Chairman Santorum and Members of the Subcommittee:
On behalf of the Rural Rental Housing Association of Texas, Inc. (the "Association"), I am pleased to have the opportunity to comment on the effectiveness of the low income housing tax credit provisions of Section 42 of the Internal Revenue Code in producing affordable housing and revitalizing neighborhoods. The Association is the oldest and largest state association devoted to the development, management and preservation of affordable family and elderly rental housing in rural areas. Our membership is diverse and includes developers, non-profit organizations, housing authorities, management companies, service providers, financial institutions, resident managers, and others interested in affordable rural housing. The Association’s address is 417-C West Central, Temple, Texas 76501. The Association’s membership represents over 790 apartment communities with over 27,900 rental units, mainly financed by the Rural Housing Service ("RHS") in Texas. Thank you for permitting us to share our views.
My name is Patrick Barbolla, and I am President of the Fountainhead Companies and a multifamily housing developer from Fort Worth, Texas. I am Chairman of the Association’s Legislative Committee and its Immediate Past President. While I have developed new apartment communities, my recent experience is concentrated in the rehabilitation of rural multi family developments.
Currently, §42(h) of the Internal Revenue Code creates a State housing tax credit ceiling for any calendar year of $1.25 multiplied by the State population. This ceiling should be increased to $1.75 per capita and indexed for inflation. This increase is justified by the severe need for affordable housing, the proven effectiveness of § 42 in fulfilling its legislative purpose, the demand for the credits from those willing to provide long term affordable housing, and the effects of inflation on the current 13 year old ceiling.
Severe Need for LIHTC in Rural Areas
In Texas, as in all states, the low income housing tax credit program is a vital component in the preservation of, and new construction of, affordable rural multi-family housing. Without the availability of tax credits under Section 42, very few affordable multi-family housing units would have been rehabilitated, or constructed, in rural Texas since 1986.
Rural Texas communities (i.e., a town/city with a population less than 20,000) have benefited significantly from Section 42. Between 1987 and 1998, 386 housing developments in 259 rural communities received $28,530,422 in annual tax credits which produced 14,519 low income housing units. Texas Department of Housing & Community Affairs, "Summary of LIHTC Allocation to Rural Communities 1987-1998", (May 7, 1999). The average annual tax credit was a very reasonable $1,965.
The need for affordable rural housing remains great. Housing conditions in rural areas are generally worse than housing conditions in metropolitan areas. Rural areas suffer from a preponderance of substandard housing and a severe shortage of adequate affordable housing. For example, in Texas, there are over 84,000 rural households paying over 50% of their income for housing and over 20,200 housing units lacking plumbing/kitchen. Thus, based on current production levels, it will be over 63 years before Texas’ existing needs are met. Nationally, over 4.1 million rural households pay more than 30 % of their income for housing. Of those, 1.6 million pay more than 50 %. 18.7 percent of rural households have incomes below the poverty level as compared to 12.6 percent of metropolitan households. Without the availability of low income housing tax credits, even more rural households would remain highly rent overburdened or destined to remain in substandard conditions.
The demand for tax credits far exceeds its availability. During Texas’ 1998 application cycle, only 53 development received an allocation of tax credits although 193 applied. In the most recent application period which ended on April 30, 1999, there were 204 apartment developments requesting $123,971,365 in tax credits while only about $21,000,000 in credits will be available. Compared to 1998, demand for credits increased by 9%. The following chart, provided by the Texas Department of Housing & Community Affairs, details the current demand for the credits:
|Set Aside||# of Applicants||# of Units||Credits
Nationally, I am aware of no state where demand does not exceed supply.
Effectiveness of LIHTC compared to Legislative Purpose.
Section 42 of the Code was intended to replace the untargeted and uncoordinated tax incentives of accelerated depreciation, five year amortization of rehabilitation expenditures, expensing of construction period interest and taxes, and tax-exempt bond financing for multifamily rental property. Joint Committee of Taxation, General Explanation of the Tax Reform Act of 1986(H.R. 3838, 99th Congress; Public Law 99-514) [May 4, 1987] (hereinafter "Blue Book") at 152. The prior tax incentives neither targeted the units to low income tenants nor limited rents. Blue Book at 153. For example, the prior tax-exempt bond provisions allowed for a complex to be financed with tax-exempt bonds if only 20% of the residents had incomes below 80% of the median income.
