Neighborhood Homes Investment Act: Overview and Policy Considerations

Neighborhood Homes Investment Act: Overview and Policy Considerations

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July 22, 2021
Neighborhood Homes Investment Act: Overview and Policy
Considerations
The Neighborhood Homes Investment Act (NHIA; S. 98
housing co-op. Second homes and rental properties would
and H.R. 2143) would create a tax credit intended to
not be eligible for the credit.
encourage the development of affordable homes for
ownership in lower-income areas. The Biden
Credit Amount
Administration has called for passage of the proposal. The
The credit amount would be equal to development costs
bill was previously introduced in the 116th Congress (S.
minus the sales price, up to a limit. No credit would be
4073, H.R. 3316, and H.R. 2).
allowed if the sales price covered development costs. The
credit amount would be limited to no more than 35% of the
Overview of the Proposal
lesser of (1) qualified development costs, or (2) 80% of the
The NHIA would provide federal tax credits —known as the
national median sales price for new homes as determined
neighborhood homes investment credits (NHICs)—to offset
by the most recent census data. For an example of the credit
the cost of constructing or rehabilitating owner-occupied
calculation for new construction, see Table 1.
homes. The credits would be awarded to project sponsors
(e.g., developers), which would either use the credits
Table 1. New Construction Credit Example
directly to offset development and rehabilitation costs or
sell the credits to investors to raise capital for home
Land Acquisition Cost
$40,000
construction.
Construction Cost
$200,000
Under the bill, states would designate neighborhood homes
Total Development Costs
$240,000
credit agencies to screen sponsor applications and allocate
Less: Sales Price
($190,000)
credits according to a federally required, but state-created,
qualified allocation plan (QAP). Each state would be
Difference
$50,000
allowed to annually award an amount of credits equal to the
greater of (1) $6 multiplied by its population, or (2) $8
Tax Credit Limit (35% of
$84,000
million. Annual allocation authority would be adjusted for
$240,000)
inflation.
Tax Credit Allowed
$50,000
The mechanics of the NHIC would closely resemble the
Source: Neighborhood Homes Coalition Presentation.
low-income housing tax credit (LIHTC), which is a federal
tax credit for the construction and rehabilitation of
In this example, the tax credit amount allowed would be
affordable rental housing. The new markets tax credit
$50,000 (the difference between development costs and the
(NMTC) and several energy-related tax credits also use the
sales price). Since this amount is less than the tax credit
same general approach, which is often referred to as tax
limit ($84,000), it is not subject to this cap.
equity financing.
Income Limits
Selected Proposal Details
Credits would be restricted to properties with occupants
whose income did not exceed 140% of an area’s or state’s
Eligible Development Types and Claimants
median income. A state’s median income would be used for
The credits could be used by developers to construct new
nonmetropolitan (i.e., rural) areas. The income limit would
homes or rehabilitate existing properties for sale.
be the same regardless of whether the home was new
Homeowners who substantially rehabilitate—meaning
construction or a rehabilitation project.
incurring a cost of at least $20,000—their principal
Sales Price Limits
residence could also benefit from the credit, though they
would have to partner with a business taxpayer (e.g.,
The sales price of a property would be limited to four times
lender) because the credit could not be claimed by
the appropriate median income measure. This price limit
individuals. Credits could not be claimed until construction
would increase to five times, six times, and seven times the
or rehabilitation were complete, and in the case of a sale,
relevant area median income for properties with two, three,
when the property was sold to a qualified homebuyer.
and four residential units, respectively.
Eligible Property Types
Resale Timeframe Limit
Eligible property would be restricted to single-family
Properties resold within five years of completion would
homes containing four or fewer residential units;
require the seller to pay a portion of the gain from the sale
condominium units; and houses or apartments owned by a
to the state’s neighborhood homes credit agency. The
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Neighborhood Homes Investment Act: Overview and Policy Considerations
payment amount would be equal to 50% of the gain for
The extent to which sales prices may be lower and
sales occurring in the first year The payment amount would
development costs higher than they otherwise would be
be reduced to 40% (year two), 30% (year three), 20% (year
may depend on how well state HFAs determined if a project
four), and 10% (year five), depending on when the sale
satisfied the financial feasibility requirement contained in
occurred.
the NHIA. This clause of the bill would require housing
agencies to consider funding sources, proceeds, costs, and
Location Restrictions
fees when determining if a credit award was appropriate.
Credits would be restricted to properties located in a
