge impact.
    Mr. Weller. Are there particular pilot, or experiments that 
States are conducting right now?
    Ms. Lewis. They're not allowed to do that. Again, because 
home ownership is completely prohibited.
    Mr. Weller. How about initiatives on their own, unrelated 
to--or State housing programs unrelated to the Federal statute.
    Ms. Lewis. We can talk about cooperative housing that's 
produced under many, many programs, Federal, State and in the 
open market. Limited equity cooperatives here in the District 
have been encouraged by the option to purchase that the 
residents have, that has been exercised for a very long time.
    A lot of the HUD programs, the 221(d)(3) program, the 236 
program, produced a lot of cooperative housing. And you can 
take a look at it. I mean, I'd love to take you on a tour.
    Mr. Weller. I believe when you increase home ownership, you 
strengthen a community, because people want to protect that 
stake they have in the community, and the equity they have.
    Ms. Lewis. They do, indeed.
    Mr. Weller. The next couple of questions I'd like to direct 
to Mr. Cooper, if I could. The GAO report made some 
recommendations regarding independent market studies, and I was 
wondering, do you perform independent market studies to verify 
that the properties are targeted to local tenant needs as part 
of your program?
    Mr. Cooper. We mentioned in our testimony about independent 
market studies. I think probably Mr. Collins can speak to the 
same issue in how he treats it, but we specifically don't rely 
on the market study that has been done by the original 
developer/builder, if you will, who engages a market analyst to 
do a study for him.
    We go to a separate, independent, third party study so that 
we can verify for our investors that, in fact, the market does 
exist. We have actually abandoned properties, if you will, when 
we find early on that our independent market study doesn't give 
us the comfort level that we need.
    Mr. Weller. But that's standard operating procedure for 
you?
    Mr. Cooper. That's standard procedure, correct.
    Mr. Weller. Is that the same for you, Mr. Collins?
    Mr. Collins. It is. And we go one step further. We have an 
acquisition staff, who are actually very experienced in doing 
market studies themselves. So we'll do a third market study to 
confirm what was seen in the other two, or to correct 
accordingly.
    Mr. Weller. Will that study determine if there's already 
low cost tenant units already available in the neighborhood or 
in the community being served?
    Mr. Collins. Yes. Actually what you're really looking at 
when you go into a study and see the marketability, you're 
really looking at the comparable rents in the area, and costs 
of construction of the projects in the area. And you're looking 
at the vacancy rates. What else?
    But in general, it's a complete process to underwrite the 
project, to know that there is, in fact, a market for that 
particular rent and that particular project and the need.
    Mr. Weller. But, now, does the availability of low cost 
tenant units in the area, will that affect your decision, if 
you discover there is----
    Mr. Collins. Yes, it will. Certainly we don't want to see 
something overbuilt in an area, because it will be drawing away 
tenants from the other particular project.
    Mr. Weller. One of the questions I focused on with the 
previous panel, of course, there's a discussion in the past, 
and of course a debate which succeeded in making permanent the 
low-income housing tax credit in 1993.
    And since them some have discussed making it temporary 
again, going back to the old way. And there were some figures 
that were shared by some members of the previous panel which 
would indicate that they felt that if we eliminated the 
permanent status of the low-income housing tax credit, and 
sunsetted it with more temporary status that we would see a 
reduction of investment by the private sector, but also a 
reduction in the amount of affordable housing units available, 
as a result of that.
    Do you agree with those figures?
    Mr. Collins. Yes, we do. As a matter of fact, I might 
mention that normally people outside of Washington don't fully 
understand the definition of sunset. To them it's repeal. And I 
know in the last case, in 1993, when sunset was being talked 
about, even the threat of it discouraged people from investing. 
Referring to what Larry Swank said earlier about the 
development process, it takes at least 2 years to actually go 
through the process which ultimately results in a developer 
making a commitment in time and money and lost opportunity.
    And in many cases, someone is really not likely to rely on 
a decision 2 years from that date to commit that kind of money. 
If you look at the investment community, a lot of what's 
happened when the credit was made permanent, you saw a large 
involvement on the part of the corporations in investing in 
this.
    And the reason for that was because it was something of a 
permanent nature. And they have to build up their own staffs 
and they have to invest time and money themselves, and they 
need some lead time.
    And what has happened, with the increased number of 
investors in the market, which was again the result of the 
permanence you find that the larger lenders were willing to 
come in at a much lower interest rate, made it much more 
competitive, and you've got to recognize that this program, in 
my 25 years of experience, this one is more market driven than 
the programs in the past.
