[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
                 TAX INCENTIVES FOR AFFORDABLE HOUSING

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

                  House Committee on Ways and Means

                                HEARING

                               before the

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 24, 2007

                               __________

                           Serial No. 110-44

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey       JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                RICHARD E. NEAL, Massachusetts, Chairman

LLOYD DOGGETT, Texas                 PHIL ENGLISH, Pennsylvania
MIKE THOMPSON, California            THOMAS M. REYNOLDS, New York
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
ALLYSON Y. SCHWARTZ, Pennsylvania    JOHN LINDER, Georgia
JIM MCDERMOTT, Washington            PAUL RYAN, Wisconsin
RAHM EMANUEL, Illinois
EARL BLUMENAUER, Oregon

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 May 24, 2007, announcing the hearing.................     2

                               WITNESSES

Michael J. Desmond Tax Legislative Counsel, U.S. Department of 
  the Treasury...................................................     6
Orlando J. Cabrera, Assistant Secretary, Office of Public and 
  Indian Housing, U.S. Department of Housing and Urban 
  Development....................................................    13

                                 ______

Shaun Donovan, Commissioner, Department of Housing Preservation 
  and Development, New York, New York............................    29
Olson Lee, Deputy Executive Director, City of San Francisco 
  Redevelopment Agency, on behalf of the National Association of 
  Local Housing Finance Agencies, San Francisco, California......    33
Brian A. Hudson, Sr., Executive Director and CEO, Pennsylvania 
  Housing Finance Agency, on behalf of the National Council of 
  State Housing Agencies Harrisburg, Pennsylvania................    39
Jeffrey H. Goldstein, Executive Vice President and Chief 
  Operating Officer, Director of Real estate, Boston Capital, 
  Boston, Massachusetts..........................................    48
Jonathan F.P. Rose, President, Jonathan Rose Companies LLC, New 
  York, New York.................................................    53
Benson F. Roberts, Senior Vice President for Policy and Program 
  Development, Local Initiatives Support Corporation.............    59
Steve Lawson, The Lawson Companies, on behalf of the National 
  Association of Home Builders, Virginia Beach, Virginia.........    65
John Leith-Tetrault, President, National Trust Community 
  Investment Corporation.........................................    74

                       SUBMISSIONS FOR THE RECORD

Council of Large Public Housing Authorities, Letter..............    87
Mortgage Bankers Association, Letter.............................    92
National Affordable Housing Management Association, Alexandria, 
  VA, Statement..................................................    93
National Association of Realtors, Statement......................    95
National Trust Community Investment Corporation, Statement.......    99


            HEARING ON TAX INCENTIVES FOR AFFORDABLE HOUSING

                              ----------                              


                         THURSDAY, MAY 24, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                   Subcommittee on Select Revenue Measures,
                                                    Washington, DC.

    The Subcommittee met, pursuant to call, at 10:02 a.m., in 
Room 1100, Longworth House Office Building, Hon. Richard E. 
Neal [Chairman of the Subcommittee] presiding. [The Advisory of 
the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                SUBCOMMITTEE ON SELECT REVENUE MEASURES

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
May 24, 2007
SRM-5

    Neal Announces Hearing on Tax Incentives for Affordable Housing

    House Ways and Means Select Revenue Measures Subcommittee Chairman 
Richard E. Neal (D-MA) announced today that the Subcommittee on Select 
Revenue Measures will hold a hearing on certain tax incentives for 
affordable housing including the low-income housing credit (LIHTC), 
section 142 tax-exempt bonds, and section 47 rehabilitation credit. The 
hearing will take place on Thursday, May 24, 2007, in the main 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 10:00 a.m.
      
    Oral testimony at this hearing will be limited to invited witnesses 
only. However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    The hearing will focus on ways to simplify and modify certain low 
income housing programs which are established in the Internal Revenue 
Code (Code) and programs administered by the U.S. Department of Housing 
and Urban Development (HUD) to ensure greater efficiency and better 
coordination of federal housing programs.
      

BACKGROUND:

      
    The Code contains certain incentives that are used to finance the 
development of low-income housing. The main provisions in the Code are 
the LIHTC, private activity tax-exempt bonds, and the historic 
rehabilitation tax credit. These incentives were enacted or 
substantially revised in the Tax Reform Act of 1986 (P.L.99-514), and 
later modified to some extent.
      
    The LIHTC is a tax incentive to spur private investment in 
construction and rehabilitation of low-income housing. The credit is 
intended to lower the financing costs of housing construction and 
enable a percentage of the units to be rented below market rates to 
eligible tenants. The credit is allocated among the states annually 
according to the population of the state. Unused credits are added to a 
national pool and redistributed to the states that apply for excess 
credits. Over the 18-year history of the LIHTC, more than one million 
new and rehabilitated units have received support under the program.
      
    Under the Code, state and local governments are permitted to use 
tax-exempt bonds to finance certain projects that would otherwise be 
classified as private activities. The development of privately-owned 
and operated multifamily residential housing falls within this 
category. In 2003, 2004 and 2005, the private activity bond volume for 
multi-family housing was $5,672.8 million, $5,007.2 million, and 
$5,561.7 million, respectively. The rehabilitation credit under Section 
47 of the Code provides an additional incentive for rehabilitation of 
historic structures and buildings placed in service before 1936. The 
credit has been an especially effective tool in building affordable 
housing, creating more than 15,000 units of housing in 2006, 40% of 
which fell into the affordable category mostly due to combination with 
the LIHTC.
      
    In announcing the hearing, Chairman Neal stated, ``Ensuring the 
availability of affordable housing for many low- and middle-income 
families continues to be a national priority. Federally subsidized 
housing plays a major role in achieving this goal. Many of the federal 
housing programs have not received the level of Congressional review 
needed to ensure maximum efficiency and effectiveness since 1986. This 
hearing is a first step in our overview of the major federal housing 
programs, including the tax incentives.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
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    *Chairman NEAL. I would ask all to take their seats so that 
we can move forward here this morning, on a very important 
subject. I'd like to call this meeting of the Select Revenue 
Measures Subcommittee to proceed. Would everybody, including 
our guests, please take their seats? Let me welcome all of you 
to our Subcommittee hearing on tax incentives for affordable 
housing.
    For the past two decades, the Low-Income Housing Tax Credit 
has brought private sector developers and investors together 
with State, Federal and local governments in order to provide 
affordable housing to millions of families. It has truly been a 
successful and efficient government initiative. Now after these 
20 years of operation, Committee Members believe it's time to 
review the program and to solicit suggestions for improvement. 
We are undertaking this review along with the Financial 
Services Committee, which has jurisdiction over certain housing 
programs outside of the tax Code.
    Because many of these programs often overlap or potentially 
conflict, we hope to move consensus legislative proposals in 
conjunction with that Committee. Thomas Jefferson noted that 
the first and only object of good government was the care of 
human life and happiness. But for millions of working families, 
reliable and affordable housing can be elusive.
    As we have recently witnessed in the aftermath of Katrina, 
lack of housing causes problems all across American society, 
from schools to law enforcement to, as Jefferson put it, basic 
happiness. There is a role for government here, and partnering 
with the private sector has answered the housing needs for 
millions of American families of modest means. Business and 
community leaders in the Gulf zone told us that they could not 
get back on track after the hurricane without assistance. For 
workers, keeping their jobs only answered one part of the 
question. With no place for their families to live, they simply 
did not want to go back. So this Committee responded with 
billions of dollars in additional housing credits. I know as a 
former Mayor that affordable housing is a key element to every 
successful community. And I also will tell you in terms of 
local economics, there is no issue that I dealt with during 
those 5 years as Mayor that was more complicated than housing.
    As Mayor of Springfield, I was proud to play a part in 
affordable housing developments, ensuring that these projects 
received land from the city in order to make the project 
feasible. And each time I drive by these developments, which 
are still standing and in fact thriving today, I understand 
this is a public-private program that works.
    Mr. Ramstad and I have offered legislation in the past to 
modernize the housing credit programs, and he has assured me 
that it is his intention to work with me again, and we expect 
to proceed. Mr. English and Ms. Tubbs-Jones have also offered 
legislation to improve the historic property tax credits, which 
also will be discussed today. All of us, along with Chairman 
Rangel and Jim McCrery are true believers in these housing 
programs. So I'm hopeful that we can move legislation forward 
this summer to ensure their long-term integrity and viability.
    I'm pleased to welcome our witnesses today, who will assist 
the Committee in understanding how these programs work. We will 
hear from three panels representing Federal, State and local 
governments, both the for-profit and not-for-profit private 
sector.
    Representing the Treasury Department, we will hear from 
Mike Desmond, Tax Legislative Counsel. Representing the 
Department of Housing and Urban Development, we will hear from 
Mr. Orlando Cabrera, the Assistant Secretary in the Office of 
Public and Indian Housing.
    Our second panel, representing New York City, we will hear 
from Housing Commissioner Shaun Donovan. And representing the 
National Association of Local Housing Finance Agencies, we will 
hear from Olson Lee, the Deputy Executive Director of the city 
of San Francisco's Redevelopment Agency. Representing the 
National Association of State Housing Agencies, we will hear 
from the Executive Director and CEO of the Pennsylvania Housing 
Finance Agency, Mr. Brian Hudson.
    On our third panel we will hear from Mr. Jeffrey Goldstein 
from my home State of Massachusetts, who is Executive Vice 
President and Chief Operating Officer of Boston Capital. 
Representing Enterprise Community Partners, we will hear from 
Mr. Jonathan Rose, President of the Jonathan Rose Companies in 
New York City.
    Representing the Local Initiatives Support Coalition or 
LISC, we will hear from Mr. Benson Roberts, the coalition 
Senior Vice President for Policy and Program Development. 
Representing the National Association of Home Builders, we will 
hear from Steve Lawson of the Lawson Companies in Virginia 
Beach, Virginia. And representing the National Trust Community 
Investment Corporation, we will hear from its President, John 
Leith-Tetrault.
    I look forward to all of the testimony we will hear today. 
And at this time I'd like to recognize my friend, Mr. English, 
for his opening Statement.
    *Mr. ENGLISH. Mr. Chairman, in the interest of brevity, I'm 
going to submit my written opening Statement for the record. 
But I would like to make a comment. And first off, that I think 
this hearing is timely and extremely important. I'm very 
grateful to you for making it a priority of this Subcommittee 
and I believe a priority of the Ways and Means Committee, to 
review the successes of this tax credit.
    We think the Affordable Housing Tax Credit, on a bipartisan 
basis, has been an extraordinary success story. It's created an 
opportunity to provide affordable housing for millions of 
Americans in communities where there have been very tight 
housing markets. But even more so, in many communities, it has 
created a vehicle for community revitalization which literally 
has leveraged millions of dollars into some of our older 
communities and some of our older downtowns.
    Frankly, Mr. Chairman, to appreciate the success story, you 
have to go no further than my own neighborhood in Erie, 
Pennsylvania. On Erie's West Side, we have an extraordinary 
structure that was empty for years called the Boston Store, 
that was the epitome of downtown Erie. And in part because of 
this tax credit and some other programs that were put into 
place, that Boston Store was renovated, revitalized and now is 
a beacon for affordable housing in the downtown, attracting 
people back into Erie's downtown. But it also has successfully, 
at the lower levels of the structure, been reused for 
commercial purposes. It's a fabulous success story that has 
changed the flavor of downtown Erie.
    More than that, in my neighborhood on Erie's West Side, we 
had an old convent of the St. Josephite nuns called the Villa. 
There was a school there, and there was also a monastic 
community. And when that became vacant a number of years ago, 
some developers came in, and using this tax credit, they were 
able to put in place an immensely successful affordable housing 
project that brought back into my neighborhood, in many cases a 
lot of people who had lived much of their lives there. It has 
helped greenline our neighborhood, revitalize it and put a new 
sheen on it.
    I'm a big believer in this program, but I think it's 
important that we as a Subcommittee hear the details and hear 
the challenges and hear how we can make this credit even more 
effective as an engine to drive neighborhood revitalization and 
create opportunities for affordable housing for millions.
    Thank you, Mr. Chairman, for taking on this effort.
    [The information follows:]
    *Chairman NEAL. Thank you, Mr. English. Without objection, 
any other Members wishing to insert Statements as part of the 
record may do so. I will ask all the witnesses, please speak 
directly into the microphone. And all written Statements by the 
witnesses will be inserted into the record as well.
    Mr. Desmond, thank you for being here.

STATEMENT OF MICHAEL J. DESMOND, TAX LEGISLATIVE COUNSEL, U.S. 
                   DEPARTMENT OF THE TREASURY

    *Mr. DESMOND. Mr. Chairman, Ranking Member English, and 
distinguished Members of the Subcommittee, thank you for the 
opportunity to discuss with you today various Federal tax 
incentives for affordable housing, including the Low-Income 
Housing Tax Credit, the Rehabilitation Tax Credit, and tax-
exempt bonds.
    The Treasury Department believes that these tax incentives 
play an important role in encouraging the development of 
affordable housing units for Low-Income Households, and shares 
the view that the goal of affordable housing is best achieved 
by continuing to examine low-income housing needs and 
addressing them through programs that are reviewed periodically 
to see how they can be better targeted and improved.
    Since it was enacted in 1986, the Low-Income Tax Credit has 
provided economic incentives responsible for producing more 
than 1 million rental units occupied by low-income households. 
An indication of the widespread appeal of the program is the 
fact that the program is usually oversubscribed, and that there 
are more applicants seeking allocations of the credit than 
there is credit available.
    The Low-Income Housing Tax Credit is a complex program, 
however, and there are many ways in which it could be 
simplified to improve its effectiveness in serving the needs of 
low-income people while at the same time reducing the burden 
placed on the Internal Revenue Service and State agencies in 
administering the program. Simplification could also reduce the 
burden on property owners who take advantage of the credit, 
increasing its efficiency.
    The Treasury Department has taken steps to reduce some of 
the complexity and uncertainty of the Low-Income Housing Tax 
Credit program by providing guidance through regulations. We 
are currently working on two projects relating to the credit. 
One project deals with a utility allowance that is a factor in 
determining the rent that can be charged to tenants of low-
income housing units. Inaccuracies in the current formula for 
computing the utility allowance have concerned for property 
owners, tenants and State and local housing agencies, an issue 
that I think is highlighted in some of the testimony that 
you'll hear later this morning. We expect that our regulations 
on the utility allowance will help to address this issue.
    In a separate regulatory project, we are working on 
proposed regulations that will provide guidance concerning the 
circumstances in which an owner of Low-Income Housing Tax 
Credit property is allowed to discontinue operating a tax 
credit building as low-income housing under the qualified 
contract provisions of the statute, which come into play toward 
the end of the 15-year compliance period that's in the statute. 
We anticipate publishing both sets of those regulations later 
this summer.
    Some aspects of the Low-Income Housing Tax Credit could 
benefit from simplification and clarification. We at the 
Treasury Department and with the Internal Revenue Service 
frequently meet with representatives of owners, tenants and 
housing agencies, who provide us with their input on the 
controversies they're facing, uncertainties they're facing, and 
complexities they're facing with respect to the credit.
    For example, the actual tax credit rate is not fixed, 
although it's often referred to as the 4-percent or the 9-
percent. It's actually adjusted on a monthly basis to achieve a 
total present value of the tax subsidy that's provided to 
owners over a 10-year credit period, equal to either 70 percent 
of the owner's eligible basis in the property, or 30 percent in 
certain cases.
    It has been suggested that the credit percentage for newly 
constructed be fixed rather than adjusted monthly. Although 
these computations are fairly mechanical and routine, they do 
impose a burden on owners of property by requiring them to make 
monthly computations based on changing percentages.
    Another suggestion is that the credit be taken ratably over 
the 15-year compliance period, rather than the 10-year period 
under the current statute, with increased applicable 
percentages to make up for any time-value benefit that the 
present accelerated credit provides. This would eliminate 
recapture of the credit in certain cases, and also eliminate 
the requirement for owners to have to post a bond when they 
dispose of the property before the end of the 15-year 
compliance period.
    Additionally, whether certain types of students may be 
considered low-income for purposes of the credit is unclear, 
particularly in the case of single-parent households in which 
both the parent and the child are full-time students. Although 
we don't think the credit was intended to encourage the 
development of housing for all college students, the current 
uncertainty with respect to this issue has become a 
disincentive for low-income persons living in credit properties 
to go back to school.
    Difficult development areas which are eligible for an 
increased credit amount have also been a source of complexity 
in recent years, because the areas designated as DDAs may 
change from year to year, making it difficult for developers 
who phase in their properties over a period of years to 
estimate the financing needs that they have.
    The Rehabilitation Tax Credit and tax-exempt housing bonds 
or other tax incentives can be combined with the Low-Income 
Housing Tax Credit to provide a greater incentive for 
affordable housing. When combined with the housing tax credit, 
these other incentives can provide a deeper Federal subsidy, 
but they can also raise complexity and administrative concerns 
when combined.
    A range of proposals have been offered by stakeholders, 
including other witnesses at today's hearing, to modify these 
various affordable housing tax incentives. As the Committee 
considers these are other proposals, there are two competing 
interests that must be kept in mind--those of the property 
owners who provide the housing, and low of the low-income 
tenants who are the ultimate beneficiaries of the Federal tax 
incentives. These interests need to be balanced while taking 
into consideration the complexity of the statutes and the 
relative effectiveness of various proposals in targeting the 
Federal tax incentives.
    Thank you, Mr. Chairman, Ranking Member English, and 
Members of the Subcommittee, for providing the Treasury 
Department with an opportunity to participate in today's 
hearing. We look forward to working with you on changes to the 
statute, and I would be pleased to answer any questions that 
you might have.
    [The Statement of Mr. Desmond follows:]

    [GRAPHIC] [TIFF OMITTED] 47758A.001
    

    [GRAPHIC] [TIFF OMITTED] 47758A.002
    

    [GRAPHIC] [TIFF OMITTED] 47758A.003
    

    [GRAPHIC] [TIFF OMITTED] 47758A.004
    

                                 
    *Chairman NEAL. Thank you, Mr. Desmond.
    Mr. Cabrera.

STATEMENT OF ORLANDO J. CABRERA, ASSISTANT SECRETARY FOR PUBLIC 
   AND INDIAN HOUSING, U.S. DEPARTMENT OF HOUSING AND URBAN 
                          DEVELOPMENT

    *Mr. CABRERA. Thank you, Mr. Chairman, Ranking Member 
English, and Members of the Subcommittee for inviting HUD to 
provide its input with respect to this hearing on the issue of 
tax incentives for low-income housing. My name is Orlando J. 
Cabrera, and I'm Assistant Secretary for Public and Indian 
Housing at the Department of Housing and Urban Development. 
It's my honor to represent the views of the Department of 
Housing and Urban Development before your Committee.
    All of our comments are provided with a significant caveat. 
Our testimony focused on the Low-Income Housing Tax Credit and 
private activity bond programs from HUD's perspective. We 
believe our partners at Treasury and the Service who administer 
both programs daily have views on the issues that HUD will 
raise today, and we would be deferential to those views.
    Nonetheless, we focused on ways to possibly improve the 
interplay between the Treasury programs and HUD programs in 
order to serve low-income, very low-income, and extremely low-
income housing needs in a more effective way. Accordingly, 
these comments focused on two current tools most familiar to 
HUD, those mentioned--the tax credit and private activity 
bonds.
    Technical issues that would help transactions that use HUD 
programs are pretty varied, together with the Low-Income 
Housing Tax Credit and private activity bonds, in order to 
construct or preserve affordable units. First of all, we 
believe that Low-Income Housing Tax Credit and private activity 
bond programs run by the States have been enormously successful 
in developing affordable housing units for the nation. They may 
not be perfect programs, but they're extraordinary ones that 
play to our strengths; private-sector execution with sound 
public policy. HUD's role in the program has been ancillary but 
important, and we believe that HUD's role should remain as 
such.
    That said, HUD's stakeholders are important consumers of 
these products, and we would want to suggest ideas that make 
the programs more accessible to them. Proudly, we offer 
suggestions that work well with HUD programs to help 
construction and preservation of units in order to serve those 
low-income Americans. While more specifically, we will note 
issues that benefit from refinement. In either case, we would 
like to underscore the importance that HFAs retain the 
flexibility that they currently have under the Code.
    HUD always welcomes--I'm sorry. Strike--excuse me. Those 
prerogatives appropriately belong to each--Mr. Chairman, pardon 
me. There's a typo.
    *Chairman NEAL. You're doing fine.
    *Mr. CABRERA. Our broader issues. I have a cold. And one of 
the things I've just discovered is I have a typo. Our broader 
issues are, and essentially in most cases, HUD, like everyone, 
is in the business of affordable housing and must undertake a 
subsidy-layering-review-process that ensures that HUD and the 
transaction are in compliance with the Housing and Urban 
Development Reform Act 1989. What does that mean? It means that 
every transaction that involves public housing property or 
funds appropriated by Congress must be reviewed by the 
Department or through assignment by the States.
    What deals do those encompass? Well, it encompasses all 
deals undertaken by public housing authorities on PHA-owned 
land using tax credits or bond allocation, all HOPE VI deals, 
all public housing transactions that seek to use a subsidy 
called Capital Funds with Low-Income Housing Tax Credits or 
bond proceeds from private activity bonds, and all deals that 
receive project-based Section 8.
    With respect to HOPE VI deals that are financed with 
Capital Fund allocations, project-based Section 8 layering, 
Section 202 and 811 transactions, each of these have 
commonalities. They are by definition complicated deals that 
have many moving parts. Moving parts that are different in 
nature when compared between the programs but nonetheless 
similarly complicated. Deals with many moving parts require 
flexibility with time. Time is at a premium with respect to 
Section 202 and rightly so. However, in these cases, those 
place--the place and service dates and carryover dates are 
challenges for PHAs that have to undertake those deals, and 
many stakeholders who have to undertake those deals, 
particularly with the elderly and the disabled.
    While HOPE VI transactions are in terms of percentage a 
small number of applications in the global pool of tax credit 
applicants, they by themselves require a lot of tax credits. 
HOPE VI grants, historically speaking, have been nearly--have 
been very difficult to finance. For example, only 65 of 237 
HOPE VI deals have actually been completed, although the 
program is 15 years old.
    It's not simply the size of the tax credit allocation that 
causes them pause. It's the fact that the allocation may not be 
used in a timely way and therefore lost to the HFA.
    Our recommendation would be to provide HFAs with some 
flexibility in the HOPE VI program and in other contexts 
mentioned to assure that unused tax credits can be reallocated 
with less risk of effective loss of the tax credit or sanction 
to the HFA.
    Mr. Chairman, I see that my time is up, so, in closing, HUD 
remains committed to helping the Low-Income Housing Tax Credit 
and private activity bond programs succeed by being a willing 
partner and facilitator as contemplated in the Code. Thank you 
once again for your invitation. I stand ready to answer any 
questions you may have.
    [The Statement of Mr. Cabrera follows:]
Statement of Orlando J. Cabrera, Assistant Secretary, Office of Public 
  and Indian Housing, U.S. Department of Housing and Urban Development
    Chairman Neal, Ranking Member English, distinguished Members of the 
Subcommittee, my name is Orlando Cabrera and I am the Assistant 
Secretary for Public and Indian Housing at HUD.
    The Low-income Housing Tax Credit (LIHTC) Program represents a 
major resource to affordable housing developers. Between 1987 and 2004, 
the most recent date that data is available, nearly 25,500 tax credit 
projects were developed and placed in service, representing more than 
one million affordable housing units. These credits are an important 
development resource for low-income housing programs in the Department, 
particularly public housing and supportive housing for the elderly 
(Section 202).
LIHTC and Public Housing
    Public housing authorities (PHA) are eligible to apply for LIHTCs, 
and the program requirements for this funding source are consistent 
with the mission of these agencies. PHAs can use LIHTCs to both 
increase the supply of affordable housing in their community and to 
revitalize existing developments that are obsolescent or distressed.
    To date, PHA participation in the LIHTC program has been limited, 
but diverse. As of 2005, approximately 230 PHAs across 44 states, the 
District of Columbia and Puerto Rico, had developed or were developing 
775 tax credit projects for the construction of 97,930 units. This 
represents approximately 9% of all tax credit units developed, 3% of 
all tax credit projects, and 7% of all PHAs in the United States.
    Projects involve both 9% tax credits and 4% tax credits with bonds, 
and include new construction as well as the redevelopment of existing 
properties. Two-thirds (66%) of the units developed by PHAs are new 
construction, versus 54% for the universe of LIHTC projects. The 
balance of remaining projects is for rehabilitation of existing 
developments, with less than 2% including a combination of new 
construction and rehabilitation. These projects vary in size, with the 
smallest project comprising only five units and the largest 475 units.
    The greatest concentration of PHA sponsored projects is in the 
Northwest (52%), followed by the Northeast (21%). Small agencies 
managing fewer than 1,000 units of public housing represent half of all 
LIHTC projects undertaken by PHAs.
    Across these projects, LIHTCs are an especially important form of 
leverage for HOPE VI developments. Since the inception of the HOPE VI 
program, 121 PHAs have received 237 HOPE VI revitalization grants. The 
program provides funding to PHAs for the revitalization of distressed 
public housing through new construction or rehabilitation of existing 
units. One goal is to create mixed-income communities that include a 
range of Federally subsidized housing types, market rate units and home 
ownership units. HOPE VI proposals are rated on their leveraging, with 
LIHTCs providing one of the major sources.
    By 2005, 649 rental phases of development were planned across HOPE 
VI developments. Most (76%) of these phases included LIHTCs. HOPE VI 
developments account for 64% of all LIHTC projects managed by PHAs. It 
should be clear from these statistics that LIHTCs are a nearly 
indispensable resource for the HOPE VI program. In fact, the phase 
closing schedules for most HOPE VI projects are built around the 
allocation timetables for LIHTCs.
    Some developers express concern that HOPE VI projects represent too 
high a percentage of all LIHTC projects. HOPE VI developments, however, 
only account for approximately 2 percent of all LIHTC projects.
    HUD will continue outreach and training to encourage PHA 
participation in the LIHTC program. LIHTC equity provides a logical and 
important source of leverage for HUD programs, including HOPE VI and 
Capital Funds, and the significance of LIHTCs as a leverage funding 
source among PHAs will likely increase.
    In addition to outreach, HUD also provides training and resource 
materials to assist PHAs in the use of LIHTCs and implementation of 
mixed-finance projects. These are important resources for PHAs, as some 
agencies require additional training and information in order to apply 
for and use LIHTCs as part of their development projects. Mirroring 
these needs, public housing industry groups such as the Local 
Initiatives Support Corporation, Enterprise Community Investment, Inc., 
the Neighborhood Reinvestment Corporation, and the National Association 
of Housing and Redevelopment Officials, also provide assistance to PHAs 
in the use of LIHTCs.
    As part of these ongoing efforts to increase utilization of LIHTCs 
by PHAs, collaboration between HUD and IRS on LIHTCs and public housing 
is important. One idea is the development of an Inter-Agency Agreement 
(IAA) between HUD and other agencies to collaborate on information 
sharing and joint outreach efforts related to LIHTCs and public 
housing. Several examples include:

      Coordination across HUD, PHAs and housing finance 
agencies (HFA) to target states where LIHTCs are underutilized and 
volume cap is available.
      Assistance to HFAs interested in the development of 
Qualified Allocation Plan and Rules (QAP) preferences that increase tax 
credit unit production for very low-income families at or below 30% of 
AMI.
      Collaboration across HUD and HFAs to increase outreach to 
PHAs and provide training in LIHTC financing.

    For the Department's Native American programs, the picture is 
improving. The use of low-income housing tax credits in Indian Country 
lags behind that of their public housing counterparts. Many tribes want 
access to this valuable resource, but under current law and 
regulations, Indian Housing Block Grant funds used for tenant--or 
project-based rental assistance in conjunction with low-income housing 
tax credits are not exempt from the reduction in eligible basis that is 
available under Section 8 and similar programs.
    The Department has been working closely with the IRS to develop the 
regulatory framework for such a change, but an amendment to the statute 
authorizing NAHASDA would create a more permanent and clearer 
resolution of this issue.
LIHTC and Supportive Housing for the Elderly (Section 202)
    Beyond the public housing program, LIHTCs are also a very important 
funding source for the Section 202 program. The importance of LIHTCs to 
this program has increased in line with demographic shifts and 
programmatic costs. Growth in the elderly population has logically 
resulted in an increased need for supportive housing that targets the 
elderly. At the same time, the cost of constructing new units continues 
to rise making it more difficult for the Department to meet this need. 
Moreover, the need to renew the rental assistance contracts on existing 
projects is also increasing, which erodes the funding available to 
produce new units.
    Given these challenges and the availability of LIHTCs, the 
Department's FY 2008 budget proposes an innovative demonstration 
program aimed at increasing production of Section 202 units. The 
demonstration project will seek to utilize LIHTCs and other housing 
resources (tax-exempt bond financing, HOME Program, private grants, 
etc.) to expand production under the Section 202 program.
    Many view the conjoining of LIHTCs with the Section 202 program to 
be a step in the right direction for LIHTC projects that target the 
elderly. For example, according to a 2006 American Association of 
Retired Persons (AARP) study titled Developing Appropriate Rental 
Housing for Low-Income Older Persons: A Survey of Section 202 and LIHTC 
Property Managers, ``Section 202 properties for older persons have 
somewhat more success than LIHTC properties for older persons in 
providing services.'' It is the goal of the Department to take positive 
aspects from both programs, drawing on development financing on the 
LIHTC side and service delivery on the Section 202 side, to produce 
additional units with strong senior services components.
    As part of the demonstration, the Department is conducting a study 
and meeting with industry experts, stakeholders and housing advocates 
to identify implementation challenges and other issues related to 
expansion of the Section 202 program. Some of the areas being explored 
include:

      Identifying ways to complete projects in a timelier 
manner, utilizing various funding sources to expand the impact of the 
limited 202 dollars, and providing enhanced supportive services.
      Identifying and removing barriers (such as legislative 
exemptions) in the Section 202 Prepayment and Refinancing Program to 
facilitate the preservation and rehabilitation of existing properties;
      Identifying ways in which HUD can partner with other 
Federal, state, and local agencies to leverage Section 202 funds.

    A draft of the study has been completed and is currently under 
review. A Notice of Funding Availability (NOFA) for the demonstration 
program is proposed for the 2008 funding cycle.
    The Department has also proposed in its FY 2008 budget a similar 
demonstration program for Section 811, supportive housing for people 
with disabilities, that seeks to increase production by addressing 
certain barriers that would encourage the levering of difference 
sources of funding.
    Mr. Chairman, and Members of the Subcommittee, the Department 
considers LIHTCs to be a significant resource in the affordable housing 
industry. When coupled with existing HUD programs such as HOPE VI, the 
Capital Fund, rental subsidies, and Sections 202 and 811, LIHTCs 
represent a crucial source of leveraged financing in the construction 
or rehabilitation of affordable housing families at various levels of 
income. The Department will continue to promote the use of tax credits 
among PHAs, Section 202 program providers, and other HUD programs.
Conclusion
    As you have seen from our testimonies today, even though the LIHTC 
is not a HUD program, the Department does have some important 
administrative roles in it. We look forward to working with the 
Congress and our colleagues at the Department of the Treasury to 
address any difficulties in the program that may require solutions, 
legislative or otherwise, and I want the Subcommittee to be aware of 
what areas HUD is examining.
    Thank you and I look forward to your questions.