The ability to do this could vary across states and depend
qualified census tract (QCT), as defined in the bill. QCTs
on staffing resources and valuation expertise. Some have
are census tracts that generally have lower income levels,
raised concerns over how well HFAs are able to determine
lower home values, and higher poverty rates.
financial feasibility in the LIHTC program.
Administration
Existing Programs
The NHIC would be a provision of the Internal Revenue
At least two HUD programs currently exist that can be used
Code (IRC) and therefore would be administered at the
to support the development of affordable owner-occupied
federal level by the Internal Revenue Service (IRS). The
housing: the HOME program and the Community
primary administrators of the program, however, would be
Development Block Grant (CDBG) program. Both
the state neighborhood homes credit agencies. Most states
programs provide grants to states and localities, which have
would likely designate their state housing finance agency
discretion over what types of housing initiatives to pursue.
(HFA) as the neighborhood homes credit agency, given
These programs do not specifically target the same
HFAs’ experience with administering the LIHTC program.
homebuyers or locations as the NHIC, and certain program
requirements may limit the extent to which funds can be
The federal government’s principal housing agency, the
used for some NHIC-eligible activities. Congress could
Department of Housing and Urban Development (HUD),
potentially adjust these programs to accomplish the same
would have no direct oversight of the program unless other
objective as the NHIC. While direct grants may be more
HUD subsidies were involved. HUD would be involved in
cost-effective than the tax equity approach used by the
some indirect aspects of the program’s administration, such
NHIC, the private sector serves a project oversight and
as identifying QCTs and providing the area median income
evaluation role in tax equity deals that can be valuable to
data.
the government.
Selected Policy Considerations
Data Collection and Oversight
The NHIA would require states to submit an annual report
Budgetary Cost
to the Treasury Secretary summarizing information about
The Joint Committee on Taxation (JCT) would provide
the program. It is not clear that these reports would be
Congress with an official revenue estimate of any NHIC
detailed enough to allow for evaluation of the credit’s
proposal. It is possible to get an idea of the budgetary
effectiveness or cost relative to alternatives, or for
impact since the proposals thus far specify that each state
comprehensive oversight. Primary oversight would be
would receive credits authority equal to the greater of (1) $6
provided by designated state agencies, likely the HFAs,
multiplied by its population, or (2) $8 million. Applying
which have experience administering the LIHTC program.
these dollar figures to the 2021 Calendar Year Resident
Population Figures, used by the IRS for determining states’
The IRS would have oversight of the NHIC at the federal
LIHTC and tax-exempt private activity bonds, suggests a
level. HUD would have no direct oversight responsibilities.
NHIC would cost approximately $2.1 billion annually in
A 2015 GAO study found that the IRS provided little
terms of foregone federal tax revenue.
oversight of the LIHTC program and recommended that
Congress designate HUD as a joint administrator of the
Sales Price and Development Cost Incentives
program. A similar recommendation could be considered
The NHIC would cover the difference between
for the NHIC. However, without additional funding, this
development costs and the sales price. If the sales price
would likely just shift the burden to HUD without
exceeded development costs, no credit would be allowed. If
providing additional resources to carry out the directive.
the sales price did not exceed development costs, then the
credit amount would equal the difference, up to a limit. A
Current law would prohibit the IRS from sharing detailed
potential concern could be that developers may lower their
tax return information about NHIC with HUD (and most
sales prices below what they could otherwise receive and
other researchers) to study the program. Congress could
not be as cautious containing development costs. This is
provide an exception to this prohibition, as it has to several
because a lower sales price or higher development costs
other departments, under Section 6103(j) of the IRC.
would be offset dollar-for-dollar up to the maximum credit
Congress could also direct states to report, and HUD to
limit. All else equal, this would result in fewer total
collect, detailed transactional data not reported to the IRS.
properties receiving financing and would unnecessarily
This would not be a costless venture.
increase the per-property cost to the government. A lower
sales price, however, would make homeownership more
Mark P. Keightley, Specialist in Economics
affordable even if the buyer would be willing and able to
pay a higher price. Lower neighborhood home prices could
IF11884
also be of concern to existing owners.
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Neighborhood Homes Investment Act: Overview and Policy Considerations

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