    In addition to that, the prices have gone up. And what that 
has resulted in is more money going into the project. Because 
there are a number of controls and constraints out there which 
prevent developers, syndicators or any other party taking 
exorbitant amounts of profit out of this. There are limits.
    Mr. Weller. So as I understand the point you're making, Mr. 
Collins, you were saying that with the permanent status, there 
is greater interest by potential lenders and investors.
    Mr. Collins. Yes.
    Mr. Weller. And because of that, more affordable rates of 
credit were provided.
    Mr. Collins. Yes.
    Mr. Weller. Bringing down the cost of construction of the 
units.
    Mr. Collins. Exactly.
    Mr. Weller. Mr. Roberts, do you want to add to that?
    Mr. Roberts. Let me just say that the projects that would 
be most severely curtailed would be the more difficult 
projects, the more time consuming projects, and the riskiest 
projects. And those tend to be the inner-city projects.
    Mr. Stevens. Mr. Weller, to respond to your question, also?
    Mr. Weller. Yes, Mr. Stevens.
    Mr. Stevens. We noticed that the IRS' oversight increased 
dramatically after the program was made permanent. And when I 
talked to the staff members at the IRS, they acknowledged that 
they have a limited budget and limited priorities also.
    And that as long as the program was possibly going to last 
only another year, they were not given the priorities to put 
all their resources into it. I think the same thing is true at 
the State level.
    It's a little bit like the Alan Greenspan effect. Comments 
that you all make, and actions that you take can have ripple 
effects in the market.
    Mr. Weller. I realize my time is running out. Is there any 
other panelists who would like to comment on that question, 
briefly?
    Mr. Harvey. Briefly, there is another effect, when you 
start to talk about sunset. Developers who are willing to go 
through the process and spend the money up front, not knowing 
if 2 years from now they're going to have a project that is 
going to come out the other end.
    There's also, for the organizations, like ours, who have 
been built up to police it, to go out and look at it, to make 
sure that it's been properly built and will be there over a 
longer period of time.
    If you say in 2 years you could not have a program any 
more, everyone begins to look at what they're doing, and you 
have to look internally as to your organization and how you 
deploy your assets, and whether you can really spend the money 
to check everything for a program that might not exist as you 
go forward.
    So it just creates tremendous uncertainty, and investors 
don't like it, developers don't like it, and if you're trying 
to run a top notch program it's very hard to juggle people, 
lives, careers on that kind of a basis.
    Mr. Weller. Thank you. And I realize my time has expired, 
Mr. Chairman.
    Mr. Portman. Thank you, Mr. Weller. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Mr. Roberts, would any good purpose be served by requiring 
more onsite inspections of low-income housing tax credit 
properties, considering the GAO report showing that in their 
judgment there is basically zero noncompliance.
    Mr. Roberts. I'm not sure you'd get a great deal more. We 
do very frequent onsite inspections ourselves. On any project 
of at least 30 units, we're there at least once a year. And 
just slightly less frequently for very small projects.
    And the States are doing a great number of onsite visits, 
according to NCSHA's best practice standards, which most of the 
States already pursue. But I'm not sure it would be harmful to 
have the Service require State visits on a periodic basis.
    Mr. Coyne. Some witnesses have told us that low-income 
housing tax credit allocations should be increased, and some 
others have told us that a portion of the allocations goes 
unused. Are these views inconsistent, or are they unrelated?
    Mr. Roberts.
    Mr. Roberts. In the places we work, there is very little or 
no underutilization of the credits. In fact, we did a study of 
our own investments, and found that fewer than one-half of 1 
percent of the housing projects to which we commit failed to 
proceed.
    Mr. Coyne. Has anyone had a different experience?
    Mr. Harvey. No. Our experience would confirm that, that 
it's a very, very competitive system out there, and I'm sure 
that NCSHA can answer that question. But it seems, this 
underallocation is a mystery to us, because we're constantly 
looking and see the need to do more and more.
    Mr. Collins. I might mention that I notice in the Chair's 
introductory comments the other day, she talked about $320 
million in unused credits. I think it was around the 1993 
period, or during the period that the study was conducted.
    I can't say for a fact, but my assumption is that that was 
due to the fact that when you had the question of the sunset, a 
lot of people were sitting on the sidelines, a lot of the 
corporations and a lot of developers to see whether or not, in 
fact, the credit would remain permanent, which resulted in less 
activity.
