Two Groups Propose Solutions to Fix Frozen Rent Problem
By Caitlin Jones & A. J. Johnson
5 min read
TWO ORGANIZATIONS have developed proposed legislative solutions to the problem of anticipated widespread, prolonged “frozen rents” for low-income housing tax credit projects in many parts of the U.S.
This problem was exacerbated last year when the U.S. Department of Housing and Urban Development (HUD) changed, to the American Community Survey (ACS), the data source it used to compute household area median incomes (AMI) for metropolitan areas and non-metropolitan counties throughout the nation for Fiscal Year 2007.
This switch resulted in reduced AMI levels, some sharply lower, for many parts of the country from the FY 2006 levels. The application of formula “exceptions” — the most prevalently used being the historical exception — prevented the income and rent limits for LIHTC tenants and incomes in these affected areas from falling below their FY 2006 levels. However, because the AMI levels fell, maximum LIHTC rents and tenant income limits in these areas were “frozen” and will stay that way — for one or more years — until the AMI rises to catch up to and surpass where it had been prior to FY 2007.
Separate studies by the National Association of Home Builders (NAHB) and by Novogradac & Company LLP, a national accounting and consulting firm, have flagged and estimated the nationwide extent of this frozen rent problem. Both contend that it could take many years for maximum LIHTC rents to rise in the most adversely affected areas if the current system of computing median incomes continues. LIHTC participants contend that in areas with frozen rents, new housing credit projects will be tougher to underwrite, and existing properties will be harmed financially because owners won’t be able to raise rents to keep pace with increases in operating expenses including utilities and taxes. (For background on Novogradac and NAHB studies, see Tax Credit Advisor, January 2008, p. 2, July 2007, p. 2.)
Proposed Solutions
LIHTC program participants hope Congress this year will enact a legislative amendment to the housing credit program to “fix” the frozen rent problem for credit properties. In fact, a list of potential housing credit amendments put together by House Ways and Means staff includes a placemarker for a to-be-developed legislative proposal to do this.
In the meantime, NAHB and the national nonprofit Local Initiatives Support Corporation (LISC) have developed separate proposed solutions to the falling AMI/frozen rent problem, both of which would require passage of legislation. Representatives of the two groups discussed their proposals in comments 1/15/08 on a panel during the National Council of State Housing Agencies’ HFA Institute conference in Washington, DC.
Paul Emrath, NAHB Assistant Vice President, said NAHB’s proposal would keep the current system in place for new LIHTC projects; initial LIHTC tenant income and rent ceilings would be set as determined under the current system. However, once a project is built and operating, the proposal would provide for yearly inflation adjustments (up or down) of these LIHTC income and rent ceilings by the annual percentage change in the Consumer Price Index (CPI). In addition, projects that had frozen rents in 2007 would be entitled to a special “catch-up” equal to the CPI increase for at least one year (2007).
Benson Roberts, LISC Senior Vice President for Policy and Program Development, described LISC’s proposal, which while similar to NAHB’s would incorporate caps and floors on annual adjustments of rent and income ceilings to protect both tenants and building owners.
For new projects, the current system would be used to establish the initial LIHTC tenant income and rent ceilings. However, going forward, rent and income ceilings would be adjusted annually but the annual increase could not exceed the annual change in the CPI plus 2%, and the minimum increase would be the CPI minus 2% (but not below 0%).
For existing properties, LISC’s proposal would provide for the FY 2006 AMI levels to be the starting point for areas that had AMI decreases in the FY 2007 figures. Again, going forward, rent and income ceilings would be adjusted annually, but the increase could not exceed the annual change in the CPI plus 2%, and the minimum increase would be the CPI minus 2% (but not below 0%). Therefore, if the CPI changed one year by 3%, the maximum and minimum increases would be 5% and 1%, respectively.
Roberts said LISC’s proposal for existing properties is designed to return the pattern of annual changes in the LIHTC income and rent ceilings to the same “trajectory” they were on prior to the switch to the use of ACS data.
