Industry responds to Bush tax cut and braces for new battles: the recently adopted federal tax cuts have caused concerns about the low income housing tax credit and the Section 8 housing choice voucher program. Kreisler reviews what has been done and what is on the horizon.

After months of heated debate in Congress and personal lobbying, President Bush in May signed the Jobs and Growth Tax Relief Reconciliation Act of 2003, a compromise $350 billion tax cut that represented an economic stimulus package far below the $726 billion tax cut he pressed for.

Central to the debate was the dividend tax exemption which, in the Bush form, would have significantly reduced the effectiveness of the low income housing tax credit (LIHTC), the most important resource for creating affordable housing. While affordable housing advocates were relieved that the LIHTC was rescued in the final budget, they are fearful that the issue will resurface and, although there is agreement in both houses that the LIHTC is a valuable tool, that it will not be as lucky again if corporations are inclined to no longer invest in them or if investments in other incentives become more appealing.

"We avoided what might have become a campaign issue, but we made sure Congress understood the value of the low income housing tax credit and the consequences of the proposed dividend tax exemption," said Ethan Handelman of Recap Advisors.

Handelman noted that the next major battle that is emerging is over proposed changes to the Section 8 program, introduced in May by the administration.

"Generally, I think there is some possibility that the administration could, in future years, try to come back with a dividend proposal that is more like what the president originally proposed," said affordable housing expert Richard Goldstein, a partner at Nixon Peabody LLC, Washington, D.C. "We have to stay vigilant. This industry needs to maintain and build support for the housing credit program. It needs constant nurturing and working the political system."

The ink was barely dry on the budget when affordable housing advocates raised concerns over other initiatives that threaten multifamily housing, including changes in the U.S. Department of Housing and Urban Development's Section 8 Program and the Administration's focus on single-family homeownership, which were already percolating.

In June, Andrew Showe, Vice President of Showe Management Corp., testified on behalf of the National Apartment Association/National Multi Housing Council (NAA/NMHC) Joint Legislative Program before the House Committee on Financial Services' Subcommittee on Housing and Community Development, airing concerns about the Administration's plan to convert the tenant-based Section 8 Housing Choice Voucher Program to a new state block grant initiative called Housing Assistance for Needy Families (HANF).

"We have considerable concerns about the complexity of the proposed state-level funding structure contained in HR 1841 [Housing Assistance for Needy Families Act of 2003]. We urge continued funding for the existing program structure administered by HUD. (See related article with verbatim testimony.)

NAA/NMHC were part of an intense lobbying effort to protect the LIHTC from any adverse affects of the dividend taxation issue. "A great educational effort led to a vast majority of lawmakers willing to step up and be counted in favor of opposing any adverse changes," said NAA/NMHC Tax Advisor Howard Menell. "We think future proposals to chip away at the LIHTC will face very tough going," said Menell.

With Bush's focus on single-family homeownership, a tax credit for single-family home developers presents a substantive threat to the multifamily industry, said Jeffrey Weiss, Vice President of Simpson Housing Solutions, a Long Beach, Calif.-based syndicator and developer of affordable housing. At stake, he said, is tax credit demand in a potentially dwindling market. "If passed, the supply of tax credits would be the same for single and multifamily developers and there is the fear that the single family credit would be an invitation to switch," he said.

Weiss said he is also concerned with the actual affordability for a consumer. "A number of strategies can be undertaken to make the purchase of a home affordable. However, the cost to replace a hot water heater or roof may still be out of reach for the homeowner," he said. "The current proposals do nothing to address this, potentially causing the next generation of slums."

Others in the industry, such as National Housing Conference Executive Director Conrad Egan, see the single-family tax credit differently. "There is real opportunity here for homeownership and it could provide an opportunity for multifamily rental housing as well," Egan said.

But for Egan, there are broader and other immediate issues. "The principal challenge of this budget is preserving the current level. HOPE VI is proposed for elimination, which seriously concerns all of us in housing and we have to make sure other programs are not reduced. We would prefer to see increases, but the strategy is preserving what we have.

"We are realists and we're practical. There is a general recognition that the focus is on keeping what we have but we would like to see attention paid to increasing federal support for expanding opportunities for affordable rental housing."

The next challenge, Egan said, is increasing the visibility and support for affordable housing.

"We need more campaigns like the Minnesota Housing Partnership and The Campaign for Affordable Housing to broaden political support and we need to preserve what we have," he said.

"Exciting things are happening in public housing, but public housing authorities are at a fork in the road. There are tremendous opportunities but significant threats to Section 8 and the stability of funding."

NAA/NMHC Provide Testimony on Section 8 Housing

On behalf of the National Apartment Association/National Multi Housing Council (NAA/NMHC) Joint Legislative Program, NAA President Thomas K. Shelton, CAPS, CPM, Greystar Real Estate Partners, Phoenix, and Andrew Shem, Vice President, Showe Management, Columbus, Ohio, spoke before key congressional committees. Following are highlights from their testimonies:

NAA and NMHC commend you, Chairman [Bob] Ney, for your leadership, and we thank the Members of the Subcommittee for your valuable work addressing the important issue of affordable rental housing in America. We also commend U.S. Department of Housing and Urban Development (HUD) Secretary Mel Martinez and the Administration for their interest in improving the Section 8 Housing Choice Voucher Program.

We, too, believe it is critical to meet the housing needs of low- and moderate-income families and believe that improving the Section 8 program is a central part of meeting those needs. However, NAA/NMHC urge Congress and HUD to enact reforms to the existing Section 8 program that will encourage apartment owner participation and, in turn, increase housing available to voucher holders. Although it is well intentioned, we think the Housing Assistance for Needy Families Act of 2003 (H.R. 1841) will not reduce the administrative costs to participating property owners and will not maximize program benefits for residents by conforming the program to conventional market practices. Instead, the proposed legislation could create new obstacles to apartment owner participation without alleviating existing burdens. The net result could be fewer available apartments for voucher residents.