                                 

    *Chairman NEAL. Thank you, Mr. Cabrera. Mr. Desmond, you 
said that the current, quote ``utility allowance'' relies on 
flawed information for rent calculations. Can you explain as 
much as you're able to what issues the new regulations will 
cover and whether this will solve the concerns raised by 
property owners?
    *Mr. DESMOND. Yes, Mr. Chairman. The issue with the current 
formula for computing the utility allowance is that it is based 
on utility costs for older Section 8-type housing. And that may 
be accurate for older Low-Income Housing Tax Credit buildings, 
but with respect to newer buildings where utility costs tend to 
be lower, it ends up imposing a higher utility allowance on 
those buildings.
    What we're trying to address through our regulation project 
is to provide more flexibility to the local housing agencies 
and to owners to use different formulas for coming up with a 
more accurate determination of the utility allowance. So it is 
merely to get the accuracy of that formula correct. The current 
rules are probably correct for older Section 8 housing, but for 
newer housing, we want to be sure that the formula that's 
applied is a realistic formula with respect to the actual 
utility costs that are being incurred by owners--or by tenants.
    *Chairman NEAL. Thank you. Mr. Cabrera, you testified that 
combining the development financing of Low-Income Housing Tax 
Credits with the service delivery of Section 202, that the 
elderly housing program, shows promise. What is HUD doing to 
foster such synergy between HUD and the tax credit programs?
    *Mr. CABRERA. Assistant Secretary Montgomery is--who is the 
Assistant Secretary for Housing in FHA, has undertaken a pilot 
program in Section 202 to better cobble 202 subsidy with tax 
credits. One of the big issues is that 202 deals and 811 deals 
have to bring in a variety of layers of subsidies that both 
deal with the construction world, which is really the tax 
credit world, or alternatively, if possible, the PAB world, the 
private activity bond world, with actual intensive operating 
subsidy for services well beyond just the operation of the unit 
but services to the tenant.
    And so I believe Assistant Secretary Montgomery has 
fashioned a program that better melds those two programs.
    *Chairman NEAL. And Mr. Desmond, several of the witnesses 
we will hear from today are advocating that the 9 and 4 percent 
housing credit amounts be fixed rather than adjusted or 
floating. Has Treasury reviewed the proposal? And if so, can 
you share your thoughts on this suggestion?
    *Mr. DESMOND. We have, Mr. Chairman, and I mentioned that 
in my testimony as well. I think the issue there is one of 
balancing the current flexibility. Now the rates float based on 
ultimately what is fixed to Federal interest rates. So as 
interest rates go up or down, the amount of the credit will go 
up and down over the credit period, now the 10-year credit 
period.
    I think the proposal is based on simplifying the formula 
and the application of the formula for owners, possibly 
building on a little bit more predictability for their 
financing. It's basically the choice between a fixed rate and a 
variable rate that I think a lot of people face in determining 
how they're going to finance a particular project.
    And if you fixed it at 4 percent and 9 percent, it would 
simplify the computations for owners, and it also may lead to a 
little bit more predictability of the amount of the credit that 
you'll be getting, obviously still putting the owners at risk 
with respect to interest rate variations. So I think it's a 
mechanical issue mostly based on simplicity and one that we 
have thought about.
    *Chairman NEAL. Mr. English.
    *Mr. ENGLISH. Thank you, Mr. Chairman. Mr. Cabrera, I 
wonder if you could share with us HUD's view on using historic 
buildings as a way to increase the amount of affordable 
housing. And specifically, as you know, I have a bill, H.R. 
1043, that the Chairman referenced, which would increase the 
efficiency of using the Rehabilitation Tax Credit along with 
the Low-Income Housing Tax Credit. Do you think this is a good 
idea?
    *Mr. CABRERA. I think it's a good idea in terms of the 
stakeholder making a determination on the cost benefit 
analysis. So, for example, if you happened to be in a QCT, 
which I think is what your bill contemplates, as I recall the 
language, that augmentation in equity would certainly help the 
deal.
    There are other things that I believe would also help the 
deal, but certainly in terms of the Historic Tax Credit, it 
would be of value.
    *Mr. ENGLISH. Thank you. Another question, should the HUD 
secretary's authority to designate difficult development area 
be changed to allow the Department to be more nimble in 
responding to future major disasters?
    *Mr. CABRERA. The short answer to that is yes, Mr. Ranking 
Member. The reason, though, I have to say is, in my previous 
life, I was an Executive Director of an HFA, and we were struck 
by six hurricanes. And one of the things you learn very quickly 
is DDAs have value, but they become a competitive issue, 
because you can only have so many DDAs under the Code.
    So I would say providing the Secretary with that 
flexibility, with reasonable and local restrictions, such as 
there is actually a housing need. There is a presidentially 
declared disaster area that's, you know, receiving significant 
subsidy to address that disaster I think has--makes enormous 
sense.
    *Mr. ENGLISH. Does HUD have specific suggestions for how 
the Qualified Census Tract provisions of the Low-Income Housing 
Tax Credit ought to be changed?
    *Mr. CABRERA. HUD has specific thoughts. I'm a little 
worried about using the word ``suggestions.'' But one of the 
big concerns--again, I'm going to put my former hat on for a 
moment--is QCTs move, and sometimes you might develop a deal 
that looks to address development in a QCT, but the lines 
change.
    And so the issue becomes giving States the flexibility to 
address those areas or create a determination that preserves 
the 30 percent bump that you otherwise get under Section 42 in 
order to preserve the deal. Because what will wind up happening 
on occasion is you'll have a deal, and part of the deal or a 
phase of that same deal will be outside of the QCT, lose its 30 
percent bump, and now the deal is handled--is hampered in terms 
of the pro forma.
    So, creating or crafting language that allows that kind of 
nimbleness, I think, yes, has some value as well.
    *Mr. ENGLISH. And I guess my final question is recognizing 
that we have limitations on what we could do and this has some 
budget consequences, do you feel that the case can be made, 
from your perspective, for substantially expanding the credit? 
In other words, increasing the amount of the credit available 
to States and communities, do you feel that there is the demand 
out there to fulfill this need, and to justify a significant 
expansion of the credit? And do you believe that's something 
the Administration could support if it were phased in?
    *Mr. CABRERA. I can't speak to the last part of your 
question, but I can say that--again, I'm going to rely on a 
former hat--when I walked into Florida housing, we were 
receiving five applications for every dollar of credit. Now as 
the market changed, mostly because of real estate economics in 
the State of Florida, that came down to four.
    So, and my sense of life, as my good friend, Brian Hudson, 
who is testifying before you in a just a little while, he'd 
probably say that his experience is the same, and my colleagues 
or my former colleagues would probably agree with most of what 
I've just said. Namely, in most places in this country, 
particularly in places where there's a large population change 
or a lot of density, the tax credit is an enormously sought-
after tool, and a valuable resource.
    So, trying to deal with it from that angle would be fine. 
But I'd say that there are other things that can be done, so 
that, for example, there's flexibility within the credit. For 
example, in HOPE VI, it's very difficult to fashion a mixed 
income deal. It's very complicated, many times because of 
subsidy layering.
    But if one were to fashion a way to take the ownership 
element for market rate units and the ownership element for tax 
rated units and allow them to work independently, that within 
the context of Section 42 could actually help induce more 
units. From the perspective of HUD, which is always looking at 
issues of mixed income when it looks at low-income housing, 
that's an important--that might be an important tool.
    *Mr. ENGLISH. Thank you so much. And thank you, Mr. 
Chairman.
    *Chairman NEAL. Thanks, Mr. English. The gentleman from 
California, Mr. Thompson, is recognized to inquire.
    Mr. THOMPSON. Thank you, Mr. Chairman, and thank you for 
holding this very important hearing. Mr. Desmond, in your 
testimony, you mentioned the complexity of the program and went 
on to say that it results in increased cost and decrease in 
efficiency for the subsidy and a burden on the IRS. And I'm 
interested in knowing if you have any suggestions or 
recommendations to the Committee how we can alleviate some of 
those complexities.
    And then also, and I don't know if it's part of the same 
question. I'll let you defer. But I know the industry has come 
up with a list of recommendations that change the tax credit 
and to also coordinate the credit with other Federal housing 
subsidies. And maybe if you could hit on those two issues or a 
combination of them.
    *Mr. DESMOND. Thank you, Mr. Thompson. The credit itself, 
the provision in Section 42, is one of the longest statutes in 
the Internal Revenue Code. It's over 30 pages long, depending 
on the compilation. So I think there is an enormous amount of 
complexity in the current statute.
    Mr. THOMPSON. You don't have to go over each one, but----
    *Mr. DESMOND. I'll try not to.
    Mr. THOMPSON. Thank you.
    *Mr. DESMOND. Any time you have a statute with that many 
provisions in it, it obviously places a burden upon the 
taxpayers who are taking advantage of it, in this case the 
owners, in administering it, understanding it and complying 
with all of its requirements over an extended period, the 15-
year compliance.
    Mr. THOMPSON. Is it appropriate to ask you to submit to the 
Committee suggestions as to how to work out some of those 
complexities?
    *Mr. DESMOND. I think there are some, and as you mentioned, 
many stakeholders have also made some suggestions. I will 
highlight several that I think have been suggested. I think one 
area of particular complexity and uncertainty is when you 
combine Section 42 credits with tax-exempt bonds under Section 
142.
    And there the issue of complexity comes up because of 
slight mechanical inconsistencies between the two provisions, 
which although they may be relatively mechanical, do cause 
considerable problems for owners who are financing projects 
with box tax credit bonds and tax-exempt bond financing. And 
for an extended use period, extended compliance period, they 
need to monitor both provisions and make sure that they're 
complying with two sometimes inconsistent requirements in both 
of those Code sections.
    Three areas in particular, there's a transient housing rule 
for both Section 142, the bonds, and for the credit, that 
encourages people to stay for a long period of time in housing 
financed by those two provisions. And there are some 
inconsistencies between the way both 142, the bonds and the 
credit treat transient housing. I mentioned students in my oral 
testimony. There are some inconsistencies in treatment of 
students as tenants in housing finance by both provisions, and 
also there are some inconsistencies in what we call the next 
available unit rules, which means if a tenant goes over the 
income limits, what the owner has to do to replace that tenant 
with another eligible tenant, some inconsistencies.
    So, one area in particular I think that could be improved 
is to look at the inconsistencies and try to make them a little 
bit more consistent, make it easier for owners to look at that, 
to comply with it.
    Mr. THOMPSON. Could we get a more comprehensive list from 
you, I mean, submit it to the Committee? Is that okay, Mr. 
Chairman?
    *Mr. DESMOND. We'd be happy to come back to you on that.
    Mr. THOMPSON. Then the other question I have is the 30 
percent bump for difficult areas, is that enough? It seems 
like--does 30 percent work for everyplace? I know that some of 
us represent areas where land prices and housing prices are 
very, very high, and I would suspect that 30 percent wouldn't 
even help, let alone get a project.
    *Mr. DESMOND. I would, to respond to that question, I would 
echo my colleague from HUD's comments, that the current credit 
is in fact oversubscribed. I think we have seen similar 
observations that it's oversubscribed, in many cases by 5 to 1, 
that there are $5 of applications for every dollar. So it 
appears that on the demand side, there is plenty of demand.
    I think your question goes more specifically to the need 
for housing. Obviously, this is a supply side program and 
encourages the development of housing as opposed to other 
programs in the Federal housing incentive area that encourage 
the demand and give credit, Section 8 credits, for example.
    So I think, to answer that question, you really need to 
look to something outside my lane, which is where is the demand 
for affordable housing? And this is certainly a very important 
component of responding to that demand, but it's just one 
component in the Federal housing structure.
    Mr. THOMPSON. Thank you. And then, Mr. Cabrera, one quick 
question to wrap up here. In your testimony, you noted that 
seniors have a better time under 202 than the tax credit 
program. Can you shed a little light on that?
    *Mr. CABRERA. Congressman, can you repeat the question, 
please? I'm sorry.
    Mr. THOMPSON. You had mentioned in your testimony, in your 
written testimony, that it's more difficult for seniors to work 
under the tax credit, more difficult under the tax credit 
program than the 202 program. Can you shed a little light on 
that?
    *Mr. CABRERA. The real issue is the development of the 
units. It's a challenge to develop Section 202 units both in 
terms of the time that it takes to develop the units and in 
terms of the layering that occurs. One of the challenges often 
has to do, and this is probably a uniform rule, with 
distinguishing that Federal grant which you can marry in only 
very difficult ways with the tax credit, and those things that 
are not technically--well, they might be considered Federal 
grants, but they're operating subsidy that are making the deal 
survive day-to-day. And trying to bridge those rules which are 
difficult to bridge is a challenge.
    Getting room within the statutory stream or the regulatory 
stream to make that work better would help 202 deals, would 
help 811 deals, which are for the disabled, in our view. But 
again, we are extremely deferential to our colleagues at the 
Service. These are things that have to be workable for them as 
well.
    Mr. THOMPSON. Thank you. Thank you, Mr. Chairman.
    *Chairman NEAL. Thank you, Mr. Thompson. And, Mr. Desmond, 
we will make the list as requested by Mr. Thompson part of the 
record. The chair would recognize the gentleman from 
Connecticut, Mr. Larson.
    *Mr. LARSON. Thank you, Mr. Chairman. Thank you again for 
holding this important hearing, and thank the witnesses for 
their testimony. I am a strong supporter of Stephanie Tubbs-
Jones and Mr. English's proposal on Community Restoration and 
Revitalization Act of 2007.
    Hailing from New England like the Chairman, there are many 
communities and many river towns. Hartford is located, as is 
Springfield, on the Connecticut River, and we have a number of 
old factory dwellings and sites that could be rehabilitated but 
for the lack of Federal funding and usage with respect to 
housing. What would you propose to remedy this, and do you 
support the Jones-English/legislation?
    *Mr. CABRERA. Is the ``you'' me?
    *Mr. LARSON. Yes, Mr. Cabrera.
    *Mr. CABRERA. Congressman, I have to become more familiar 
with Congresswoman Tubbs-Jones' legislation, but I think one of 
the things that I would always come back to within the context 
of either Section 42 or Section 142 is provide greater latitude 
within the context of trying to get deals done with a variety 
of different subsidies, and not penalize the deal by virtue of 
their existence.
    There are subsidies and then there subsidies. For example, 
project-based Section 8. Project-based Section 8 is a well 
known subsidy, and for very good reasons, there were limits 
imposed about who can access tax credits once you come out of 
the contracting project-based Section 8. Revisiting that issue 
is probably a terrific idea. Why? Well, one of the challenges 
today is the preservation of affordable units. And although it 
made sense at the time to deal with that, it probably doesn't--
it doesn't make as much sense now.
    A second thing that I would probably think about is 
revisiting the 10-year rule on acquisition tax credits. Why? 
Again, it's a preservation issue. At the time you had concepts 
in the Code; accelerated depreciation, for example, that really 
today aren't as salient. And so if the mission is let's 
preserve and build units, that is one way to do it. And so 
that's what I would offer.
    *Mr. LARSON. How would you expedite that?
    *Mr. CABRERA. I don't. I think you do.
    *Mr. LARSON. Well, in terms of--in terms of what kind of 
specific legislation? Is there anything--I take it you're not 
familiar with the Jones legislation, which I think seeks to 
amend Section 47? And maybe I'd yield to my colleague from 
Pennsylvania to--but I think the path that you're going down 
makes an awful lot of sense.
    What we hear from interested parties and developers is that 
because they can't get their hands on the money and because of 
the constraints that are placed upon them, you have these 
structurally sound buildings that just continue to deteriorate 
and become a blight when they could otherwise become an 
important cog in the center of the community.
    *Mr. CABRERA. There's another side to that, though, and 
that is, it's often very difficult, and we face this as well. 
This is the counter-argument to the historic issue not in a 
QCT. So very often, for example, in public housing, many of 
those assets are 70 years old and the open and notorious 
question is should they be preserved? They are so old that 
maintaining them is far more expensive than just building 
something different.
    Not necessarily, you know, public housing is a stream of 
finance. It is an operational stream of finance. So the tax 
credit, getting PHAs to a point where they can utilize a tax 
credit or private activity bonds or other pools of subsidy to 
create a wider spectrum of units financed in a variety of ways 
that serve the same bandwidth of people, that's really what 
we've been focused on for quite a while now. I think that's 
probably the play that we most often use.
    With respect to specific legislation, it's very hard to 
craft from this table right now. But at the end of the day, 
that would be the way that--that is the way that we usually--
the track we usually take.
    *Mr. LARSON. I thank you very much.
    *Mr. CABRERA. Thank you.
    *Chairman NEAL. We'll eagerly await your answers, Mr. 
Larson. The gentleman from Minnesota, Mr. Ramstad, is 
recognized to inquire.
    *Mr. RAMSTAD. Thank you, Mr. Chairman. I'd like to thank my 
good friend, Chairman Neal, for holding this important hearing 
on affordable housing and for your outstanding leadership in 
this critical area.
    I enjoyed working with you, Mr. Chairman, in the last 
Congress when you joined me in introducing H.R. 4873, which 
would have made several improvements to the housing bond and 
credit programs, and I look forward to working with you this 
session as well. Also, Ranking Member English was a cosponsor 
of that legislation and has been an important leader on 
affordable housing. I appreciate your contributions. I'm 
looking forward to working with both of you and all the Members 
of the Committee this year on common sense reforms to make 
these critical programs work even better.
    In my suburban district, I represent 34 suburban cities and 
one township, and virtually all of the cities, all 34 cities, 
have a waiting list for affordable housing, which isn't too 
atypical vis-a-vis the rest of the country. Certainly housing 
is one of our most basic needs, and it should never--my basic 
belief is that it should never be priced far out of reach for 
America's families.
    We worked on the reforms in H.R. 4873 with State housing 
agencies and other key groups who support affordable housing, 
and those groups are--many of them are represented on the other 
panels here today and are in audience, and we appreciate their 
collaborative efforts as well.
    I am very much optimistic that we can produce a 
collaborative and consensus bill, and I hope the bipartisan 
spirit, the spirit of cooperation on the Committee will produce 
such a work product. If any area of legislation should be 
bipartisan, it should be housing. We're dealing with a basic 
need, as I said before, of the American people. And we need to 
help more Americans afford the housing they need.
    In fact, the other month, a couple months ago, a study was 
done in the community where I live, in Minnetonka, Minnesota, 
and the bottom line, the conclusion of the study was that no 
firefighter or police officer could afford to buy a house, and 
most didn't have the income to support the rents being charged 
in that community.
    Let me direct a question to you, Mr. Cabrera. And by the 
way, I'm glad that both Treasury and HUD are represented at 
this hearing. Both departments obviously play a critical role 
in making sure that our affordable housing programs work. And 
as we consider reforms this year to make the housing bond and 
credit programs more efficient, work better, serve people 
better, I trust we can count on both Treasury and HUD to 
continue working with us in that spirit as well of bipartisan 
cooperation.
    The question I have for you, Mr. Cabrera, one of the 
reforms I've proposed is allowing the low-income housing credit 
to be used for Section 8 moderate rehabilitation housing. Does 
HUD have a position on this proposal?
    *Mr. CABRERA. That's what I just mentioned, Congressman. I 
would say that that would--removing that restriction would be 
helpful in terms of helping preservation. Again, with the 
caveat that our good friends at Treasury have their concerns. 
From a policy perspective. If you have project-based vouchers, 
and you have a HAP contract that's expiring, and then you take 
that improvement and exclude it from the field of possibility 
in terms of affordability, that does not help the overarching 
policy goal of retaining affordability.
    So we would say, yes, we would be in favor of that.
    *Mr. RAMSTAD. Okay. I just wanted to follow up on the 
previous colloquy that you had with the Speaker--with the 
Member. Well, thank you again, both of you, for your testimony, 
and thank you, Mr. Chairman, for allowing me to be here today 
as a Member of the full Committee but not this Subcommittee, I 
appreciate the invitation very much. Thank you.
    *Chairman NEAL. Thanks for your good work, Jim. The 
gentlelady from Pennsylvania, Ms. Schwartz, is recognized to 
inquire.
    *Ms. SCHWARTZ. Thank you. And good morning. I want to ask a 
little bit more about Section 8 housing. I come from a district 
that has had some issues with Section 8 housing. I understand 
of course that it's been a very successful initiative across 
this country.
    One of the questions that certainly come up in my district 
and some of the concerns expressed about Section 8 housing has 
to do--well, a couple of them. One is in the concentration of 
Section 8 units. This is more about the scattered site single 
units rather than a building that has many units in it, that 
seems to be less of a problem in the way.
    I think it might be the opposite, but it's sort of the 
scattered sites all across a part of my district, and really 
about two issues with that is the quality of the particular 
unit or home and the maintenance of that, the sort of ongoing. 
It may start out fine, but then the oversight that is, or lack 
thereof, of how that site is maintained by the owner, as well 
as by the tenant, and about perceived, you know, tolerance of 
criminal behavior and activity in those sites.
    I know there are certain rules around all of this, but 
really my question I think for I guess mostly for HUD here is, 
what about the oversight from the Federal level to make sure 
that we are seeing full compliance? And how do you respond to, 
you know, particular situations such as in Northeast 
Philadelphia, which is an area I represent, that has had some 
very significant concerns about Section 8 housing?
    And it's a community, of course, that's also concerned 
about moving from home ownership to rental units. There is a 
perception that some of these buildings are actually not 
Section 8 housing, they're just private rental, and that has 
caused a problem. But it's exacerbated in a neighborhood.
    So, again, it's concentration and it is oversight and 
compliance for ongoing maintenance and quality of these units. 
So I believe you refer to it as standards of habitability. So 
it's really both initial standards and compliance with those 
standards, and ongoing oversight that these units continue to 
be maintained well.
    Can you speak to your oversight and what response you have 
had? You may be well aware of the situation in Philadelphia.
    *Mr. CABRERA. I think that there are two answers. The first 
one has to do with the overall world of Section 8, whether it 
involves a property that is financed with Low-Income Housing 
Tax Credits or private activity bonds or not. And then those 
that have to do with those discrete programs.
    So I'm going to address the more general world. There are 
two Section 8 programs essentially. They're not. There's only 
one, but there's two applications of it. There's tenant-based 
rental assistance where one receives a voucher and one goes to 
someone in the market and redeems that voucher for housing. So 
the concentration issues there are actually the choice of the 
landlord in the private marketplace.
    The HQS standards, Housing Quality Standards, that apply to 
that, are pretty rigorously enforced, at least according to 
landlords that report to us. And in fact, they often say too 
rigorously enforced, and sometimes they say inconsistently 
enforced.
    *Ms. SCHWARTZ. Do you have data on that? Do you actually--
--
    *Mr. CABRERA. We have a lot of data.
    *Ms. SCHWARTZ. Can you say----
    *Mr. CABRERA. Sure.
    *Ms. SCHWARTZ. Would you say that it's really--the 
compliance data and to find out where it actually is working, 
where it isn't, and----
    *Mr. CABRERA. Absolutely.
    *Ms. SCHWARTZ. That would be certainly helpful. And how 
often you applied a penalty and----
    *Mr. CABRERA. HQS are done at least annually and certainly 
on move-in. But there's a second component to Section 8, which 
is project-based vouchers. And project-based vouchers attach to 
the unit, not the tenant. And so they are basically an 
operating subsidy for a number of units within a development or 
all of the units within a development. Those are more rigorous 
HQS standards than the tenant-based voucher system, because 
there is an assumption that you have reserved those vouchers 
for those units.
    *Ms. SCHWARTZ. Right. As I said, so maybe I'm not using the 
right--the project-based seems to have, you say better 
standards, has greater compliance. There's often a manager. 
There's someone who's actually watching it on a very regular 
basis.
    *Mr. CABRERA. Right.
    *Ms. SCHWARTZ. It's really the tenant vouchers that is the 
issue--that is an issue within my district.
    *Mr. CABRERA. Okay.
    *Ms. SCHWARTZ. So I would be interested to see information 
you have about violations and about compliance, about how 
rigorous those annual inspections are, and response that we see 
in terms of that compliance and what gets done. Certainly I 
think if we start to see some real penalties applied, rather 
than sort of a bit of a slap on the wrist, fix this, and you 
move on, would be helpful in letting landlords know that this 
actually is--we're serious about this. And I think it has to 
come from the top, which is really--would be coming from the 
Federal level, would be very, very helpful to us.
    *Mr. CABRERA. We're happy to provide you the data that you 
requested.
    *Ms. SCHWARTZ. Okay.
    *Chairman NEAL. Thank----
    *Ms. SCHWARTZ. My time is up? Okay.
    *Chairman NEAL. I thank the gentlelady.
    *Ms. SCHWARTZ. Thank you very much.
    *Chairman NEAL. The gentleman from Oregon, Mr. Blumenauer, 
is recognized to inquire.
    *Mr. BLUMENAUER. Thank you, Mr. Chairman. I'm curious if 
you gentlemen may have some thoughts about ways that we stretch 
this scarce resource to get the most value of out of it.
    One of the things that is intriguing to me is that in many 
parts of the country, we have opportunities to have some 
location efficiencies, that there are cost factors that are 
involved in terms of the transportation demands for the people 
who live in the housing, what's energy efficient. 
Paradoxically, many of the areas that are potentially location 
efficient in terms of energy demands, the carbon footprint of 
these people, something our Committee is looking at in a wide 
variety of contexts, have very high property values.
    Is there some thought that you folks have given or some 
guidance that you can give us now, or upon reflection, to send 
back to the Committee, if there are adjustments that can be 
made in criteria to make allowance for projects that are 
location-efficient, that have fewer demands on the tenants, 
occupants themselves for transportation--which for many of 
these people, they spend more on transportation than they do on 
housing itself--and in terms of our societal efforts to try and 
be more energy efficient, reduce the carbon footprint, that we 
might be able to meet affordable housing goals plus our concern 
about global warning and energy independence? Any thoughts 
about adjustments to the programs?
    *Mr. DESMOND. Sure. I can address that, Congressman. There 
are, as you know, a number of incentives that have been put in 
the tax Code recently to incentivize energy-efficient homes, 
energy-efficient buildings that are not targeted to low-income 
or affordable housing. And I think those are very important 
incentives, those are very important programs.
    We have been working at Treasury to try to implement many 
of the provisions from the Energy Tax Policy Act of 2005. And I 
would make an observation on that provision or that Act similar 
to the observation about Section 42, which is it's extremely 
complicated. There are many complexities in energy efficiency, 
and oftentimes the tax Code is not the best vehicle for 
measuring and determining energy efficiencies, things that are 
sort of outside the lane of tax administrators.
    I think that energy efficiency is a very important goal, 
something that the Administration has supported in a number of 
different areas. I do just make the observation that if you 
want to take the fairly complicated energy incentives in the 
Energy Tax Policy Act, those kinds of things for energy-
efficient buildings and energy-efficient homes, and apply those 
to another program, such as Section 42, just an observation 
about the complexity that may result from that, and 
inefficiencies that will come about as a result of that in 
terms of owners trying to apply those and use those two fairly 
complicated areas and apply them together.
    I think there is some work that can be done in that area, 
but I would just make that observation about whether we would 
have an administrable program from the tax administrator's 
perspective at the end of the day.
    *Mr. BLUMENAUER. I appreciate your observation. One of the 
things we have been working on, on this Committee, we've been 
in consultation with Chairman Frank in Financial Services. 
There's some of the work with the GSE and others that they're 
doing there and with the Global Warming Committee, is that 
there may be some way that we can synthesize this to make it 
less complex, to be more direct, to be more clear about what 
our priorities are in terms of affordable, sustainable housing 
that reinforces our goals of community development and energy 
independence.
    I appreciate this may be a little off point in terms of 
what you were planning to talk about today, but I wanted to 
plant the seed, and, Mr. Chairman, invite observations that our 
witnesses here or on subsequent panels may have about ways that 
we can integrate this rather than have scattershot efforts, tax 
Code, housing, with two or three different Committees on 
energy, that the extent to which they can be integrated and 
focused, we may be able to start with the work that you've 
already been doing with some of the energy incentives.
    I appreciate your courtesy and would welcome any 
observations that people may have upon subsequent reflection.
    *Mr. CABRERA. May I add one comment? When my colleague, 
Brian Hudson, comes up in a little while, he will note that 
when States develop qualified allocation plans and their 
competitive cycle, very often they will award points for 
precisely those things that you've just mentioned--proximity to 
public transportation, proximity to services, proximity--I'm 
sorry, use of energy-efficient appliances.
    So--but that's something that is very much handled within 
the concept of each State's QAP, and you will see that pretty 
widely within all jurisdictions.
    *Mr. BLUMENAUER. We have entertained some of that in my 
State of Oregon. I'm not certain that it might not be an area 
that we could give some guidance and some uniformity so that it 
is applied more broadly to get the most of these investments.
    Thank you very much.
    *Chairman NEAL. I thank the gentleman. The gentleman from 
Washington, Mr. McDermott, will inquire.
    *Mr. MCDERMOTT. Thank you, Mr. Chairman. I'd like to ask 
both of you, I chair the Subcommittee on Income Security and 
Family Support. And one of the programs that we deal with is 
the program of foster children in this country. Now when you 
get to be 18 years old, the system drops you out on the street 
with nothing. You get a better deal coming out of the 
penitentiary than you do getting out of foster care.
    And I would like to hear, what's the likelihood that a 
youngster could get a low-income housing situation in this 
country at 18? A single youth.
    *Mr. DESMOND. I could start off and let my colleague from 
HUD build on this, but I think one observation that people have 
made about both Section 42, the credit, and low-income housing 
bonds, is that they are not targeted to the very low-income 
individuals in-households. They are based on rental--average 
area house--or incomes, and rents are set to average area 
incomes. For individuals who have very low-income, it's more 
difficult for them to meet even those reduced income standards.
    So that in a program like Section 42, the credits and the 
bonds, if it has an income-based component to it, oftentimes 
that works to the exclusion of very low-income households, and 
oftentimes I would suspect foster children may fit into that 
category and not benefit.
    *Mr. MCDERMOTT. Is that in the law? Did you have to do it 
that way? Or is that by rule and regulation?
    *Mr. DESMOND. I believe the law has in it the income-based 
calculation of the maximum rent that can be charged to tenants 
of these facilities. So that is part of the statute. There are 
other programs that my colleague from HUD can talk about, the 
voucher programs and other things, that may not be tied in 
their statutes to the income levels in the area. But the bonds 
and the credits we're talking about here are in fact keyed to 
income, area income levels.
    *Mr. CABRERA. Most of the units that you've just described, 
Congressman, are what serve a group of folks that we call 
extremely low-income people, people between 0 and 30 percent, 
vary in medium income. Things are not measured in terms of age 
as much as in terms of income.
    And when those units are constructed, be they by a public 
housing authority or anybody else that's an applicant 
developing these units, when you aim to create units that serve 
that population, those become deep subsidy units. Those become 
units that require funding layers above that equity that is 
brought in by Section 42. Or if it's a debt deal that can 
survive above the debt that's created by the mortgage in the 
private activity bond program.
    That money typically comes from a variety of sources, 
including the State, the local government. There are efforts 
that I am aware of, notably in my home State of Florida, to 
create demonstrate programs to serve that bandwidth. Those are 
generally done on a State-by-State basis.
    *Mr. MCDERMOTT. Let me add a further complication. This 
young 18-year-old foster kid is smart, gets himself a 
scholarship and is also a student. Now, can he qualify?
    *Mr. CABRERA. I want to--my first instinct is, this is a 
Code issue, and so I'd like to defer to Mike first.
    *Mr. DESMOND. Certainly there's nothing that precludes a 
student from being able to live in low-income housing. There 
are some rules that I mentioned in my testimony precluding 
housing units from being occupied only by all full-time 
students. I think your question goes to something different if 
you are----
    *Mr. MCDERMOTT. Why--that's a regulation or that's in the 
law?
    *Mr. DESMOND. I think it's in the law, and there's some 
legislative history that speaks to students occupying Section 
42 tax credit-financed units.
    *Mr. MCDERMOTT. So if they're living there with their 
girlfriend, they could qualify still? If there's somebody else 
who isn't in school living there?
    *Mr. DESMOND. Right. And for the bond finance program, 
there's actually a rule that requires you to be--if you are a 
full-time student, to file a joint income tax return with 
someone else. So it would have to be with a spouse who is not a 
student. But, again, I'd come back to the income requirements.
    *Mr. MCDERMOTT. You mean a single person cannot get into 
one of the units? They have to be married?
    *Mr. DESMOND. For the bond finance, a single student 
cannot. They would have to be filing--a single, full time 
student would have to be filing a joint return with a spouse in 
order to be eligible. There's a different rule under the tax 
credit provisions.
    *Mr. MCDERMOTT. Give me the justification for that. Why 
can't a single student not--he works 40 hours a week. He's 
going to school part-time at Seattle Community College, and he 
wants into a housing unit. Why is he--what's the justification 
for that? Just in the law. Is that it? We have to change the 
law to make that possible?
    *Mr. DESMOND. Right. And as I said, there's legislative 
history back in 1986 that speaks to that. I'd have to go back 
and review that. I think overall, the concern is that the tax, 
the Federal tax incentives not be used to subsidize all college 
students living in federally subsidized housing. I think what 
you're speaking to is certainly a much more narrower concern. 
It's not all college students. It's just a, you know, low-
income individuals. So I'd have to go back and look at the 
legislative history to see what Congress's original concern 
was. But that is in the rules as they're currently written.
    *Mr. MCDERMOTT. Thank you.
    *Chairman NEAL. Let me thank the panelists for their 
testimony today, and I'd like to call up the second panel now.
    Let me welcome the second panel.
    Mr. Donovan.

STATEMENT OF SHAUN DONOVAN, COMMISSIONER, DEPARTMENT OF HOUSING 
        PRESERVATION AND DEVELOPMENT, NEW YORK, NEW YORK

    *Mr. DOVONAN. Thank you, and good morning, Chairman Neal, 
Ranking Member English, and Members of the Subcommittee. I am 
Shaun Donovan, Commissioner of the New York City Department of 
Housing Preservation and Development, or HPD.
    I want to thank you for inviting me to testify before the 
Subcommittee today, and I especially want to thank Chairman 
Rangel. New Yorkers are fortunate to have him representing us. 
He is a tireless advocate for his constituents and for 
affordable housing.
    HPD is the nation's largest municipal housing development 
agency. As part of our responsibility, HPD directly allocates 
approximately $12.5 million in 9 percent Low-Income Housing Tax 
Credits each year. In my capacity as Commissioner of HPD, I 
also serve as Chairman of the Housing Development Corporation, 
or HDC, New York City's Housing Finance Agency, which is the 
largest issuer of multi-family affordable housing bonds in the 
nation.
    The crisis of abandonment that plagued many New York 
communities in the seventies and eighties was solved by 
rebuilding neighborhoods, driving down crime, and improving 
schools. Hundreds of thousands of people have moved back to New 
York to share in our success, and we are predicting that New 
York City's population will grow by close to a million by the 
year 2030. That population growth will add to our current 
challenge of housing affordability.
    On Earth Day, Mayor Bloomberg unveiled PlaNYC 2030, which 
includes a commitment to create enough affordable and 
environmentally sustainable housing for our growing population. 
That pledge builds on the commitment made in Mayor Bloomberg's 
New Housing Marketplace Plan to fund the construction and 
rehabilitation of 165,000 affordable apartments by 2013.
    We have already reached one-third of our goal--55,000 units 
of affordable housing have been created or preserved in New 
York City since 2004. But it has not been easy. The rapid rise 
real estate prices in New York, also experienced by many other 
cities around the country, has challenged us to find new and 
creative ways of doing business.
    Through re-zonings, inclusionary housing initiatives and 
changes to our local tax incentive programs, we have been able 
to harness the strength of the private market to create 
affordable housing. This would not be possible without Federal 
partnership in the form of Low-Income Housing Tax Credits and 
tax-exempt private activity bonds. These two programs have 
crated thousands of units of housing that otherwise would not 
be affordable to low- and moderate-income New Yorkers.
    With the scale and ambition of the Mayor's housing plan, we 
now face a challenge caused by our success. We find ourselves 
needing more tax credits and private activity bond volume cap 
to be able to keep pace with our commitment to produce more 
affordable housing. Throughout New York State, demand for 9 
percent credits outstrip supply by at least 3 to 1.
    In addition to allocating more credits, we hope that the 
Subcommittee will consider changes to the program that have 
been championed by the National Council of State Housing 
Agencies and others, most notably, fixing the housing credit 
percentages at 4 and 9 percent; removing the prohibition on 
using 9 percent credits with other Federal subsidies; and 
synchronizing HOME and tax credit rules.
    New York City is facing an immediate crisis in private 
activity bond volume cap, which we expect to deplete before the 
end of June this year. Without additional volume cap, almost 
7,000 units of housing in our pipeline will not be built. We 
have shared with Chairman Rangel two possible solutions that we 
what hope you will consider.
    The first is to allow for recycling or refunding of multi-
family bonds after principal repayments or prepayments of the 
bonds. This is already permitted in the single-family program, 
and we believe that this proposal would free up millions of 
dollars in volume cap at little or no cost to the Federal 
Government.
    Second, we hope you will consider raising the allocation of 
volume cap for high-cost areas. The tax credit program allows 
for a higher credit in difficult development areas, or DDAs, 
out of recognition that it is more expensive to build in some 
markets than others. Similarly, an additional allocation of 
volume cap to States with difficult development areas would 
help States where the current volume cap allocation is not 
sufficient to cover costs and demand.
    We are also strongly supportive of Chairman Rangel's idea 
for a new tax credit to create housing for people earning 
between 60 and 80 percent of median income. In keeping with the 
current affordable housing bond and tax credit rules, the 
majority of new affordable housing development in New York 
using these programs follows an 80/20 model, in which 80 
percent of the units are market rent and 20 percent of the 
units serve people with incomes below 50 percent of area median 
income.
    But there is a real need for affordable housing for people 
higher on the income spectrum. Over half of the renters in New 
York City now spend more than 30 percent of their income on 
rent. We believe an additional credit could work in tandem with 
the Low-Income Housing Tax Credit and private activity bonds, 
and I have provided more details on this in my Statement for 
the record.
    In closing, I'd like to thank you for the opportunity to 
testify, and for prioritizing the programs that we're 
discussing today. The Subcommittee's leadership has been 
crucial to the success we've had developing and preserving 
affordable housing in New York City and across the nation.
    Thank you.
    [The Statement of Mr. Donovan follows:]
    Statement of Shaun Donovan, Commissioner, Department of Housing 
            Preservation and Development, New York, New York
    Good morning Chairman Neal, Ranking Member English, and Members of 
the Subcommittee. I am Shaun Donovan, Commissioner of the New York City 
Department of Housing Preservation and Development (HPD), the nation's 
largest municipal housing development agency. I want to thank you for 
inviting me to testify before the subcommittee today, and I especially 
want to thank Chairman Rangel. New Yorkers are fortunate to have him 
representing us--he is a tireless advocate for his constituents and for 
affordable housing.
    HPD is the nation's largest municipal housing development agency. 
As part of our responsibility, HPD directly allocates approximately 
$12.5 million in 9% tax credits each year. In my capacity as 
commissioner of HPD, I also serve as Chairman of the Housing 
Development Corporation, or HDC, New York City's Housing Finance Agency 
which provides bond financing for affordable housing projects.
    The crisis of abandonment that plagued many New York communities in 
the 1970's and 80's was solved by rebuilding neighborhoods, driving 
down crime and improving schools. Hundreds of thousands of people have 
moved to New York to share in our success and we are predicting that 
New York City's population will grow by close to a million by the year 
2030. That population growth will add to our current challenge of 
housing affordability. On Earth Day, Mayor Bloomberg unveiled PlaNYC 
2030, which includes a commitment to create enough affordable and 
environmentally sustainable housing for our growing population. That 
pledge builds on the commitment made in Mayor Bloomberg's New Housing 
Marketplace Plan to fund the construction and rehabilitation of 165,000 
affordable apartments and homes by 2013.
    We have already reached 1/3 of our goal--55,000 units of affordable 
housing have been created or preserved in New York City since 2004. It 
hasn't been easy. The rapid rise in real estate prices in New York, 
also experienced by many other cities around the country, has 
challenged us to find new and creative ways of doing business. Through 
rezonings, inclusionary housing initiatives and changes to our local 
tax incentive programs, we have been able to harness the strength of 
the private market to create affordable housing. This would not be 
possible without Federal partnership in the form of low-income housing 
tax credits and tax-exempt private activity bonds. These two programs 
have created thousands of units of housing that otherwise would not be 
affordable to low- and moderate-income New Yorkers.
    With the scale and ambition of the Mayor's housing plan we now face 
a challenge caused by our success--we find ourselves in a position of 
needing more tax-credits and private activity bond volume cap to be 
able to keep pace with the demand and need for more affordable housing. 
Throughout New York State, demand for 9 percent credits outstrips their 
supply by 3 to 1.
    In addition to allocating more credits, we hope that the 
Subcommittee will consider changes to the program that have been 
championed by NCSHA and others, most notably--fixing the housing credit 
percentages at 4 and 9 percent, allowing 9 percent projects in 
difficult development areas to use HOME funds and still be eligible for 
the 30 percent basis boost, and synchronizing HOME and tax credit rents 
and eligibility rules.
    The actual percentages for the ``4'' and ``9'' percent tax credits 
fluctuate monthly and are consistently below those maximum amounts. For 
example, the May 2007 percentages are 3.47% and 8.11%. Fixing the 
credit percentages at 4 and 9 percent would increase the value of the 
credits, make the program easier to administer, and make the process 
more transparent.
    Tax credit projects in difficult development areas are eligible for 
a 30-percent increase in the value of the credits. The additional 30 
percent is lost if the project includes HOME funds. Difficult 
development areas are by definition areas that have high construction, 
land, and utility costs relative to the area median income. It is 
because the costs are high that additional subsidies are needed. 
Reducing the value of the credits because of the presence of HOME funds 
limits the flexibility needed in tight markets to create affordable 
housing.
    Similarly, synchronizing HOME and tax credit rents and eligibility 
rules would make the combined use of these two programs much easier. 
Issuers would benefit from simpler and more predictable financial 
underwriting, and owners would be better able to stay in compliance 
with program rules after lease-up.
    New York City is facing an immediate crisis in private activity 
bond volume cap, which we expect to deplete before the end of June. 
Without additional volume cap, 6,700 units of housing in our pipeline 
will not be built. We have shared with Chairman Rangel two possible 
solutions that we hope you will consider. The first is to allow for 
``recycling'' or, ``refunding'' of multi-family bonds after principal 
repayments or pre-payments of the bonds. This is already permitted in 
the single family program and we believe that this proposal could free 
up millions of dollars in volume cap at little or no cost to the 
Federal Government. The second is to allocate additional volume cap to 
States with high cost areas.
    A multi-family bond allocation penalty occurs through ``burn-off'' 
when tax credit equity proceeds pay off construction bonds after two to 
3 years because affordable developments can not support the full amount 
of the bonds issued. Thus, through early principal repayments and 
unscheduled prepayments, a large portion of multi-family housing bond 
proceeds are lost via burn-off and bonds that could have otherwise been 
outstanding for as long as 48 years are used only for a few years. 
Bonds issued for single family homes and student loans are allowed to 
be recycled within their first 10 years of issuance. This proposal does 
not call for low income tax credits to be attached to the recycled 
bonds as they are in the initial issuance.
    Two changes, one in regulation and one in statute are required to 
allow for the refunding of multi-family bonds. The first, Treasury 
regulation 1.150-1(d)2(ii)(B, should be amended to specifically provide 
that the obligor of an issue used to finance qualified residential 
rental projects does not include the recipient of the loan. Under 
current regulations, if the issuer does not know who the borrower will 
be for the recycled project at the time of original issuance, then the 
bonds can not be re-used. Rental projects would thereby be treated like 
obligors of issuers financing qualified mortgage loans, qualified 
student loans and similar program investments. The second change needed 
is to Section 42 of the Code providing that recycling prepayments into 
other projects, either directly or through a refunding issue, satisfies 
the requirement of Section 42(h)(4)(A)(ii) that ``principal payments on 
such financing are applied within a reasonable period to redeem 
obligations the proceeds of which were used to provide such 
financing.'' This broadening would permit recycling.
    We also hope you will consider raising the allocation of volume cap 
for high cost areas. The tax credit program allows for a richer credit 
in difficult development areas (DDAs) out of recognition that it is 
more expensive to build in some markets than others. Similarly, an 
additional allocation of volume cap to States with difficult 
development areas would help States where the current volume cap 
allocation is not sufficient to cover costs and demand. This could be 
done either by making an additional allocation to States for the 
population living in a DDA, which would increase the allocation of 
volume cap for 37 States and by 17% overall, or by increasing the 
volume cap for States with more than half of their population living in 
a DDA. This would increase the overall allocation of volume cap by 13%.
    We are also strongly supportive of Chairman Rangel's proposal for a 
new tax credit to create housing for people earning between 60 and 80 
percent of median income. We believe that such a proposal is especially 
needed, and would work especially well, in high cost areas. Should 
Congress allocate additional volume cap for high cost areas, it could 
be made in tandem with the flexibility to use tax credits to serve this 
income bracket.
    In keeping with the current affordable housing tax credits, the 
majority of new affordable housing development in New York follows an 
80/20 model, in which 80% of the units are market rent and 20% of the 
units serve people with incomes below 50% of area median income. But 
there is a real need for affordable housing for people higher on the 
income spectrum. Over half of the renters in New York City spend more 
than 30% of their income on rent. We believe an additional credit could 
work in tandem with the low-income housing tax credit and private 
activity bonds.
    In New York City, residential rental buildings are eligible for tax 
exempt bond financing and 4% as-of-right tax credits if 20% of the 
units are rented to households earning less than 50% of area median 
income or 25% of the units rented to households earning less than 60% 
of area median income. This program has been widely utilized in 
Manhattan where there is extensive 80/20 development that includes 20% 
of the units at 50% area median income. Outside New York City, 20% of 
the units must be at 50% of area median income or a developer can 
provide 40% of the units to households earning less than 60% of area 
median income.
    A ``mixed income housing tax credit'' (MIHTC) would reflect the 
same characteristics of the low income housing tax credit: utilize tax-
exempt financing, be paired with the low-income housing tax credits, 
and target a small segment of overall tax credit unit production. 
Though project types and characteristics would vary by region, the 
following proposal characterizes a LIHTC/MIHTC structure that would be 
typical for the New York region.
    A new MIHTC could be based on and coupled with the existing as-of-
right 4% LIHTC credit. Coupling or linking the credits provides a 
structure that doesn't compete with, but instead builds upon the 
existing program. A MIHTC program could modify the 80/20 structure into 
a 50/30/20 or 60/20/20 structure, making projects eligible to receive 
tax credits not only on the 20% low-income units (as in an 80/20 
structure) but also on an additional percentage of units if they are 
occupied by households earning up to 80% of AMI. A new tax credit rate 
would be created for this structure and it would be applicable to all 
40% of the affordable units. Our modeling shows that a tax credit rate 
between 6-8% would be the most effective.
    In closing, I'd like to thank you for the opportunity to testify, 
and for prioritizing the programs that we're discussing today. The 
Subcommittee's leadership has been crucial to the success we've had 
developing and preserving affordable housing in New York City, and 
across the nation.

