[Congressional Record Volume 147, Number 159 (Friday, November 16, 2001)]
[Extensions of Remarks]
[Pages E2108-E2109]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




   INTRODUCTION OF LEGISLATION TO CLARIFY THE ELIGIBILITY OF CERTAIN 
             EXPENSES FOR THE LOW-INCOME HOUSING TAX CREDIT

                                 ______
                                 

                         HON. NANCY L. JOHNSON

                             of connecticut

                    in the house of representatives

                       Friday, November 16, 2001

  Mrs. JOHNSON of Connecticut. Mr. Speaker, I am introducing 
legislation to clarify the standards for determining basis of property 
for purposes of calculating the amount of low-income housing tax 
credits for which that property may be eligible. I am proud to be 
joined in this effort by Reps. Charles Rangel, Mark Foley, and Gary 
Miller.
  A year ago, I called my colleagues' attention to the fact that the 
Internal Revenue Service, in a series of technical advice memoranda, 
had taken a very restrictive view of what items were includible in 
basis for purposes of allocating low-income housing tax credits. At 
that time, I noted that this would have an adverse impact on the 
ability of states to target affordable housing to those who need it the 
most.
  It was also troubling to me that after 16 years during which the 
Treasury Department had failed to issue regulations or provide any 
other guidance on this issue, the first pronouncement was in a series 
of technical advice memoranda. TAMs are not official guidance, reviewed 
by the Treasury Department, but merely IRS legal opinions provided to 
an IRS agent during an audit. They are not citable in court proceedings 
because they are not official guidance. However, in absence of official 
guidance, I was concerned that these TAMs would be taken as an official 
government position. In fact, that is exactly what has happened, as 
investors in tax credit properties

[[Page E2109]]

have required that any properties in which they invest must meet the 
standards set forth in the TAMs.
  It is important to note that the Treasury Department agreed that this 
was an issue worthy of review and placed it on this year's Treasury 
Department/Internal Revenue Service business plan. I understand that 
there may be some guidance in the pipeline on one of the items 
addressed by the TAMs, but there does not seem to be much progress on a 
full review of the impact of the positions taken in the TAMs on the 
policy goals of the low-income housing tax credit program.
  It is important to understand that this legislation will not increase 
the number of low-income housing tax credits available. The maximum 
amount of credits that states may allocate to developers of affordable 
housing properties is set by the Internal Revenue Code. Thanks to 
legislation that we enacted last year, that amount available to each 
state will increase next year to $1.75 times the state's population. 
That is a hard cap on the revenue impact. Since the unmet demand for 
affordable housing is many times greater than what can be built with 
the help of the credit, our legislation should not affect revenues. In 
fact, the only way for this legislation to have a revenue impact is if 
the legislation makes it easier for the states to use the credits we 
intend for them to have under present law.
  What this legislation does, however, is very important. To understand 
its importance, it may be useful to have a little background on how the 
low-income housing tax credit works. In economic terms, the credit is 
equity financing which replaces a portion of debt that would otherwise 
be necessary to finance a property. By replacing debt, credits work to 
reduce interest costs. This allows a property to be rented at lower 
rates than otherwise would be the case.
  States allocate credits to individual properties based on criteria 
provided in the Internal Revenue Code and additional criteria they 
establish to provide affordable housing that closely matches the needs 
of the state's population. A state, thus, has a strong incentive not to 
allocate more credits to a property than necessary, because, if it did, 
it would have fewer credits to allocate to other properties.
  In addition, the amount of credits a state may allocate to a 
particular property is limited by the Internal Revenue Code. The limit 
is determined as percentage of the basis of a property. The basis is, 
generally speaking, the costs of constructing a building that is part 
of an affordable housing project. The percentage is 9 percent for a new 
building that is not otherwise federally subsidized, and 4 percent for 
existing buildings and new buildings that receive other federal 
subsidies. Thus, the smaller the basis is, the fewer the credits that 
may be allocated.
  The problem is that the TAMs take the position that certain 
construction costs should not be included in basis. The effect of this 
position is to make a large number of affordable housing properties 
financially infeasible and weaken the economics of those that still 
pass minimum underwriting requirements. The loss of equity would affect 
most severely properties that serve the lowest income tenants, provide 
higher levels of service or operate in high cost areas. The reason for 
this is simply that reducing the amount of credits does not reduce the 
development costs. It merely removes a source of financing, forcing 
either higher rents or lower quality construction.
  In many cases the largest item that would be excluded from eligible 
basis under the TAMs are impact fees. These fees, covering a wide range 
of infrastructure improvements including, sewer lines, schools, roads, 
are imposed because of the ``impact'' of construction of the 
improvements on the land and would not be incurred if the land remained 
undeveloped. Certainly, whether or not they are includible in basis for 
the purpose of calculating the amount of tax credit, these costs will 
be incurred and will impact the economics of the property. This 
legislation will clarify that these costs are includible in eligible 
basis.
  Other items that would be severely restricted or excluded from 
eligible basis under the interpretations expressed in the TAMs are site 
preparation costs, development fees, professional fees related to 
developing the property, and construction financing costs. The 
legislation we are introducing today will clarify that any cost 
incurred in preparing a site which is reasonably related to the 
development of a qualified low income housing property, any reasonable 
fee paid to the developer, any professional fee relating to an item 
includible in basis, and any cost of financing attributable to 
construction of the building is includible in basis for the purpose of 
calculating the maximum amount of credit a state may allocate to a low-
income housing property.
  The intent of these clarifications is simply to codify common 
industry practice before the issuance of the TAMs. Not only will the 
legislation allow the low-income tax credit program to provide better 
quality housing at lower rental rates than would be possible if the 
positions taken in the TAMs are followed, but clarification will help 
simplify administration of the credit by giving both taxpayers and the 
Internal Revenue Service a clearer statement of the standards that 
apply in calculating credit amounts.
  Our economy is not doing as well as we thought it was a year ago when 
I first spoke about this issue. We are going to need even more 
affordable housing than we thought last year. We should be proud that 
we increased the amount of low-income housing tax credits that will be 
available to help finance this housing. What we need to do now is to 
make sure that these credits are used as efficiently as possible to 
provide housing for those who need it the most. The legislation we are 
introducing today will help achieve that goal.

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