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HomeMy WebLinkAboutIssue Brief - State Workforce Housing Tax Credit 1 ISSUE BRIEF State Workforce Housing Tax Credit Community and business leaders around the state recognize the need for more housing that is safe, stable, and affordable. Throughout rural and urban Montana, the housing shortage is affecting our quality of life and our economy. Each year, 10 to 12 worthy housing development applications are denied by the Montana Board of Housing (BOH) because of lack of funds. A workforce housing tax credit would help investors leverage and augment the Federal Housing Tax Credit (FHTC), leading to more workforce housing developments across Montana that working families and seniors can afford to live in. Workforce Housing Helps Families and Individuals Flourish Households with modest means need safe, suitable housing that they can afford. When housing is affordable, low- and moderate- income families have room in their budgets for nutritious food and necessary medical care. The stability of an affordable mortgage or rent has positive effects on childhood development, success at school, and health outcomes for families and individuals. Affordable housing reduces poverty rates and alleviates pressure on social service budgets. Workforce Housing Development Helps the Economy The benefits of workforce housing development extend to the broader community: • Development of workforce housing creates both immediate and long-term employment opportunities and spending in a local economy. • Creating more workforce housing allows employers to attract and retain employees, growing their business and the regional economic competitiveness. • Development and rehabilitation of affordable housing provides immediate fiscal benefits for state and local government, including building fees, impact fees, 2 inspection fees, special assessments, corporate income taxes on builders’ profits, and income taxes on construction workers. Projections for Montana indicate that over 10-year period a state tax credit would mobilize enough private capital to produce 18,000 homes and apartments and generate over $828 million in economic activity in the form of construction, job creation, ongoing property operation, increased incomes, and property value increases. How the World of Housing Tax Credits Works The state workforce housing tax credit would simply serve as a companion to the FHTC and would follow many of the same federal rules and requirements as well as those adopted by Montana. The FHTC helps finance the production and preservation of rental housing that is affordable to working families and seniors. It was authorized through the Tax Reform Act of 1986 – spearheaded by Congressman Jack Kemp and signed into law by President Ronald Reagan – to give private investors a federal income tax credit as an incentive to make equity investments in affordable rental housing. The equity raised is used to construct new properties, acquire and renovate existing buildings, and refinance and renovate existing rental housing properties. The program has been a huge success, producing over 2.3 million units with a 97% occupancy rate in 2016, and a foreclosure rate of less than 1% throughout the program. Income Eligibility and Affordability Requirements The basic requirements of the FHTC program focus on how low the rents must be and how long those rents must remain low. A unit is considered affordable if the household is paying no more than 30% of its income for housing costs (including utilities). Households earning up to 80% of area median income (AMI) are allowed in FHTC-assisted units as long as the average income of all households in assisted units is 60% of AMI or below. In exchange for tax credits, properties are required to comply with investment regulations for 15 years and meet rent limitations for at least 30 years. Monitoring compliance involves regularly certifying that only income-eligible households live in assisted units and are paying associated rents and conducting housing quality inspections. Investors in projects that fail to comply can lose their tax benefit. Types of Credits and Allocation Process The FHTC program offers two types of tax credits, a 9% tax credit and a 4% tax credit. To qualify for tax credits, property owner must rent to low- and moderate- 3 income people for 30 years. Monitoring involves certifying that only income-eligible households live in assisted units and are paying associated rents and conducting housing quality inspections. Investors in projects that fail to comply can lose their tax benefit. Investors claim tax credits over a 10-year period and are subject to a 15-year compliance period. Annually, 9% credits are allocated to Montana by the IRS for eligible developments, as determined by the Montana Board of Housing. The Qualified Allocation Plan helps determine which projects win FHTC awards. The 9% credits are highly competitive, with many more projects requesting credits than can be funded. A state workforce housing tax credit would increase the pool of funds available thereby increasing the number of projects that receive funding, especially those in rural areas. Projects that receive at least half of their funding through tax-exempt bond financing are eligible for 4 % tax credits. The 4% credits are not as competitive but are much harder to finance because 4% credits supply only half of the equity. A workforce housing tax credit would add a much-needed source of funding for 4% developments, increasing the number of developments that will be built. Financing The FHTC and the WHTC programs provide direct equity from private investors in exchange for income tax benefits, reducing project need for debt and subsidies. A state workforce housing tax credit would create a Montana workforce housing tax credit to channel more equity into developments to make construction feasible, while keeping rents affordable.