                                 

    *Chairman NEAL. Thank you, Mr. Donovan.
    Mr. Lee.

STATEMENT OF OLSON LEE, DEPUTY EXECUTIVE DIRECTOR, CITY OF SAN 
     FRANCISCO REDEVELOPMENT AGENCY, ON BEHALF OF NATIONAL 
         ASSOCIATION OF LOCAL HOUSING FINANCE AGENCIES

    *Mr. LEE. Good morning, Mr. Chairman, and Members of the 
Subcommittee. I am Olson Lee. I'm the President of the National 
Association of Local Housing Finance Agencies and the Deputy 
Executive Director of the San Francisco Redevelopment Agency.
    We appreciate the opportunity to share our views on 
refinements to the Low-Income Housing Tax Credit program. 
Supporting my testimony today are the U.S. Conference of 
Mayors, the National Association of Counties, and the National 
Community Development Association.
    The Low-Income Housing Tax Credit program is the Federal 
Government's principal means of stimulating private sector 
investment in the production of affordable rental housing. With 
these credits, local and State housing finance agencies and 
their private and nonprofit partners produce an average of 
110,000 newly constructed or rehabilitated units annually. It 
is the essential resource in the affordable housing tool kit.
    In San Francisco, the Redevelopment Agency and the Mayor's 
Office of Housing has used the tax credit program to construct, 
acquire and rehabilitate over 20,000 units, including over 
2,000 units of at-risk housing, housing for the formerly 
chronically homeless, workforce housing, as part of the San 
Francisco's redevelopment project areas, and public housing.
    NALHFA and our partners urge the Subcommittee and Congress 
to adopt a number of refinements to the tax credit program. As 
local housing finance agencies, we share the responsibilities 
of providing the gap financing for most affordable housing 
projects in our communities. Our suggested refinements are 
organized as follows:
    Increase the effectiveness of the current credits;
    Provide for greater flexibility when credits are used with 
tax-exempt bonds.
    Congress can increase the effectiveness of the credit by 
eliminating or modifying certain rules related to the use of 
credits with other funding sources. Many of these rules date to 
the earliest days of the credit program and were incorporated 
to prevent over-subsidizing a project. Even if the majority of 
these refinements are adopted, local housing finance agencies 
would still need to provide gap financing to make projects 
feasible. Our suggested refinements include:
    Exempting the Low-Income Housing Tax Credit from individual 
and corporate alternative minimum tax. And this would allow 
individuals to participate in the Low-Income Housing Tax 
Credit. And individuals would be a good source for additional 
equity for the program. But individual taxpayers that are 
subject to the AMT lose nearly all of the tax benefits they 
would otherwise receive from this investment. Because 
individual investors invest much smaller amounts than the 
corporations who currently are the largest investors in the 
credits, they base their decisions on characteristics such as 
the location of the project, the size of the project, or the 
population to be served by the project.
    Modify the tax credit Code to ensure the eligibility for 9 
percent projects containing subsidies from all Federal 
programs. For example, as the earlier speaker said, Section 202 
or Section 811 funds and the Federal Home Loan Affordable 
Housing Program funds trigger a reduction in value of the 
credit from 9 percent to 4 percent.
    Remove the restriction in the tax Code that prevents tax 
credit projects from receiving the 9 percent credit and below-
market-rate loans from HOME funds from getting the 30 percent 
tax credit bonus in designated low-income census tracts or 
difficult-to-develop areas. This would facilitate the 
development in high-cost areas.
    As the earlier speaker said, set the value of the tax 
credit to 4 and 9 percent, again, a simplification.
    My full Statement has a list of other changes that would 
further increase the effectiveness of the credit by, again, 
eliminating these unnecessary regulations, to increase the ease 
in which the credit is used, but clearly to increase the 
ability for the credit to bring capital to our low-income 
renters in our communities.
    The next set--and I'll just read these, because they're 
part of the written record--is to talk about the greater 
flexibility:
    Modifying the low-income credit to allow bond issuers to 
exchange a portion of tax-exempt bond allocation for the 
authority to issue a higher credit amount.
    Modify the Low-Income Housing Tax Credit to allow housing 
bond issuers to forego 4 percent tax credits in exchange for 
additional bond volume cap.
    Extend the eligibility for 4 percent credits to units with 
tenants up to 80 percent of median income after meeting the 
base project affordability requirements in communities with 
severe shortages of housing for this group.
    And if I may just continue, I have three more items, then 
I'll wrap up:
    Exempt tax-exempt bonds, again, from the AMT.
    Repeal the mortgage revenue bonds tenure rule, which 
prevents the recycling of single-family mortgage payments.
    And permit the recycling of multi-family bonds, as 
permitted for single family.
    And provide exit tax relief to encourage owners of 
affordable housing to transfer such housing to non-profits who 
will maintain the long-term affordability of such housing.
    Mr. Chairman, I thank you very much for the opportunity to 
present NALHFA's recommendations on these critical issues. And 
they're really in the spirit of using the existing resources 
and building more affordable housing.
    Statement of Olson Lee, Deputy Executive Director, City of San 
 Francisco Redevelopment Agency, on behalf of the National Association 
      of Local Housing Finance Agencies, San Francisco, California
    Mr. Chairman and Members of the Subcommittee:
    On behalf of the National Association Local Housing Finance 
Agencies (NALHFA), thank you for the opportunity to testify today on 
refinements to the Low-Income Housing Tax Credit program. I am Olson 
Lee, President of NALHFA and Deputy Executive Director of the City of 
San Francisco Redevelopment Agency. NALHFA is a national non-profit 
organization of city and county government agencies and their partners 
that finance affordable housing through a variety of means including 
Federal tax incentives such as the Low-Income Housing Tax Credit 
(LIHTC). We appreciate this opportunity to share our views. Supporting 
my testimony today are the U.S. Conference of Mayors, National 
Association of Counties, and the National Community Development 
Association.
    The Low-Income Housing Tax Credit program is the Federal 
Governments' principal means of stimulating private sector investment 
in the production of affordable rental housing for low- and very-low 
income Americans. The tax credit is available in two forms: a 
competitive 9% or 70% present value credit allocated by state and a 
handful of local governments and a non-competitive 4% or 30% present 
value which is used with tax-exempt multifamily housing bonds. With 
these credits, local and state housing finance agencies, and their 
private and non-profit partners, produce on average 110,000 newly 
constructed or rehabilitated units annually. It is an essential 
resource in the affordable housing tool kit.
    In San Francisco, the Redevelopment Agency and the Mayor's Office 
of Housing has used the tax credit program to construct, acquire, and 
rehabilitate over 10,000 units including over 2,000 units of housing 
at-risk of converting to market rate housing, housing for the formerly 
chronically homeless, workforce housing as part of the City's 
redevelopment project areas, and rebuilt public housing.
    NALHFA urges the Subcommittee and Congress to adopt a number of 
refinements to the tax credit program. These suggested refinements come 
from a local housing finance agency's perspective. As local housing 
finance agencies, we share the responsibility of the gap funder for 
most affordable housing projects in our communities. But each local 
housing finance agency works in different markets and needs flexibility 
in the program to ensure that the credit can help address their 
particular local housing needs. Thus our suggested refinements are 
organized as follows: (1) increase the effectiveness of the current 
credits; and (2) provide for greater flexibility when credits are used 
with tax-exempt bonds.
Increase Effectiveness for Current Credits
    Congress can increase the effectiveness of the credit by 
eliminating or modifying certain rules related to the use of tax 
credits with other funding sources. Many of these rules date to the 
earliest days of the credit program and were incorporated to prevent 
over subsidizing of a project. Even if the majority of these 
refinements are adopted, local housing finance agencies would still 
need to provide additional subsidy to make projects financially 
feasible. In California, the Tax Credit Allocation Committee conducts 
subsidy layering reviews which prevents such over-subsidizing of a 
project and makes these certain rules duplicative. The suggested 
refinements include:

      Remove the restriction in the Tax Code that prevents tax 
credit projects which receive a 9% tax credit, and a below market rate 
loan from HOME funds, from getting the 30% tax credit bonus that is 
otherwise available to projects located in a designated low-income 
census tract or difficult to develop area.
        This change would facilitate development in high housing-cost 
areas.
      Modify the Tax Code to ensure eligibility for the 9% 
credit projects containing subsidies from all Federal programs (e.g. 
Section 202 elderly and Section 811 housing).
         Currently, Section 202 or Section 811 funds and the Federal 
Home Loan Banks Affordable Housing program funds that are invested in 
LIHTC projects trigger a reduction in the value of the credit from 9% 
to 4%.
      Other changes that would increase the effectiveness of 
the credit include:
      --  Not reduce basis for a Section 236 interest rate subsidy
      --  Repeal the prohibition against project-based Section 8 
Moderate Rehabilitation subsidy
      --  Eliminate the 10-year ownership rule
      --  Allow land and land leases as part of creditable basis for 
projects in high housing-cost areas where land constitutes a larger 
part of project costs
      --  Allow the cost of a building as creditable basis at the 9% 
level for rehabilitation projects in high-housing cost areas, since the 
building has value
      --  Allow incomes for existing tenants to go up to 80% of median 
income for ``at-risk'' projects
      Set the value of the tax credits at 4% and 9%
         The current 30% and 70% percent present value causes 
uncertainty in the marketplace and makes project underwriting 
difficult.
      Repeal the 10% expenditure rule
         We are asking for repeal of the requirement that 10% of a tax-
credit assisted project's expected costs be incurred within 6 months 
after receiving a credit allocation (or by the end of the calendar year 
if later) with a requirement that housing credit allocating agencies 
ensure that projects are ready for implementation. The current rule 
adds unnecessary costs to the project.
      Conform the rule for next available unit between the Low-
Income Housing Tax Credit and tax-exempt multifamily housing bond 
program
         Under both the tax credit and multifamily bond programs, 
tenant income may increase up to 140% of the initial eligible income 
while still being qualified. If the tenant's income exceeds 140%, the 
landlord must rent the next available unit of comparable size to an 
income-qualified tenant. In the tax credit program, the rule applies to 
each building in a development, whereas in the bond program it applies 
to the full development. In the interest of simplicity, the tax credit 
rule should conform to the bond rule.
      Exempt Low-Income Housing Tax Credits from the Individual 
and Corporate Alternative Minimum Tax (AMT)

    Individual taxpayers subject to the AMT lose nearly all of the tax 
benefit that they would otherwise receive from these investments. AMT 
exemption would enable individuals to become a source of capital for 
the program. According to a study by the National Association of 
Homebuilders, ``. . . corporations now provide more than 95 percent of 
all new capital. This in turn has affected the type, size, and location 
of LIHTC projects that receive funding. In general, corporations invest 
in large projects ($5 million to $10 million) . . . There is also some 
evidence that corporations are reluctant to invest in special needs 
projects or in projects designed to spur economic or community 
revitalization. As a result of these factors, corporations tend to 
invest in large urban and suburban developments.
    Because individuals invest much smaller amounts . . . they are 
generally associated with smaller projects and base their investment 
decisions on idiosyncratic characteristics, such as the location of the 
project, the size of the project or the type of tenants.
    The next set of refinements pertains to the need for greater 
flexibility in the use of credits with tax-exempt bonds. When 51% of 
the cost of a project is funded by tax-exempt housing bonds it is 
eligible for a non-competitive 4% credit for the affordable units which 
must equal 20% of the units for those at 50% of median income or 40% of 
units at 60% of median income.

      After meeting the base project affordability requirement, 
extend eligibility for the 4% credit to units with tenants with incomes 
up to 80% of median income in communities with severe shortages of 
housing for this income group.

    In many high-housing cost urban areas, persons with incomes above 
60% of area median cannot find suitable housing to rent. Under this 
proposal, housing credit allocating agencies would be permitted to 
award 4% credits to units in a project to be rented to those with 
incomes up to 80% of median income. However, the project must still 
target at least 20% of the units for those at 50% of median income or 
40% at 60% of median income and demonstrate through a market study that 
there is a shortage of housing for those between 60% and 80% of median 
income and that the rents at 30% of 80% are below market. This proposal 
is intended to facilitate creation of mixed income housing.

      Modify the Low-Income Housing Tax Credit to allow housing 
bond issuers to exchange a portion of a tax-exempt bond allocation for 
the authority to issue a higher tax credit.

    In recent years, Congress has increased the amount of Low Income 
Housing Tax Credits and the amount of private activity tax-exempt 
bonding authority. Until recently, when economic conditions led to 
renewed interest in single family mortgage revenue bonds, many state 
allocating agencies experienced a surplus of authority for tax-exempt 
bonds for private activity. With respect to affordable rental housing, 
however, there has not been an increase in secondary funding (such as 
CDBG and HOME) to complement the tax credits, which can only partially 
fund housing developments. This is particularly true of the tax credits 
generated by tax-exempt bonds.
    While it is very attractive to use tax-exempt bonds and then 
generate tax credits, outside of the basic 9% program, these tax 
credits are 4% credits and consequently generate less than half the 
equity of the 9% credits. As a result, the funding gaps are larger, and 
without local sources of secondary funding, many projects cannot be 
done, and valuable resources tax-exempt bonds and 4% credits go unused. 
This proposal would permit local agencies to forego or trade in tax-
exempt bonding authority in order to increase tax credits in a 
particular project, thereby reducing and possibly eliminating the need 
for secondary funding.
Example:
Senior Housing Project
      100 units at $150,000/unit
      Total development cost: $15 million
      In a typical bond issuance, $7.5 million of tax-exempt 
bonds would be issued with 4% credits and generating approximately $5 
million in equity.
      An alternative scenario would be to issue the $7.5 
million tax-exempt bonds but also trade in an additional $15 million 
tax-exempt bond allocation to effectively use up $22.5 million in 
bonding authority. If tax credits were permitted to be generated by the 
foregone bond cap, this would have the effect of issuing 12% low income 
housing tax credits. It would generate an additional $10 million in 
equity and eliminate the need for secondary funding.

    The 12% tax credit scenario is used for illustration purposes only. 
It is attractive because it eliminates the need for other funding. But 
the essential idea is to permit the foregone bond cap (whatever the 
limits) to automatically generate tax credits at the same rate as the 
bonds used in a project. If properly structured, this concept would 
give greater flexibility to local issuers, would encourage more 
complete utilization of a resource that has already been allocated, and 
would not require any additional expenditure by the Federal Government.

      Modify the Low-Income Housing Tax Credit to allow housing 
bond issuers to forgo 4% tax credits in exchange for additional bond 
volume cap.

    This proposal is essentially the reverse of the previous proposal. 
A project would get additional tax-exempt bond authority if it agreed 
not to take the 4% credit to subsidize its affordable units.
    The preceding two proposals parallel the Mortgage Revenue Bond 
(MRB) program wherein issuers may trade in tax-exempt bond volume cap 
for the authority to issue Mortgage Credit Certificates.

      Rename the Low-Income Housing Tax Credit, the Affordable 
Housing Tax Credit.

    This provision was in H.R. 4873 that was introduced in the 110th 
Congress. This change better describes the nature of the tax credit.
    Although not the subject of this hearing there are several 
proposals affecting housing preservation and the tax-exempt Mortgage 
Revenue Bond and Multifamily Bond programs that NALHFA urges the 
Subcommittee to adopt:
Housing Preservation
      Provide exit tax relief to encourage owners of affordable 
housing to transfer such housing to nonprofits who will maintain the 
long-term affordability of such housing.

    In 2002, the Millennial Housing Commission noted that ``. . . [t]he 
stock of affordable housing is shrinking. Some properties are in 
attractive markets, giving owners an economic incentive to opt out of 
Federal properties in favor of market rents, and many owners have done 
so. Other properties are poorly located and cannot command rents 
adequately to finance needed repairs. In general, properties with 
lesser economic value are at risk of deterioration and, ultimately 
abandonment, unless they can be transferred to new owners. To remove an 
impediment to transfer, the Commission recommended . . . that Congress 
enact a preservation tax incentive [i.e. relief from exit taxes] to 
encourage sellers to transfer their properties to nonprofits.'' Exit 
tax relief would be a tremendously helpful in preserving affordable 
housing in urban and rural areas.
Tax-Exempt Bonds
      Exempt Tax-Exempt Bonds from the Individual and Corporate 
Alternative Minimum Tax (AMT).

    Taxpayers subject to the AMT lose all of the tax benefit that they 
would otherwise receive from these investments. General obligation 
bonds, Liberty Bonds for New York City's recovery from 9/11, and the GO 
Zone bonds for Gulf Coast recovery are not subject to the AMT. 
According to testimony before the House Select Revenue Measures 
Subcommittee, a representative of The Bond Market Association stated 
that the AMT adds 15-25 basis points to the borrowing costs of issuers 
of private activity bonds. An exemption was included in H.R. 4873 that 
was introduced in the 110th Congress.

      Repeal the Mortgage Revenue Bond's ``10 year'' rule which 
prevents the recycling of single-family mortgage prepayments 10 years 
after the bonds were issued to make loans to additional first-time 
homebuyers.

    This repeal was included in H.R. 4873 that was introduced in the 
110th Congress. It also passed the Senate in 2004, but it was rejected 
by a House-Senate conference Committee.

      Permit the recycling of multifamily bonds as is permitted 
for single family bonds under the Mortgage Revenue Bond (MRB) program.

    Under the Mortgage Revenue Bond program, issuers may use mortgage 
prepayments or non-originations to make new mortgages as long as they 
are used within 10 years of the bond's original issuance. Prepayments 
of tax-exempt multifamily bonds are not able to be recycled into new 
mortgages. This would allow issuers to stretch limited bond volume cap 
thereby assisting additional lower income renters. The refunding bonds 
would be subject to a TEFRA hearing and would require corresponding 
changes in the tax credit program to permit projects to qualify for 4% 
credits.

      Eliminate the current law requirement that issues 
designate a specific use for bond volume cap that is carried forward.

    This requirement has caused some NALHFA members to lose the amount 
carried forward because of a change in the housing market. As an 
example the City of Chicago lost $80 million in volume cap that it 
carried forward for multifamily housing. There was insufficient demand 
for multifamily bond cap at the same time that the demand for single 
family bond cap was exploding.

      Treat displaced homemakers, single parents, and 
homeowners who are victims of presidentially declared disasters as 
first time home buyers for purposes of the Mortgage Revenue Bond 
program.

    This repeal was included in H.R. 4873 that was introduced in the 
110th Congress. In addition, Congress waived the first time home buyer 
requirement for victims of Hurricanes Katrina, Rita and Wilma, 
presidentially declared disaster areas.
    Mr. Chairman, thank you for the opportunity to present NALHFA's 
recommendations on these critical housing issues.

                                 

    *Chairman NEAL. Thank you, Mr. Lee.
    Mr. Hudson.

STATEMENT OF BRIAN A. HUDSON, EXECUTIVE DIRECTOR, PENNSYLVANIA 
                     HOUSING FINANCE AGENCY

    *Mr. HUDSON. Thank you. Good morning, Mr. Chairman, 
Representative English. I am Brian Hudson, Executive Director 
of the Pennsylvania Housing Finance Agency. Thank you for the 
opportunity to testify on behalf of the National Council of 
State Housing and Finance Agencies in support of proposals to 
modernize the Low-Income Housing Tax Credit program and tax-
exempt private activity housing bond programs.
    NCSHA's members allocate the housing credit and issue 
housing bonds in every State to produce affordable housing and 
ownership housing. NCSHA is deeply grateful to Chairman Rangel 
and for your support of the housing credit and bond programs. 
Without you, we would not be here today talking about how to 
make these extraordinary programs even better.
    I'd like to share with you examples in Pennsylvania and 
what we have done. In Brentwood in West Philadelphia, long 
abandoned and decaying buildings now stand tall, proudly 
providing affordable homes to 43 families and older residents 
of the Parkside Historic District, thanks to the housing 
credit.
    In before and after pictures in South Philadelphia, the 
housing and credit bonds work together to produce Greater Grays 
Ferry estates, a 40-acre mixed-income. The before picture shows 
a decaying neighborhood, in total decay, boarded-up homes, 
which was transformed into a mixed-income, mixed-use 
development that combines affordable housing, single-family 
homes, and apartments and a senior care center, and a community 
center onsite replacing dilapidated public housing, totally 
revitalizing the community. And this was done in a joint effort 
with the Housing Authority.
    Moving to a world away in a small rural town of Edinboro, 
29 affordable single-family homes stand among the older homes 
because of the housing credit. This initiative was undertaken 
by a local non-profit to provide these 29 homes, once again a 
major part in revitalizing this community.
    And in Pittsburgh, many public housing and private hands 
reclaimed an aging federally assisted housing development in 
this neighborhood, using the housing credit to preserve 266 
affordable rental apartments at Second East Hills. You created 
in the housing credit and bonds an unprecedented public-private 
partnership for affordable housing by unleashing the private 
sector, limiting Federal directives, and entrusting program 
administration to the States.
    The States have lived up to your trust. We have established 
a long record of diligent and successful housing credit and 
bond administration. You have a chance now to eliminate program 
rules that made sense when you wrote them but have outlived 
their usefulness, rules that add unnecessary complexity and 
cost to the development process.
    For example, it's time to eliminate the arbitrary limit on 
the amount of housing credits a State can allocate to federally 
subsidized developments. Allow States to determined when 
housing credit amounts higher than the law now allows are 
necessary to achieve development in places for people they want 
to serve. This would allow the States to target their resources 
in the hard-to-develop areas.
    Allow housing bonds to finance single-room occupancy 
housing as the housing credit can.
    Fix the housing credit and bond student rules so they don't 
inadvertently discourage lower income single parents from 
pursuing more education. We certainly believe that was not the 
intent of the law.
    Repeal the Alternative Minimum Tax on housing credit and 
bond investments to attract more investor interest, increase 
dollars they supply affordable housing, and cut housing costs 
for the lower income families they serve.
    We're asking for you to consider repealing the MRB tenure 
rule so States can recycle all MRB mortgage repayments into new 
mortgages for lower income families. In 2006 in Pennsylvania 
alone, that number was $51 million.
    Allow MRBs to give single parents a second chance at home 
ownership by easing the first-time home buyer requirement.
    These are just a few mostly, we believe, low steps to 
empower States and our partners to respond more effectively to 
our affordable housing needs and priorities. I describe these 
changes and others we propose more fully in my attachments to 
our testimony. I ask that it be made part of the hearing 
record.
    Demand for housing credits and bonds exceed supply by a 
great measure in Pennsylvania and all across the country. 
Again, that demand is 3 to 1 in Pennsylvania.
    Finally, we commend you for reaching out across 
jurisdictional lines to the Financial Services Committee 
Chairman Frank, to make sure this housing credit and bond 
modernization effort includes a review of HUD programs on which 
the housing credit and bonds so heavily rely. We urge you to 
work with Chairman Frank to make sure any new housing programs 
his Committee proposes, such as the GSE affordable grants that 
just passed the House, can be effectively combined with the 
housing credit bonds.
    We understand you are faced with difficult decisions, with 
limited resources. I thank you for all you have done and will 
do to create affordable housing opportunity in this country. 
The States are honored to partner with you in this effort.
    Thank you.
    [The Statement of Mr. Hudson follows:]
Statement of Brian A. Hudson, Sr., Executive Director and CEO, 
        Pennsylvania Housing Finance Agency, on Behalf of the National 
        Council of State Housing Agencies Harrisburg, Pennsylvania
    Mr. Chairman, Representative English, and members of the 
Subcommittee, thank you for the opportunity to testify on behalf of the 
National Council of State Housing Agencies (NCSHA) in support of 
proposals to modernize the Low Income Housing Tax Credit (Housing 
Credit) and tax-exempt private activity housing bond (Housing Bond) 
programs. I am Brian Hudson, executive director of the Pennsylvania 
Housing Finance Agency.
    NCSHA is a national nonprofit organization that represents the 
housing finance agencies (HFAs) of the 50 states, the District of 
Columbia, Puerto Rico, and the U.S. Virgin Islands. NCSHA's member 
agencies allocate the Housing Credit and issue Housing Bonds in every 
state to produce affordable rental and ownership housing.
    NCSHA is deeply grateful to Ways and Means Committee Chairman 
Rangel and you for your strong and consistent support of the Housing 
Credit and Bond programs. Many of you helped create these programs and 
extend them in their early years. You strengthened them and made them 
permanent. You restored their purchasing power and protected them 
against future inflation.
    Just in the last few years, many of you have worked diligently to 
advance legislation to modernize them. Without your commitment and 
leadership, we would not be here today talking about how to make these 
extraordinary programs even better.
    But, even you--some of the Housing Credit and Bond programs' 
strongest supporters--probably did not imagine the remarkable results 
these programs would achieve. All across the country, the Housing 
Credit and Bonds are turning around neighborhoods and transforming 
communities. They are bringing affordable housing to our inner cities 
and rural towns. They are building new housing and saving old. They are 
housing working families and the very poor. They are providing housing 
hope to people with special needs, the elderly, and persons who are 
homeless.
    Here are just a few examples of the impact the Housing Credit and 
Bonds are making in Pennsylvania.
    Not long ago, once magnificent buildings sat abandoned and decaying 
in West Philadelphia, as they had for more than 30 years. Today, thanks 
to the Housing Credit, these august buildings stand tall once more, 
proudly providing affordable homes to 43 families and older residents 
of the Parkside Historic District.
    In South Philadelphia, the Housing Credit and Bond programs worked 
together to produce Greater Grays Ferry Estates, a 40-acre mixed-
income, mixed-use development that combines affordable single-family 
homes and apartments, a senior care center, and a community center on 
one site. This development stands where dilapidated public housing once 
did, drawing retail and restaurant development to the surrounding 
community.
    A world away, in the small town of Edinboro, Pennsylvania, 29 new 
affordable single-family homes are nestled among older homes. A local 
nonprofit knew just what kind of housing fit this rural community, and 
the Housing Credit made it possible.
    With many public and private hands, Pittsburgh reclaimed an aging 
Federally assisted housing development and the neighborhood it plagued, 
preserving 266 affordable rental apartments at Second East Hills and 
driving out crime and vagrancy. Without the Housing Credit, this 
property and the Federal Government's investment in it would have been 
forever lost.
    I could tell you hundreds more stories like these, as could my 
state HFA colleagues. We invite you all to come out and see what you 
have made possible. We hope you will.
    Together, state HFAs and our affordable housing partners have 
produced nearly 2 million affordable rental homes with equity provided 
by the Housing Credit. About one-quarter of these homes are Housing 
Bond-financed. We have financed almost another million affordable 
rental homes with Housing Bonds alone. With the Housing Credit and 
Bonds, we add another 150,000 homes to our country's affordable rental 
housing inventory every year.
    State HFAs have made home ownership a reality for 2.6 million 
working families with single-family Housing Bonds, probably known to 
you as Mortgage Revenue Bonds or MRBs. Another 100,000 families--
teachers, firefighters, nurses, and service workers--join them each 
year with the help of MRB mortgages.
    With the Housing Credit and Bonds, state HFAs and our partners are 
creating some of the highest quality, most innovative affordable 
housing ever produced with Federal assistance. With your help, we can 
do even more.
    Congress got it right when it created the Housing Credit and Bond 
programs. By unleashing the private sector, limiting federal 
directives, and entrusting administration to the states, you created in 
these programs an unprecedented public-private partnership for 
affordable housing.
    You have the opportunity now to reinvest in the Housing Credit and 
Bond programs' success. You can extend their reach to people and places 
they now struggle to serve by eliminating and rationalizing rules that 
have outlived their usefulness in these now mature and established 
programs.
    When Congress created the Housing Credit, you took a bold new 
approach to affordable rental housing production. You let states and 
their local partners--not Washington--decide how best to respond to our 
unique and diverse housing needs with this new resource.
    Recognizing the Housing Credit was an experiment, Congress built 
into it a number of safeguards. You limited, for example, the amount of 
Housing Credit states could allocate to developments financed with 
other Federal subsidies to insure against oversubsidization. Later, 
acknowledging even the maximum Credit amount states could allocate 
would not be enough to make development feasible in areas where incomes 
were especially low or low relative to construction costs, you allowed 
states to allocate more Credit to developments in these areas. But, 
even then, you had Washington, not the states, designate and limit 
those areas.
    Over the years, you have entrusted the states with even greater 
responsibility to oversee the Housing Credit, requiring us to direct it 
to our most pressing housing needs under statewide allocation plans we 
and our partners devise. In addition, you have called on states to 
allocate through rigorous financial review and underwriting only the 
amount of Housing Credit necessary to developments' long-term viability 
as affordable housing.
    The states have lived up to your trust. We have established a long 
record of vigilant Housing Credit allocation, underwriting, and 
compliance monitoring. We understand what a precious resource the 
Credit is and husband it carefully, squeezing every bit of affordable 
housing from it that we can.
    In response, over time Congress has eased some rules that made 
sense at the program's outset, but proved no longer necessary. You, for 
example, made exceptions to the Federal subsidy rule for a number of 
Federal programs, like HOME and CDBG, commonly used with the Housing 
Credit.
    A number of outdated Credit constraints still remain, however, that 
make it difficult--sometimes even impossible--for states and our 
partners to develop Housing Credit properties for people and in places 
that need them most. It is time to:

      Eliminate the 4 percent Housing Credit limit on 
properties financed with other Federal subsidies, allowing states to 
fully exercise the authority Congress gave us nearly two decades ago to 
determine appropriate Credit allocations;
      Permit states to determine when and where Credit amounts 
higher than the maximum the law now allows are necessary to achieve 
affordable housing goals we and our partners judge important in our 
states; and
      Eliminate the prohibition on the use of the Housing 
Credit in Section 8 Moderate Rehabilitation properties, as the Credit 
is necessary to their preservation and state underwriting will prevent 
their oversubsidization.

