[Congressional Record Volume 149, Number 77 (Thursday, May 22, 2003)]
[Senate]
[Pages S7003-S7004]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRAHAM of Florida (for himself, Mr. Hatch, and Mr. 
        Jeffords):
  S. 1119. A bill to amend the Internal Revenue Code of 1986 to clarify 
the eligibility of certain expenses for the low-income housing credit; 
to the Committee on Finance.
  Mr. GRAHAM of Florida. Mr. President, today I am re-introducing 
legislation that will improve the effectiveness of one of the most 
successful programs we have to help Americans get affordable housing, 
the Low-Income Housing Tax Credit. I am proud to be joined in this 
effort by my esteemed colleagues, Senators Hatch and Jeffords.
  The need for affordable housing is as great today as ever. The 
generally accepted definition of affordability is for a household to 
pay no more than 30 percent of annual income on housing. Today, twelve 
million renter and homeowner households pay more than 50 percent toward 
housing costs. In fact, nowhere in the country can a family with one 
minimum wage worker afford the rent on a two-bedroom apartment.
  The Low-Income Housing Tax Credit was created in 1986 to attract 
private sector capital to the affordable housing market. It has been 
the major engine for financing the production of low-income multi-
family housing. The program offers developers and investors in 
affordable housing credit against their federal income tax in return 
for their investment. Since its inception, the Low-Income Housing Tax 
Credit has assisted in the development and availability of roughly 
850,000 new and rehabilitated units of affordable housing.
  In the fall of 2000, the Internal Revenue Service isssued its first 
guidance in the program's 16-year history. That guidance was issued in 
the form of several technical advice memoranda, or TAMs, and specified 
which development costs will be eligible and ineligible for the credit, 
known as eligible basis.
  TAMs are not official guidance, reviewed by the Treasury Department, 
but instead, are IRS legal opinions providing direction to IRS agents 
conducting audits. They are not citable in court proceedings because 
they are not official guidance. In the absence of official guidance, 
TAMs could be taken as the official government position. In fact, that 
is exactly what is happening.
  The problem is that the IRS's position is contrary to common industry 
practice, and eliminates many reasonable, legitimate and necessary 
costs from the tax credit. This has caused uncertainty among investors 
as to whether the credits for which they have paid, will be realized. 
Moreover, these guidelines could adversely affect the ability of States 
to target affordable housing to those who need it the most.
  It is important to understand, this legislation will not increase the 
pool of low-income housing tax credits. The Internal Revenue Code sets 
the maximum amount of credits that States may allocate to developers of 
affordable housing properties. Thanks to legislation that we enacted in 
2000, the amount available to each State has increased from $1.50 to 
$1.75 times the State's population. That 40 percent increase is 
expected to produce about 30,000 more units a year. 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 do, 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 owner to offer lower rents than otherwise would 
be the case.
  The most unique feature of the program is that state housing finance 
agencies award Federal tax credits to developers of rental housing. 
Since these agencies have considerable flexibility in how they 
distribute the credits, developers compete for the limited number of 
tax credits by submitting project proposals. The agencies rate the 
proposals, and allocate credits to individual properties based on 
criteria provided in the Internal Revenue Code, and on the state's 
particular housing needs and priorities.
  The Internal Revenue Code also limits the amount of credits a state 
may allocate to a particular property. The limit is determined as 
percentage of the basis of a property. The basis is, generally 
speaking, the cost of constructing a building that is part of an 
affordable housing project. Non-federally subsidized new construction 
may receive a 9 percent credit. Existing buildings and new buildings 
receiving other federal subsidies may get a 4 percent credit.
  The IRS takes the position that certain construction costs should not 
be included in basis. This position makes a large number of affordable 
housing properties financially unfeasible, and weakens the economics of 
those that still pass minimum underwriting requirements. The loss of 
equity would surely affect the properties that serve the lowest income 
tenants, provide higher levels of service, or operate in high cost 
areas. The reason that this is problematic is simple. Reducing the 
amount of credits does not reduce the development costs. It merely 
alters the source of financing from equity to debt, forcing either 
higher rents or lower quality construction.
  Apparently, the Treasury Department and Internal Revenue Service 
agree that this is an issue worthy of review, as both agencies have 
included it in their business plan. Last year, the IRS issued new 
guidance on one of the items addressed by the TAMs, but there does not 
appear to be a full review of the effect of the positions set forth in 
the TAMs anytime soon.
  This legislation would amend the Internal Revenue Code to specify 
that certain associated development costs are to be included in 
eligible basis. In many cases, the largest item excluded from eligible 
basis under the TAMs is ``impact fees.'' Impact fees are fees required 
by the government ``as a condition to the development'' and considered 
ineligible because they are one- time costs, unlike building permits 
that need to be renewed each time a building is built. These fees cover 
a wide range of infrastructure improvements including sewer lines, 
schools, and roads. Certainly, whether or not they are includable 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. 
As I mentioned previously, the IRS has recently addressed the inclusion 
of impact fees in eligible basis, but not other costs directly related 
to building construction.

  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 
includable in basis, and any cost of financing attributable to 
construction of the building is includable 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 hosing 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 would like, and there is a 
significant likelihood that we are going to need even more affordable 
housing in

[[Page S7004]]

the not too distant future. 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.
  I ask unanimous consent that the text of this bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                S. 1119

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. ELIGIBILITY OF CERTAIN EXPENSES FOR LOW-INCOME 
                   HOUSING CREDIT.

       (a) In General.--Subsection (d) of section 42 of the 
     Internal Revenue Code of 1986 (relating to low-income housing 
     credit) is amended by adding at the end the following new 
     paragraph:
       ``(8) Associated development costs included in basis.--
       ``(A) In general.--Solely for purposes of this section, 
     associated development costs shall be taken into account in 
     determining the basis of any building which is part of a low-
     income housing project to the extent not otherwise so taken 
     into account.
       ``(B) Associated development costs.--For purposes of 
     subparagraph (A), the term `associated development costs' 
     means, with respect to any building, such building's 
     allocable share of--
       ``(i) any cost incurred in preparing the site which is 
     reasonably related to the development of the qualified low-
     income housing project of which the building is a part,
       ``(ii) any fee imposed by a State or local government as a 
     condition to development of such project,
       ``(iii) any reasonable fee paid to any developer of such 
     project,
       ``(iv) any professional fee relating to any item includible 
     in the basis of the building pursuant to this paragraph, and
       ``(v) any cost of financing attributable to construction of 
     the building (without regard to the source of such financing) 
     which is required to be capitalized.''
       (b) Effective Date.--The amendments made by this section 
     shall apply to--
       (1) housing credit dollar amounts allocated after December 
     31, 2002, and
       (2) buildings placed in service after such date to the 
     extent paragraph (1) of section 42(h) of the Internal Revenue 
     Code of 1986 does not apply to any building by reason of 
     paragraph (4) thereof, but only with respect to bonds issued 
     after such date.
                                 ______