Low-income housing tax credits have succeeded in targeting tax incentives to low income tenants. Two years ago, the first truly comprehensive and independent analysis of the low income housing tax credit program was completed. Without the General Accounting Office’s Report "Tax Credit: Opportunities to Improve Oversight of the Low-Income Housing Program" (hereinafter "GAO Report") [March 28, 1997], there would be no independent empirical data to properly evaluate the program and its administration. The program’s success is established by the fact that the average annual tenant household income was $13,300 with three-fourth’s of qualifying households having incomes below 50% of the area median income. GAO Report at 38. Such success is not only attributable to the utilization of §42, but the ability to couple the use of tax credits with other direct and indirect federal or state governmental assistance.
Inflation Has Lessened the Effectiveness of the Credit
In considering the advisability of increasing the State yearly tax credit cap, the effect of inflation since the institution of the Low Income Housing Tax Credit should be considered. Since November 1986, the Consumer Price Index for All Items has increased by 49.59%. Phased another way, the 1986 $1.25 is worth only $.63 today. In constant dollars, $1.00 in credits in 1987 has eroded to slightly over $50 today. To assist an equal number of renter households as originally projected, the cap should be increased to $1.75 which will closely approximate the 49% increase in the C.P.I.
LIHTC Use in Rural Areas
Affordable multi-family housing is extremely difficult to produce in rural America without the coupling of low income housing tax credits with other financing, such as HOME financing, RHS loans under the §515 program, or other rental assistance programs. Likewise, Home financing, RHS loans under the §515 program, or other rental assistance programs can not produce affordable multi-family housing unless coupled with the low income tax credit program. The availability of low income tax credits is a necessary part of the continued preservation and production of affordable multi-family housing in rural America.
In many areas of rural Texas, the median income levels are substantially lower than the urban counterparts. For example, the median income of a two-person household in Dallas is $46,600 while the median income of a two-person household in Maverick County is $25,200. Correspondingly, the maximum tax credit qualifying income for a two-person household would be $27,960 in Dallas versus $16,260 in Maverick County, Texas. Since the maximum rent that may be charged under §42 is based on local area median income, the maximum rent for a two-bedroom apartment in Dallas is $786 per month versus $457 in rural Maverick County. For developers of rural housing, the difficulty lies in developing housing of the same quality as urban developers while maintaining strict cost controls in order to have affordable rent levels.
By utilization of §42, developers are able to provide affordable housing to Rural America. A couple of examples will provide a flavor of how § 42 is benefiting rural America. I recently completed the rehabilitation of a 90-unit property in Decatur, Texas. This property has 32 one-bedroom apartments, 50 two-bedroom units and 8 three-bedroom apartments. There is 68,850 square feet of net rentable area with an office building, two on site laundry rooms, two playgrounds with appropriate equipment, and three outdoor grills with picnic tables and benches. The 90 apartments are all single story buildings, with 22 4-plexes and 1 duplex. The land area was approximately 6.1 acres. This was a rehabilitation of a twenty-year-old property. The total development cost was $2,367,383. The land and existing buildings were purchased for $572,015. Rehabilitation improvements included the replacement of all heating and air-conditioning units, carpets, vinyl tile flooring covering, almost all ranges, refrigerators, and exhaust fans, substantially all of the plumbing fixtures and lines, painting of all interiors and exteriors wood surfaces after repair of all damage, foundation repairs of several buildings, repaving the parking lot, the complete retrofit of 5 apartments handicap accessible, and many other items too numerous to mention. This was a substantial rehabilitation of a severely deteriorated property. Tax credits were allocated in the amount of $60,120 per year. Thus, the property’s financing was composed of a $1,872,870 RHS below market rate loan and a capital infusion of $494,513 from the sale of the tax credits and the developer. Upon completion of the property, the gross rental rates for the apartments were as follows: (1) one bedroom units at $341; (2) two bedroom units at $430, and (3) three bedroom units at $486. For Wise County, Texas, the maximum allowable rents for these units are: (1) one bedroom - $416, (2) two bedroom - $499, and (3) three bedroom - $577. On average, our rents are $78.00 per month below the LIHTC maximum allowable for the County.
At this property, our residents are diverse – some are single elderly individuals whose sole income is Social Security, some are single head of households working full time job(s) trying to provide for their children, some are handicapped or disabled individuals, some are those newly entering the job force at lower paying jobs, and some are just the average hard working family. Earlier I emphasized that the rents for this property are lower than the authorized maximum. The rehabilitation of existing structures will generally allow lower rents than a newly constructed property. By offering lower rents than newly constructed properties, the residents directly benefit from the rehabilitation.