    In addition, NCSHA urges you to fine tune the Housing Credit and 
multifamily Housing Bond statutes to eliminate other rules that made 
sense when Congress wrote them, but now add unnecessary steps and cost 
to the development process and throw up pointless barriers to the use 
of the Housing Credit and Bonds together. It is time, for example, to 
allow Housing Bonds to finance single-room occupancy housing, as the 
Housing Credit can, and to fix the student prohibition rules, which 
inadvertently discourage lower-income single parents from seeking more 
education.
    We understand Chairman Rangel is also concerned that market rate 
rental housing is simply unaffordable in high-cost areas, like his own 
New York City district, to lower income families that earn more than 60 
percent of area median income and so cannot access Housing Credit 
developments. We share the Chairman's concern and want to explore with 
him and the Subcommittee mixed-income and possibly other solutions to 
this problem.
    We urge the Subcommittee to seize this opportunity to also make a 
few modest changes to the MRB program to give states more resources and 
flexibility to respond to the nation's home ownership needs. Most 
notably, we ask you to finally repeal the MRB Ten-Year Rule, so states 
can recycle all payments on mortgages financed with MRBs into new loans 
for lower-income first-time home buyers. We also ask you to allow 
states to use MRBs to help single-parent households and respond to 
natural disasters.
    Finally, we understand Chairman Rangel and many of you are 
committed to the repeal of the Alternative Minimum Tax (AMT) on middle-
income taxpayers. We urge you, as part of that effort or this housing 
program modernization effort, to exempt Housing Credit and Bond 
investments from the individual and corporate AMT, as it limits 
investor interest in the Housing Credit and Bonds, reduces the dollars 
they supply for affordable housing, and ultimately increases housing 
costs for the lower income families they serve.
    The changes I have just reviewed and others that would empower 
states and our partners to respond more effectively and efficiently to 
our affordable housing needs are described more fully in the attachment 
to our testimony. We ask that this attachment also be made part of the 
hearing record.
    The changes we propose will allow us to do more with the Housing 
Credit and Bond resources we have. And, we must do more, as we do not 
begin to meet our states' housing needs with these limited resources.
    Demand for the Housing Credit across the country exceeds supply by 
an average of two to one. In Pennsylvania, we receive three times the 
number of qualified Credit applications we can fund. The tax-exempt 
private activity bond volume cap, from which states draw their Housing 
Bond authority, is also oversubscribed in Pennsylvania and virtually 
every state. Many of the Housing Credit and Bond changes we are 
proposing will increase pressure on these resources by increasing 
demand for them and, in some cases, reducing the amount of housing they 
produce.
    We deeply appreciate the Housing Credit and private activity bond 
cap increases Congress enacted in 2000 and the annual increases you 
have permitted since to offset inflation. However, the cap increases 
were not enough at the time to restore fully the purchasing power the 
Housing Credit and Bonds had already lost to inflation since first 
capped, and the inflation adjustments since have been outpaced by 
construction cost increases.
    Meanwhile, our Nation's affordable housing need only grows. The 
Housing Credit and Bond programs account for most affordable rental 
housing developed in this country each year. But, their combined 
production does not even replace the affordable housing we lose 
annually to rent increases, conversion, deterioration, and abandonment.
    At the same time, one in three families in this country spends more 
than 30 percent of its income on housing, and one in seven spends more 
than half, according to Harvard University's Joint Center for Housing 
Studies. Yet, only one in four families qualified for federal housing 
help receives it.
    We want to work with you to find a way to increase the Housing 
Credit and Bond caps as soon as possible. We also want consider new 
ways to stretch the existing bond cap further, by exploring with you on 
the multifamily side recycling opportunities like we are seeking to 
expand on the single-family side with MRB Ten-Year Rule repeal.
    Finally, we are heartened that Chairman Rangel and you have reached 
across jurisdictional lines to Financial Services Committee Chairman 
Frank to make sure this Housing Credit and Bond modernization effort 
includes a review of the HUD programs on which the Housing Credit and 
Bonds so heavily rely to reach lower income families than they can 
serve on their own. We have provided Chairman Frank's staff several 
suggestions for modifying HOME, voucher, and other HUD program rules to 
make these programs work more effectively with the Housing Credit and 
Bonds. We also urge you to work with Chairman Frank to make sure any 
new housing programs his Committee creates, such as the GSE affordable 
housing grant fund the House is considering and the trust fund his 
Committee will soon consider, can be effectively combined with the 
Housing Credit and Bonds.
    In closing, I want to thank you again for all you have done and 
will do to create affordable housing opportunity in this country. State 
HFAs are honored to partner with you in this effort.

                                 

    *Chairman NEAL. Thank you, Mr. Hudson. We'll now proceed to 
inquiry.
    Mr. Donovan, you advocate for a legislative change that 
would permit recycling of private activity bonds for multi-
family housing within the annual cap. Can you explain why you 
think you need this change and whether current law allows for 
any such recycling of bonds that are redeemed early?
    *Mr. DOVONAN. Currently the problem is that with many low-
income developments done with bonds and tax credits there is a 
requirement that at least 51 percent of the costs be financed 
by the bonds. Because of this, what ends up happening is that 
projects get financed with tax exempt bonds. But at the time of 
their completed construction those bonds get replaced by tax 
credit equity funds or other funding and are retired.
    And so a resource that was intended and expected to be 
available for 15 or 30 years is only available for 3 years. But 
unlike on the single family side where those bonds can be 
recycled without requiring an additional volume cap, on the 
multi-family side there is a restriction.
    We don't believe this was ever contemplated or intended by 
Congress, but it is an unintended consequence of other 
restrictions in the rules. So therefore we believe if we were 
given the ability to recycle those that it would allow us to 
make much greater and more effective use of that resource with 
little or potentially no additional costs because the original 
scoring didn't expect this short-term prepayment of the bonds.
    So we believe that with that change there are two 
regulations which are specifically referenced in my testimony 
which we believe restrict our ability to recycle those bonds 
with either a legislative or potentially a regulatory change to 
do that. We believe it could be eliminated and there would be 
little or no cost on the scoring.
    *Chairman NEAL. Mr. Lee, part of our focus today is on the 
increasing need for affordable housing for middle-income as 
well as low-income families. What consideration has your agency 
given to this growing and acknowledged problem?
    *Mr. LEE. Our agency has really looked at the notion of 
providing housing across a very broad spectrum. We focus our 
credit on extremely low-income households, but we have tried to 
reach out to a higher income group through the development of 
our inclusionary housing as opposed to using the credits per 
se.
    We have gone from 80/20 transactions in our community, 
which has fostered mixed-income housing, but in terms of our 
current real estate market, our market is such that the real 
estate developer community is going toward condominiums rather 
than affordable rentals and condominiums are priced at a very, 
very high level.
    Our agency has also done affordable homeownership which has 
tried to reach the income level that is above that which is 
served by the Low-Income Housing Tax Credit. Our membership, as 
a whole, strongly supports the notion of increasing the access 
to the 4 percent credit for those at 80 percent of median 
income because that would provide for those other communities a 
much greater opportunity to serve a slightly higher group of 
individuals in their communities that they want to keep within 
the boundaries of their communities they are the teachers and 
the firemen that we all want to serve and they are outside the 
income limits of the 60 percent program.
    So for many, many of the membership in NALHFA, moving the 
bar from 60 to 80, but still meeting the principal project 
affordability requirements at 20 percent or 40 at 60 is a way 
of doing more mixed-income housing and making that mixed-income 
housing more financially feasible.
    *Chairman NEAL. Mr. Hudson, we've heard testimony that the 
States should have the authority to allow an additional basis 
boost in certain areas rather than the Federal Government. Do 
you think it's a good idea to take the 30-percent basis boost 
designation out of the hands of HUD and to put it in the hands 
of the State housing agencies?
    *Mr. HUDSON. We do. I mean we know what's happening in our 
States. For instance they would allow the States to target 
those hard-to-develop areas, for instance in inner-city urban 
areas or even rural areas, which we have in Pennsylvania. But 
we think it's an excellent idea to allow the States to make 
those determinations where is the best to use those resources.
    *Chairman NEAL. I thank you. The gentleman from 
Pennsylvania, Mr. English may inquire.
    *Mr. ENGLISH. Thank you. Mr. Hudson, it's a privilege to 
have you back testifying before this Subcommittee. And 
certainly from my own experience your agency does an 
extraordinary job, uses a great deal of creativity and is a 
model for how housing programs can be maximized nationally.
    On that point, if we had the opportunity to deal with 
higher credit amounts, if we had the opportunity--and I think 
you heard the testimony of the HUD representative before. If 
this Committee had the opportunity to expand the current credit 
amounts, what could PHFA do if it had the flexibility to award 
higher credit amounts?
    *Mr. HUDSON. Our demand is three to one, quite truthfully. 
We get $24 million in the State. We see applications totally 
$60 million. But in just expanding the credit amount per 
property we could actually help more properties in hard-to-
develop areas across the Commonwealth.
    *Mr. ENGLISH. We've heard similar testimony from other 
States to this effect, but when you say that you have three 
times the demand, what is the quality of the demand? Are most 
of those projects that you are ultimately comfortable that if 
you financed that they would yield positive benefits and 
benefits on the order that the program has traditionally 
achieved?
    *Mr. HUDSON. We believe so, that at least 90 percent of 
those projects would be financed. We have a scoring process, as 
do most of my counterparts in other States. So right now we're 
actually doing the highest ranking projects. But that ranking 
margin is very narrow. Projects that don't get done sometimes 
are within one, two points of each other.
    So it's a very narrow band of those projects. So we do two 
funding rounds a year but the majority of those projects would 
get done if we had more credit.
    *Mr. ENGLISH. And as you set your priorities, what does 
PHFA do to ensure the credit properties are not over 
subsidized?
    *Mr. HUDSON. We're looking at the project three times, 
quite truthfully. When the application first comes in we're 
doing a review, we're scoring it. When we approve it it goes to 
initial closing, we're looking at it again. And if there's any 
adjustments that need to be made as part of that credit they're 
also made. And then we're looking at it one more time after 
construction, going through a complete cost-certification 
process to determine if it is the right amount of credit in 
this property.
    And many times PHFA has some soft funds in that development 
also and we end up being the gap filler. So we're seeing it 
three times before it closes to make sure that the credit is 
not over-subsidized.
    *Mr. ENGLISH. On a related point, what impediments does 
PHFA encounter when combining Federal programs to build 
affordable housing?
    *Mr. HUDSON. Well, we think the regulations for instance on 
some of the home McKinney Act funds are not coordinated with 
the credit program. The credit is actually reduced when it is 
combined with those Federal funds.
    And the example I can give you best is that years ago we 
refunded a deal that was insured and we could not use some of 
the savings from a refunded bond issue because it tainted the 
credit. So the credit had to be reduced. So we see that that 
needs to be changed so that other Federal sources coordinate 
with the credit so we can basically leverage those funds more 
down for the properties.
    *Mr. ENGLISH. On a narrower point, current law, we 
understand, prohibits households made up entirely of full-time 
students from living in Low-Income Housing Tax Credit 
apartments. I understand the rationale here, but it seems that 
this policy has had the unintended consequence for single 
parent families who fall outside the four narrow exceptions 
that are provided under the law because children in grades K-12 
are counted as ``full-time students'' and because the tax 
dependent status of these children is considered, many 
custodial single parents who return to school full time become 
ineligible for Low-Income Housing Tax Credit housing, which it 
is fair to say is a bizarre outcome.
    Working adults trying to complete the requirement for a 
high school education have also been adversely affected. In 
your view, what should Congress do cleanly to deal with this 
issue?
    *Mr. HUDSON. We think that definitely should be changed. We 
certainly believe not to discourage education. We support 
changing it to allow a single parent to pursue an education 
with regards to being eligible to live in a tax-credit unit, 
either eliminate the K-12 that the child is a full-time student 
or write specific language that allows that educated parent to 
go back to school, to live in that tax-credit unit. So we would 
support changes in legislation to do that in one or two of 
those ways.
    *Mr. ENGLISH. Thank you, Mr. Hudson. And again, I want to 
compliment the entire panel and especially you, Mr. Hudson and 
Mr. Donovan for some of the ideas that you've laid out here 
that I think are certainly meritorious and I think stimulating 
for our discussion.
    Thank you, Mr. Chairman.
    *Chairman NEAL. Thank you, Mr. English. Mr. Blumenauer.
    *Mr. BLUMENAUER. Thank you.
    Gentlemen, you may have heard an earlier question I had 
about energy efficient locations. I'm curious if your specific 
agencies as you are trying to allocate scarce dollars amongst 
worthy projects, if you evaluate the energy efficiency, the 
transportation efficiency and whether they have energy 
efficient appliances, whether they are located in a place 
that's access to mass transit, looking at the energy footprint. 
Do you evaluate them? Is that part of your criteria?
    *Mr. DOVONAN. Absolutely, and it's done on a number of 
different levels.
    *Mr. BLUMENAUER. Okay. What I'd like, because time is short 
and I have another question, actually for you, Mr. Donovan--if 
you could, supply the Committee with what that criteria would 
be relating to that.
    Mr. Lee.
    *Mr. LEE. Yes, the city of San Francisco also can provide 
you written testimony but I could elaborate on what the city 
does if you would like.
    *Mr. BLUMENAUER. Energy efficiency, transportation location 
is a part of----
    *Mr. LEE. Yes.
    *Mr. BLUMENAUER. And Mr. Hudson?
    *Mr. HUDSON. Yes, we do the same. I can provide that 
information to you also.
    *Mr. BLUMENAUER. That would be great. Would any of you 
three gentlemen have objections if there were some minimum 
criteria for energy efficiency or transportation efficiency 
that were part of Federal regulations?
    *Mr. DOVONAN. No objection.
    *Mr. LEE. No objection, I guess I just would like to know 
what it would be.
    *Mr. BLUMENAUER. Well, we're the Federal Government. It 
would be very minimal, you know. And with your help it wouldn't 
be bureaucratic.
    Mr. Donovan, I recently had a chance to have an exchange 
with your Mayor and be a part of the RPA's regional assembly 
where there was the presentation of this really exciting 127-
point plan about greening New York, which I'm seeing in other 
cities around the country where innovative Mayors, local policy 
initiatives--we have what, 494 cities now that are deciding 
they're going to do something about global warming.
    I'm curious if you have given some thought to what's going 
to happen here. We are going to have, I think most of the 
experts agree and even some politicians, a carbon constrained 
economy. There will be something that will come forward in the 
course of the next few years where there will be some 
significant value that will be realigned to reinforce what we 
want in terms of reducing the carbon footprint.
    Have you given any thought to how your specific mission or 
the broader context of what the Mayor is proposing could be 
given credit as part of larger Federal legislation for reducing 
carbon emissions?
    *Mr. DOVONAN. Specifically as part of Federal legislation, 
you're saying? Well, I think one of the most important things 
that we are aiming to do in New York and with our partners 
nationally that could be replicated and perhaps incorporated 
into some of the Federal programs, we have been looking very 
closely at ways to incentivize private developers to 
incorporate sustainable elements into their projects.
    *Mr. BLUMENAUER. Right.
    *Mr. DOVONAN. And ultimately if we can assemble the 
information, the data, to demonstrate that these energy 
efficient improvements not only pay for themselves in the long 
run in terms of operating costs but in fact create more value 
than the up front cost, then we can figure out how to actually 
get the private sector to begin to finance in those 
improvements up front.
    So I believe both incorporating certain standards cost 
effective, not all of the technologies are cost effective, but 
then also----
    *Mr. BLUMENAUER. My point is a little different. I 
understand what you're saying and I agree, and I hope you do 
it, and hopefully we can--I mean we're trying to do it in 
Portland, Oregon and elsewhere. My question or my observation I 
guess I would leave for all three of you, particularly relevant 
to New York because I think 70 percent of your energy use is 
building as opposed to transportation in other communities is 
that you folks get credit from the Federal Government under 
this scheme for the work that you're doing because some of it 
costs money and some of it needs to be jump started or incented 
that when the Federal Government comes up with what it's going 
to do with a carbon constrained economy that some of that comes 
back so that what you're doing in San Francisco, New York or 
Philadelphia you get advantage from some of that to help with 
your important work, that it might be another resource for 
housing.
    If you gentleman could reflect on that and maybe give us 
some guidance it would be extraordinarily--at least of great 
interest to me. Thank you very much.
    *Chairman NEAL. Thank you, Mr. Blumenauer. Mr. McDermott.
    *Mr. MCDERMOTT. I have no questions.
    *Chairman NEAL. Thank you. I want to thank the panelists 
for your insights and we'd like to have the next panel step up 
now.
    Welcome. Mr. Goldstein, would you begin please.

  STATEMENT OF JEFFREY H. GOLDSTEIN, EXECUTIVE VICE PRESIDENT 
                         BOSTON CAPITAL

    *Mr. GOLDSTEIN. Mr. Chairman, Congressman English, Members 
of the Subcommittee, my name is Jeff Goldstein, and I'm Chief 
Operating Officer and the Director of real estate of Boston 
Capital.
    Boston Capital is a privately held real estate firm founded 
in 1974 to raise equity for investment in and construction of 
affordable housing. Over the past 33 years, our investors have 
financed the new construction or the rehabilitation of over 
157,000 units of affordable housing in 48 States, Puerto Rico 
and the District of Columbia.
    Today we monitor the ongoing operations and compliance of 
these units on behalf of our investors. On behalf of the entire 
syndication industry I would like to thank you for giving me 
the opportunity to testify before you on the current economic 
and investment environment confronting the affordable housing 
marketplace as well as the opportunity to comment on the 
changes and the evolution to that marketplace which have led to 
the need for certain modifications to our housing program.
    The Low-Income Housing Tax Credit is the most successful 
program ever created by Congress. This partnership between the 
public sector tax incentives and the private sector capital is 
responsible for producing over 1.9 million units of affordable 
housing since its inception in 1986.
    The current program provides housing which serves residents 
earning 60 percent or less of the area median income. While 
area median incomes and the resulting per unit rental rates 
have not increased in many parts of the country, operating 
expenses are increasing.
    Because of increased operating costs and specifically 
utility costs, taxes and insurance, there is less rental income 
available to pay the costs of debt service. Land costs, which 
are not includable in the calculation of the amount of low-
income housing tax credits allocable to a property, have also 
grown to the point where proposed properties are no longer 
financially feasible in many high growth and high cost areas.
    With such changes in economic conditions and many 
regulatory barriers in place when trying to combine the low-
income credit with other sources of housing and development 
proceeds it is certainly time to modernize the credit and to 
simplify the program. We strongly support and encourage your 
effort.
    As you know, the Low-Income Housing Tax Credit program 
works like a block grant to the States. States allocate credits 
under Federal guidelines to developers who then sell those 
credits to investors. Developers use the proceeds from the sale 
of the equity in the project to replace the funds that would 
otherwise have to be borrowed.
    This reduction in debt translates into a reduction in debt 
service, which ultimately translates into a reduction in rents 
and thus keeps properties affordable. The following suggestions 
may seem complicated but they generally go to one of four 
goals, increasing the pool of investors available, giving the 
States more flexibility to use credits where they're most 
needed, making rents more accurately reflect increased utility 
costs and increasing the flexibility of the income ranges of 
tenants served.
    I'd like to focus your attention on just a few things that 
I think would be particularly helpful. By exempting the Low-
Income Housing Tax Credit from corporate Alternative Minimum 
Tax or AMT, this change would increase the market for the 
credit and ultimately increase the amount of equity into this 
marketplace. Allow projects with home funds to be used in 
difficult to develop and qualified census tracked areas; this 
change will facilitate the development of high cost areas.
    Clarify the utility allowance formulas; we support removing 
the utility allowance from the gross rent equation and allowing 
the allocating State agency to determine maximum gross rent at 
the time of underwriting. This change ensures that the property 
can maintain financial feasibility.
    Allowing residents earning up to 80 percent of area median 
income in projects in communities with severe shortages of 
housing for this income group; it's our experience that there 
is a tremendous demand in many areas for this income group and 
they are currently not being served.
    Include land in allocable and eligible basis; this would 
support affordable housing in high cost areas. And lastly, 
amend the formula for determining the amount of credit 
allocable to a property to be the higher of the amount 
determined; under the present law, we're 9 percent for 
properties with no Federal subsidy; we're 4 percent if there is 
a Federal subsidy.
    We support this change as it provides certainty for both 
investors and housing sponsors.
    Again, thank you for the opportunity to testify. Please let 
me know if there's any additional information you'd like to 
receive. We're happy to help you and thanks again.
    [The Statement of Mr. Goldstein follows:]
 Statement of Jeffrey H. Goldstein, Executive Vice President and Chief 
  Operating Officer, Director of Real Estate, Boston Capital, Boston, 
                             Massachusetts
    Mr. Chairman, ranking Member, Mr. English, and other Members of the 
Subcommittee, my name is Jeffrey Goldstein. I am the chief operating 
officer and director of real estate for Boston Capital.
    First, let me thank you for inviting me to testify. I am honored to 
have the opportunity to comment on the changes and evolution to that 
marketplace which have led to the need for certain modifications to our 
housing program. I am also grateful to the Subcommittee for recognizing 
the need to improve the effectiveness of the low income housing tax 
credit (LIHTC) program and for holding this hearing to provide a forum 
to discuss the current economic and investment environment confronting 
the affordable housing marketplace.
    Next, let me give you a little background about our company. Boston 
Capital is a privately held real estate firm founded in 1974 to raise 
equity for investment in and construction of affordable housing. Over 
the past 33 years, our investors have financed the new construction or 
rehabilitation of over 157,000 units of affordable housing in 48 
states, Puerto Rico, and the District of Columbia. Today, we monitor 
the ongoing operations and compliance of these units on behalf of our 
investors, while we continue to raise capital and invest in new 
properties.
    While I am testifying on behalf of Boston Capital, we are also a 
coordinating member of the Housing Advisory Group, an organization with 
approximately 100 members from the affordable housing development, 
syndication, and accounting industry, who share our views and concerns.
    The low income housing tax credit is the most successful housing 
program ever created by Congress. This partnership between public 
sector tax incentives and private sector capital is responsible for 
producing 1.9 million units of affordable housing since its inception 
in 1986. However, it is clear that over the last 21 years, economic 
circumstances have changed dramatically, making the credit less 
flexible than it could be.
    For example, the LIHTC limits rent to a maximum of sixty percent of 
the area median income. Area median incomes have not gone up 
significantly in most of the U.S. for several years. As a result, 
income-limited rents have remained relatively flat. Operating expenses, 
however, have been moving upward nationally, and are very likely to 
continue to do so for the foreseeable future. Utility, insurance, 
taxes, and other operating costs have increased over the last several 
years. With the statutory ceilings on rents, there is less cash-flow 
available to pay debt service.
    The amount of LIHTC that may be allocated to any property is based 
on the eligible basis of the property. Land costs, however, are not 
includable in ``eligible'' basis on which the amount of allocable 
credit is based. Yet, land costs have increased significantly, 
especially in high growth areas where affordable housing is greatly 
needed. As a result, the percentage of total project cost financed by 
the LIHTC has declined in many cases.
    Exacerbating this problem of escalating operating costs and 
stagnant rents is the formula used to reduce rent to reflect the 
utility costs tenants have to pay. Under present law, the formula is 
set by HUD and significantly overstates the rise in utility costs which 
results in lower rents. CPI would be a more accurate measure or, 
alternatively, the state housing agencies could set rent ceilings that 
reflect the actual costs.
    Over the last quarter century, the nature of the investors in 
affordable housing has changed dramatically, as well. When the LIHTC 
began, the largest market for affordable housing investment was 
individuals. However, due in substantial part to the alternative 
minimum tax and passive activity loss limitations, the individual 
market has disappeared. Increased cost in raising equity, auditing 
properties and reporting to investors of publicly offered investments 
subject to SEC regulation have added to the inability of syndicators to 
offer an investment with an adequately attractive return for the 
individual market.
    The LIHTC marketplace, nevertheless, has become more efficient 
since Internal Revenue Code Section 42 was made permanent. The vacuum 
left by the individual market has been filled by corporations, 
primarily banks, insurance companies, Fannie Mae and Freddie Mac. This 
concentration is due, in part at least, on the ability of financial 
institutions to use the LIHTC to satisfy Community Reinvestment Act 
(CRA) requirements, not solely on the rate of return realized. Thus, it 
is obvious that, while the investment base is solid, it is not as broad 
as it could be.
    With the changes in economic conditions, and with many regulatory 
barriers in place when trying to combine the LIHTC with other sources 
of housing development proceeds, it is certainly an appropriate time to 
review the program with a view to modernization and simplification.
    The most valuable change within the jurisdiction of the Committee 
on Ways and Means would be to allow the LIHTC to be used against the 
corporate alternative minimum tax. This would allow corporations that 
are now reluctant to invest in affordable housing out of concern that 
they may be subject to the AMT at some point during the credit period 
to invest with confidence. If Congress wanted to increase the 
likelihood that individuals would enter the marketplace again, LIHTC 
investments should be allowed to offset individual earned income and 
should also be creditable against the individual AMT.
    It may be that changes to the corporate AMT to broaden the market 
for LIHTC investment could have some revenue impact. However, if you 
assume, as has been the case in recent years, that there is full 
utilization of credits, there should be little to no revenue impact 
other than taxpayers who thought that they would be able to use the 
credits over the 10-year period prescribed, but who turned out not to 
be able to use the full value of the credits because of the alternative 
minimum tax or, in the case of individuals, the passive activity loss 
limitations.
    However, in addition to the AMT, there are a number of other 
modifications that would make the LIHTC usable in more situations. 
There is a consensus in the affordable housing industry on these 
suggestions, and we hope that the Subcommittee will carefully review 
and adopt them:

      Allow HOME-assisted properties in difficult development 
areas (DDAs) or qualified census tracts (QCTs) to use the 30-percent 
increase in eligible basis in calculation of the amount of LIHTCs 
allocable to those properties otherwise available for properties in 
DDAs or QCTs. This change will facilitate development in high-cost 
areas by reducing higher-cost debt financing.
      Clarify utility allowance formulas. As I mentioned 
earlier, the formula for reducing rent to account for utility costs, 
set by HUD, is flawed. Removing the utility allowance as a reduction in 
gross rent and allowing the allocating State Housing Agency to 
determine maximum gross rent at the time of the underwriting would help 
insure that the property can maintain financial feasibility over time.
      Allow a 30% increase in eligible basis for properties 
that meet state-specified geographic or income targeting requirements. 
Under present law, HUD has authority to determine which portions of a 
state are DDAs and high cost areas. The state agencies, however, have a 
better grasp on their affordable housing needs for high cost areas, 
rural areas and where deeper targeting may be necessary. As mentioned 
above, providing more equity into developments places less pressure on 
rising operating costs because the increased equity allows for much 
less debt service.
      Allow residents earning up to 80% of area median income 
(AMI) in projects in communities with severe shortages of housing for 
this income group. It is our experience that there is tremendous demand 
in many areas for this income group, and that this change would place 
the LIHTC in line with other existing affordable programs.
      Allow land to be included in eligible and allocable 
basis. Since the amount of the LIHTC allocable to a property is 
determined by reference to cost basis, this would support affordable 
housing in high-cost areas by increasing the percentage of equity 
financing provided via the LIHTC and reducing debt financing.
      Amend the formula for determining the amount of credit 
allocable to a property to the higher of (1) the amount determined 
under present law or (2) 9 percent for properties with no other Federal 
subsidy (e.g., tax-exempt bonds) or 4 percent if there is an additional 
Federal subsidy. A statutory formula limits the amount of credits 
allocated to any particular property to 70 percent of a property's 
qualified basis (essentially, depreciable basis minus Federal grants) 
over a 10-year period or to 30 percent of the property's qualified 
basis if there is another Federal subsidy (almost always, tax exempt 
bonds). The original legislation set the discount rates at 9 percent 
and 4 percent. The rates now float as a percentage of an average of the 
annual Federal mid-term and long-term interest rates, thus providing 
rates lower than 9 percent and 4 percent. Setting the rates at 9 
percent and 4 percent as a floor would allow more equity into each 
property and place less pressure on debt servicing as operating costs 
increase. Setting the rate at a constant percentage allows more 
predictability for sponsors when layering other sources of capital and 
grants, while retaining the present law formula if it results in a 
higher credit amount will protect the credit's viability in a high 
inflation/interest rate environment.

    In addition, I would like to mention two issues not specifically 
within the Committee's jurisdiction, but very important to the 
economics of the low-income housing tax credit program.
    The first relates to Form 2530, a filing requirement promulgated by 
HUD that would limit investment in affordable housing. Thank you for 
your efforts to correct an attempt by HUD to over-regulate the 
affordable housing agency. On April 24th, the House passed H.R. 1675 
the ``Preservation Approval Process Improvement Act of 2007'' by voice 
vote with no opposition.
    The bill will reduce unnecessary and overly burdensome HUD filing 
requirements for purposes of participating in HUD programs. 
Specifically, the bill would exempt limited liability corporate 
investors from being required to file. Additionally, the legislation 
would allow for continued paper filings for those required to file 
until technical issues with the electronic filing system have been 
addressed.
    The Senate Banking Committee reported H.R. 1675, without amendment, 
last week, and we are hopeful that this issue will be finally resolved 
shortly.
    The second issue I would like to bring to your attention is a 
similar case of over-regulation by the Securities and Exchange 
Commission. Under U. S. securities regulations, an auditor of an entity 
regulated by the SEC cannot aid or assist in the preparation of 
financial statements. Last year, the SEC staff recognized that, while 
audits of public syndicated limited partnerships have been performed by 
auditors who meet the specific independence standards required under 
the securities laws, many audits of operating limited partnerships--in 
which the public funds invest as limited partners--did not meet these 
specific independence requirements. As a result, the SEC staff provided 
a temporary exemption from the Commission's independence requirements, 
in a letter dated April 21, 2006, for the filings of LIHTC registrants 
with limited partnership investments in operating partnerships for 2005 
and prior years. However, the SEC staff has stated that they will not 
extend this exemption permanently.
    The problem is that the auditor independence standards for 
nonpublic companies are not as restrictive as those established by the 
SEC. Most affordable housing developers and management agents do not 
have the in-house expertise and capacity required to prepare financial 
statements for their auditors and many operate in communities that do 
not support more than one accounting firm. It is far more likely that 
an accurate set of financial statements will be prepared if a 
professional, outside accounting firm prepares them under the generally 
accepted rules issued by the AICPA for privately held firms than if the 
general partners are forced to prepare financials in-house, assuming 
they can find the staff to perform these duties.
    In some communities there may be several accounting firms 
available. However, experience has shown that splitting the accounting 
and auditing functions for even these financially simple businesses can 
increase costs beyond the ability of the business to pay. It is 
important to emphasize that these LIHTC investments are constructed 
assuming no free cash flow. In other investments, the price of the 
product or service produced might be increased to offset additional 
costs. However, in the case of an LIHTC property, the only source of 
income--rent--is strictly limited by Federal tax law.
    It is also very important to understand that the applicable state 
housing agency is actively monitoring each property for compliance with 
the LIHTC requirements. Under the coordination of the National Council 
of State Housing Agencies, these state agencies provide comprehensive 
and ongoing independent review of the factors critical to LIHTC 
investors.
    We urge Congress to address this issue, as it has in the HUD 
reporting problem, to maintain the efficiency of the LIHTC program and 
reflect the independent oversight role of the state housing agencies in 
protecting the interests of both tenants and investors in affordable 
housing.
    Again, thank you for this opportunity to testify. Please let me 
know if there is additional information that you would like to receive 
from us. We are happy to help you in any way we can.

                                 

    *Chairman NEAL. Thank you, Mr. Goldstein.
    Mr. Rose.