Professional apartment owners, in partnership with the current voucher administrators, have made great strides in helping low-income families find quality affordable rental housing through the Section 8 program--a partnership that helps the community as a whole. NAA/NMHC wholeheartedly support the Section 8 program as a means to engage private housing providers in providing affordable rental housing to families who need it.

We believe more apartment owners would participate in the program if the costs of renting to voucher residents were more comparable to the costs of serving unsubsidized residents. In other words, the program must be more "transparent" to the market. NAA/NMHC propose the following recommendations to achieve that goal:

1. Funding

Some assert that the Section 8 appropriations structure should be reworked and reduced. Historically, many criticized the Section 8 appropriations structure because too much funding remained unused each year. To be sure, appropriations were once based upon the erroneous assumption that every authorized voucher would be utilized for an entire fiscal year and funds were routinely recaptured and rescinded. Those returned funds reduced annual appropriations to the amounts actually used. Effective this year, Congress enacted changes to minimize recaptures and, moreover, national utilization rates have risen to nearly 96 percent. That success should be recognized and the process supported. NAA/NMHC support increased utilization rates, and we believe that the existing successful appropriations structure is working. We have considerable concerns about the complexity of the proposed state-level funding structure contained in H.R. 1841. We urge continued funding for the existing program structure administered by HUD.

2. Inspections

Under current law, before an apartment is eligible for lease to a Section 8 voucher holder, the administering Public Housing Authority (PHA) must inspect that unit for compliance with HUD-prescribed Housing Quality Standards (HQS). Unit-by-unit inspections cause intolerable leasing delays and do not necessarily satisfy HUD's objective of protecting residents and assuring owner compliance with the Department's health and safety criteria. Unit-by-unit inspections delay resident occupancy even if the PHA conducts its inspection within the required time frame, and some apartment owners report delays of 30 days or longer. The apartment industry relies on seamless turnover to meet its overhead costs, and the financial implications of such delays are sufficient to deter them from participating in the program.

As proposed, Section 11 of the proposed legislation would extend the existing inspection requirement to HANF. PHAs would conduct individual unit inspections rather than property-wide inspections or relying upon recent past inspections. Importantly, the bill specifically states that owners would not receive any subsidy revenue until an inspection is completed, and the bill is silent on whether residents could move in prior to an inspection. In short, the proposed inspection provision would do nothing to fix the lost revenue problem.

NAA/NMHC propose speeding up the move-in process by allowing PHAs to conduct individual unit inspections within 60 days after the resident moves in and payment commences. PHAs could also conduct building-wide, rather than unit-by-unit, inspections in certain cases and rely upon recent past individual inspections. Alternatively, PHAs could initially inspect a representative sample of units in order to "certify" that the building is eligible. Thereafter, periodic inspections would assure that the property remains compliant with program rules. This approach would reward well-managed properties, allow PHAs to focus their scarce resources elsewhere and maintain resident safety.

3. Payment System

PHAs are required to make prompt subsidy payments to apartment owners. However, subsidy payments are sometimes untimely either because of antiquated systems or HUD processing delays. Just as owners would not regularly accept late rental payments from conventional residents, they should not be asked to accept late subsidy payments. We commend HUD for authorizing a $75 late fee charged to PHAs that do not make timely payments due to accounting inefficiencies. We urge Congress and HUD to continue their efforts to provide timely payments to owners by ensuring that PHAs have the ability to make automated electronic fund transfers to owners. Some PHAs already use automated funds transfer systems but it would be helpful if HUD would provide technical assistance, funding, and other support to ensure that all PHAs have the capacity to utilize automated payment systems. HUD also should establish incentives to facilitate timely payments to owners.

4. Fair Market Rents and Payment Standard

Fair Market Rents (FMRs), set annually by HUD for each metropolitan area, must be set high enough to encourage owner participation and, in turn, create a sufficient supply of apartments and choice for voucher holders. We thank HUD for raising the current FMR level to the 50th percentile in 39 high-cost areas, but that level is insufficient in certain areas with extremely high-cost sub-markets. We urge HUD to enact a more efficient, streamlined process for PHAs to apply for higher FMRs that are more reflective of sub-market rents.

The current payment standard, the maximum amount that the housing agency will pay toward a family's rent minus 30 percent of the tenant's adjusted income, is generally capped at 110 percent of an area's FMR. If the area's FMR does not accurately reflect local market conditions, and the payment standard is not sufficiently high to allow owners to earn sufficient income to meet costs, owners will not participate in the program. Low FMRs are a primary reason many apartment owners do not participate in the voucher program. NAA/NMHC urge program changes that will allow PHAs to raise the payment standard to 120 percent of FMR without HUD approval, and afford PHAs increased flexibility to request higher payment standards when necessary to reflect actual market conditions in a particular location.

Conclusion

In summary, NAA/NMHC believe that the existing Section 8 program, with improvements I have just noted, will make affordable housing available to more Americans. Widespread participation is not always economically feasible in the absence of the aforementioned program reforms that will reduce the sometimes-significant costs and burdens imposed on implementation of the program. I thank you for the opportunity to testify on behalf of the National Multi Housing Council and the National Apartment Association, and wish to offer our assistance to the Subcommittee as you continue your important work to improve affordable housing opportunities for low and moderate income families.

B. Kreisler, Imprint LLC, is a consultant to the affordable housing industry, providing public relations and social marketing support. She can be reached by calling 703/366-2861 or e-mail to [e-mail].