    But our experience, too, we do quite a bit annually. And we 
haven't seen any shortages.
    Mr. Coyne. Mr. Roberts, in your judgment, are there any of 
these low-income housing tax credit projects that have failed, 
that you can cite?
    Mr. Roberts. I would say there may be very rare failures, 
but the system is structured that when a project starts to get 
into trouble, there are early warning signs, and there are 
enough participants in the process with enough at stake so that 
people come and fix it.
    It's distinctively different from some of the previous 
generation housing programs in that regard.
    Mr. Coyne. So while there are some failures, there are only 
a very few?
    Mr. Roberts. Very occasional, and by failure you might mean 
that perhaps a sponsor just can't fulfill its obligations, and 
so instead of the project itself failing, the sponsor fails and 
another sponsor is brought in to take over.
    Mr. Coyne. Thank you.
    Mr. Portman. Just following quickly on Mr. Coyne's 
questions, it sounds as though, from what you're saying, and I 
think this is consistent with what we've been learning, that 
there, in fact, is excess demand out there, and I see some 
affirmative head shaking.
    My question is sort of the flip side of that, Mr. Collins 
and others. Does that mean the credit is too rich? I mean, 
let's look at this as a taxpayer subsidized system. If the 
credit weren't so rich, then the States wouldn't be in the 
situation of the excess demand. Instead there would be more of 
a balance, wouldn't there?
    Mr. Collins. I wouldn't say the credit was too rich. You 
have to look at the comparable costs out in the marketplace and 
returns, because when an investor invests in one of these 
complexes or investments, he's looking at other alternative 
investments, and they've got to be competitive.
    And we're seeing right now, where the returns or the yields 
are getting lower, we have seen corporations withdrawing from 
the market because of that. It's not----
    Mr. Portman. Because of----
    Mr. Collins. Because the yields are coming down, because 
they're not competitive with alternative investments that 
they're faced with. And that's what they're really looking at.
    Mr. Portman. OK. But you just told me that the demand is in 
excess of the credits available.
    Mr. Collins. Agreed. There's still a lot of people.
    Mr. Portman. We can't have it both ways here. Let's decide 
which one it is.
    Mr. Harvey. Let me, if I could, Herb, let me turn----
    Mr. Portman. I understand it's all in comparison to other 
investments, and most of you who are in the investment business 
understand that.
    But all I'm suggesting is, could the credit be less rich, 
and could there still be a viable program?
    Mr. Harvey. If you look at the credit, it's capped, 
Congressman Portman, and there is great demand. What we find in 
our organization is that there are a great many other projects 
they could go through because there are a lot of people to be 
served.
    They go into that competitive process, and I think it's 
three to one in a number of States that apply, and only one 
comes out the other end.
    There is money waiting at the other end, and there are a 
number of banks and other investors who would like to invest in 
a project that's going to make sense for 15 years.
    The competition has lowered the yields, yet they are still 
willing to do a project that makes sense over that period of 
time. And they've stabilized those yields that they're willing 
to receive.
    There are some other reasons why banks and financial 
institutions want to do that, because they have a Community 
Reinvestment Act, a proactive responsibility to put their money 
out and to do something that will cure that need for them, and 
also make money for them.
    Mr. Portman. You're opening up another area of questioning, 
which is interesting, and just quickly if I could go off on 
that. I know we may have to abandon this room for another 
meeting coming in, but how many of you have experienced where 
CRA is an influence in terms of.
    Mr. Stevens. Definitely.
    Mr. Portman. It is?
    Mr. Stevens. Definitely.
    Mr. Portman. So the flip side of that is these units in a 
sense are even more subsidized to the extent that now there's a 
CRA incentive. Do you see what I'm getting at?
    It's sort of an additional subsidy in a sense, depending on 
how you view that requirement on banks.
    Mr. Harvey. That requirement on banks is not something that 
a bank makes money from. There's no subsidy. They're putting 
their money at risk, just as anyone else in the private sector.
    Mr. Portman. To meet a Federal requirement.
    Mr. Stevens. Right.
    Mr. Portman. That they would not otherwise do, you're 
saying, perhaps, except for that requirement. And passing that 
cost along.
    Mr. Harvey. They add to the market force that is out there 
for these projects. And they're competing with other investors 
that don't have that same requirement.
    Mr. Portman. Right. But do you see the point that I'm 
making is just when you look at the totality, and I'm not 
saying that the GAO should have done this. This wasn't really 
its charge. But there is an interesting combination here of 
incentives and subsidies.