          STATEMENT OF JONATHAN F.P. ROSE, PRESIDENT,
                  JONATHAN ROSE COMPANIES, LLC

    *Mr. ROSE. Thank you, Congressman Neal, Ranking Member 
English and Members of the Subcommittee. I'm Jonathan Rose, 
president of Jonathan Rose Companies. Our firm is a for profit 
that collaborates with cities, community development 
corporations and academic and other institutions to repair the 
fabric of community.
    We have seven tax credit projects currently underway in 
places ranging from Harlem to Connecticut to Albuquerque, New 
Mexico. And to answer a previous question, each is in a 
difficult to develop area. The 30 percent basis boost is very 
helpful and appreciated, but it is not sufficient to cover the 
costs of developing these areas, and we'd love to see that the 
basis boost be increased.
    As a firm, we're also very committed to green building, 
environmentally responsible development, and absolutely agree 
that with climate change before us that every program needs to 
respond to climate change. And we make some suggestions on how 
to do that.
    I'm not here today only as a businessman, but I'm also a 
trustee of the Enterprise Community Partners and a member of 
the Executive Committee. Enterprise actually pioneered the use 
of the tax credit to serve low-income and special needs 
populations and has been a leader in the movement to make 
affordable housing not only healthier and more energy efficient 
but to reduce climate impacts through it's the green 
communities guidelines.
    And this initiative by the way has created a standard. And 
so earlier when you were asking about standards, it's an 
excellent, nationally approved standard that's been applied to 
projects all across the country that we know doesn't cost much 
more, one or 2 percent, and really works.
    The time has come, if you add all these things that all of 
our requests and the demand, the time has come to increase the 
amount of tax credit available, and really by 50 percent at a 
minimum. At the same time we need to simplify and enhance the 
program because there's so much demand.
    And as you know there are conflicts within it. We're seeing 
across the country both the supply of affordable housing shrink 
as more and more buildings are being taken off the market and 
rising energy and transportation costs that are cutting into 
the precious earnings of low-income families, and rising 
construction costs which are making the credit smaller and it's 
essential, absolutely essential, a smaller portion of the 
housing that we're building.
    So in addition to the 50-percent increase in total credit 
available we'd like to see that any Federal housing subsidies 
that enable residents or owners such as housing authorities to 
pay rent or pay operation expenses under credit properties does 
not reduce the amount of housing credits a building can 
receive, something that Representative McDermott is 
championing. We really appreciate that.
    The second thing is that when you build a project that has 
non-housing space the credit does not apply to these uses. And 
so, Congressman McDermott, for example, we are building housing 
for youth aging out of foster care in Harlem. There is a youth 
construction trades academy on the ground floor and that is not 
considered housing space, so we can't apply the credit to it. 
So increasing the ability of the credit to fund or allowing the 
ability of the credit to fund support spaces would be very, 
very helpful.
    We deeply believe there should be a 30 or a 50 percent 
basis boost in the housing credit for developments that 
incorporate cost-effective green criteria--this will help pay 
for the costs--and for projects that are adjacent to mass 
transit or in walkable locations. These we think are better for 
the residents, better for the owners of the buildings, the not-
for-profits, public housing agencies, et cetera, and better for 
our country in terms of a climate change strategy.
    We strongly recommend that Enterprise's green communities 
criteria be attached to the program. Many States are using it, 
many cities, some who have been here today, are using it as 
their criteria, but let's make it a consistent, nationwide 
program. Just attach it to the tax credit program. We know it 
works. We've used it in many, many States around the country.
    As I mentioned, we'd love to see a basis boost for projects 
that are next to--in down towns and walkable locations next to 
transit. And one of the reasons is these are more expensive 
locations. For example, you cannot do surface parking in these 
locations, so they really need the basis boost to make them 
work. That's the only way we're going to get the density we 
need in these locations.
    Same criteria, green criteria we recommend be attached to 
multi-housing finance bonds. And by the way one of the 
cheapest, actually a no cost way that Congress could respond to 
climate challenge is to take all taxes and bonds, whether 
they're for housing, hospitals, schools, et cetera, and just 
require them to comply with Energy Star. That costs you nothing 
and it will green every new project, lower the energy cost of 
every new project built under tax exempt bonds.
    By the way, Representative English, I'm a former board 
member of the National Trust for Historic Preservation. I 
applaud your proposed legislation. And the trust, by the way, 
is also looking at how it can apply green building standards to 
its new work, its renovation work going forward.
    And the last thing is Enterprise has recommended a new tax 
incentive to complement the housing credit, to fill the gap in 
housing finance system while encouraging greater energy 
efficiency and we support that too. Thank you very much.
    [The Statement of Mr. Rose follows:]
  Statement of Jonathan F.P. Rose, President, Jonathan Rose Companies 
                        LLC, New York, New York
    Thank you, Congressman Neal, Ranking Member English and members of 
the Subcommittee for this opportunity to testify on strengthening the 
Low Income Housing Tax Credit and other tax incentives for affordable 
housing. I am Jonathan Rose, president of Jonathan Rose Companies.
    Our firm collaborates with cities, community development 
corporations, academic and other institutions to help them solve 
complex development problems. Often this involves building affordable 
housing or institutional buildings, and all of our work aspires to be 
as green as it can be with limited budgets. We bring to this testimony 
a deep commitment to repairing the fabric of our communities and the 
practical experience of our long term engagement in this work. 
Affordable housing is at the core of our development work, often as 
part of larger mixed-use developments. Our firm is actively engaged in 
the development of a variety of mixed-use, urban infill, public housing 
revitalization and senior housing projects. We currently have seven 
Housing Credit projects in process in locations ranging from the heart 
of Harlem to downtown Albuquerque.
    Among my volunteer affiliations I am a trustee of Enterprise 
Community Partners, which has been an active advocate of the Housing 
Credit since its founder Jim Rouse and chairman Bart Harvey helped 
Congress create the program in 1986. Enterprise Community Investment, a 
subsidiary organization, is a major participant in the Housing Credit 
program, having raised more than $6 billion to support nearly 1,500 
properties with more than 83,000 affordable housing units under asset 
management. Enterprise has pioneered use of the Housing Credit to serve 
special needs populations and advance healthier and more energy 
efficient development through the Green Communities initiative.
    I will not go into exhaustive detail about the effectiveness, 
efficiency and importance of the Housing Credit program. Others from 
whom the Committee will receive testimony will likely cite the 
overwhelming evidence of the Credit's singular achievements among 
affordable housing programs.
    Suffice to say that from my perspective as a socially motivated 
for-profit developer of affordable housing, and for my firm and many 
not for profit community partners, the Housing Credit is the single 
most important resource available to enable developers to create decent 
affordable homes for people who need them most. The Housing Credit 
elegantly joins private market discipline with public purpose and for 
the most part strikes the proper balance between flexibility and 
appropriate statutory requirements to help achieve a critical social 
objective.
Worsening Affordable Housing Needs
    It is worthwhile to examine even the most successful public policy 
from time to time to determine whether market conditions, social needs 
and on the ground experience suggest modifications may be in order. The 
Housing Credit statute has not been significantly amended since 2000, 
when Congress made several important improvements while substantially 
expanding the program. The time has come to expand the credit again in 
the context of additional enhancements to further strengthen its 
ability meet pressing housing needs, for three central reasons.
    First, affordability problems for low-income renters are worsening. 
The number of households paying more than half their incomes for rent 
increased by more than two million to a record 15.8 million between 
2001 and 2004. Nearly two-thirds of this increase in severe cost burden 
was borne by households in the bottom income quartile, earning less 
than $22,540.\1\ We are now seeing large investment funds purchasing 
affordable housing, and investing in it, but raising rents beyond the 
reach of low-income families.
---------------------------------------------------------------------------
    \1\ Joint Center for Housing Studies of Harvard University, The 
State of the Nation's Housing 2006, (Cambridge, MA: Joint Center for 
Housing Studies of Harvard University), p. 25.
---------------------------------------------------------------------------
    Second, the supply of affordable apartments available to these 
households is shrinking. More than one million units affordable to the 
very poor were lost between 1993 and 2003. According to the Harvard 
University Joint Center for Housing Studies, ``the shortage of rentals 
available and affordable to low-income households was a dismal 5.4 
million.'' \2\ At the same time, construction costs have increased 
dramatically, raising the cost per unit built. Thus the credit itself 
is producing fewer units each year.
---------------------------------------------------------------------------
    \2\ Ibid, p.24.
---------------------------------------------------------------------------
    Third, rising energy and transportation costs are exacerbating the 
effects of housing challenges and are linked to detrimental health and 
environmental impacts. A recent national study documented the brutal 
choices that poor families make when faced with unaffordable home 
energy bills. The study found that during the prior 5 years, due to 
their energy bills: 57 percent of non-elderly owners and 36 percent of 
non-elderly renters went without medical or dental care; 25 percent 
made a partial payment or missed a whole rent or mortgage payment; and 
20 percent went without food for at least one day.\3\
---------------------------------------------------------------------------
    \3\ National Energy Assistance Directors' Association, 2005 
National Energy Assistance Survey, (Washington, DC: National Energy 
Assistance Directors' Association, 2005), pp. i-iv.
---------------------------------------------------------------------------
    In addition, energy costs have increased much faster than incomes 
for low-income households in recent years. Today a family earning 
minimum wage pays more than four times as much a share of their income 
for energy as a median income household.
    Transportation costs consume a large share of low-income family 
budgets as well. A study of 28 metropolitan areas found that families 
with incomes between $20,000 and $50,000 spend an average of 29 percent 
of their income on transportation and an average of 28 percent on 
housing.\4\
---------------------------------------------------------------------------
    \4\ Barbara J. Lipman, A Heavy Load: The Combined Transportation 
Burden of Working Families, (Washington, DC: National Housing 
Conference Center for Housing Policy, 2006) p.1.
---------------------------------------------------------------------------
    These sobering statistics and the severe human and community needs 
they reflect call for another expansion of the Housing Credit. Congress 
should act immediately to increase the program by at least 50 percent, 
with a priority for states and cities with the most acute housing 
supply shortages and the most innovative strategies for addressing them 
holistically and sustainably.
    Even an expanded and improved Housing Credit cannot be expected to 
solve our country's affordable housing crisis on its own, however, 
especially with the huge projected increase in population--100 million 
over the next generation. We need much greater investment in rental 
housing assistance and other production programs and a more holistic 
housing policy that supports smarter land use, more sustainable 
development, greater transit access and healthier, higher performing 
buildings.
    In fact, housing, transportation and environmental policy should be 
integrated and funded to a much greater extent at all levels of 
government. Smarter land use policies are part of the answer to global 
climate change, as well challenges faced by low-income people and 
communities. (For the Subcommittee's reference I have attached a list 
of policy recommendations in the area of transportation and affordable 
housing.)
    Several improvements to the Housing Credit would make it a more 
effective resource in the context of broader policy changes.
Recommendations for Improving the Housing Credit
    Enable the Credit to better serve especially vulnerable 
populations. The Housing Credit has proven to be an effective resource 
for creating affordable homes for extremely low-income families and 
people with special needs, such as the frail elderly, the homeless and 
individuals with HIV/AIDS, in part because the program generally works 
well with some other funding sources that help those members of our 
society pay their rent and enables building owners to keep properties 
in good shape. Internal Revenue Service rules are unnecessarily 
constraining the Housing Credit from achieving this purpose even more 
effectively. Some background is important to provide.
    Section 42(d)(5)(A) of the Internal Revenue Code provides that the 
amount of Housing Credits awarded to a building is reduced to the 
extent of any grant of Federal funds made with respect to the building 
or operation thereof. Citing legislative history that ``Congress did 
not intend to treat Federal rental assistance payments as grants'' the 
Treasury Department issued regulations in 1997 [Treasury Regulations 
Sec. 1.42-16(b)] excluding from the definition of Federal grant certain 
rental assistance payments made to a building owner on behalf of a 
tenant.
    Payments are excluded therefore if made pursuant to: (1) Section 8 
of the United States Housing Act 1937 (``the Act''); (2) A qualifying 
program of rental assistance administered under Section 9 of the Act; 
or (3) A program or method of rental assistance as the Secretary may 
designate by publication in the Federal Register or in the Internal 
Revenue Bulletin.
    Following up on that regulation, the Service has subsequently 
issued guidance excluding three other rental assistance programs from 
the definition of Federal grant, including: payments made to building 
owners under the Section 8 Assistance for the Single Room Occupancy 
Dwelling Program; the Shelter Plus Care Program; rental assistance 
payments under the Housing Opportunities for Persons with AIDS Program; 
and rental assistance payments under the Section 236 program and under 
Section 101 of the National Housing Act.
    Those rulings were based on specific requests by affected 
organizations. Meanwhile, a number of other federal housing programs 
providing rental assistance under substantially identical rules have 
not received clearance from the IRS, and there is some confusion 
whether they could be considered a Federal grant.
    In addition, there are other programs that provide operating 
assistance to enable Housing Credit properties to rent units to the 
lowest income tenants at rates they can afford. These operating 
subsidies are economically equivalent to rental assistance payments and 
should be treated the same for purposes of determining whether they are 
Federal grants under Section 42(d)(5)(A). The purpose of the Federal 
grant rule is to prevent credits from being awarded on construction 
costs that are not paid by the owner of the property, but that are 
instead covered by a Federal grant. While that rule should not be 
changed, it should not apply to operating subsidies that are designed 
to make the property affordable to the lowest income tenants.
    Congress should modify Section 42(d)(5)(A) to specifically provide 
that the following subsidies are not considered to be Federal grants: 
rental assistance payments, operating subsidies, interest subsidies and 
other ongoing payments to a housing property designed to reduce cash 
flow needs from rent to enable the property to be rented to the lowest 
income tenants. This seemingly ``technical'' change would dramatically 
improve the Housing Credit's effectiveness in assisting families and 
individuals who are homeless, elderly, disabled, occupy older assisted 
housing where continued affordability is threatened or reside in Native 
American communities
    Enhance the Housing Credit's capacity to help create community 
space. Under the statute Housing Credits are provided for the cost of 
those units of a property that are rented to qualifying low-income 
tenants. Housing credits can also be claimed for the cost of common 
areas used by residents in the property, such as hallways and lobbies. 
In addition, under current law [Section 42(d)(5)(A)] Housing Credits 
can cover the cost of a limited amount of space known as ``community 
service facilities.'' This is space that can be used for such purposes 
as child care, Meals-on-Wheels, elderly care programs and other similar 
activities.
    The law limits community service facilities to 10 percent of the 
eligible basis of the property. In addition it requires that the space 
be designed primarily to serve individuals who otherwise meet the 
income requirements for living in the property, even if they are not 
residents of the property.
    The community service facility rule deals with a serious problem in 
many low-income communities: the lack of public space for activities 
that serve the community such as programs for the children and the 
elderly. The 10 percent limitation in current law is unduly restrictive 
and prevents the construction of sufficient space in many smaller 
Housing Credit properties.
    To solve this problem, Congress should increase the space 
limitation in Section [42(d)(4)(C)(ii)] from 10 percent of eligible 
basis to 20 percent of eligible basis on the first $5 million of 
eligible basis, and 10 percent on the basis above $5 million.
    Encourage energy efficiency and transit access through the Housing 
Credit. Current law allows a 30 percent higher credit amount (``basis 
boost'') for developments located in areas where at least half the 
households have incomes below 60 percent of area median income; where 
construction, land and utility costs are high relative to average 
incomes; or where the poverty rate is 25 percent or greater [Section 
42(d)(5)C)]. This policy recognizes that certain kinds of Housing 
Credit developments need additional funding to be feasible. (In fact, 
the House Credit must typically be supplemented by state and city 
subsidies to work in most parts of some large urban areas such as New 
York City.)
    More affordable housing developers are recognizing that 
construction and rehabilitation practices that create healthier, more 
energy efficient developments and implement site planning that enhances 
access to transit can deliver significant economic benefits to 
properties as well as residents.
    Achieving meaningful levels of energy efficiency or securing sites 
near transit can result in higher development costs. These costs are 
typically paid back from energy savings and result in better outcomes 
for tenants. However many affordable developers are unable to incur 
even marginally higher costs to realize these benefits, due to the 
scarcity of funds for affordable housing overall. Congress should allow 
a 30 percent basis boost and the necessary volume cap to pay for it for 
Housing Credit developments that incorporate cost-effective, 
comprehensive criteria resulting in healthier, higher performing and 
more environmentally sustainable developments.
    A proven and workable reference standard Congress could use are the 
Green Communities Criteria. The Criteria are the only national standard 
for healthy, efficient, environmentally friendly affordable homes. The 
Criteria were specifically designed to maximize the health, economic 
and environmental benefits of sustainable development for low-income 
people on a cost-effective basis for developers.
    The Criteria were developed by Enterprise, the Natural Resources 
Defense Council, the American Institute of Architects, the American 
Planning Association, the National Center for Healthy Housing, 
Southface, Global Green USA, the Center for Maximum Potential Building 
Solutions and experts associated with the U.S. Green Building Council.
    There are more than 180 Green Communities developments with more 
than 8,000 affordable units in various stages of development in 23 
states. These include new construction, rehab and preservation 
developments; urban, small town and rural developments; and 
developments serving families, the elderly and people with special 
needs. Enterprise's initial assessment indicates that total development 
costs can be 2 percent to 4 percent higher on average for projects that 
meet Green Communities Criteria compared to projects that do not 
deliver the same health, economic and environmental benefits.
    The Green Communities Criteria are also the basis for policymakers 
at all levels of government committed to more environmentally 
responsible housing and community development policies for low-income 
people. More than 20 states and cities have used the criteria to ensure 
their housing programs support healthier, more energy efficient and 
more environmentally responsible development.
    By the way, similar criteria could be applied to Multifamily 
Housing Bonds, which are often used in combination with Housing 
Credits. More broadly, Congress should consider ways to increase energy 
efficiency in all facilities financed by Private Activity Bonds, such 
as ensuring projects meet the efficiency standard of the Federal Energy 
Star program and providing additional authority for projects that 
exceed a minimum standard.
    There are a number of other worthy proposals for strengthening the 
Housing Credit that others have put forward. My suggestions are not 
intended to be exhaustive, but rather to reflect recommendations 
particularly designed to strengthen the Housing Credit's ability to 
meet the needs of some of our society's most vulnerable members and do 
so in ways that create healthier and more environmentally sustainable 
homes and communities
A New Proposal to Increase Energy Efficiency in Affordable Housing
    My testimony concludes with a recommendation developed by 
Enterprise. While a new proposal, it is in the sprit of this hearing to 
improve tax policy to support affordable housing. The proposal would 
complement the Housing Credit and fill a gap in the housing finance 
system, and the Tax Code, while encouraging greater energy efficiency 
on a cost-effective basis.
    Increasing energy efficiency in affordable multifamily housing 
delivers several important benefits. These include lower utility costs 
for low-income residents, more stable operating reserves for building 
maintenance, better building performance and reduced carbon emissions.
    Significant improvements in energy efficiency are achievable for 
only slightly higher costs than would be the case for projects that do 
not deliver these benefits. Based on Enterprise's experience through a 
portfolio of more than 180 energy efficient affordable developments 
around the country, Enterprise estimates these costs to be between 
$2,000 and $3,000 per unit, on average, with some variability by 
location, project type, developer capacity and other factors.
    As discussed, current affordable housing subsidies do not provide 
sufficient resources to cover the incremental costs of achieving high 
levels of energy efficiency in affordable multifamily developments. 
Current tax incentives for energy efficient buildings generally are not 
applicable or appropriate for affordable housing developments. In other 
words, while the Tax Code encourages energy efficiency in most other 
major building types, it offers no such incentive for affordable rental 
housing developments.
    The solution is a one-year federal income tax credit to owners of 
affordable rental properties for eligible costs to achieve a 
significant reduction in energy in the building. The standard would be 
the American Society of Heating, Refrigeration and Air Conditioning 
(ASHRAE) Standard 90.1-2004 plus 20 percent or its equivalent. This is 
the standard for the Federal Energy Star for multifamily buildings 
program currently under development by the Environmental Protection 
Agency and Department of Energy.
    To tie public subsidy directly to public benefit and to limit the 
cost to the Federal Government, the tax credit would provide only 
enough subsidy to cover the incremental costs associated with energy 
efficiency improvements that would not otherwise be feasible, i.e., 
only up to an additional $3,000 per unit in costs.
    Taxpayers would claim the credit the year the building was placed 
in service and its energy performance verified through a similar 
process for claiming the current law energy efficient home credit 
(Section 45L). The credit would not be allocated but could be subject 
to an overall annual cap on authority. The credit would not reduce 
eligible basis for the purpose of claiming Housing Credits or other 
available Federal tax benefits. Additional aspects of the proposals 
would ensure it could also support non-Housing Credit developments
    I suspect that this proposal would have a very small revenue 
impact, yet generate significant benefits for low-income residents and 
operators of affordable rental housing. Enterprise and I would look 
forward to working with Members of the Subcommittee and full Committee 
to further refine and enact this proposal.

                                 

    *Chairman NEAL. Thank you, Mr. Rose.
    Mr. Roberts.

   STATEMENT OF BENSON F. ROBERTS, SENIOR VICE PRESIDENT FOR 
   POLICY AND PROGRAM DEVELOPMENT, LOCAL INITIATIVES SUPPORT 
                          CORPORATION

    *Mr. ROBERTS. Thank you, Mr. Chairman and Members of the 
Committee. My name is Benson Roberts. I work for Local 
Initiatives Support Corporation. We are a national, not-for-
profit organization, and have been around for 27 years. Our 
mission has been to help local residents to rebuild 
communities--low-income communities--into sustainable places to 
live, work and do business. Over the course of that period 
we've raised and invested about $8 billion from the private 
sector into these low-income communities.
    We've been involved with the Low-Income Housing Credit 
since its first conception in 1985 and enactment finally in 
1986 and have been an active participant in the program ever 
since. We've raised and invested over $5 billion over those 20 
years in about 80,000 units of affordable housing in about 
1,500 properties all around the country, focusing on community 
revitalization and stabilization as our primary theme.
    We've all learned a lot. We agree with many of the comments 
others have made earlier. This is an outstanding program but it 
is time to review and update it in order to reflect changes in 
local communities, housing priorities and in the investment 
marketplace. I want to focus on just a few themes here.
    One: let's simplify the way the housing credit coordinates 
with other Federal policies. We've heard about this from other 
panelists. These policies include below market loans that are 
used to develop the housing. They include the kinds of 
subsidies Jonathan Rose just mentioned for providing operating 
and rent subsidies to help these properties serve especially 
low-income people or to preserve existing affordable housing. 
And these policies includes tax incentives such as the historic 
credits. We think they're also very important. Right now there 
are penalties in the tax Code for doing all of those things and 
they ought to be removed.
    Second: mixed-income housing. We've heard a little bit 
about that earlier. The Housing Credit does a great job of 
reaching tenants between about 40 and 60 percent of area median 
income. Typically that's between about, oh, $24,000 to $36,000 
for a family of four. But it has a very hard time reaching to 
very, very low-income people, just because of the economics 
that are involved, and moderate income tenants are ineligible 
to generate tax credits. There are at least four specific 
circumstances where we think there's a compelling public 
objective here.
    The first is to revitalize low-income communities so that 
they serve really a mixed income population from the poor to 
moderate-income. Second would be in very high cost markets 
where moderate income tenants have very, very significant 
rental affordability obstacles. Third would be to preserve 
existing, federally assisted stock where some tenants' incomes 
have risen above the tax credit ceiling, and that means that 
you can't get tax credits to renovate those units.
    And fourth is in rural areas. We haven't talked a lot about 
rural today but in many rural areas populations are so sparse 
that you simply can't put a deal together. If you could expand 
the income band that you're trying to reach to serve very poor 
residents as well as some moderate-income residents we could do 
a lot more rural housing than is possible today.
    We'd like to maintain the overall income targeting. The 60 
percent income targeting has been, I think, part of what has 
kept this program focused and strong, but we'd suggest that if 
sponsors are willing to go down and serve especially low-income 
tenants for some units that they also be able to go up 
correspondingly so that the overall balance is maintained.
    Another theme would be community revitalization. Again, we 
very much agree with Jonathan's point about community service 
facilities. There is some provision in current law, but it is 
particularly difficult for smaller projects. Combining child 
care or primary health care resources that are critical to low-
income communities and in very short supply would be very 
helpful.
    Housing preservation is another key area. Here we agree 
that the so-called exit taxes that have to be paid upon a 
transfer of property does impede the preservation of affordable 
housing and we'd like to see that addressed. There is 
legislation to do that.
    There is more detail that others have presented and also in 
our written testimony, but I will stop there and thank you very 
much.
    [The Statement of Mr. Roberts follows:]
 Statement of Benson F. Roberts, Senior Vice President for Policy and 
       Program Development, Local Initiatives Support Corporation
    Good morning, Mr. Chairman and Members of the Subcommittee. My name 
is Benson Roberts. I am Senior Vice President for Policy and Program 
Development at LISC, the Local Initiatives Support Corporation.
    Since 1980, LISC's charitable mission has been to revitalize low-
income urban and rural communities, principally by mobilizing private 
capital for and providing expertise to local community developers. We 
have invested $7.8 billion--including $1 billion last year alone--in 
215,000 affordable homes, 30 million square feet of economic 
development space, 80 schools educating 28,000 children, 130 child care 
centers serving 12,300 children, and 155 playing fields for 150,000 
youth. We have seen that low-income communities can be good places to 
live, raise families, and do business, and that community leaders can 
drive a revitalization process in partnership with the private sector 
and government. Former Treasury Secretary Robert Rubin chairs our board 
of directors.
    For 20 years, the Low Income Housing Tax Credit has been central to 
LISC's work. Our affiliate, the National Equity Fund, has raised and 
invested $5.5 billion in 1,500 properties with 80,000 quality 
affordable homes in 43 states. We have been part of a broad partnership 
that has helped the Housing Credit grow from a novel idea into the most 
successful Federal policy for producing affordable rental housing the 
U.S. has ever had. The Housing Credit has proven to be:

      Productive: It has created nearly 2 million homes, 
including about 130,000 annually, for low-income families at restricted 
rents for terms of at least 30 years. This production would not have 
occurred but for the Housing Credit.
      Locally responsive: It works for new construction, 
rehabilitation, and preservation of affordable housing. It works in 
cities, suburbs, and rural areas. It revitalizes low-income 
communities. It serves families, the elderly, the disabled, and the 
homeless. Each state sets its own housing priorities, and developers 
compete aggressively to meet these priorities.
      Collaborative: It creates partnerships among nonprofit 
and for-profit developers, private investors and lenders, and all 
levels of government.
      Cost efficient: It delivers about 90 cents at the start 
of a project for a stream of tax credits totaling one dollar over 10 
years. Investors accept aftertax rates of return just above 5%, 
remarkably low for an equity investment in a form of real estate once 
seen as too risky without guaranteed rents and mortgages.
      Market disciplined: Investors receive their tax credits 
only if housing is built on time and on budget, operates successfully 
within local housing markets, and is well maintained over time. The 
annual foreclosure (failure) rate for Housing Credit properties is 
0.02% annually, well below that for other housing or commercial real 
estate.\1\
---------------------------------------------------------------------------
    \1\ Ernst & Young. Understanding the Dynamics III: Housing Tax 
Credit Investment Performance, Boston, MA: Ernst & Young, December 
2005, page 3.
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      Adaptive: The way Housing Credits work continues to 
evolve, primarily to meet local needs and find more efficient ways to 
attract and manage investment capital.
    As successful as the Housing Credit has been, it could benefit 
significantly from updating. When the Housing Credit was enacted in 
1986, no one could know precisely how it would work. Many provisions 
written two decades ago have been essential to making the Housing 
Credit effective, while others have proven unnecessary and some have 
become obstacles to efficiency and flexibility. Markets and local needs 
have changed substantially. For example, before 1986 individuals had 
been the predominant investors in low-income housing; now corporations 
provide virtually all of the investment, and fewer than 20 provide most 
of it. Similarly, as housing costs have risen, many states and 
communities are focusing more on preserving affordable housing as well 
as developing new housing, and low-income community development 
strategies have become more sophisticated and comprehensive. Finally, 
the Housing Credit has become integral to many other federal housing 
policies and programs.
    Accordingly, we strongly urge Congress to address the following 
objectives.
Eliminate penalties for combining Housing Credits with other federal 
        housing programs.
    We urge Congress to remove various restrictions that make it hard 
to coordinate Housing Credits with other Federal policies and programs. 
These restrictions frustrate efforts to address local needs and add 
unnecessary legal and accounting costs. In some cases these 
restrictions were set many years ago to prevent properties from 
receiving excessive subsidy. However, they are no longer needed because 
states examine each project at three points to ensure that it needs the 
amount of Housing Credits allocated to it. In addition, the high demand 
for Housing Credits and other subsidies motivates all subsidy providers 
to limit subsidies to the minimum amount necessary. Congress has lifted 
restrictions for some specified programs, and that has worked well in 
those cases, but Housing Credit policy has not kept pace with other 
policy developments and emerging local needs.

      Ongoing governmental subsidies (e.g., rent, interest, and 
operating subsidies) should not be treated as grants, and instead 
treated similarly to Section 8 rental assistance. For many years, most 
forms of Section 8 rental assistance have been used to help very low-
income tenants who could not afford even the modest rents of Housing 
Credit properties. Over the years, the IRS has extended this policy to 
accommodate a limited number of similar Federal subsidies, such as 
public housing operating subsidies. However, there are still other 
comparable subsidies that the IRS has not affirmatively approved, 
leaving considerable confusion about their treatment, and interfering 
with the development of many important projects, mostly serving very 
needy populations. This change would facilitate the use of Housing 
Credits with numerous programs, including: homeless and other special 
needs housing under the McKinney-Vento Act and homeless veterans 
programs; preservation of older properties financed under HUD's Section 
236 program and the Section 8 moderate rehabilitation program; HUD's 
Section 202 elderly housing program; and HUD's Section 811 program for 
the disabled.
      Eliminate penalties for below-market Federal loans except 
tax-exempt bonds. Under current law, the available Housing Credit 
amount is reduced for projects receiving below-market Federal loans, a 
policy that complicates many projects and makes others unfeasible. This 
change would allow Housing Credits to be used without penalty in 
conjunction with below-market Federal loans in general, including those 
under the Section 202 elderly housing, Section 811 disabled housing, 
and HOPE VI public housing redevelopment programs, among others, as 
well as any future resources (e.g., under GSE legislation the House is 
considering this week). We are not seeking to permit the use of 9% (70% 
present value) Housing Credits with tax-exempt bonds.
      Permit the ``high cost area'' basis increase on 
properties receiving below-market HOME loans. The HOME program is a 
Federal block grant that states and localities use for the acquisition, 
development and preservation of affordable housing. In general, 
properties in areas where housing is especially hard to develop--
markets where rents are very high relative to incomes and low-income 
communities--can get extra Housing Credits. However, these extra 
credits are not permitted if states and localities use HOME funds to 
make below-market loans. Not surprisingly, it is exactly these kinds of 
hard to serve areas where every possible resource is needed to make 
housing possible.
Encourage mixed-income housing
    We recommend that the Housing Credit be modified to accommodate 
mixed-income housing, at least in certain circumstances. For 20 years 
the Housing Credit has done an excellent job of reaching low-income 
households at 40-60% of the area median, a national average of about 
$24,000--$36,000 for a household of four persons. However, it has been 
difficult to use the Housing Credit to build mixed-income housing: 
reaching very low-income tenants at reasonable rents without deep 
ongoing subsidies is financially all but impossible, and units serving 
moderate-income tenants are ineligible for Housing Credits. 
Nevertheless, many practitioners and policy experts agree that mixed-
income housing is desirable social policy and conducive to the long-
term financial sustainability of the housing.
    More specifically, properties that serve some very low-income 
tenants at very low rents should also be able to serve a like number of 
moderate-income tenants at moderate rents, provided that the average 
income/rent ceiling for all Housing Credit units in a property does not 
exceed 60% of median. Under current law, the 60% standard generally 
applies to each unit rather than a building-wide average.\2\ There are 
several circumstances for which there is a compelling policy 
justification for mixed-income housing:
---------------------------------------------------------------------------
    \2\ In most cases Housing Credit properties serve tenants with 
incomes below 60% of area median. A smaller share of properties 
provides 20-40% of their units for tenants below 50% of area median; a 
comparable provision would apply to these projects.

      In high-rent markets where moderate-income renters face 
significant affordability problems.
      In low-income/high poverty areas as part of a mixed-
income revitalization strategy.
      To preserve and revitalize Federally assisted rental 
housing, including the redevelopment of public housing. In many 
properties, some tenants' incomes have risen above 60% of AMI, and 
Housing Credits are unavailable to that extent.
      For rural areas. The population of many rural areas is 
too sparse for Housing Credit projects to work if the effective market 
is effectively limited to households between 40-60% of median income. 
Expanding the range of eligible incomes would make more rural 
developments financially feasible, especially in isolated areas with 
few other affordable housing opportunities.
    We recommend that the maximum permissible income/rent for any unit 
should be based on 90% of area median. This level would enable another 
unit in the property to serve an extremely low-income household with an 
income below 30% of median. However, project sponsors should otherwise 
have flexibility, e.g., to balance a household below 40% of median 
income with another below 80%.
Foster Low Income Community Revitalization
    The Housing Credit has played a driving role in revitalizing low-
income communities. It has replaced blight with attractive assets, 
provided low-income families a solid foundation for upward mobility, 
helped community leaders take charge of their neighborhoods' future, 
forged multi-sector partnerships, and stabilized shaky neighborhood 
markets. Housing Credit investments frequently lead to other 
investments in home ownership and retail and other economic development 
activities.
    Independent research confirms positive community effects. The most 
sophisticated study examined the effects of 13 Housing Credit projects 
on the quality of nearby neighborhoods in three different cities.\3\ 
Projects produced upward shifts in nearby sales prices of 55 percent in 
Cleveland, 64 percent in Seattle, and 81 percent in Portland compared 
to what they would have sold for otherwise. (Most economists agree that 
property values are highly indicative of neighborhood quality, 
including such factors as crime rates and the physical attractiveness 
of the area.) Indeed, research has shown that nationwide, neighborhoods 
where Housing Credit properties are sited showed greater improvements 
in poverty, income and housing values than did all other metropolitan 
area neighborhoods.\4\ LISC and Enterprise Community Partners have 
commissioned further research from New York University's Furman Center. 
Preliminary findings confirm those of other research and deepen our 
understanding of how Housing Credit projects create value. For example, 
developing larger projects up to a point produces correspondingly 
larger benefits. This is true mainly for projects involving 
rehabilitation of existing buildings, most likely reflecting the 
blighting influence of buildings in need of rehabilitation.
---------------------------------------------------------------------------
    \3\ Johnson, Jennifer E. and Beata Bednarz. 2002. Housing Price 
Effects of the Low Income Housing Tax Credit Program. Washington DC: 
United States Department of Housing and Urban Development.
    \4\ Freeman, Lance. 2004. Siting Affordable Housing: Location and 
Neighborhood Trends of Low Income Housing Tax Credit Development in the 
nineties. Washington, D.C.: The Brookings Institution, Center on Urban 
and Metropolitan Policy.
---------------------------------------------------------------------------
    To further foster low-income community revitalization, we urge 
Congress to enact the mixed-income proposal discussed above and make 
two other modest changes:

      An important obstacle for families in low-income 
communities is the dearth of facilities for child care, primary health 
care, recreation and other community services that help families to 
grow strong and independent. Under current law, up to 10% of the 
eligible basis of projects in low-income or high poverty census tracts 
can support community service facilities. However, this allowance is 
too limited for smaller projects; for example, a child care center must 
be a certain size to function well. We recommend expanding eligible 
basis for these facilities to 20% of first $5 million (indexed for CPI) 
and 10% thereafter.
      Incomes in rural areas are generally lower than in 
metropolitan areas, and in very low-income rural areas it is 
financially very difficult to make Housing Credit development work. To 
facilitate rural housing, we recommend basing rural rent/income 
ceilings on greater of: (1) current law or (2) 60% of national non-
metro median. Since the national non-metro median income is 
significantly below the metro median, genuinely low-income households 
would still be served.
Preserve Affordable Housing
    Tighter housing markets and rising housing costs have prompted many 
governmental and community leaders to prioritize the preservation of 
existing affordable housing. Housing preservation is often faster, less 
costly, and more scaleable than constructing new housing, though each 
strategy is appropriate in different circumstances. In addition to the 
mixed-income housing proposal discussed earlier, we recommend three 
other changes.

      A modest number of older Housing Credit properties 
developed 15-20 years ago are starting to need additional capital 
improvements. Additional capital can be raised by transferring the 
property to new ownership. However, current law requires replacing at 
least 90% of the ownership for the cost of acquiring a building to 
qualify for new Housing Credits. This transfer requirement is far more 
stringent than the general related-party rules elsewhere in the Tax 
Code [Sections 267(b) and 707(b)], which generally require replacing 
only 50% of the ownership. The more stringent requirement is 
unnecessary, since states already allocate credits to only the highest 
priority projects and ensure that projects receive only the credits 
they need. Nor is it workable. Fewer than 20 corporate investors 
provide most Housing Credit investments, and most of these are banks 
that target only the communities where they have branch networks. The 
Section 42 requirement should be conformed to the Tax Code's general 
50% related-party rule.
      In general, the cost of acquiring a building is 
ineligible for Housing Credits if the building changed owners within 
the previous 10 years. This rule made sense when the Housing Credit was 
enacted in 1986, following a surge of real estate sales in the early 
19eighties to take advantage of accelerated depreciation rules. These 
rules served little public purpose. However, since accelerated 
depreciation is no longer available, it makes no sense today, 
especially since preserving affordable housing has become so important 
and state administrative rules provide safeguards against abuse.
      Acquiring housing developed through HUD and USDA programs 
in the sixties through early eighties and preserving affordability is 
difficult in part because some current investors must pay depreciation 
recapture (``exit taxes''). Investors/sellers can avoid exit taxes by 
holding their ownership until death, when basis is stepped up as 
ownership is passed to their estates. However, properties in weak 
housing markets often deteriorate in the meantime, and properties in 
stronger markets are often converted to rents unaffordable to low- and 
moderate-income families. We urge Congress to enact H.R. 1491, the 
Affordable Housing Preservation Tax Relief Act of 2007, which would 
provide exit tax relief for housing that will remain affordable for an 
additional 30 years. This would facilitate the use of Housing Credits 
to preserve the affordability of Federally assisted housing. Relief for 
properties that have previously received Housing Credits is 
unnecessary.
Eliminate Unneeded Inefficiencies
    Several requirements serve little public purpose but impose 
unnecessary rigidities or administrative burdens. We recommend that 
Congress make several changes to address these issues.

      A technical but important data problem is freezing rents 
in many Housing Credit properties, threatening their financial 
stability. Each year, HUD adjusts maximum incomes and rents as area 
incomes change, usually upward. HUD's source of data was recently 
changed from the old census ``long form'', which no longer exists, to 
the American Community Survey. The new income levels across the country 
are lower than previously reported. Under HUD's ``hold-harmless'' 
policy, maximum incomes and rents were not reduced, but they were 
frozen, and in many areas it will be several years before rents will 
increase. Meanwhile, operating costs continue to rise, and energy and 
insurance costs rising steeply. The result will be to destabilize 
current properties and to create great uncertainty for future 
developments. We are working with other organizations to recommend a 
technical modification to the Housing Credit that will address this 
problem and serve low-income tenants.
      In general the income of each tenant in Housing Credit 
properties must be recertified annually. In Housing Credit properties 
where all units are income- and rent-restricted, this requirement 
serves no purpose, since tenants are not evicted if their incomes rise, 
rents cannot be increased, and all vacated units are reserved for low-
income tenants. The IRS does accommodate a waiver process, but not all 
states participate. The result is that many project sponsors annually 
recertify all tenant incomes at substantial cost and for no real 
purpose. This requirement should be eliminated for such Housing Credit 
properties.
      We strongly support repeal of the recapture bond rule 
under the Housing Credit. It requires investors selling an interest in 
a Housing Credit property to purchase a guarantee bond from an 
insurance company to cover recapture liability in the event of 
noncompliance. This is a unique rule; no other part of the Tax Code 
requires taxpayers to post a recapture bond. It is particularly 
unnecessary in this program where a limited number of large financial 
companies account for almost all investor capital; there is no risk 
they will not pay a potential tax liability. Indeed, for the most part 
smaller, lower rated insurance companies are being paid to insure a 
potential tax liability of larger, higher rated Housing Credit 
investors. However, the bonds are costly; they make the secondary 
market less liquid; and they increase investor yields at the expense of 
program efficiency.
      Currently, 10% of expected project costs must be incurred 
within 6 months after receiving a Housing Credit allocation (or by the 
end of the calendar year if later). The current provision requires the 
expenditure of substantial legal and accounting costs, and does not 
achieve the desired policy result. We do support the purpose of this 
provision, which is to encourage projects to move forward 
expeditiously. However, we believe it would be more effective if 
Congress provided broader direction that states should ensure that 
projects are ready to proceed. It is also notable that other provisions 
require projects to be completed by the end of the second year after 
Housing Credits are allocated.
      That Housing Credits are subject to the Alternative 
Minimum Tax restricts the investor market, adds risks to those who do 
invest, and as a result reduces the efficiency of this tax incentive. 
We recommend that the AMT not apply to corporate investments in Housing 
Credits, historic rehabilitation tax credits (which are often combined 
with Housing Credits), and New Markets Tax Credits.
      Currently the maximum Housing Credit amount is set based 
on prevailing interest rates so that its present value is 70% of 
eligible basis (30% for building acquisition costs and properties 
financed with certain below-market Federal loans). The actual Housing 
Credit amount will fluctuate with interest rates, making it hard for 
sponsors and other participants to plan developments reliably. We 
recommend that the Housing Credit percentages be set at the greater of 
current law or 9%/4% annually. Under most conditions, the 9%/4% rates 
would apply, but if interest rates were to rise substantially, the 
current rule would allow a somewhat larger tax credit.
Expand the Volume of Housing Credits
    Although our testimony has focused on provisions that would require 
little or no cost, we would also urge the Committee to consider 
expanding the volume of Housing Credits. The need for affordable 
housing is far greater than the Housing Credit and other programs 
currently can address. The Housing Credit is already a proven success, 
and is well positioned for expansion.
Conclusion
    This concludes my testimony. I would be happy to answer any 
questions.