The Decatur, Texas property is revitalizing the neighborhood. It is located five blocks from the County Courthouse (the center of the community) and one block from a historic structure that is the local museum. From an eyesore with only 19 residents living in seriously deficient housing, we now have a vibrant community of 90 families that are proud to live in the apartments. Since the rehabilitation process commenced, the neighborhood is improving. The single-family homeowners on one side of the property have begun to take better care of their homes. A semi-developed area on another side of the property that had experienced no new single family construction in over 10 years is now coming to life again. A commercial area is being developed near the property. Other than the neighborhood’s physical development, the community is also being revitalized by people remaining in the community rather than moving to the city. For example, those residents newly entering the work force now have a decent place to live – otherwise, they would be leaving rural America to move to the city. The working class families would leave the area to seek jobs where they may live affordably.
The rehabilitation of existing substandard housing is the best and most cost effective means to revitalize neighborhoods and communities. I have never received any citizen or local official opposition to the renovation of existing deteriorated housing. Renovation unifies communities -- it does not divide them. My personal experience is also supported by empirical data from a survey conducted by the Texas Department of Housing & Community Affairs. That survey was mailed to all cities and counties (3,500) in the State, LIHTC developers, Community Housing Development Organizations, non-profit housing developers and others knowledgeable of the housing needs of Texas. In absolute numbers, the local cities and counties comprised the greatest number of respondents. Ninety-two percent among all respondents revealed that substandard housing is a problem in their communities and thirty-eight percent considered it a serious problem. More than two-thirds of all respondents expressed a major or critical major need for the rehabilitation and repair of existing renter-occupied housing.
Another example of cost effective use of §42 is a property that I currently have under development in Seagoville, Texas. This is an 80 unit all two-bedroom rehabilitation of a 20+ year old property. The existing land and structures will be acquired for $1,500,000 with a total development cost of $3,257,439. Since RHS financing will be used for part of the financing, the property will qualify for the 4% credit. The property requested $108,750 in annual tax credits or slightly more than $1,350 per unit. The project financing involves a $2,100,000 RHS loan, $350,000 from a HOME loan, and $807,439 from the sale of tax credits. After completion, the gross rents (rent plus utilities) for the two bedroom units will be $460 per month. Again, the anticipated rent is substantially lower than the $786 maximum authorized gross rent level for the area. Not only will be the rents be lower than the maximum, but the $1,359 requested tax credits per unit for this rehabilitation property are substantially below the State’s average per unit of $5,007. Rehabilitation of existing structures not only maximizes the tax credits dollars but plays a significant role in renewing neighborhoods.
From the Texas data, rehabilitation has been more frequently utilized in rural areas than urban areas. For example, in 1998, Texas allocates its available tax credits funds into three "set-asides": (1) 15% of the credits are allocated to rural areas; (2) 10% of the credits are allocated to non-profit developers, and (3) 75% of the credits are in a "General" pool. In 1998, the General Pool allocated credits to 22 projects, only 1 of which was a rehabilitation; the Non-Profit Pool allocated credits to 9 properties of which 1 was a rehabilitation, and the Rural Pool selected 22 properties of which 7 involved rehabilitation. The greater utilization of rehabilitation in rural areas is predominately the result of the necessity of using rehabilitation to produce rents below the maximum authorized rent level for the county. As a general rule, the use of tax credits for new rural developments is limited to the larger rural communities near a SMSA with higher rent levels.
By increasing the per capita state tax credit ceiling, utilization of tax credits for rehabilitation will increase. In many states, the allocation for tax credits is highly competitive and the application are ranked according to a scoring system developed by the state. Frequently, the selection process is determined by which property has the amenities that allows a property to score the greatest number of points. For example, in Texas, additional points are allowed for properties having a computer facility, covered parking, on-site day care, on-site senior citizen center, and having 15% of the units be either 3 bedroom units with at least 1,000 square feet or 4 bedroom units with at least 1,200 square feet. Due to the competitive nature of the selection process, developers will design properties to score the maximum points. Frequently, an existing property can not be feasibly rehabilitated with the extra amenities and, hence, will not score high enough to be awarded tax credits. Thus, as a matter of the selection process, new construction properties have an inherent advantage over the preservation of existing properties. By increasing the amount of tax credits an individual state may award, it is probable that the selection process will reach down to the rehabilitation properties.
States have Prudently Allocated Tax Credits.
