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Tax bill amendment puts artist housing in jeopardy

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The change could have implications for affordable housing as a whole as well

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Affordable housing advocates were already scrambling after the House’s tax reform bill included a surprise elimination of the tax-exempt private activity bonds that are used to fund low-income housing units across the country.

But a last-second amendment added to the Senate bill early Saturday morning by Pat Roberts (R-Kan) has put another group’s housing in the tax bill’s crosshairs: artists.

As part of the Low-Income Housing Tax Credit (LIHTC) program, developers and property owners are currently allowed to target and market to low-income artists for their LIHTC projects, one of the very few exclusions to a rule that says LIHTC units must be open to the general public. But Roberts’s amendment swaps out artists for veterans, and applies the change retroactively to development projects already under way.

Because of the retroactive effective date, the provision could not only undermine current and future housing for low-income artists, but experts believe it could undermine the entire LIHTC program, which has helped fund almost 3 million low-income housing units since the program’s inception in 1986.

“If I’m an investor of a property, I depend on having some level of certainty,” said Peter Lawrence, Director of Public Policy for Novogradac & Company, an accounting firm that specializes in LIHTC. “If I get the sense that Congress is going to retroactively pull the rug out from under my feet, do I want to risk investing my capital up front for 15 years when there might be something else coming down the pike? It would be troubling to the program, even to those who never invested in artist housing.”

Low-Income Housing Tax Credits, explained

The Low-Income Housing Tax Credit program was enacted as part of the Tax Reform Act of 1986, the last successful tax reform effort. The program works like this: The IRS allocates LIHTCs to states on a per-capita basis. States then field offers for the credits from developers who agree to include low-income units in their project. Developers then flip those credits to an investor, likely a bank, to raise equity for their project.

To affordable housing advocates, the program is a win-win-win: developers get equity for their project; investors get a tax credit; and low-income people get an affordable housing option. But the units come with a “general public use requirement” that stipulates the units must be open to everyone. The rule was meant to keep an employer from using the credits to build units for their employees, or to keep social clubs like the Elks Lodge and Kiwanis from using them to build housing for its members.

That provision was tweaked by the Housing and Economic Recovery Act of 2008. In the mid-2000s, the IRS started auditing LIHTC development projects that were marketing to artists, which are often lured to a city district as part of a city’s community revitalization program. Congress exempted artists from the general public use rules, in addition to people with “special needs,” like the elderly or disabled, and people who are members of a specific group under a federal or state program that supports housing for that group. The provision ended the IRS’s effort to audit LIHTC projects that were marketing to artists.

What the Roberts amendment means for artists and veterans

Currently, artists who meet the income requirements can apply for LIHTC units whether the project is marketed to artists or not, and the Roberts amendment doesn’t change that; removing the artist exclusion from the general requirement rule just means that developers who target artists could be subject to an audit by the IRS, and ultimately have their LIHTCs recaptured if they’re found to be in violation of the rule.

Conversely, veterans who currently meet the income requirements can apply for LIHTC units despite not being exempt from the general requirement rule; some might even be exempt from the general requirement rule on the basis of a disability or “special need.” The inclusion of veterans would simply mean a developer using LIHTCs could target veterans with their project without being subject to an audit by the IRS for possible violations of the general requirement rule.

But without developers targeting them, artists might find the amount of low-income housing available to them start to shrink. What’s worse, the retroactive effective date might put a hard stop to the LIHTC unit in which they currently live, as the layer of protection they’ve enjoyed since 2008 is removed. If the IRS recaptured the tax credits used to fund the project, the developer might not be bound by rules that require the rent for those units meet affordability standards. Rent could go up, and artists could be displaced, although there’d likely be a three-year grace period consistent with current law.

“What that would do is instantly all those properties that were depending on the safe harbor for artist housing would be taken away,” Lawrence said. “All those properties would, instantly, be potentially subject to tax credit recapture because that safe harbor would be taken away from them. It’s particularly concerning to owners of existing properties, investors, and developers who operated in good faith with the existing safe harbor in the law to then have it taken away on a retroactive basis.”

Why did Roberts submit this amendment?

This is unclear, and calls to Roberts’s office weren’t returned as of publication. Because Republicans have pushed so hard to get tax reform done as quickly as possible, it’s possible that in their haste Roberts submitted an amendment without fully understanding its implications.

What’s puzzling is that there’s no requirement in the LIHTC program that there can only be three exceptions to the general use requirement, meaning Roberts could have simply added veterans to the exclusion and made no changes to the status of artists. Removing artists doesn’t raise any revenue or change the cost of the program in any way because the total cost of LIHTCs is fixed on a per capita basis.

And even more puzzling is the retroactive effective date, which could not only jeopardize existing low-income housing units, but spook investors away from funding future developments, which could be catastrophic to the LIHTC program and thus the affordable housing effort.

Lawrence said his firm reached out to Roberts and believes there’s a good chance that, at a minimum, the retroactive effective date will be removed as the House and Senate try to reconcile their bills. Still, there’s the question of why Roberts would go out of his way to jeopardize the status of artists, who are often seen by cities as an integral part of their community revitalization strategies.

“They seem to understand the problem with the effective date,” Lawrence said. “You never want to absolutely assume everything is going to happen until you see it on paper, but from the conversation they understand at a minimum that the effective date for each have to change.”