                                 

    *Chairman NEAL. Thank you very much, Mr. Roberts.
    Mr. Lawson.

   STATEMENT OF STEVE LAWSON, THE LAWSON COMPANIES, NATIONAL 
                  ASSOCIATION OF HOME BUILDERS

    *Mr. LAWSON. Good morning, Chairman Neal, Ranking Member 
English and Members of the Subcommittee. My name is Steve 
Lawson and I'm a third generation builder and president of the 
Lawson Companies in Virginia Beach, Virginia.
    For 35 years, our company has been active in the financing, 
development and management of single and multi-family housing, 
serving both affordable and market rate residents. It's my 
pleasure to be here today on behalf of the 235,000 members of 
the National Association of Home Builders.
    NAHB applauds the Committee's effort to enhance the 
efficiency and effectiveness of the housing tax incentives. In 
an era of limited resources, increasing development and 
operational costs and a constant need for more affordable 
housing, maximizing the value of our existing tools is 
absolutely critical.
    My written Statement contains a number of recommendations 
for fine tuning the Low-Income Housing Tax Credit, the private 
activity bonds and the historic rehab credit. It's worth noting 
that many of these recommendations are shared by several other 
organizations who are testifying here this morning.
    I won't bore you by repeating those, but I think it is 
important to point out that this speaks very highly of the 
consensus in the industry about the specific ways to improve 
the affordable housing tax incentives.
    In my brief time today I'll focus on one specific issue 
that affects Low-Income Housing Tax Credit properties. Namely, 
that is stagnant rents. This critical issue is one part of a 
significant challenge facing all tax credit properties today. 
That is balancing operating expenses versus revenue in order to 
maintain the long-term viability of a property.
    Tax credit properties are facing stagnant rents because the 
changes in the system and the data used by HUD to establish 
income limits and thus rents for these properties. Most notably 
a shift to the American community survey data from the previous 
census data has resulted in a downward adjustment in income 
limits and rents in most areas of the country.
    To HUD's credit, the Department established a very 
necessary hold harmless policy and did not reduce income limits 
or rents but instead froze them to blunt the impact of this 
trend. The strategy worked well in the context of smoothing 
over a temporary anomalous downturn in income data, but it 
cannot counter the effects of a systemic shift to the ACS data 
or other data changes.
    In 2007, HUD's estimates show median family incomes 
actually declined in more than 75 percent of the country. This 
means more than two-thirds of the nation will be held harmless 
and see no increase in rents over the coming year. This follows 
several years where rents have already been frozen in many 
places.
    Even worse, hundreds more localities will see no increases 
moving forward for several years because of the magnitude of 
these changes. Curiously, and I dare say tragically, while 
HUD's estimates show a widespread decline in incomes, the most 
recent ACS data, which is the data that all of this is based 
upon, actually shows the average median family income 
nationwide has increased by four percent.
    In the context of trying to establish rents for tax credit 
properties, I believe this constitutes a complete disconnect 
between the statistical methodology and the real world. Even 
more, I think it begs the question whether income limits are 
the best way to establish annual rent increases for this 
program.
    Compounding stagnant rents is a significantly increasing 
environment of operating costs. Utilities, insurance, real 
estate taxes, all of our costs are going up precipitously. 
Taken together, these issues create an ever widening gap 
between operating revenue and expenses. A tax credit property 
with such a critical gap could eventually be unable to meet its 
debt service obligations and default on its mortgage.
    In the long-term, because of this fundamental weakness in 
the program, tax credit prices could fall, less equity would be 
available for each project and less affordable housing would be 
built.
    Currently there's no good option for owners or property 
managers to address this situation. In order to cover the cash 
flow shortfall when expenses exceed revenues, properties must 
rob Peter to pay Paul by deferring needed maintenance or 
borrowing from capital reserves. This is not sustainable over 
the long-term and places properties at even greater risk 
because the maintenance and replacement costs become even 
greater as the property ages.
    To address the rent side of the equation, NAHB has proposed 
indexing tax credits to a reasonable inflation factor such as 
the consumer price index after the initial rents had been set 
according to the income limits of the program. We believe this 
keeps rent increases at a modest level, ensures a stable 
increase in revenues over time and maintains the income 
targeting that is central to the program.
    Whatever solution we do adopt here, something must be done 
to preserve the existing units and maintain production of new 
units. NAHB has crafted more detailed explanation of these 
issues, and we respectfully ask that these documents be 
included in the record. Thank you again for testifying, for 
allowing us to testify today. NAHB and its members look forward 
to working with the Committee and the rest of the industry and 
finding a solution.
    [The Statement of Mr. Lawson follows:]
   Statement of Steve Lawson, The Lawson Companies, on behalf of the 
    National Association of Home Builders, Virginia Beach, Virginia
    The 235,000 members of the National Association of Home Builders 
(NAHB) appreciate the opportunity to comment for the House Ways and 
Means Committee, Subcommittee on Select Revenue Measures, regarding tax 
incentives for low-income housing. This statement contains 
recommendations for improvements in several programs of the Internal 
Revenue Code (IRC) for low-income and historic housing, including the 
Low Income Housing Tax Credit (LIHTC), private activity bonds and the 
Section 47 historic rehabilitation credit. The primary focus of this 
statement, however, is on the LIHTC.
    In the last 20 years, the LIHTC has facilitated the construction or 
preservation of nearly 1.4 million affordable housing units for 
individuals and families making less than 60 percent of area median 
income (AMI) and, oftentimes, much lower than that. It has evolved into 
the foremost tool for the production and rehabilitation of affordable 
housing. For-profit developers and builders have been and continue to 
be integral partners in that effort. However, the need for affordable 
housing greatly outpaces even this significant level of production and 
the existing supply of units. NAHB looks forward to working with the 
Members of the Committee as they craft legislation to maximize the 
efficiency and effectiveness of the LIHTC and other tax incentives for 
affordable housing to help meet this need.
    NAHB's statement is organized into five parts. The first section 
discusses two critical issues in the LIHTC program that need resolution 
to ensure the continued vitality and success of the program. The second 
section proposes several technical improvements to the LIHTC to make it 
more efficient and effective while minimizing the economic impact on 
the federal budget.
    The third section of this statement sets forth recommendations for 
reducing barriers to using the LIHTC with the U.S. Department of 
Housing and Urban Development's (HUD) Federal Housing Administration 
(FHA) multifamily mortgage insurance. NAHB strongly supports the FHA 
multifamily mortgage insurance programs and believes that these two 
important housing production programs should work together as 
efficiently as possible. The fourth section recommends ways to improve 
coordination between the LIHTC and other HUD programs. The fifth and 
final section makes recommendations in regards to the historic 
rehabilitation credit and private activity bond programs.
I. Critical Issues in the LIHTC Program
    As legislation is crafted to improve the efficiency and 
effectiveness of the LIHTC NAHB urges Congress to address two critical 
issues that, unless resolved, will undermine the long-term success of 
the program. The first issue deals with the financial viability of 
existing and new LIHTC properties that are in jeopardy because of 
recent changes in the data used to establish their rents. These rents 
are being artificially frozen--and have been in many areas for several 
years--while operating expenses like utilities and insurance are rising 
precipitously. The second issue is inexorably tied to the first and 
deals with utility allowances for LIHTC units that must be deducted 
from gross rent to establish the amount of rent chargeable to the 
tenant. Taken together, these two issues present an unsustainable long-
term financial scenario for the LIHTC program.
Income Limits and Rents\1\
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    \1\ NAHB recently published a detailed analysis of this issue 
entitled; New Income Estimates Freeze Tax Credit Rents in Hundreds of 
Areas in the April 2007 edition of the NAHB Multifamily Market Outlook. 
While the article was too lengthy to include as part of this statement, 
we can provide it along with property-specific examples of the issue to 
any interested Members of the Committee.
---------------------------------------------------------------------------
    Each year, HUD estimates median family income for metropolitan and 
non-metropolitan areas of the country and publishes a list of ``income 
limits'' based on these estimates. These income limits determine 
eligibility and allowable rents for the LIHTC program, in addition to 
other Federal housing programs. The system and underlying data sources 
that HUD uses to establish income limits, however, have changed, most 
notably by shifting to data from the American Community Survey (ACS), 
which has replaced previous census reports. As a result of this data 
source change, in most areas, incomes and rents were adjusted down. 
Under its ``hold-harmless'' policy, HUD did not reduce LIHTC income and 
rent ceilings, but instead froze them. In 2007, two-thirds of the 
nation will be ``held harmless'' and see no increase in income limits 
or LIHTC rents. Hundreds more will see no increases going forward for 
several years.
    NAHB stresses its commitment to serving low-income households, with 
reasonable rent adjustments over time. The concern here arises solely 
from the unintended impact of data changes. Indeed, data from the ACS 
indicate that incomes have actually risen in a notable number of these 
areas, but under HUD's ``hold harmless'' policy it will take several 
years or more in some areas before these increases will result in 
higher LIHTC rents\2\ The ``hold harmless'' policy was designed to 
smooth over a temporary, anomalous downturn in income data, and it has 
worked well in that context. However, it cannot accommodate the effects 
of a systemic shift to the ACS or other data methodology changes. The 
spike in the number of areas with flat income limits in 2007 follows 
several years during which the limits had already been frozen in many 
places. Thus, tax credit properties have seen little or no increase in 
rent for the past 5 years in some areas.
---------------------------------------------------------------------------
    \2\ NAHB estimates that over 300 counties across the country will 
have frozen income limits and LIHTC rents for 3 years or more. Over 100 
will be frozen for 4 years or more.
---------------------------------------------------------------------------
    Flat rents for LIHTC properties mean rent reductions in real terms, 
given even ordinary inflationary increases in expenses. This creates an 
ever-widening gap over the long-term, which is unsustainable, despite 
efforts by developers, owners, managers, syndicators, state and local 
housing finance agencies, and investors to fill the gap. Ultimately, it 
could lead to a loss of existing LIHTC properties and significant 
negative impacts on financing for future affordable housing 
development.
    An LIHTC property with a critical gap in revenue versus expenses 
could eventually fail to meet its debt service requirements and default 
on its loan, at which point foreclosure occurs and the tenants lose 
their housing. In the long-term, because of this fundamental weakness 
in the program, investors will demand higher yields for their tax 
credit dollars. Consequently, credit prices go down, less equity will 
be available for each LIHTC project, and less affordable housing will 
be constructed. This will be especially hard on projects serving the 
elderly, those with special needs and very low income populations, 
because these properties typically operate on extremely thin margins of 
expense versus revenue. In the case of future projects serving these 
populations, many will not meet the underwriting criteria required by 
lenders and, therefore, will not be built.
    There are no simple solutions to this problem. It is critical to 
protect the low-income tenants the LIHTC program serves while ensuring 
the long life of the nation's supply of affordable housing units. As 
noted above, properties can currently go for years without any increase 
in their rents, but because of the erratic nature of the current data 
and system used to establish these rents, tenants can also be faced 
with higher-than-usual increases in rent in a single year. What both 
the properties and their residents need is a level of reasonable and 
modest predictability in what the increase in rent will be from year-
to-year.
    Indexing LIHTC rents to a reasonable inflation factor such as the 
Consumer Price Index (CPI) would create more consistency for owners and 
tenants. In practical application, a developer would set rents 
according to the income restrictions for the project at underwriting 
and each year following those rents would increase by the change in 
CPI.\3\ This maintains the income-targeted nature of the program while 
allowing for a modest increase in revenue over time to operate the 
property. Most importantly it would provide a much more reasonable and 
predictable growth in rent over time for residents and property owners.
---------------------------------------------------------------------------
    \3\ CPI was 3.2% for 2006.
---------------------------------------------------------------------------
    Certainly, the effect of this type of proposal would be a built-in 
rent increase every year for the resident; however, increasing by the 
change in CPI annually is certainly more reasonable than potentially 
larger increases that could occur under the existing system. 
Ultimately, a reasonable annual increase in rent for residents annually 
has to be considered against the outright loss of affordable housing 
units in the immediate term and decreased production of new affordable 
housing in the long-term.
Utility Allowances
    The second critical issue faced by LIHTC owners, which is occurring 
at the same time that income limits have been stagnant, is that 
operating costs--especially utility expenses--have continued to 
escalate. Property owners are required to calculate a utility allowance 
annually and subtract that from gross rent to arrive at the net rent 
that is charged to the tenant. As utility costs rise, upward pressure 
is placed on the utility allowance, thus reducing net rent and overall 
revenue to operate the property.
    Operating costs, particularly utilities, are never completely 
predictable, but in general, owners feel secure assuming a reasonable 
increase in costs over time. While underwriting assumptions vary, a two 
to 3 percent increase in operating expenses per year is fairly typical. 
In polling NAHB members that build and own LIHTC properties around the 
country, utility costs have increased significantly more than this.
    While developers always assume some rate of increase in annual 
operating expenses, they also always assume a steady increase in income 
over time--income necessary to keep pace with increasing expenses and 
to maintain the property's positive cash flow position. This has been 
very difficult in recent years as volatile utility costs and stagnant 
income limits severely limit owners' ability to project accurately the 
property's cash flow. When expenses like utility costs overtake income, 
property owners and managers are often forced to cover cost increases 
by deferring other important expenses, such as maintenance or 
replacement for reserves. Eventually, these dollars run out which does 
even more damage to the viability of the project in the long term since 
maintenance and replacement costs only increase as a project gets 
older.
    Allowing state HFAs to convert the utility allowance into a 
percentage of maximum gross rent at the time of underwriting would help 
address this problem. Regardless of the level of future rents, an owner 
could estimate more accurately their cash flow over the life of the 
project, which improves their ability to cover unanticipated spikes in 
operating costs and attract private equity into the project. In the 
example below, the maximum allowable gross rent at the time of 
underwriting for a two-bedroom unit is $500. The LIHTC allocating 
agency sets the utility allowance at 20 percent or $100. Therefore, the 
maximum allowable net rent to the owner is $400.
Year 1 (Underwriting) 2005
    Maximum Allowable Gross Rent
                                    $500
    Documented Utility Allowance
                                    $100
    Max Allowable Net Rent
                                    $400

    In Year 2, the Maximum Allowable Gross Rent increases to $520 and 
the utility allowance increases as well to $104.
Year 2 2006
    Maximum Allowable Gross Rent
                                    $520
    New Utility Allowance
                                    $104
    Max Allowable Net Rent
                                    $416

    In theory, utility expenses could increase by more or less than the 
percentage assumed at underwriting; however, having a relatively 
constant utility allowance is the trade off for any potential 
significant drop in utility costs. Like the proposal offered above for 
stagnant LIHTC rents, we believe this not only serves the property but 
the residents themselves. They will have more predictability in their 
utility expenses and are guaranteed an increased utility allowance if 
their rent increases.
II. Improving the Efficiency and Effectiveness of the LIHTC Program
Conform the LIHTC and Tax-Exempt Bond Next Available Units Rules
    One central inconsistency between the LIHTC and tax-exempt bond 
programs is on the issue of the ``next available unit'' rule. This rule 
requires that once a tenant exceeds 140 percent of AMI, the next 
available unit must be rented to an income-qualified tenant. For the 
LIHTC program this rule is applied on a building-by-building basis, 
while in the tax-exempt bond program it is applied on a project-wide 
basis. Currently, both rules must be followed for properties financed 
with both LIHTCs and tax-exempt bonds, creating an extremely complex 
management process. Applying the more restrictive LIHTC requirement to 
these properties would simplify project compliance.
Reform the Full Time Student Occupancy Rules
    Current law prohibits households made up entirely of full-time 
students from living in LIHTC apartments. Exceptions exist for families 
who are: receiving Temporary Assistance to Needy Families (TANF); 
enrolled in a federal, state or local job training program; single 
parents and their children, provided that such parents and children are 
not claimed as dependents of another individual; or married full time 
students who file a joint return. While well-intentioned, full time 
student occupancy prohibitions are an obstacle for low-income families 
trying to make a better life for themselves.
    Often, child support agreements allow noncustodial parents to claim 
their children as dependents on tax returns. Because children in grades 
K-12 count toward the determination of whether family is a full-time 
student household, many custodial single parents who returned to school 
full-time become ineligible for LIHTC housing. Working adults trying to 
complete the requirements for a high school education have also been 
adversely affected.
    Education enables low-income families to expand their economic 
opportunities and NAHB supports specifying that minor children in 
grades K-12 should not count toward the determination of who is a full 
time student household. NAHB also supports striking the requirement 
that a single parent and their children must not have been claimed as 
dependents of another individual to qualify for the single parent with 
children exemption and exempting working adults who are full-time 
students pursing a high school diploma or GED.
Fix the LIHTC Percentages at 9 and 4 Percent.
    Actual credit percentages for the LIHTC have rarely ever been at 
four or 9 percent and are typically well below those figures (3.47 and 
8.11 percent, respectively for May 2007). Not having the full amount of 
the credit available requires project sponsors to secure more debt or 
scarce soft financing. Fixing the tax credit percentages would increase 
LIHTC resources available for each project, simplify the Tax Code and 
provide certainty for project sponsors.
Remove Federal Subsidy Restrictions
    Currently, LIHTC transactions utilizing grant sources such HOME or 
Federal Home Loan Bank AHP funds must reduce eligible basis unless they 
are structured as loans to the project. However, this process is costly 
and reduces funding available for bricks and mortar. Allowing grants 
like HOME and AHP to be included in eligible basis would decrease 
transaction costs and increase funds available for developing 
affordable housing.
    NAHB also believes that other sources of Federal subsidies, such as 
the interest rate reduction payment (IRP) connected with Section 236 
properties (of the Housing Act 1937), should not be treated as such for 
purposes of determining eligible basis. In years past, the IRP was not 
treated as a Federal subsidy for purposes of determining eligible basis 
in a LIHTC project. More recently, the treatment of the IRP has changed 
and is being deducted from eligible basis, thus reducing the amount of 
LIHTCs available to the property. Allowing the IRP to be includable in 
eligible basis would facilitate the preservation of these older 
affordable housing properties.
Enlisted Military Personnel and LIHTC Housing
    In order to qualify for LIHTC housing, individuals and families 
must meet specific income limits. Property managers collect information 
on a potential resident's income but are allowed to exclude certain 
items from the income calculation. Among those items that can be 
excluded is rental assistance provided by the Section 8 Housing Choice 
Voucher program (of the Housing Act 1937). However, the Basic Allowance 
for Housing (BAH), which is a similar housing subsidy, cannot be 
excluded from the calculation of income and typically puts enlisted 
families over the income limits for LIHTC-financed housing. Ultimately, 
enlisted families are needlessly shut-out of quality, affordable 
housing around the military posts and bases where they are assigned. 
NAHB supports excluding the BAH from the determination of income for 
purposes of qualifying for an LIHTC unit.
Streamline the Inspection Process
    There are multiple inspection requirements for properties developed 
with LIHTCs and other Federal programs, such as HOME, Section 8 
project-based and Section 8 tenant-based vouchers. Streamlining of the 
inspection process would help cut overall costs while allowing quicker 
move-ins by tenants. NAHB recommends the following: In the case of a 
LIHTC property with a Section 8 tenant-based voucher holder, if the 
unit has been inspected within the last 12 months under any Federal 
program with inspection requirements equivalent to Housing Quality 
Standards (HQS), the tenant should be allowed to move in immediately 
and housing assistance payments (HAP) should also begin immediately. A 
PHA would have 60 days to complete an inspection.
Repeal 10-Year Rule for Existing Properties
    One roadblock in the LIHTC program for acquisition/substantial 
rehabilitation of affordable housing is the ``10-year rule.'' The IRC 
requires that for an existing building to be eligible for LIHTCs there 
must have been a period of at least 10 years between the date of the 
developer's acquisition of the building and the date the building was 
last placed in service or substantially improved. The purpose of the 
10-year rule is to prevent ``churning'' of properties for tax benefits 
by individual taxpayers. However, the Tax Reform Act 1986 eliminated 
the benefits of property ``churning'' and eliminates the need for this 
rule. The 10-year rule inhibits investments in existing properties. 
There are many vacant, blighted properties that could provide 
affordable housing if they received an allocation of LIHTCs. Repeal of 
the 10-year rule would assist state housing finance agencies (HFAs) in 
meeting their preservation goals. NAHB supports repeal of this rule.
Repeal the Recapture Rule for LIHTCs
    The Internal Revenue Code (IRC) requires that when an investor 
disposes of an interest in a LIHTC property, a recapture bond must be 
purchased to guarantee payment to the Treasury of any potential 
recapture tax liability. This imposes significant unnecessary costs on 
investors and can even prevent some properties from obtaining critical 
recapitalization resources. Further, according to the IRS, this process 
is ``administratively difficult'' to support. It represents excessive 
protection against a negligible risk (the IRS has never collected on a 
recapture bond), and repealing this rule would improve the secondary 
market for LIHTCs and bring more resources into affordable housing.
Change the Name of the Program
    While awareness has grown of the need for more affordable housing, 
local resistance remains a significant issue. Although nearly all LIHTC 
units are rented to working families, many communities react negatively 
to the term ``low-income.'' Opposition to proposed LIHTC properties can 
dramatically slow the development process, increase transaction costs 
and ultimately result in properties not being constructed at all. One 
option for addressing this issue would be to change the name of the 
program to the ``Affordable Housing Credit.'' This would help reduce 
program stigma and diffuse ``Not In My Backyard'' (NIMBY) challenges 
making it easier to develop affordable housing.
Allow State Agencies to Designate QCTs and DDAs
    LIHTC properties located within Qualified Census Tracts (QCTs) or 
Difficult to Develop Areas (DDAs) are eligible to receive a 30 percent 
boost in tax credit basis. However, there also are LIHTC properties 
outside of QCTs and DDAs that would benefit from a boost in tax credit 
basis. In some cases, these properties are located literally across the 
street from projects within the QCT or DDA boundary. Allowing state 
HFAs more flexibility to award the basis boost to projects in other 
areas would help alleviate this problem. State authorities have 
detailed information regarding local market conditions and can ensure 
that only the minimum amount of credit needed is awarded to a 
particular project.
Streamline Compliance Monitoring and Subsidy Layering Requirements
    Although the affordability rules (percentage of income that must be 
served and term of the affordability period) differ among programs, the 
rules do not pose a significant problem for NAHB's members. However, 
compliance monitoring could be streamlined when multiple sources of 
financing are included in a transaction. For instance, a single agency 
could be responsible for overall monitoring (income targeting and 
eligibility, rent restrictions and compliance periods). A good model to 
follow is the recent action taken by the Federal Home Loan Banks 
related to the Affordable Housing Program (AHP). A bank may now rely on 
another agency for compliance monitoring if the project's financing 
(e.g., LIHTCs) include affordability rules substantially equivalent to 
those of the bank's.
    Similarly, a single agency could be responsible for subsidy 
layering. NAHB recommends that state HFAs take over that responsibility 
from HUD, when LIHTCs and other federal funds, such as HOME or FHA 
financing, are used. Since the HFAs already underwrite LIHTC projects, 
this change would streamline the subsidy layering process.
Allow LIHTCs to Offset Alternative Minimum Tax Liability
    The role of individual investors in the LIHTC has changed from 
being significant investors in LIHTC properties to that of supplying 
very little capital through this housing tax program. The increasing 
impact of the alternative minimum tax (AMT) on individuals is likely to 
further erode the already attenuated role of individual investors. The 
impact of this decline in individual investors will potentially be felt 
most acutely in the mix of types of affordable housing properties that 
are developed.
    Corporations tend to invest in large urban and suburban 
developments. Moreover, there is evidence that some corporations are 
reluctant to invest in special needs projects or in projects designed 
to spur economic or community revitalization. In contrast, individual 
investors tend to invest much smaller amounts and so are naturally 
attracted to smaller projects (including rural projects). Also, 
compared to corporate investors, individuals are more likely to take a 
personal interest in their investment projects and so may have more of 
a preference for projects aimed at particular types of renters in their 
communities, such as unwed mothers or the mentally disabled. As a 
result, any success in increasing individual investor demands for LIHTC 
projects is likely to increase demand for smaller projects, rural 
projects, and special needs projects. To insure that individual 
taxpayers maintain an active role in this important housing program, 
NAHB supports allowing LIHTCs to be fully applicable against AMT 
liability.
III. Reducing Barriers to Using LIHTCs with Federal Housing 
        Administration (FHA) Multifamily Mortgage Insurance
Adjust Rules Related to Use of Equity
    FHA multifamily mortgage insurance rules also require that LIHTC 
equity be used first, before any proceeds insured by FHA. LIHTC 
investors pay less for the credits if the equity contribution cannot be 
phased in over the course of construction and lease-up. The end result 
is less equity for the project. Allowing the phasing-in of the LIHTC 
equity would be a significant improvement.
Improve Processing Time
    A significant issue for LIHTC developers using FHA insurance is 
that the approval process for FHA insurance, even using Multifamily 
Accelerated Processing (MAP), is too long to meet the time deadlines 
accompanying the allocation of LIHTCs. A large part of this problem is 
the lack of expertise on the part of HUD staff related to the LIHTC 
program. Solutions could include the creation of a special office to 
process LIHTC/FHA deals, along with more technical training and the 
hiring of experts in LIHTC transactions.
Develop New Financing Tools
    FHA also does not offer an array of financing options for 
developers. For example, NAHB has encouraged HUD to develop a variable 
rate (or lower floater) option, as well as improve its small projects 
processing. Although HUD now has a pilot underway for a more 
streamlined small projects program, it does not include LIHTC projects. 
HUD needs to be more innovative in its product offerings.
Revise Rules on Use of Insurance Proceeds
    HOPE VI projects often include LIHTCs, FHA financing, HOME funds, 
tax exempt bonds and other funding. Currently, HOPE VI contracts 
include a provision that requires insurance proceeds to be returned to 
the public housing authority (PHA). In the event of a disaster, those 
insurance proceeds should be used to pay legitimate financial 
obligations of the property, not returned to the PHA. If the insurance 
proceeds are not returned to the affected development, the developer 
may face default on the mortgage obligations or may not be able to fund 
rebuilding of the property. This requirement is a significant deterrent 
to private sector investment in public housing.
Revise HUD's 2530 Previous Participation Requirements for Investors
    One significant barrier to the development of LIHTC projects is the 
HUD 2530 Previous Participation rule. This rule is intended to ensure 
that HUD does business with reputable persons and organizations that 
will honor their legal, financial and contractual obligations. This 
applies to participants wishing to use certain HUD programs, including 
FHA mortgage insurance, who must first be cleared through the 2530 
process.
    For many FHA-insured projects that also include LIHTCs, the 
requirements are burdensome and, in some cases, discourage investment 
in such properties. For example, HUD currently requires a 2530 review 
of individual officers of any corporation directly investing as a 
limited partner in a FHA-insured tax credit transaction. All officers 
and directors three levels below the mortgagor entity must be listed 
with their social security numbers and a listing of their personal 
project undertakings. In the case of syndications, this often means 
2530 clearance must be obtained for the officers, directors and 
stockholders who hold more than 10 percent of a corporation's shares. 
If Microsoft made such an investment, for example, HUD would require 
Bill Gates and his fellow officers to go through the 2530 review 
process and to personally sign 2530 forms.
     NAHB applauds the passage of H.R. 1675 by the House of 
Representatives and hopes the Senate will do the same soon. Reducing 
the burden from the Section 2530 requirement would ensure a stable pool 
of investors for future LIHTC development.
IV. Ways to Better Coordinate the LIHTC with Other HUD Programs
Remove Caps on Voucher Rents in LIHTC Properties
    Section 8 voucher rents and HOME rents should be permitted to be at 
least as high as the LIHTC rent. If units with voucher or HOME tenants 
must have lower rents than the tax credit rent, the total revenue to 
the project is decreased. This places additional financial pressure on 
the project and increases the difficulty in meeting operating expenses.
Remove Prohibition on Using LIHTCs with Section 8 Moderate Rehab
    Another conflict between a HUD program and the LIHTC is the 
restriction in the IRC against using tax credits with Section 8 
Moderate Rehabilitation (Mod Rehab) properties. This restriction was 
enacted in the late eighties after revelations that some Mod Rehab 
properties were being over-subsidized. Over-subsidization no longer 
exists in the LIHTC program because tax credit allocating agencies 
conduct extensive underwriting analyses of each LIHTC application. No 
funding has been provided for the Mod Rehab program for many years and 
these properties are in great need of rehabilitation. Raising capital 
to do this is very difficult without the LIHTC program and lifting this 
restriction would help preserve these affordable housing units.
Provide Consistent Underwriting Standards for Federal Programs
    LIHTC properties with multiple financing resources, from both the 
private and Federal sectors, will almost always require multiple 
underwriting standards. NAHB would strongly support consistent 
underwriting standards and processes for federal programs utilized in a 
transaction. This would help reduce both the complexity of LIHTC 
projects and transaction costs, which translates to more dollars for 
bricks and mortar. However, NAHB would caution against adopting a 
uniform set of underwriting standards for private capital investment 
sources. Imposing a fixed system on the market would increase 
regulatory burdens and reduce the incentive for investment in 
affordable housing.
Repeal the Mortgage Revenue Bond Ten-Year Rule
    Current law requires Mortgage Revenue Bond (MRB) issuers to use 
payments on MRB-financed mortgage loans to retire the existing MRB 
obligations rather than make new mortgages for more lower income 
families, once the MRB has been outstanding for ten or more years. 
Commonly referred to as the ``Ten-Year Rule,'' this requirement costs 
states billions of dollars each year in lost MRB mortgage loan money 
and is administratively burdensome. A survey of state Housing Finance 
Agencies that was conducted by the National Council of State Housing 
Agencies estimates the Ten-Year rule will cost states $11.8 billion in 
MRB mortgage money between 2005 and 2008. These funds could finance 
nearly 115,000 mortgage loans for first-time home buyers.
Repeal the First-time Home Buyer Requirement for MRB-funded Mortgage 
        Loans.
    Without MRB-funded loans, teachers, first responders, municipal 
workers, service sector employees, and military veterans may not be 
able to purchase homes in or around the communities in which they work, 
even if these families previously owned homes elsewhere. Under the IRC, 
borrowers who receive MRB funded loans may not have owned a home during 
the preceding 3 years, except homes purchased in targeted areas 
suffering from chronic economic distress. In addition, the Code 
requires that a borrower's family income not exceed 115 percent of the 
median income for a family of similar size, and the purchase price of a 
home may not exceed 90 percent of the average price for homes in the 
area. NAHB believes that the family income and home-price eligibility 
requirements serve as sufficient constraints to maintain the focus of 
the MRB program on serving buyers of modest homes.
Increase the Mortgage Revenue Bond Home Improvement Loan Limits
    State HFAs are currently authorized to sell MRBs or Mortgage Credit 
Certificates (MCCs) to fund home improvement loans to low- and 
moderate-income homeowners. The existing limit of $15,000 for loans 
that can be funded by MRBs or MCCs was established by Congress in 1980 
and is too low to be economically justifiable for state HFAs to offer 
home improvement loans.
Revise the 50 Percent Test on Tax-Exempt Bonds
    It is increasingly difficult to use tax-exempt bonds and 4 percent 
tax credits together, especially in rural areas. Under current law, at 
least 50 percent of eligible basis of a development must be financed 
with tax-exempt bonds. This means there is a relatively large mortgage 
on the property. In areas with very low median incomes, it is often not 
possible to generate enough revenue from rents to cover debt service 
and operating expenses, given this constraint. NAHB suggests that the 
50 percent test be reduced to a lower percentage to permit projects 
that are able to obtain significant subordinate debt to still take 
advantage of 4 percent tax credits.
Expand the Section 47 Historic Rehabilitation Credit to Owner-occupied 
        Housing
    NAHB supports the important role that the Section 47 Rehabilitation 
Credit plays in preserving historic communities across the country 
while also helping in the provision of affordable housing. Like the 
LIHTC, there are also ways in which the historic rehabilitation credit 
can be improved to maximize its efficiency and effectiveness. NAHB 
applauds the introduction of H.R. 1043 the ``Community Restoration and 
Rehabilitation Act'' by Representatives Stephanie Tubbs-Jones (D-OH) 
and Phil English (R-PA). This legislation provides for improvements to 
the historic rehabilitation credit that will enhance its value for 
smaller rural and urban projects and strengthen it as a tool for both 
affordable housing and community revitalization efforts.
    NAHB also believes that the preservation of historic housing would 
be increased significantly by expanding the credit to include owner-
occupied housing. Doing so would help revitalize older neighborhoods 
and historically important properties while retaining the private and 
social benefits of home ownership for those homes and local areas. This 
is a particularly important issue for inner suburbs in large 
metropolitan areas and small towns in non-metropolitan areas, for which 
the aging owner-occupied housing stock defines the character of a 
neighborhood.
Conclusion
    NAHB appreciates the opportunity to comment on ways to improve the 
efficiency and effectiveness of tax incentives for low-income housing. 
Programs like the LIHTC, the Section 47 historic rehabilitation credit 
and private activity bonds have proven themselves invaluable to the 
production and preservation of safe, decent and affordable housing. 
Enhancing their positive impact even further is critical to continuing 
to meet the needs of low-income families.

                                 

    *Chairman NEAL. Thank you, Mr. Lawson.
    Mr. Tetrault.