In considering the advisability of increasing the tax credit ceiling, it is important to recognize that many, if not all states, have undertaken actions to protect the credits from undeserving projects and/or to "stretch" the credits. For example, Texas and Illinois require at least $6,000 per unit hard cost expenditure on rehabilitation to prevent "cosmetic" rehabilitation obtaining credits in connection with an acquisition. Under §42, a property could qualify for acquisition and rehabilitation credits if only $3,000 per unit was expended on the rehabilitation. Almost all states limit the fees paid to developers. Many states have restricted the total development costs to either the §221(d)(3) limit, a per square foot limit or a per bedroom unit type cost. All states limit the amount of credits that a property may receive to only the amount necessary to close the "gap" between other financing and the total development cost. All of these actions and others that have not been mentioned establish that the states are wisely administering and prudently allocating tax credits. As would be expected with 50 separate states, there are many different types of restrictions that are particularly crafted to the needs of that state. But the common thread that binds all the allocating agencies as one is the consistent desire to protect the integrity of the program while producing affordable housing for the State’s residents.
Rural Areas Need a Fair Share of LIHTC
According to the legislative history of the low income housing tax credits, "Congress intended that any allocation procedure established by the governor or State legislature give a balanced consideration to the low-income housing needs of the entire State." Blue Book at 169. In Texas, the low income housing tax credit allocation plan creates a set-aside of 15% of the total low income housing tax credits for nonmetropolitan areas. While Texas’ rural population is approximately 18.9% of its total population, the 15% set-aside is a fair allocation to rural areas considering the difficulties of developing affordable housing in rural areas. While many other states have also created rural set-asides, Congress could ensure this practice continues by requiring that all state allocation plans give a "balanced consideration to the housing needs of the entire State," even to the extent of requiring the creation of a rural set-aside.
The Texas allocation plan also created a sub category of the rural set-aside that should be a model for statutory revision to Section 42. The Texas allocation plan sets aside 25% of the credits available to the nonmetropolitan areas for properties either to be constructed or rehabilitated with financing provided by the RHS under Section 515 of the Housing Act of 1949. In prior years, many properties that had received a commitment for RHS financing had not received an allocation of low income housing tax credits due to either a prejudice against rehabilitation or a failure to have various amenities such as covered parking or security gates at the entrances. The Texas Department of Housing & Community Affairs has made the progressive and reasonable determination that an allocation of federal tax credits should be made to those properties deemed necessary and desirable for rural Texas by the Federal agency charged with the only housing program servicing rural areas. I recommend that consideration be given to also including a similar provision within Section 42 to require the allocation of tax credits to properties financed by the RHS and other federal rural affordable housing programs.
Such a requirement would be consistent with the preferential treatment of Section 42(d) of allowing the waiver of the ten-year holding period for Federally assisted buildings. Since a Federal Agency charged with providing financing for rural multi-family housing has determined that a particular project deserves being rehabilitated or constructed, it would be counterproductive and a violation of the concept of the federal/state partnership for a State to withhold the federal tax credits that are necessary for the project to be viable. To serve the very low and low-income families of rural Texas and the nation, it is necessary that tax credits be available in conjunction with a viable RHS program.
Rehabilitation should be placed on Parity with New Construction.
The GAO Report states that the average development cost per unit of properties with rehabilitation $48,250 while those of new construction is $67,098. (Page 133). In times of limited federal and state resources for affordable housing, the rehabilitation of existing units should be seriously considered as a means of stretching tax credit. This can best be accomplished by placing rehabilitation on parity with new construction. Our Association does not recommend that properties involving rehabilitation should be given any preferential treatment over new construction, merely that rehabilitation be placed on parity with new construction especially in rural areas.
The increased use of rehabilitation, where appropriate, would be a cost containment measure and allow a greater number of absolute units to remain in, or return to, the stock of affordable housing. Unfortunately, there is an increasing trend among many States to prefer new construction over rehabilitation. At the same time, where rehabilitation may be allowed, there is a trend to prefer vacant complexes, or almost vacant, over occupied complexes. While it is laudable to rehabilitate vacant complexes, it is more cost efficient to rehabilitate a complex with residents for $10,000 per unit than wait until it is a mere shell and require a substantially greater rehabilitation cost. The Association recommends that statutory direction be given to the States that would preclude preferential treatment of new construction over rehabilitation.
The Rural Rental Housing Association of Texas, Inc. is committed to the production and preservation of affordable housing through the low income housing tax credit program that has served our nation’s rural poor so well. We greatly appreciate your consideration of our views.
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