    The question I would have, too, for you, Mr. Harvey, if you 
can give us a sense of this, and maybe Mr. Collins and others 
have these numbers also, is what rate of return are your 
investors looking for these days?
    I mean, what is the typical rate of return? What's the 
after tax return that they're expecting out of a tax credit 
project?
    Mr. Harvey. I'd say it's on the 15 percent order, and it 
just depends----
    Mr. Portman. Fifteen percent after tax?
    Mr. Harvey. After tax rate of return is about where it is. 
Now, this is for 15 years, being in this over a period of time. 
And that's--I think that's----
    Mr. Cooper. Well, if you present value that down, it drops 
in half from what he just said. If you're present valuing that 
15 year, 15 percent. So you're talking about more like a 7\1/2\ 
or 8 percent present valued. And that's what Mr. Collins was 
talking about, competing with alternative investments.
    Mr. Portman. Right. But that's the market. And there are 
incentives.
    I just want to make one final comment, and that's to thank 
Mr. Platt for some of his recommendations and give him a chance 
to further comment if he would like. We talked a little bit 
about the credit, could it be altered. You gave us a couple of 
specific recommendations where you think it could be altered.
    Do you want to comment on those further, in terms of the 
context of this discussion, that the credit might be adjusted?
    Mr. Platt. I think there's no question that we are probably 
going to face in the years to come a shortage of housing. And 
there's probably a need for new construction. So I'm not 
suggesting that that's an issue that somehow is not going to 
have to be dealt with.
    But I'm not sure that within the confines of the current 
budget, one, for HUD, and two, in terms of the money allocated 
for the low-income housing tax credit, that that's an effective 
use in terms of new construction costing $100,000-$150,000. In 
some cases, we have found, in California, as high as $200,000 a 
unit for new construction. That's not an effective use of the 
low-income housing tax credit. Rather, we should emphasize 
rehabilitating and saving from deterioration the existing 
housing stock.
    I know we're working with a not for profit group in Mr. 
Coyne's district to--they're interested in acquiring a HUD 
project that they want to rehabilitate, I believe, in Homewood, 
and that they've been in touch with you about.
    We also would be very supportive, I think, of your 
suggestions in terms of cooperatives. We've been trying to do 
some of the same kinds of things, but within the current law, 
where the tenant association becomes the general partner, the 
leasing co-op. They're all not satisfactory substitutes for 
what you suggested.
    And I think the cooperative mode is probably a better mode 
to go for than tenant owned condominiums, simply because you're 
going to have the restrictions that you talked about in terms 
of allowing people to buy into the project and so forth.
    I think it is very critical to try to do something to 
preserve existing housing, make sure the dollars we've spent to 
create the low-income housing is well spent, that it stays 
affordable for a longer period of time, and that we offer 
opportunities for tenants to be empowered and own their own 
housing in one fashion or another.
    Mr. Portman. And the longer period of time is why you would 
support the 30 years.
    Mr. Platt. The 30 years. And as most people have commented, 
most States already do that. Some don't.
    Mr. Portman. And the $40,000 per unit is----
    Mr. Platt. In Federal law it ought to be taken out to that 
period of time.
    Mr. Portman. The $40,000 per unit is to be able to target 
the resources?
    Mr. Platt. Well, that's a target. It ought to be market--
you're basically saying market prices. What you are doing now, 
the Housing Committee is doing with section 8 rents is a 
similar process.
    You've got areas in which the rent necessary in a low-
income housing project, this might not be a low-income housing 
tax credit project, but to service the mortgage and maintain 
the property is, let's say, $650 a month. You've got tenants at 
20 percent of median income who are able to pay a very small 
percentage of that.
    And so there's a significant subsidy both from the State 
and the Federal Government in terms of section 8 to pay that 
rent.
    On the other hand, the market rent for a similar apartment 
in the same community is $450 a unit. So what Mr. Lazio's 
Subcommittee is driving to, and HUD's driving to is make sure 
that that section 8 subsidy is no greater than the market rates 
are.
    And that's in effect what we're saying here. To do the same 
thing with the credit.
    Mr. Portman. Thank you again for your input. Mr. Coyne, 
additional questions?
    Mr. Coyne. No questions.
    Mr. Portman. I want to thank the panelists for their expert 
testimony. It's been very, very helpful as we pursue this 
project of looking at the credit, and thank you for sticking 
with us this afternoon.
    This hearing is adjourned.
    [Whereupon, at 1:45 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

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