  STATEMENT OF JOHN LEITH-TETRAULT, PRESIDENT NATIONAL TRUST 
                COMMUNITY INVESTMENT CORPORATION

    *Mr. LEITH-TETRAULT. Thank you, Chairman Neal, Ranking 
Member English and Members of the Subcommittee. My name is John 
Leith-Tetrault and I am President of the National Trust 
Community Investment Corporation. And as such I can speak about 
housing rehab in historic and older buildings from both the tax 
creditor syndicator and developer perspectives.
    Before I begin I'd also like to thank Representatives 
Stephanie Tubbs-Jones and again Phil English for introducing 
the national trust's leading bill, H.R. 1043, the Community 
Restoration and Revitalization Act. This legislation provides 
for a wide range of amendments to the 20 percent historic and 
10 percent old building rehab credits.
    These changes would enhance the existing linkage between 
historic and Low-Income Housing Tax Credits, unlock more of the 
historic credits potential for neighborhood reinvestment and 
make the credit easier to use for smaller rural and main street 
projects.
    My written Statement explains in detail the technical 
changes the legislation makes to the Historic Tax Credit, but 
in the interest of time I will briefly outline the changes and 
showcase two projects that would benefit from these 
modifications. Congress amended the Historic Tax Credit in 1986 
to allow it to be combined with the Low-Income Housing Tax 
Credit.
    Since that time, based on National Park Service statistics, 
about 86,000 affordable housing units have been created through 
the combination of the Low-Income Housing and Historic Tax 
Credit. While this accomplishment is noteworthy, we believe 
that through the enactment of H.R. 1043 much more could be done
    What most don't realize is that a large percentage of older 
and historic building stock is located in economically 
depressed areas. This is evidenced by research conducted by my 
company which showed that in 2006, two thirds of all Historic 
Tax Credit transactions approved by the National Park Service 
were located in high poverty census tracks that met the 
requirements of the new market's tax credit program.
    The nexus between historic rehab and community development 
is indeed broad. The affordable housing provisions of H.R. 1043 
are as follows. H.R. 1043 eliminates the low-income housing 
basis adjustment that's required when combining two credits. 
The basis adjustment, under current law, lowers the value of 
the Low-Income Housing Tax Credit by at least 25 percent and as 
much as 33 percent in difficult to develop areas. The bill 
provides a 130 percent basis boost for the Historic Tax Credit.
    Thirdly, it would make housing an eligible use for the 10 
percent provision of the Historic Tax Credit. Broadening the 
use of the 10 percent credit to include housing would open the 
potential to twin the 10 percent credit with the Low-Income 
Housing Tax Credit.
    I have a couple of case studies, the first of which is 
Parkside Commons, the renovation of the former Meadeville 
Junior High in Crawford County, Pennsylvania into 56 affordable 
housing units and 3,000 square feet of commercial space.
    The school was built in 1921 and was threatened with 
demolition until the current developer, Tom Kennedy of 
Prudential Real estate of Erie, Pennsylvania stepped forward 
with a historic rehab plan. The project is currently under 
construction and has experienced serious cost overruns. The 
developer has addressed the situation by reinvesting his entire 
developer fee into the property, cutting the scope of work by 
$600,000 and delaying the commercial phase of the project.
    Parkside Commons has utilized both the Low-Income and 
Historic Tax Credits. The mandatory Low-Income Housing Tax 
Credit basis reduction cost the project $781,000, more than 
enough to restore the $600,000 in project enhancements that 
were abandoned due to the cost overruns.
    The second case study involves the Worthington Commons 
apartments located in Springfield, Massachusetts. This property 
was formerly known as Summit Hill apartments and was acquired 
in foreclosure by Mass Housing. Subsequently Mass Housing 
selected First Resources Companies to be the new developer. The 
redevelopment plan calls for the rehab of 12 buildings into 149 
apartments and a community center.
    This $19 million project is in a qualified census track and 
therefore qualifies for the 130 percent Low-Income Housing Tax 
Credit basis boost. If H.R. 1043 were enacted, the additional 
historic credit basis boost would result in an additional 
$900,000 for this project. Also, $400,000 in equity would be 
generated by eliminating the low-income housing basis 
adjustment.
    So in total there would be $1.3 in additional equity 
available, which would have virtually eliminated the need for 
the $1.6 million in soft debt provided by the Massachusetts 
Housing Partnership freeing those scarce resources to be used 
on other similar projects across the State.
    Alternatively, the extra funding could have been used to 
establish a much needed maintenance reserve. It was the lack of 
maintenance reserves, among other things, that contributed to 
Summit Hill's original downfall.
    Chairman Neal and Ranking Member English, Members of the 
Subcommittee, thank you for this opportunity to testify and I'd 
be happy to answer any questions you have.
    [The Statement of Mr. Leith-Tetrault follows:]
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    *Chairman NEAL. Thank you, Mr. Tetrault. Your description, 
certainly in the closing words, was entirely accurate.
    Mr. Goldstein, one of the problems you've highlighted is 
that the credit limits the amount of rent allowable to 60 
percent of area median income and though operating costs, 
utilities and taxes have increased over time, median income has 
not. Do you know why incomes have not kept pace with other 
rising costs?
    *Mr. GOLDSTEIN. Well, I think a number of people here have 
testified to some of the issues that we've run up against. 
There are formulas involved whereby even when, in fact, incomes 
are rising, our rental rates are not rising.
    *Chairman NEAL. That's the second question, but go ahead.
    *Mr. GOLDSTEIN. It also is somewhat geographically based. 
In other words, there are certainly places along the coasts in 
high growth areas that are much different than the middle of 
the country in areas that haven't experienced that same level 
of growth.
    *Chairman NEAL. Having said that, that was the tease. Now 
here's the next follow up. If we allow the rents to increase 
would some families with stagnant wages no longer be able to 
afford such housing?
    Let me get this out. You got a big job ahead of you here in 
Washington.
    *Mr. GOLDSTEIN. Well, I think there are a number of ways to 
answer that. Certainly, perhaps first and foremost is that, 
again, as one of the other panelists has testified, if in fact 
they're not allowed to rise in some manner, properties can't 
support themselves. And if properties can't support themselves, 
in fact we will lose units, not gain units.
    That being said, I think there have been a lot of creative 
suggestions today both orally and in written testimony with 
respect to things that we can do that in fact wouldn't have a 
tremendous burden on the tenants themselves but would allow the 
properties themselves to realize greater revenue.
    *Chairman NEAL. Thank you.
    Mr. Lawson, you heard my discussion earlier with Mr. 
Desmond of Treasury about the utility allowance regulation 
expected later this year. Should Congress, do you think, 
legislate in this area if in fact new regulations are on their 
way?
    *Mr. LAWSON. I do think Congress should step in. Rising 
utility costs are one of the main factors that we've 
experienced. Those hit us both on the expense side of our 
ledger and also affect utility allowances, which thereby 
decrease the revenue side of our ledger. Both put pressure on a 
property.
    But utility costs are just one of the significant increases 
we've found. Insurance since--starting with 9/11, insurance 
went up significantly, again with Katrina. We work in a 
primarily coastal environment and we have seen just outrageous 
increases in expense costs.
    Real estate taxes with the housing boom, the housing boom 
has benefited many homeowners but by the same token assessors 
always look to apartments to pay their fair share. That has put 
more pressure on our bottom line as well.
    *Chairman NEAL. Mr. Tetrault, that reference you made to 
Summit Hill earlier, there have been many announcements, many 
ground breakings, many demolition projects and kind of back on 
the treadmill again, time and again. It's not, I think, 
friendly to children, concentrating poor people, and there's 
not a lot of open space nearby. In fact, there's minimal 
sunlight in some of the back streets there. And there are parts 
of that initiative--I shouldn't say that initiative but nearby 
that have worked. Why hasn't that worked?
    *Mr. LEITH-TETRAULT. Well, I think that the--for many of 
the reasons you've mentioned, when we over-concentrate poverty, 
put too many units together, we create a stigma for the 
families living there. I would say that all of those work 
together to increase the challenges that these projects have. I 
think one of the things that we hope is part of this equation 
in the future more often on other projects is the added cache, 
if you will, that historic preservation brings to a project 
that provides a visual anchor to the neighborhood and preserves 
buildings that people can relate to.
    I think that preservation by itself doesn't answer all the 
questions you've raised. Certainly there are questions of 
security, of proper property management. I think large projects 
can be managed well, but there's also room for thinning out 
projects when it's appropriate.
    *Chairman NEAL. Mr. English.
    *Mr. ENGLISH. Thank you, Mr. Chairman. This has been a 
particularly stimulating panel. And Mr. Tetrault, in your 
testimony, touching on real life examples, you've touched a 
great one in my district in Parkside Commons, which not only 
highlights I think the potential of the credit to have a 
transforming effect and create opportunities for affordable 
housing but also some of the particular struggles in the 
current applications of the credit and particularly in a 
smaller community, the difficulty of making the credit 
available within a certain census track.
    In your testimony you I think offered two cases for how 
improvements in the tax Code could have been used to make 
projects function better. Isn't the point that under current 
law both of these projects still got done?
    *Mr. LEITH-TETRAULT. They got done, although I would say in 
the case of Parkside the project can't be finished. I spoke to 
Tom Kennedy as recently as yesterday. Because of the cost 
overruns, he doesn't have funding left to do the commercial 
part of the project and so he has the difficulties now of 
leasing apartments above vacant storefronts.
    The projects get done. The question I have--and I guess I'm 
old enough to have seen projects get rehabilitated more than 
once. The question--and when we go--I'm a syndicator and I go 
to all the ground breakings and all the ribbon cuttings, they 
all look great on the first day. The question is what do they 
look like 5 years later.
    I think that what 1043 speaks to is long-term 
sustainability. The additional funding that I described that 
could have gone to the Parkside apartments could have provided 
an operating reserve, could have helped close that $600,000 gap 
and provided a project for that downtown area that is more 
sustainable over time.
    *Mr. ENGLISH. Thank you. Are you aware of similar deals 
that did not get done for the reasons that you outlined in your 
testimony?
    *Mr. LEITH-TETRAULT. Well, we at National Trust Community 
Investment Corporation were working with a group in Little 
Rock, Arkansas. The name of the group is Arc of Arkansas. They 
do group housing for physically disabled households. And they, 
similar to the Parkside project, are renovating an old high 
school in Little Rock. They've finished phase one. Phase one is 
struggling to pay its mortgage, and for that reason and others 
they're having difficulty raising financing for phase two.
    The funding gap, and this is after exhausting all Federal, 
State and local resources that they can find, is about 
$500,000. And when we ran the numbers and we looked at the fact 
that it was in a difficult to develop area, it would also, 
under 1043, benefit from the reduced or the elimination of the 
basis adjustment, that would close the gap for that project and 
that project would be under construction today were we to enact 
1043.
    You know, it's hard to find case studies of projects that 
didn't go forward. People don't write articles about what 
didn't work as much as they do about success stories. But I can 
tell you from my own professional background, and I've worked 
in affordable housing much longer than I worked in historic 
preservation, there are dozens of projects that don't go 
forward for all the ones that do.
    And I think often the gap is in that $500,000 to $1 million 
dollars range where you get to the point of passing the hat or 
doing bake sales to get those final dollars in the door. And 
those are the marginal projects that I think 1043 would assist, 
you know, that the cost of these two provisions that I focused 
on are not that great but they can close small gaps.
    *Mr. ENGLISH. And on that point, I guess a two part 
question, if I could wrap up my time. You had mentioned that 
those buildings which are only eligible for the 10 percent 
credit, built before 1936, cannot be used for housing. Two part 
question, Congress had to have had a rationale for putting in 
this prohibition. Can you identify it for us? And what would 
happen if we changed the law to allow the 10 percent credit to 
be combined with the Low-Income Housing Credit?
    *Mr. LEITH-TETRAULT. Well, we have looked at the 
legislative history of the 10 percent credit. We've talked to 
Members of various pertinent Committees. We've posed the 
question to joint tax. No one seems to know why housing was 
prohibited. And I think in the context of today's affordable 
housing need it seems to be an anomaly and an unfortunate one 
in the tax Code.
    It's a bit speculative to say exactly what would happen if 
we make the 10 percent credit eligible for housing. Certainly I 
think Low-Income Housing Tax Credit investors would see the 
opportunity to look again at rehab, developers that may have 
been drawn more in the direction of new construction. It might 
take some pressure off the 9 percent credit and we might see 
developers using the 4 percent credit, lifetime credit and the 
10 percent rehab credit.
    There are I think interesting upper floor housing 
applications. One of the features of this bill, which I haven't 
talked about, is the small deal applications. The tax driven 
real estate is very awkward and clumsy for small transactions 
because the transaction costs on a million dollar deal are the 
same as the deal that's a $20 million deal.
    So when the benefits get under a million dollars, 
particularly on Main Street where typical shop owners are only 
willing to give the Federal Government so much control over the 
cash register, there's a reluctance to take on these tax credit 
programs as a way to renovate their properties.
    So I think the small deal provisions of this credit I think 
will--and particularly the 10 percent used for housing will 
encourage store owners who have vacant upper floor housing to 
renovate it and augment their revenues.
    *Mr. ENGLISH. Thank you very much. Thank you, Mr. Chairman.
    *Chairman NEAL. Thank you, Mr. English. Mr. Blumenauer.
    *Mr. BLUMENAUER. Thank you. And I must say Mr. Chairman the 
way the panel is coming together really covered a wide range of 
areas that I found extraordinarily useful, and I appreciate 
what you and the staff have done to make it a very worthwhile 
morning.
    Mr. Rose, you referenced an additional cost of one or 2 
percent with the projects that you're involved with to make 
them very energy efficient. What's the payback period to recoup 
that one or 2 percent?
    *Mr. ROSE. I want to add that it's not just to make them 
more energy efficient. It's the total greening. It's also to 
make them healthier, lower toxic and better places to raise our 
children. And the payback period is certainly often less than 5 
or 7 years. Some of the investments actually--I'll give you a 
very simple example.
    When we take a boiler and we--some of the investments are 
just cheaper, they're actually just smarter ways to do things 
and save money day one.
    *Mr. BLUMENAUER. And I appreciate your clarification. I 
understand that you are attempting to have a totally green 
environment. I didn't mean to unduly concentrate on energy and 
water, but those are things that are quantifiable. But you're 
saying some of these improvements actually are net savings, 
they're not--there isn't a payback period?
    *Mr. ROSE. Yes.
    *Mr. BLUMENAUER. And others it may be 5 to 7 years?
    *Mr. ROSE. Yes. So my point was that actually the energy 
and water savings, the 5 to 7 year payback includes the paying 
for the one--the health savings that don't have a direct dollar 
payback. And this is all, by the way, under the Enterprise 
Green Community Program, which was designed for affordable 
housing. So it is what we call practical green. It's not 
pushing the limits. It's a very--that's why we can do it for 
one to 2 percent, because it was really designed for this 
particular need.
    *Mr. BLUMENAUER. And if you would, take a step with me 
beyond practical green, you may have heard an earlier question 
to one of our witnesses about ways to tie this into a broader 
vision of a carbon constrained economy that we're going, the 
business community, the environmental leadership seem to be 
linking, and visionary local leaders are involved with it.
    If, in theory, the Federal Government catches up with you 
all and has a series of Federal policies dealing with the 
carbon constrained environment, have you given some thought to 
ways that, of the value created and transferred, that benefit 
could flow back to these efforts at practical green communities 
so you get credit for it as well as maybe a little boost to 
make it easier?
    *Mr. ROSE. If there--I have several thoughts, but if you're 
talking about if there's a cap-and-trade carbon system, if that 
could bring benefits back to low-income communities and 
actually that would be of enormous benefit--so for example one 
could imagine if you could retrofit boilers in existing low-
income housing, make them more efficient and have that paid for 
by a cap-and-trade system, you would lower the operating costs 
that we've heard so much about and you would be reducing 
climate change impacts.
    But the other key thing is that when we look--we look at 
energy from a total budget of both the building itself and the 
energy getting to and from it. Particularly low-income people 
we think it's so important they get the jobs, they get the 
education, they get the opportunity to really move up. We think 
that's very important.
    And so what happens is when you have low density sprawled 
development, the transit, the amount of energy used in transit 
is often higher than the energy used by the building itself. 
And so what we have found is as we bring affordable housing 
closer to walkable main streets, next to community colleges, 
next to mass transit, et cetera, we're not only saving the 
total energy picture, we're actually improving the ability of 
the family to move upward by giving them better access to jobs 
and education and daycare.
    *Mr. BLUMENAUER. Thank you. Mr. Chairman, I guess I would 
close by just asking to Mr. Rose or others of our panelists if 
they have some thoughts based on their experience about 
practical problems, the way these programs are currently 
structured, to building complete communities that probably--the 
reference that was made to a--I forget the social service 
agency in the bottom floor, problems occasionally in terms of 
the vacant first floor. If there are thoughts that panelists 
might provide to the Committee about statutory or regulatory 
difficulties in their being able to realize their vision of 
mixed use, sustainable community where we're kind of in the 
way, that would be very helpful I think as we're looking at the 
bigger picture in the future.
    *Mr. ROSE. As my time is short, I'll just refer you to my 
written testimony where I call for a whole series of those. One 
other thing that's not called for, if you could, create a 
mixed-use credit enhancement program. We currently do not have 
one, a Federal, mixed-use credit enhancement program. It would 
be extraordinarily helpful.
    *Mr. BLUMENAUER. Thank you.
    *Chairman NEAL. Thank you, Mr. Blumenauer. I want to thank 
our witnesses--the testimony was very helpful--and without 
objection the record will remain open for a few days for any 
additional material that needs to be included. And I would urge 
you to submit it and it really will be vetted by the 
Subcommittee and staff members.
    So thank you very much. This was very helpful and this 
hearing is adjourned.
    [Whereupon, at 12:23 p.m., the Subcommittee was adjourned.]
    [Submissions for the record following:]

                        Council of Large Public Housing Authorities
                                                       June 7, 2007
The Honorable Richard E. Neal, Chairman
Subcommittee on Select Revenue Measures
Committee on Ways and Means
U.S. House of Representatives
1135 Longworth House Office Building
Washington, DC 20515

Dear Chairman Neal:

    On behalf of the Council of Large Public Housing Authorities 
(CLPHA), I am pleased to provide our comments as a submission for the 
record in regard to the Subcommittee's recent hearing on Tax Incentives 
for Affordable Housing.
    CLPHA is a national non-profit public interest organization 
dedicated to preserving, improving and expanding housing opportunities 
for low-income families, elderly and disabled. CLPHA's 60 members 
represent virtually every major metropolitan area in the country; on 
any given day, they are serving more than one million households. 
Together they manage almost half of the nation's multi-billion dollar 
public housing stock, and administer 30 percent of the Section 8 
voucher program; they are in the vanguard of housing providers and 
community developers.
    The 1.2 million public housing units serve the very lowest income 
households, whose median income is less than $12,300 and more than half 
of those households are elderly and persons with disabilities. Public 
housing is home to more than one million children, and, as you know, a 
recent study found that children who grow up poor cost the economy $500 
billion a year because they are less productive, earn less money, 
commit more crimes and have more health-related expenses. While housing 
authorities are daily meeting the challenges of serving the lowest 
income residents they are also facing an aging housing stock that has 
been chronically underfunded and is in need of additional capital 
investment.
    Over the years, CLPHA members have grown increasingly sophisticated 
in their use of the low income housing tax credit program (LIHTC) to 
augment funds available for the revitalization and redevelopment of 
their public housing developments. Public housing authorities (PHAs) 
have coupled the tax credit program with other federal, state, local 
and private financing mechanisms to improve, expand and renew their 
housing stock. More recently, PHAs have borrowed private market funds 
in order to raise capital for major repairs by pledging their future 
capital funds toward the repayment of bonds or loans. Some of these 
transactions have also used low-income housing tax credits to further 
leverage scarce public housing funds in creative ways to make large-
scale comprehensive improvements to their developments.
Unmet Public Housing Capital Needs
    Public housing capital needs accrue at more than $2 billion per 
year; yet, recent annual appropriations for the Public Housing Capital 
Fund have been barely adequate. There are over 189,000 public housing 
units that are most likely distressed and the most recent comprehensive 
study of public housing capital needs found a backlog of more than $20 
billion. Even if appropriations improved so that at least the accrual 
needs are met, it is unlikely that sufficient federal funding resources 
will be available to address the significant backlog in capital needs 
for viable public housing developments. This does not even begin to 
address the need for units to replace the public housing stock lost to 
demolition.
    To effectively address these challenges in a comprehensive, 
sustainable way, public housing agencies need:

      a dedicated source of capital to supplement Federal 
funding
      debt-financing tools to unlock the value of existing 
assets
Public Housing Tax Credits
    As noted above, for more than a decade, PHAs have been using the 
Low-Income Housing Tax Credit to leverage significant amounts of 
private equity for the redevelopment of public housing. PHAs have 
experience using tax credits, forming and participating in ownership 
entities with tax credit investors, and managing or contracting for 
management of redeveloped properties under tax credit rules. HOPE VI 
projects now typically leverage tax credits, while other public housing 
redevelopment projects are often financed with tax credits and other 
resources. The existing LIHTC has broad market acceptance and an 
existing administrative and regulatory infrastructure.
    Given the overwhelming level of public housing capital needs, 
public housing appropriation levels, and the need for replacement 
housing in many jurisdictions, a targeted resource for public housing 
redevelopment is needed. A dedicated public housing tax credit could 
raise significant amounts of equity for this purpose. For example, an 
annual allocation of $100 million in public housing tax credits would 
generate approximately $1 billion in equity, assuming a 10-year credit 
period. After 20 years, a public housing tax credit program would 
generate the roughly $20 billion in equity needed to address the 
existing public housing capital needs backlog.
    In addition to an increase in tax credit allocations for public 
housing redevelopment, there are various modifications to the tax 
credit that would benefit these projects. (See the attached CLPHA 
Public Housing Tax Credit Proposals and CLPHA Public Housing Funding 
Reform Proposals.) An alternative to increasing the LIHTC for public 
housing would be to design a tax credit tailored to the redevelopment 
of public housing properties, and that might address the broader 
community development and resident self-sufficiency mission of public 
housing agencies and their partners. A recent example of this approach 
is the New Markets Tax Credit (NMTC), enacted by Congress in 2000 to 
encourage investment in low-income communities.
Public Housing Debt Financing
    A recent study by Econsult Corporation found the value of existing 
public housing assets to be approximately $162 billion. Gaining access 
to this value through debt financing would help PHAs meet current 
capital funding needs. Indeed, a Harvard study found that a significant 
number of public housing developments could support their capital needs 
through debt underwritten at market rent levels, meaning that lenders 
would see these properties as a sound investment. However, many 
properties could only finance a portion of their capital needs at 
market rents. These developments would need an upfront capital subsidy, 
such as tax credit equity or a HOPE VI grant, in order to be feasible 
under a debt-financing model. The Millennial Housing Commission also 
proposed debt-financing of public housing capital improvements.
    PHA pledges of public housing funds for debt service could also be 
enhanced by a Federal loan guarantee or other credit enhancement. This 
approach is similar to that proposed by HUD several years ago in the 
Public Housing Reinvestment Initiative (PHRI). Current pledges of 
public housing Capital Funds to debt service are limited to roughly 
one-third of a PHA's annual Capital Fund receipts. A loan guarantee 
would increase this ratio. FHA insurance might be another alternative 
to a new loan guarantee program.
    Another approach to financing the renewal, revitalization and 
redevelopment of public housing is through bond financing similar to 
the Qualified Zone Academy Bond (QZAB) program for educational 
facilities. Such a program could provide zero-interest debt financing 
for the borrowing housing authorities and a tax-credit or other 
incentive to lenders supplying the financing. The bonds could be used 
for either the redevelopment or replacement of deteriorated public 
housing. CLPHA also seeks to explore methods of combining QZAB 
financing with the low-income housing tax credit in order to maximize 
the leveraging of public housing funds.
    In conclusion, CLPHA believes there is an urgent need for 
additional financing mechanisms to support a comprehensive preservation 
program for the nation's public housing stock. Such a program would 
utilize a variety of funding sources, including annual appropriations, 
low-income housing tax credits, debt financing, and innovative 
approaches such as QZABs.
    We appreciate the opportunity to share with the Subcommittee many 
of our ideas for improving and expanding the LIHTC and approaches to 
new financing tools for preserving and revitalizing public housing. We 
look forward to working with you and the Subcommittee staff as you 
continue to develop your affordable housing proposals.
    Thank you for your consideration. With best wishes, I am,
            Sincerely,
                                                    Sunia Zaterman,
                                                 Executive Director
                               __________
    May 14, 2007
CLPHA Public Housing Tax Credit Proposals
1. Incremental Tax Credits Dedicated to Public Housing Revitalization
      Additional tax credits allocated to States, reserved (or 
prioritized) for approvable public housing redevelopment projects
      Allocate to States based on
      overall number of public housing units in State, or
      backlog need through a proxy such as average age of units 
under ACC, or
      specific projects identified nationally through pre-
determined criteria.
      Alternatively, establish a set-aside for public housing 
revitalizations similar to the 10% set-aside for nonprofits
2. Tax Credits Linked to HOPE VI Awards
      Public housing developments which are awarded HOPE VI 
grants, and therefore have been determined by HUD to be ``severely 
distressed'' but also to have feasible redevelopment plans, would 
receive automatic awards of tax credits
      Subject to compliance with standards established by State 
allocating agencies, similar to requirements for bond-financed projects 
under Sec. 42(m)(1)(D)
      Permits smaller HOPE VI grants to go farther through 
leveraging
      Expedites HOPE VI projects by avoiding timing problems 
associated with coordinating HOPE VI and tax credit application process
3. Add-On Tax Credits for Public Housing Revitalization
      Add-on credits awarded to public housing redevelopment 
projects which successfully compete for LIHTCs
      Similar to State tax credits that piggyback on Federal 
tax credits
      Rewards unique characteristics of public housing, 
including deeper income targeting, greater number of rent restricted 
units, and longer use restrictions.
4. Below Market Federal Loans
      Modify Sec. 42(i)(2)(E)(i) to treat public housing funds 
(including HOPE VI and Capital Funds) in the same way as HOME and 
NAHSDA funds.
      Since these funds are used similarly in transactions, 
there seems to be no rationale for treating public housing funds 
differently in this context.
      Public housing transactions now require involved 
negotiations with the investor so that loans of public housing funds 
are not treated as a ``federal subsidy'', which would reduce the credit 
from 9% to 4%.
5. Qualified Census Tracts/Difficult Development Areas
      Distressed public housing developments often have 
dramatic negative effects on surrounding neighborhoods and discourage 
other investment. Similarly, redeveloping these developments has 
equally dramatic impacts in stimulating neighborhood revitalization.
      Therefore, public housing developments, perhaps above a 
certain size, should be deemed to be in qualified census tracts or 
difficult development areas under Sec. 42(d)(5)(C), thereby providing a 
30% increase in tax credit basis.
6. Public Housing Loans Collateralizing Tax-Exempt Bonds
      Some public housing transactions are now structured using 
tax-exempt bond financing to trigger 4% tax credits. Public housing 
funds (HOPE VI or Capital Funds) are used to fully collateralize the 
bond proceeds. As bond proceeds are drawn down for construction costs, 
commensurate amounts of public housing funds are drawn from HUD and 
escrowed. After project completion, the public housing funds repay the 
bondholders.
      This structure allows PHAs to access 4% credits, but 
involves significant additional fees and expenses.
      Transaction costs would be reduced and projects would be 
completed sooner if loans of public housing funds from PHAs to owners/
investors were simply treated in the same manner as tax-exempt bonds 
for purposes of Sec. 42(h)(4).
7. Exception from Volume Cap for Bonds Secured by Public Housing Funds
      A number of PHAs have been using creative tax credit/bond 
financing structures to rehabilitate viable, but at-risk, public 
housing developments.
      These structures involve the PHA's pledge of its future 
public housing formula funds, subject to appropriation, as security for 
a tax-exempt bond issue and the use of 4% tax credits through an 
allocation of volume cap.
      While it varies by State, some PHAs have had considerable 
difficulty getting the volume cap allocation necessary to make these 
deals work.
      This problem could be solved by modifying Sec. 42(h)(4) 
to provide that projects with tax-exempt financing secured by a pledge 
of public housing funds does not count against the State tax credit 
ceilings even if they do not receive volume cap. The same exception 
should apply to the public housing loan collateralization model 
described in item 6, above.
                              May 14, 2007
          CLPHA CONCEPT PAPER ON PUBLIC HOUSING FUNDING REFORM
PUBLIC HOUSING REVITALIZATION TAX CREDITS, DEBT FINANCING, AND 
        DEREGULATION
1.  Current Status of Public Housing Funding and Regulation
      Backlog Needs. The most recent comprehensive study of 
public housing capital needs found a backlog of more than $20 billion. 
While a significant number of high cost units have been demolished, it 
is reasonable to assume that continued under-funding of the Operating 
Fund, Capital Fund, and HOPE VI has resulted in an offsetting increase 
in capital backlog needs.
      Public Housing Capital Fund. Additional public housing 
capital needs accrue at more than $2 billion per year. Yet, recent 
annual appropriations for the public housing Capital Fund have been 
barely above that. Even if appropriations improved in the new Congress, 
so that at least these accrual needs are met, it is unlikely that 
resources will be available to address the significant backlog in 
capital needs for viable public housing developments. This does not 
even address the need for units to replace public housing units lost to 
demolition.
      HOPE VI. The HOPE VI program has been very successful in 
revitalizing severely distressed public housing developments and has 
helped to establish the mechanisms through which public housing funds 
and private funds can be combined to accomplish redevelopment goals. 
However, HOPE VI funding has fallen dramatically in recent years, from 
a high of approximately $500 million per year to $99 million last year. 
The current authorization for the HOPE VI program sunsets on September 
30, 2007.
      Public Housing Operating Fund. The public housing 
Operating Fund has been seriously under-funded for a number of years. 
According to a benchmark established by Harvard's Public Housing 
Operating Cost study, the Operating Fund is now funded at only 
approximately 83% of need. The resulting deferral of maintenance work 
adds to the level of capital backlog needs.
      Regulatory Environment. PHAs have the worst of both 
worlds, operating in a highly-regulated environment, but without 
adequate operating or capital funding to comply with these rules. A 
more reliable funding contract and a less intensive regulatory 
environment, such as that applied to project-based Section 8 
assistance, would address these issues and would be more consistent 
with asset management.
      Asset Management. While HUD and PHAs are still in 
conflict over the final rules and timing for implementing asset 
management, it is clear that asset management in some form is on the 
horizon. PHAs have generally endorsed the concept of asset management 
as a tool for managing their public housing portfolios. However, asset 
management is infeasible without adequate funding and may cause viable 
properties to appear to be non-viable, potentially subjecting them to 
HUD rules on mandatory conversion and demolition.
      Value of Public Housing Assets. A recent public housing 
economic impact study conducted by Econsult found that existing public 
housing assets are valued at $162 billion (including land and 
buildings). PHAs need financing tools that enable them to unlock this 
hidden value to support current capital funding needs.
      Solutions. To effectively address these challenges in a 
comprehensive, sustainable way, public housing agencies need:
        a dedicated source of capital to supplement Federal 
funding
        debt-financing tools to unlock the value of existing 
assetsan enforceable contract for Federal operating subsidies
        a rational, streamlined regulatory environment
2.  Public Housing Revitalization Tax Credits
      PHA Tax Credit Experience. For more than a decade, PHAs 
have been using the Low-Income Housing Tax Credit to leverage 
significant amounts of private equity for the redevelopment of public 
housing. PHAs have experience using tax credits, forming and 
participating in ownership entities with tax credit investors, and 
managing or contracting for management of redeveloped properties under 
tax credit rules. HOPE VI projects now typically leverage tax credits, 
while other public housing redevelopment projects are often financed 
with tax credits and other resources, but without HOPE VI funds.
      Need for Public Housing Tax Credits. Given the 
overwhelming level of public housing capital needs, public housing 
appropriation levels, and the need for replacement housing in many 
jurisdictions, a targeted resource for public housing redevelopment is 
needed. A dedicated public housing tax credit could raise significant 
amounts of equity for this purpose. For example, an annual allocation 
of $100 million in public housing tax credits would generate 
approximately $1 billion in equity, assuming a 10-year credit period. 
After 20 years, a public housing tax credit program would generate the 
roughly $20 billion in equity needed to address the existing public 
housing capital needs backlog.
      Targeting Public Housing Developments. Different types of 
public housing developments could be targeted for the tax credit, such 
as distressed developments that receive or are eligible for HOPE VI 
grants. Alternatively, the targeted developments might be those that 
need a significant level of rehabilitation, but are not distressed and 
therefore would not be competitive for a HOPE VI grant. These 
developments are particularly in need of alternative financing in order 
to remain viable.
      Expanding the Existing Tax Credit. Using the existing 
LIHTC rather than designing a new tax credit makes sense given its 
broad market acceptance and the existing administrative and regulatory 
infrastructure. The most direct approach would be to increase the State 
tax credit ceilings and target the increase to public housing 
redevelopment projects. A less direct mechanism would be to increase 
the ceilings and mandate a preference for public housing projects.
      Modifying the Tax Credit. In addition to an increase in 
tax credit allocations for public housing redevelopment, there are 
various modifications to the tax credit that would benefit these 
projects. (See CLPHA Public Housing Tax Credit Proposals.)
      Designing a New Credit. Although it would likely be more 
difficult to achieve, an alternative to increasing the LIHTC for public 
housing would be to design a tax credit tailored to the redevelopment 
of public housing properties, and that might address the broader 
community development and resident self-sufficiency mission of public 
housing agencies and their partners. A recent example of this approach 
is the New Markets Tax Credit (``NMTC''), enacted by Congress in 2000 
to encourage investment in low-income communities.
3. Debt Financing
      Value of Public Housing Assets. A recent study by 
Econsult found the value of existing public housing assets to be 
approximately $162 billion. Gaining access to this value would help 
PHAs meet current capital funding needs. Implementing asset management 
principles also puts PHAs in a better position to consider debt 
financing of capital improvements.
      Feasibility of Debt Financing. The Harvard Public Housing 
Operating Cost Study found that a significant number of public housing 
developments could support their capital needs through debt 
underwritten at market rent levels, meaning that lenders would see 
these properties as a sound investment. However, many properties could 
only finance a portion of their capital needs at market rents. These 
developments would need an upfront capital subsidy, such as tax credit 
equity or a HOPE VI grant, in order to be feasible under a debt-
financing model. The Millennial Housing Commission also proposed debt-
financing of public housing capital improvements.
      Loan Guarantees or Other Credit Enhancement. PHA pledges 
of public housing funds for debt service would be enhanced by a Federal 
loan guarantee or other credit enhancement. This approach is similar to 
that proposed by HUD several years ago in the Public Housing 
Reinvestment Initiative (PHRI). Current pledges of public housing 
Capital Funds to debt service are limited to roughly one-third of a 
PHA's annual Capital Fund receipts. A loan guarantee would increase 
this ratio. FHA insurance might be an alternative to a new loan 
guarantee program.
4. Reliable Funding and Deregulation through ACC Reform
      Reliable Funding. PHAs would be able to use tax credits 
and debt-financing more effectively and efficiently if public housing 
properties had reliable funding streams. This is difficult to achieve 
under the existing program structure, since the public housing Annual 
Contributions Contract (``ACC'') does not provide adequate assurances 
of future funding levels.
      ACC Reform. For this reason, the Millennial Housing 
Commission, the Harvard cost study, and HUD's PHRI proposal all 
advocated converting public housing properties from ACCs to contracts 
more like those used in the project-based Section 8 programs, which 
have more enforceable and reliable funding provisions.
      Deregulation. In addition to greater funding certainty, 
converting to a Section 8-type contract has the advantage of moving 
PHAs into a regulatory environment that is generally less burdensome 
and more market oriented than the current
    public housing program.

                                 

                                       Mortgage Bankers Association
                                                       June 4, 2007
The Honorable Richard Neal
Chairman, Select Revenue Measures Subcommittee
Committee on Ways and Means
U.S. House of Representatives
Washington, DC 20515

Dear Chairman Neal:

    The Mortgage Bankers Association (MBA) \1\ appreciates the 
opportunity to submit comments for the hearing record in follow up to 
the Subcommittee on Select Revenue Measures' Hearing on Tax Incentives 
for Affordable Housing, held on May 24, 2007. MBA is the trade 
association representing virtually all of the lenders that participate 
in the FHA multifamily insurance programs. Our members are very 
familiar with the difficulties arising from financing properties with 
low income housing tax credits (LIHTCs) and tax exempt bonds utilizing 
the FHA insurance programs as a credit enhancement.
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    \1\ The Mortgage Bankers Association (MBA) is the national 
association representing the real estate finance industry, an industry 
that employs more than 500,000 people in virtually every community in 
the country. Headquartered in Washington, D.C., the association works 
to ensure the continued strength of the nation's residential and 
commercial real estate markets; to expand homeownership and extend 
access to affordable housing to all Americans. MBA promotes fair and 
ethical lending practices and fosters professional excellence among 
real estate finance employees through a wide range of educational 
programs and a variety of publications. Its membership of over 3,000 
companies includes all elements of real estate finance: mortgage 
companies, mortgage brokers, commercial banks, thrifts, Wall Street 
conduits, life insurance companies and others in the mortgage lending 
field. For additional information, visit MBA's Web site: 
www.mortgagebankers.org.
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    MBA has been working with a number of other associations to 
identify key concerns that undermine the value of the LIHTC and tax 
exempt bond programs and restrict the use of these programs with FHA 
insurance. Attached is a list of issues, most of which require 
legislative changes, but many of which could be accomplished by HUD. In 
fact, we are working with HUD to adjust FHA program requirements, where 
possible, to make the FHA programs a viable financing vehicle.
    The National Association of Home Builders (NAHB), in its testimony, 
addressed many of the issues in the attached list. However, we would 
like to elaborate on one area of NAHB's testimony, that is ``Improve 
Processing Time.'' Without some adjustment in the FHA review and 
processing requirements to expedite their approval process, FHA will 
never be an effective tool for financing properties with LIHTCs. The 
time deadlines in the allocation of the credits and, quite frankly, the 
demands of today's real estate and capital markets, have made FHA a 
niche player, not only for tax credit-assisted properties, but for all 
but a small percentage of rental properties.
    MBA has recommended to HUD, and suggests that Congress consider, a 
pilot program for processing applications for FHA mortgage insurance 
that involve low income housing tax credits. Under this pilot program, 
HUD would not undertake detailed reviews of the loan application in a 
multi-step process as is currently required. Under the existing 
process, mortgagees that make project loans that are underwritten and 
ultimately insured using FHA's Multifamily Accelerated Processing (MAP) 
procedures, are responsible for obtaining and facilitating all required 
FHA documentation including market studies, appraisals, architectural, 
cost and environmental reports from qualified FHA-approved third-party 
professionals. The approved MAP lender, through an underwriter approved 
by FHA, ensures that the proposed loan meets all of FHA required 
program requirements and the market, appraisal, environmental and 
credit associated with the proposed loan meet sound underwriting 
standards that are necessary for a successful credit-worthy 
development. A detailed narrative from the mortgagee's underwriter is 
included in the mortgagee submittal package that makes a recommendation 
for loan insurance. FHA, using long-established procedures, then 
reviews the mortgagee's proposed loan submittal in a multi-step 
process. The application package is first reviewed by an FHA 
architectural and cost reviewer, then reviewed by an FHA appraiser, and 
then reviewed by the FHA loan specialist. The Firm Commitment is 
subsequently circulated through the HUD field office for each 
discipline to sign and then signed by the program director or his/her 
designee. From the submittal date until closing it can take as long as 
six months to one year. This is an antiquated system of approvals that 
is contrary to industry norms that use a single Chief Underwriter to 
approve a loan.
    Under the proposed pilot program, in lieu of existing FHA 
processing procedures, a ``Chief Underwriter'' position would be 
established in the HUD field offices to review multifamily loan 
insurance applications submitted by approved mortgagees. The position 
of Chief Underwriter would be solely responsible for the review of the 
mortgagee submittals and would rely upon all third-party reports, 
including environmental, submitted by the approved lender who will use 
procedures established for mortgagees under FHA program standards. This 
approach would be similar to that which conventional lenders use when 
they underwrite loans for their own portfolios or for sale in the 
secondary market. As an additional check on loan quality, HUD lender 
monitoring and oversight associated with this program would be a post-
closing review process, utilizing procedures currently established by 
the Department.
    We do not anticipate that this new process will have an adverse 
affect on loan quality or on the FHA insurance fund. Developments with 
LIHTCs generally have an extremely low loan-to-value ratio and seldom 
go into default. All incentives for the lender and the investor are to 
keep the property viable and the loan performing.
    We urge you to include such a pilot program in any legislation 
amending the National Housing Act and also to encourage HUD to 
implement as much of this approach as possible, pending any necessary 
legislative changes. The legislative and regulatory proposals on the 
attached list are also important to facilitating financing of 
properties with LIHTCs and tax exempt bonds; however, without these 
process changes FHA will remain, at best, a niche player in this 
market.
    We appreciate this opportunity to submit the comments of the 
Mortgage Bankers Association on improving the financing of affordable 
rental housing, and would be delighted to furnish any additional needed 
information.
            Sincerely,
                                                  John Robbins, CMB
                                                           Chairman

                                 

   Statement of National Affordable Housing Management Association, 
                          Alexandria, Virginia
    Thank you, Chairman Neal and Ranking Member English for this 
opportunity to present the views of National Affordable Housing 
Management Association (NAHMA).
    NAHMA represents individuals involved with the management of 
privately-owned affordable multifamily housing regulated by the U.S. 
Department of Housing and Urban Development (HUD), the U.S. Rural 
Housing Service (RHS), the U.S. Internal Revenue Service (IRS), and 
state housing finance agencies. Our members provide quality affordable 
housing to more than two million Americans with very low and moderate 
incomes. Executives of property management companies, owners of 
affordable rental housing, public agencies and vendors that serve the 
affordable housing industry constitute NAHMA's membership.
    I would like to bring three key affordable housing issues to the 
Subcommittee's attention. My testimony respectfully requests reasonable 
updates to the tax laws governing the full time student occupancy rule 
for Low Income Housing Tax Credit (LIHTC) properties, the LIHTC utility 
allowance, and exit taxes on affordable properties.
Full Time Student Households
    Correcting the unintended consequences of the current LIHTC student 
occupancy restrictions for single parents and adult GED students is 
among NAHMA's highest advocacy priorities.
    As you know, current law prohibits households made up entirely of 
full-time students from living in LIHTC apartments. Only four narrow 
exceptions exist for families who are:

      Receiving Temporary Assistance to Needy Families (TANF);
      Enrolled in a federal, state or local job training 
program;
      Single parents and their children, provided that such 
parents and children are not claimed as dependents of another 
individual; or
      Married full time students who file a joint return.

    If the tenant or applicant was enrolled as a full-time student for 
any of five months during the calendar year, she is considered a full-
time student for LIHTC purposes. The five calendar months need not be 
consecutive. Also, please be aware that the educational institution 
determines what constitutes ``full-time'' based on credit hours.
    The occupancy prohibitions for full time student households have 
become an obstacle for low-income families trying to make a better life 
for themselves. Often, child support agreements allow non-custodial 
parents to claim their children as dependents on tax returns. Because 
children in grades K-12 count toward the determination of whether 
family is a full-time student household, many custodial single parents 
who returned to school full-time become ineligible for LIHTC housing.
    Here is a common example of how single-parent families are 
disqualified under current law:
    Mrs. Jones has lived in a LIHTC unit for two years. She works 
during the day, and is also attending night school (full-time) to 
qualify for a promotion. Her oldest son is in the sixth grade. Her 
youngest son was not in school when they moved into their LIHTC unit, 
so the Jones family was not a full-time student household at that time. 
The youngest began kindergarten in September. Children in K-12 are 
counted as full-time students. The Jones family is a full-time student 
household now that both children are in school. But they no longer fall 
under the single-parent exemption because Mrs. Jones' ex-husband 
claimed the children as dependents on his tax return. The family does 
not meet any of the other exemptions to the full-time student occupancy 
rule provided by the Internal Revenue Code. The Jones family is no 
longer qualified to live in their LIHTC unit. They have to move.
    Senator Charles Grassley introduced a bill (S. 1241) that would 
address the unintended consequences of this policy for single-parent 
families. NAHMA supports S 1241 as a very positive step in the right 
direction. It allows the child to be a tax dependent of ``a parent,'' 
as opposed to just the head of household.
    While NAHMA is pleased that S. 1241 has generated interest in the 
Senate, we respectfully request a more comprehensive solution. The 
problem for single-parent families occurs when the child attends school 
(K-12) and is a tax dependent of the non-custodial parent. S. 1241 
addresses this issue, but we believe the fact that a child is attending 
school (as required by state law) should not be a factor which 
disqualifies otherwise qualified single-parent families from living in 
a LIHTC unit. Our members feel that counting children in grades K-12 as 
full time students for LIHTC purposes is contrary to the No Child Left 
Behind Act. State law, quite properly, requires that children be 
educated. It is simply unfair that sending children to school should 
play any role at all in excluding otherwise-qualified families from 
LIHTC housing.
    NAHMA also believes adults who are completing their GED 
requirements should be commended, rather than disqualified, from living 
in LIHTC apartments. This change would be particularly helpful for 
full-time GED students who are the sole members of the household. 
Because of the restrictions under the current law, our members must 
sometimes deny housing to these applicants, who would be otherwise 
qualified to live in the LIHTC unit. The current law is contrary to 
good public policy, since achieving a high-school education helps 
create economic opportunity that enables LIHTC tenants to eventually 
own a home or move to market rate apartment.
    As the Subcommittee considers changes to the LIHTC program, please 
support legislation which removes the unintended consequences of the 
current student rule by:

      Specifying that minor children in grades K-12 should not 
be counted as full-time students for LIHTC purposes;
      Removing the tax-dependent status of a single parent's 
minor children as factor to determine whether the family qualifies for 
the single parent with children exemption; and
      Adding a new exemption for working adults who are full-
time students pursing a high school diploma or GED.

    Furthermore, we request that these changes also extend to 
multifamily housing financed under the tax exempt mortgage revenue bond 
program. The only exemption provided for full-time student households 
to live in apartments developed under this program is for students who 
are entitled to file a joint tax return.
Low Income Housing Tax Credit Utility Allowance
    Escalating energy costs are placing severe financial strains on 
affordable properties. This situation is particularly challenging in 
the LIHTC program, because the tenants' utility allowance (UA) is part 
of the gross rent formula. Also, maximum tax credit rents can not 
exceed 30 percent of 60 percent of area median income. When energy 
costs rise and the UA increases, the rent to the owner decreases. A 
number of approaches could be used to ensure LIHTC developments remain 
financially viable as they struggle to deal with escalating utility 
costs.
    As a short-term solution, NAHMA looks forward to the IRS' 
publication of a proposed regulation for determining a more accurate 
utility allowance. This rule change was requested by a coalition of 
trade associations which represent owners and management agents 
involved with the Section 42 program. We agree that having a more 
accurate UA will often result in a lower UA for newer, energy efficient 
properties. We believe this change will improve the financial outlook 
for many struggling properties, and we look forward to the opportunity 
to submit comments.
    In the long-term, NAHMA believes Congress should seriously examine 
statutory changes to the LIHTC program to help properties deal with 
increasing utility costs. Ideally, our members would like Congress to 
consider removing the UA from the rent equation. Other possible 
solutions could result from examining the overall rent structure of the 
LIHTC program, or increasing cash flow to properties operating in areas 
where income limits are stagnant. NAHMA looks forward to working with 
the Subcommittee to address this challenging issue.
Encouraging Preservation of Affordable Rental Housing through Exit Tax 
        Relief
    The ``exit tax'' problem results from the financing structures used 
to build affordable housing many years ago. Today, owners face large 
tax bills if they sell the property, and there is no incentive to make 
any additional investment in the property. Under the current policy, 
owners can avoid recapture taxes by holding onto the property until 
death and leaving the property to their heirs at a stepped up basis or 
convert the property to market rate housing at a sufficient price to 
cover exit taxes.
    The Affordable Housing Preservation Tax Relief Act of 2007 (HR 
1491) offers a win-win alternative to the status quo. This legislation, 
and a similar Senate bill, S 1318, would waive the payment of 
depreciation recapture taxes if the affordable housing property is 
transferred to a qualified housing preservation entity that agrees to 
maintain the rent affordability restrictions for 30 years. In essence, 
these bills accelerate the stepped up basis that the property would 
receive upon the death of the investor in exchange for an agreement to 
keep the property affordable for another thirty years.
    NAHMA respectfully asks Subcommittee members to cosponsor and 
support HR 1491.
Conclusion
    In closing, please allow me to express NAHMA's sincere appreciation 
for the Subcommittee's interest in affordable housing. Our members are 
proud to provide communities of quality for low-income families to call 
home. I look forward to working with you and your staff to improve the 
tax-related affordable housing programs. Thank you for your 
consideration.

                                 

             Statement of National Association of Realtors
    On behalf of its 1.3 million members, the NATIONAL ASSOCIATION OF 
REALTORS' (NAR) salutes Chairman Neal for convening hearings 
on affordable housing. NAR has a long and ongoing commitment to 
affordable housing and looks forward to working with Congress to find 
solutions to this growing problem. We agree with Chairman Neal's view 
that there is a great need to modernize existing incentives under 
Internal Revenue Code Sections 42, 47 and 142. NAR believes that, in 
addition to these important existing provisions, two additional housing 
issues merit the Subcommittee's consideration. One has implications for 
the long-term sustainability of homeownership; the second addresses the 
shortage of entry-level and workforce housing.
Sustaining Homeownership in a Fragile Marketplace
    Recent media reports have noted an anticipated wave of foreclosures 
on homeowners who are unable to make payments associated with some 
adjustable rate mortgage products. In addition, some markets have 
experienced more than one quarter of declining home prices, thus 
putting some sellers in the unenviable position of having to sell their 
homes for less than the outstanding amount of the mortgage. (These 
transactions are typically identified as ``short sales,'' i.e., the 
seller is ``short'' of cash at settlement.) The news reports have not 
mentioned the tax problem that sellers in short sales and foreclosures 
will face if lenders forgive (i.e., do not require payment on) some or 
all of a mortgage debt at the time of disposition. These sellers just 
might get a visit from the IRS.
    Current Law. Any lender that forgives debt is required to provide a 
Form 1099 information report to the borrower and to the IRS stating the 
amount of the forgiven debt. The Form 1099 is required in any 
circumstance when a debt is forgiven, whether it is a short sale, 
foreclosure, deed in lieu of foreclosure or any similar arrangement 
that relieves the borrower of the obligation to pay some portion of a 
debt. Many home sellers have been alarmed at real estate settlements 
when they have learned that the IRS will receive this report and that 
they will, in many cases, be required to pay tax on this non-cash or 
phantom income. We believe that the taxation of phantom income is 
fundamentally unfair.
    The incidence of taxation on home sellers reinforces the 
fundamental unfairness of taxing phantom income. The overwhelming 
majority of sellers will never pay any income tax at all on the sale of 
their principal residence. Code Section 121, enacted in 1997, permits 
an exclusion of up to $250,000 ($500,000 on a joint return) of gain on 
the sale of a principal residence. As less than half of the existing 
housing stock has even a value of $250,000, the number of sellers who 
experience a gain in excess of $250,000 is small, indeed. (The current 
nationwide median sales price of an existing home is $212,300.) Those 
who do have taxable gains are taxed at capital gains rates (currently 
15%). This group might fairly be characterized as the truly fortunate.
    The other individuals who pay tax on the sale of a principal 
residence are the truly un fortunate. These are the individuals who 
find themselves in a short sale or in foreclosure or similar loss 
circumstance. This group will experience what, for most, will be the 
most cataclysmic economic loss of a lifetime. These individuals will be 
required to pay tax on phantom income. Moreover, they will pay income 
tax at ordinary rates. This seems a remarkably heavy burden.
    The Section 121 exclusion has proven to be a great benefit to 
taxpayers, particularly when they relocate from high cost areas to more 
moderately priced communities and as they downsize in anticipation of 
retirement. Section 121 is straightforward and is not riddled with the 
kinds of exceptions that create complexity. To undermine that provision 
would be a true burden for taxpayers who are changing their living 
circumstances. The provision does, however, underscore the anomaly of 
requiring that phantom income on the sale of a principal residence be 
taxed at ordinary rates when the only gains ever taxed are taxed at low 
capital gains rates.
    Who's Affected: Short Sales. During the first quarter of 2007, the 
median sales price of a residence nationally and in every region was 
lower than it had been in the first quarter of 2006. The national 
decline is 1.8% over last year. Those national figures are based on 
local data provided to NAR as it tracks existing home sales in 159 
Metropolitan Statistical Areas (MSAs). Of the 159 MSAs, in the first 
quarter of 2007, sixty had declining median sales prices compared with 
a year ago, ranging from a negligible decline of 0.1% (Columbus, Ohio 
and Corpus Christi, Texas) to a maximum decline of 14.9% (Elmira, New 
York). Data was not available or was unchanged for twelve MSAs. Thus, 
41% of MSAs experienced declining prices over the past year (60 / 147).
    Those who have owned their homes only for a short period are 
particularly exposed to the possibility of short sales. In a declining 
market, sellers are not necessarily at ``fault'' when they are unable 
to realize even the amount of their outstanding mortgages at sale. In 
addition, sellers in declining markets are not necessarily those who 
have been preyed upon in the subprime loan marketplace. They are not 
responsible for the declining home values around them, but they are 
certainly affected by the phenomenon. The most vulnerable are those who 
made low or zero downpayments. Often individuals in this class are 
first-time homebuyers. If they are wiped out financially on the sale of 
their first home, achieving the goal of homeownership a second time is 
substantially more difficult. Tax burdens on those transactions make 
the climb even steeper.
    Who's Affected: Foreclosure.  The most extreme predictions of 
foreclosures are that more than 2.4 million homeowners will lose their 
homes over the next 18 months. Often foreclosure occurs when economic 
conditions in a community change or when one wage earner in a family 
unexpectedly loses a job. However, in the current situation, the bulk 
of those who face foreclosure are those who are unable to keep up their 
payments on adjustable rate mortgages and similar products with 
floating interest rates.
    Most of these adjustable mortgages were issued during the past 2--3 
years at relatively low ``teaser'' interest rates that were to be 
adjusted after 2 to 3 years. Borrowers were sold on the idea that they 
would never be subject to the above-prime, above-market interest rates 
these products carried because borrowers would be able to refinance 
before the adjustment period arrived. In fact, these products were 
generally viable only if housing prices continued to escalate. Hot 
markets began to cool at the end of 2005, exposing these individuals to 
rising mortgage payments. Often these borrowers were less-sophisticated 
individuals with blemished or impaired credit ratings.
    These products are generally known as ``subprime'' loans. A 
significant majority (about 80% of subprime borrowers) has fared well 
with their loans, but the remaining minority has been unable to make 
their payments. Mortgage brokers and lenders made subprime products 
available both as original purchase money and as mechanisms to ``cash 
out'' and have funds available for a variety of uses, including debt 
consolidation, home improvements, vacations, cars and other 
consumption.
    The Ways and Means Committee does not have jurisdiction over the 
business practices of subprime lenders, but the Committee does have 
control over the tax treatment of borrowers who were harmed by 
shenanigans in that market. Significant numbers of these borrowers were 
first-time homebuyers. Many are members of minority groups or are 
immigrants. It is unthinkable that individuals who were subjected to 
sharp practice by lenders should have to pay tax when they lose their 
homes to foreclosure.
    Subprime borrowers are not necessarily the working poor buying 
their first house. A recent Wall Street Journal article explored the 
impact of subprime loans on one middle class African American 
neighborhood in Detroit. In that community, the subprime products were 
sold as ways to put an owner's equity to a so-called better use. (See 
``The Debt Bomb,'' Wall Street Journal, May 30, 2007, page A1.) The 
neighborhood is described as ``a model of middle-class home ownership, 
part of an urban enclave of well-kept Colonial residences and manicured 
lawns.'' But dandelions began to appear and the foreclosure rate in 
that neighborhood rose to 17%. Neighbors are concerned that ``nobody's 
going to want to buy into a neighborhood with 20% foreclosures.'' A 
death spiral begins that can defeat even the well-employed and educated 
residents who remain. When a neighborhood is subject to high rates of 
foreclosure, even the most creditworthy and financially conservative 
are harmed. Home values fall along with property maintenance; the 
dandelions start to grow.
    Corrective Measures.  To mitigate the harm that sellers and 
borrowers are experiencing, NAR seeks enactment of H.R. 1876 or relief 
that is similar to it. H.R. 1876 (and a Senate companion, S. 1394) 
provides that borrowers will not be subject to taxation when a lender 
forgives mortgage debt on a residence. The legislation provides 
safeguards so that owners cannot load up their debt level and then bail 
out. The bill provides that relief will not be granted to those who 
have added debt in excess of acquisition indebtedness. (Code Section 
163(h)(3)(B) defines interest on acquisition indebtedness as debt used 
to acquire, construct or substantially improve a residence. The debt 
must be secured by the residence.) NAR advocates this relief because it 
believes that individuals who have experienced a substantial economic 
loss should not become indentured at the time of the loss. If they must 
pay tax on phantom income, it will be that more difficult to repair 
their credit and acquire new housing either through purchase or lease.
    NAR looks forward to working with the Committee to refine this 
legislation and secure taxpayer relief at the earliest possible 
opportunity.
    Precedents for Relief.  The residential real estate market has not 
been subject to the combined pressure of waves of foreclosure and 
declining property values in recent memory. There is precedent for 
declining real estate values, however. Historically, residential real 
estate has almost always appreciated in value. However, in some limited 
situations, values in some neighborhoods fall, often through no fault 
of the owners. In the early 1980's, sky-high interest rates put 
significant downward price pressure on sellers. During that same 
period, markets in the ``oil patch'' of Texas and Oklahoma experienced 
declining values because of declines in the oil and gas economy. In the 
early 1990's, the collapse of the aerospace industry caused significant 
property value declines in Southern California. During that period, 16% 
of all sales in California were ``short sales.'' Similar experiences 
affected New England during a high-tech recession in the early 1990's. 
Denver and Phoenix were particularly vulnerable during the so-called 
credit crunch of that era, as well.
    Other circumstances might put downward pressure on prices in 
limited circumstances. For example, a major employer might leave an 
area, a military base could close or environmental problems might 
emerge. In other circumstances, a homeowner might be in a situation 
where they need to sell in a down market to relocate, or because of job 
loss or health reversals.
    Today, the decline in property values is not isolated to small 
geographic areas as it has been previously, but is rather experienced 
nationwide. The scope of foreclosure is substantial. Imposing heavy tax 
burdens in such a context seems unwise and sure to make a fragile 
housing environment even more vulnerable. Further, it seems 
particularly unfair to tax phantom income at a time when a taxpayer is 
in reduced economic circumstances.
    In 1999 and in 2000, the House and Senate passed several separate 
bills that each included mortgage cancellation tax relief identical to 
that found in H.R. 1876. Those bills were never in conference, however, 
so the provision was not enacted. In 2005, the Hurricane Katrina relief 
package included a provision identical to H.R. 1876. Its application 
was limited to debt forgiveness on mortgages secured by properties in 
the so-called GO Zone. The GO Zone relief was available only between 
September 2005 and January 1, 2007. NAR believes that it is time for 
that relief to be extended nationwide.
    Finally, during the commercial real estate collapse of the early 
1990's, Congress provided debt cancellation tax relief to owners of 
commercial real estate as part of the 1993 tax bill. The relief 
provision allows owners of commercial/investment real estate (i.e., 
real estate other than owner-occupied personal residences) to defer the 
recognition of income when debt is forgiven. The deferral takes the 
form of an adjustment to the basis of other real property.
    While not all owners of commercial real estate owned other 
properties that permitted them to utilize the deferral, the 1993 
provision does set a precedent for tax relief for owners of real estate 
during periods of market failure. As most home owners have only one 
residence, no analogous basis adjustment relief would be available. 
Further, it is extremely unlikely that individuals in short sales or 
foreclosures would be purchasing a replacement property immediately 
following either the economic loss of a short sale or the literal loss 
of a home in foreclosure. Thus, very few would have any property to 
which a basis adjustment might be applied.
Answers to a Few More Questions:
      What if a property declines in value, but is not sold? 
The mere fact of declining property values would not trigger the 
provision, as there is no yearly mark-to-market requirement for homes 
or other real estate assets. Tax relief should be extended when 
triggering events occur, however. These might include short sales, 
foreclosures, deed-in-lieu of foreclosure and workout arrangements with 
lenders that are intended to prevent a disposition.
      Do all lenders forgive mortgage debt when property values 
decline? No. In states with applicable laws, the lender may work out a 
repayment arrangement, particularly if the borrower has other assets.
      How many transactions would be affected by relief 
provisions? The figure is difficult to quantify. Between 2001 and 2005, 
virtually every residential real estate market in the U.S. was healthy 
and profitable and property values increased, often by double digit 
amounts. NAR has been unable thus far to identify a data source that 
would indicate how many sales in any market are short sales. 
Foreclosure data is available, but the fact that the marketplace 
anticipates a growing number of foreclosures makes it difficult to 
evaluate the impact.
      What is the revenue effect of the proposal? In 2000, the 
revenue estimate for an identical bill was a loss of $27 million over 5 
years and a loss of $64 million over 10 years. It has not been scored 
since 2000.
Homeownership in the Future--An Adequate Supply of Housing
    If one were to ask young people in their 20's or 30's to identify 
the most pressing housing problem in their communities, a majority 
would likely note the diminishing quantity of entry-level housing and 
the shortage of so-called ``work force'' housing. (Work force housing 
is usually thought of as housing that is priced so that school 
teachers, fire fighters, policemen and similar essential public sector 
professionals and young people can find housing in the communities 
where they work.) Realtors in those communities would also note that it 
is far easier to find financing for a home than it is to find entry-
level or work-force housing in many communities.
    Developers, financiers and tax professionals in older, inner-ring 
suburbs, central cities or rural areas might answer the same question 
from a different direction. They would note that the cost of land and/
or the availability of capital make it impossible to construct or 
rehabilitate owner-occupied housing at a price that is affordable in 
the community. The tax professionals might note, as well, that while 
there are incentives that make the construction or rehabilitation of 
rental housing financially feasible in these types of communities, 
there is no incentive or mechanism available that would equalize the 
costs and likely prices for developing or rehabilitating housing that 
would be available for purchase.
    Community development activists would note that the New Markets tax 
credit has been effective in bringing business development capital into 
communities that need redevelopment. They would go on, however, to note 
that community development would move more quickly and be more vibrant 
if the capital available for new businesses could be matched with 
incentives to bring decent housing to those neighborhoods.
    One solution was proposed in both the 108th and 109th Congresses. A 
bipartisan majority of Ways and Means Committee members sponsored 
legislation that had the backing of a wide variety of real estate and 
housing advocacy organizations. Those bills were H.R. 839 in the 108th 
[a Portman-Cardin bill with 303 cosponsors] and H.R. 1549 in the 109th 
[a Reynolds-Cardin bill with 200 cosponsors.] Entitled the ``Renewing 
the Dream Tax Credit Act,'' the legislation's stated goal was ``to 
allow an income tax credit for the provision of homeownership and 
community development.'' The proposed tax credit was designed on the 
model of the successful Section 42 low-income rental credit that 
equalizes the cost of providing rental housing with the amount of rent 
that can be charged.
    NAR urges the Committee to consider the Renewing the Dream Tax 
Credit act at an appropriate time as part of any discussion of 
affordable housing. The need for entry-level and work-force housing 
continues to become more intense. The current challenges in residential 
real estate and lending have not eased the difficulties that moderate 
and low-moderate individuals face in finding decent housing.
Supporting Affordable Housing Programs
    Finally, NAR wishes to inform the Committee of some of its efforts 
to advance the cause and elevate the profile of affordable housing 
through its state and local Realtor organizations. NAR has created a 
Housing Opportunities Board, made up of 35 Realtors, Realtor 
association executives, developers, and Housing Finance Agency leaders 
from around the country. The Board is a clearing house for a variety of 
local affordable housing initiatives. Primary among these are two grant 
programs: Ambassadors for Cities and the State and Local Initiative 
Fund.
    NAR and the U.S. Conference of Mayors (USCM) created the 
Ambassadors for Cities program, which brings together local REALTORS 
and mayors to increase home affordability and rental opportunities 
within a town or city. The goal of the Ambassadors program is to 
highlight successes in which REALTORS and cities have played 
significant roles. The initiative provides models that REALTORS and 
mayors can adopt in other cities. Each year, several highly successful 
REALTORS and mayors receive the Ambassadors for Cities designation and 
$5,000 grants to foster their initiatives. Twenty-three cities have 
participated in the Ambassador for Cities program. Grants have totaled 
$115,000.
    NAR also supports its State and Local Initiatives Fund to provide 
grants for a wide range of housing opportunity programs. Grants of up 
to $4,000 are awarded in April and October. By the end of 2007, the 
Fund will have made grants totaling $179,000.

                                 

      Statement of National Trust Community Investment Corporation
    Thank you Chairman Neal, ranking member English, and members of the 
Subcommittee for the opportunity to testify before you today on ways to 
simplify and amend the tax code to make affordable housing more 
available. My name is John Leith-Tetrault and I am President of the 
National Trust Community Investment Corporation. As such, I can speak 
about housing rehabilitation in historic and older buildings from both 
the tax credit syndicator and developer perspective. Before I begin, I 
would also like to thank Representatives Stephanie Tubbs Jones and--
again--Phil English in particular for introducing the National Trust 
for Historic Preservation's leading bill, HR 1043, the Community 
Restoration and Revitalization Act, which provides for a wide range of 
amendments to the federal historic rehabilitation tax credit. These 
changes would enhance the existing linkage between historic and low-
income housing tax credits, unlock more of the historic tax credit's 
potential for neighborhood reinvestment, and make the historic credit 
easier to use for smaller, main street projects.
    Four of these amendments would positively impact the economic 
feasibility of projects that rehabilitate existing buildings for reuse 
as affordable housing. HR 1043 now has 53 co-sponsors from both sides 
of the aisle. Senators Gordon Smith and Blanche Lincoln have introduced 
an identical bill, S 584 which currently has 3 Republican and 2 
Democratic co-sponsors.
    My organization, the National Trust Community Investment 
Corporation (NTCIC)--a wholly owned for profit subsidiary of the 1949 
Congressionally chartered National Trust--has invested $185 million in 
historic and new markets tax credit (NMTC) equity in housing and 
commercial properties over the past six years. NTCIC is a certified 
Community Development Entity and a recipient of $180 million in NMTC 
allocations since 2003. Rehabilitation, neighborhood reinvestment, and 
economic development are integral components of historic preservation, 
since the majority of the nation's National Register historic districts 
overlap census tracts where there are high percentages of people living 
in poverty.
    My testimony today will focus on the four affordable housing-
related provisions of HR 1043, and provide two case studies of how 
subsidy amounts from both the federal low-income housing (LIHTC) and 
historic tax credits would increase under this bill to create a more 
favorable financing structure and to better achieve affordable rent 
structures for these transactions. The many endorsers of this bill in 
the affordable housing and rehabilitation tax credit industries hope 
the Subcommittee will consider the provisions of HR 1043 in its effort 
to put together a Low-Income Housing Tax Credit amendments bill.
    1. The Nexus between Affordable Housing and Historic 
Rehabilitation--Affordable housing developers have always viewed 
historic and older buildings in low-income communities as an important 
resource for decent and affordable housing. Congress anticipated the 
rehabilitation of historic buildings for affordable housing in1986 by 
allowing the combination of these two credits as part of the Tax Reform 
Act of 1986. Since the inception of the historic tax credit program, 
combining the LIHTCs and historic tax credits has created, based on 
National Park Service estimates, about 86,000 affordable housing units 
nationwide. Despite popular belief, most older and historic building 
stock is located in economically depressed low-income census tracts as 
evidenced by research conducted by the NTCIC. That research shows that 
in 2006, 67 percent or two-thirds of all historic tax credit 
transactions approved by the National Park Service were located in 
high-poverty census tracts. A prime acknowledgement of this demographic 
reality is the 2002 IRS ruling that specifically considers the overlap 
of historic properties and high poverty areas by allowing New Markets 
Tax Credits (NMTC) and historic tax credits to be combined on certified 
historic commercial projects benefiting low-income businesses.
    2. The Impact of HR 1043 on affordable housing development_Among HR 
1043's broad set of provisions to improve the effectiveness of the 
historic tax credit, the following four are aimed at the historic tax 
credit's compatibility with affordable housing transactions:
    a. Elimination of the basis adjustment--Section 2 of HR 1043 asks 
Congress to treat the historic tax credits the same as the LIHTC and 
NMTC by eliminating the reduction of a property's depreciable basis 
that is required when combining the historic and low-income housing tax 
credits. Since the LIHTC is calculated as a fraction of the depreciable 
basis, the reduction of LIHTC basis by 100 percent of the amount of the 
historic tax credit significantly diminishes the value of combining 
these incentives. At today's pricing for both LIHTC and historic tax 
credits--$.95 on the tax credit dollar--the reduction in low-income tax 
credit value is a full 25 percent over the ten-year vesting period of 
the credit.
    In a so-called Difficult to Develop Areas (DDAs) or Qualified 
Census Tracts (QCTs), the impact of reducing the LIHTC basis by 100 
percent of the historic tax credit amount is even more severe. Due to 
the 130 percent basis boost provided to LIHTC developers of properties 
in these severely distressed areas, every $1.00 of historic tax credit 
reduces the LIHTC basis by $1.30. The net effect is to reduce the 
average value of the Low-Income Housing Tax Credit by nearly 33 
percent. These provisions have the perverse impact of providing less 
combined credit subsidy to projects in communities with the greatest 
economic need. While this provision may be seen as a way to prevent 
double dipping, no such treatment is required by the tax code on LIHTC-
only transactions, nor does the IRS require such an adjustment to the 
historic tax credit basis when combining the historic tax credit and 
the new markets tax credits. Furthermore, the legislative history of 
the LIHTC and historic tax credit indicates two different purposes that 
act independently on historic buildings used for affordable housing. 
The historic tax credit's purpose is to offset the higher cost of 
rehabilitation over the less expensive option of demolition and 
constructing anew. The LIHTC is meant to lower conventional debt 
service loads on rent restricted buildings. Allowing the full benefits 
of twinning these two credits therefore addresses the twin impediments 
to using historic properties for affordable housing.
    b. Providing a 130 percent basis boost for the historic tax 
credit--HR 1043 asks Congress to treat the historic tax credit the same 
as the LIHTC by providing a 130 percent basis boost in DDAs and QCTs. 
By definition, these are areas where incomes are especially low and the 
cost of development is high. The basis boost for the LIHTC is meant to 
help defray higher costs such as security, insurance, materials and 
labor so that these added costs do not force up targeted affordable 
rents. The same logic should apply to the special costs of historic and 
old building rehabilitations that are also proportionately higher in 
these designated areas. The net effect of this provision of HR 1043 
would increase the value of the historic tax credit by about 25 percent 
on a twinned transaction.
    c. Making housing an eligible use for the 10 percent ``older 
building'' portion of the historic tax credit--for reasons that are 
unclear from legislative history, the 10 percent portion of the 
historic tax credit program (the portion that accrues to non-certified 
historic structures) may not be used for housing. Whatever the reason 
was for this exclusion, it seems to be an anomaly in the context of the 
current national affordable housing need. Broadening the use of the 10 
percent portion of the historic tax credit to include housing would 
open up the potential to twin the 10 percent portion of the historic 
tax credit with the LIHTC. This new combination of federal housing 
subsidies would have several valuable applications. Since the 10 
percent credit is for non historic buildings only, this provision would 
potentially impact a much larger number of buildings eligible for both 
credits. The lack of historic design guidelines for the existing 10 
percent portion of the historic tax credit would provide affordable 
housing developers with more flexibility in addressing compromises 
between preserving a building's architectural character and overall 
construction costs. This measure would also add additional subsidy to 
transactions aimed at preserving existing affordable units as 
previously awarded HUD subsidies expire.
    A related change to the 10% credit, Section 6 of HR 1043 would 
index the eligibility date for older buildings to correspond with 
Congress' intent that these building be at least 50 years old. The 
current law requires that 10 percent portion of the historic tax credit 
properties must have been built before 1936. The indexing of the 10 
percent tax credit eligibility date would make buildings built before 
1957 eligible, adding approximately 225,000 post war multifamily 
properties to the stock of units that can receive the 10 percent 
portion of the historic tax credit.
Case Studies on the Impact of HR 1043 on Low-Income Tax Credit 
        Transactions
    a. Parkside Commons, the renovation of the former Meadville Junior 
High School in Crawford County, PA into 56 affordable housing units and 
3,000 sq. ft. of commercial space, is an example of a project that 
might have benefited from the enactment of HR 1043. The school is 
located on North Main Street in Meadville and shares prominent frontage 
on Diamond Park with the Crawford County Courthouse. It was built in 
1921 and was threatened with demolition until the current developer, 
Tom Kennedy of Erie, stepped forward with a historic rehabilitation 
plan. The project is currently under construction and has experienced 
cost overruns. The developer has addressed the situation by reinvesting 
his developer fee into the property, cutting the scope of work by 
$600,000 and phasing the project. According to the developer, Meade 
Junior High's conversion has gone from ``feasible to marginally 
feasible.''
    Parkside Commons has utilized both the LIHTC and historic tax 
credits. The LIHTC contributes $3 million and the historic tax credit 
provides $1 million in equity to a total development cost of $5.5 
million. Unfortunately it is situated across the street from a 
Qualified Census Tract and therefore could not apply for the 130 
percent LIHTC basis boost nor benefit from the proposed basis boost for 
the federal rehabilitation credit. The mandatory LIHTC basis reduction 
by the amount of the historic tax credit cost the Meade Junior High 
project $781,000 dollars, more than enough to restore the $600,000 in 
project enhancements abandoned due to the cost overruns. HR 1043's 
proposed elimination of the LIHTC basis reduction would have meant a 
great deal to Mr. Kennedy, the developer, and to the future tenants of 
the building.
    b. Worthington Commons Apartments is located on Summit, Federal and 
Worthington Streets in Springfield, Massachusetts. This property was 
formerly known as Summit Hill Apartments and was acquired in 
foreclosure by MassHousing. Subsequently, MassHousing selected First 
Resource Companies to be the developer. The redevelopment plan, which 
utilizes the LIHTC and historic tax credit calls for the rehabilitation 
of nine buildings into 111 apartments, rehabilitation of two abandoned 
buildings into 38 apartments, and the rehabilitation of a third 
abandoned building into a management office and resident community 
center. All of the units will be affordable.
    This $19 million project is in a Qualified Census Tract and 
therefore qualified for the 130 percent LIHTC basis boost. If HR 1043 
were enacted, the additional 130 percent historic tax credit basis 
boost would result in an additional $932,210 to the project. 
Additionally, $413,000 in equity could be generated by eliminating the 
reduction of the low-income housing tax credit basis by the amount of 
the historic tax credit. If available, this additional $1,345,210 could 
have been used by the developer to reduce the soft debt on the project 
provided by the Massachusetts Housing Partnership, (freeing these funds 
to be utilized for other projects in the state). Alternatively, the 
extra funding could have been used to establish reserves to fund 
operating deficits and maintenance for the property, the lack of which 
contributed to Summit Hill's original downfall.
    Chairman Neal, ranking member English, and members of the 
Subcommittee, thank you again for this opportunity to discuss how the 
enactment of HR 1043, The Community Restoration and Revitalization Act, 
would allow historic tax credits to make an even more significant 
financial contribution to the production of affordable housing that 
also relies on the low-income housing tax credit. I would be happy to 
answer any questions members of the Subcommittee may have.

                                  
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