Housing Opportunity Tax Credit Incentive Plan
ASSUMPTIONS AND RATIONALE
Housing is complicated. It is location-specific and capital-intensive. It is a problem that defies easy solutions.
There is no enthusiasm for increasing taxation in the country, nor is there support for spending that increases the deficit.
Creation of a new bureaucracy with never-ending funding needs will not win favor.
There is a national imbalance in housing supply in nearly all regions and at nearly all price points. Much of this imbalance has been created by restrictive local regulations. Local governments must play significant roles in the solutions.
The consensus size of this housing shortfall is approximately 4 million housing units. While large in scale, this is a short-term, quantifiable problem with quantifiable costs. With short-term (but large) capital infusions focused on units to be produced, this imbalance can be relieved, and the free market private sector can carry on to solve future market needs. Success must be judged by units produced and in a time frame that matters.
It's a mistake to design a long-term solution to a short-term problem.
It's a mistake to increase taxes to solve this problem. Once taxes are put in place, they tend not to go away. It's imperative not to create a housing entitlement, with its unintended consequences and the inevitable creation of winners and losers.
It is a mistake to design a whole new program that actually constructs the housing. The costs are way too high when the government builds. The private sector is best geared to utilize existing programs, including non-government means, to address costs, locational differences, and tastes across the country. This plan puts incentives into the housing delivery system to overcome the gaps and to rapidly increase production of new housing and revitalize existing neighborhoods.
This plan uses more carrots than sticks, providing a voluntary buy-in with a financial incentive to the participating taxpayers. It will reduce the cost of government by administering at local levels within existing structures.
The "Missing Middle" of the housing spectrum is what has been neglected by the government (80% - 150% of average incomes). There are multiple reasons, including restrictive zoning codes, approval processes, lack of infrastructure funds and just general resistance to change. This program is intended to provide the catalysts to meet unmet needs and increase housing inventory for this "Missing Middle", so that, with increased inventory, all Americans can move up the "housing ladder".
THE PROPOSAL
Housing Opportunity Tax Credit (HOTC) "Bonds" (2 Types)
Federal Offset Tax Credit-New Neighborhood Bonds
New Construction Goal — 2.5 million Units Nationally
At 5 years, 500,000 units/year average is the new unit goal.
Average cost at $140,000/unit = $350 billion/$52.5 billion per year average. Capital raised upfront.
115% tax credit at $402.5 billion/$80.5 billion per year average for participants' tax offsets.
Max tax credit offset at 35% per year from federal tax per year. Carries forward until used or resold.
Personal or corporate use, per guidelines.
Unused tax credit offsets can be sold into the secondary market after 2 years.
Program sunsets after 2.5 million units or EOY 5 (build out by EOY 8).
Two Uses for HOTC-New Neighborhood Bonds
A. First Time Buyer Assistance
Up to 10% granted as a "Silent" second mortgage. Adjusted by SMA.
Buyer must have at least 5% downpayment in cash. Thereafter, Silent Second is matched dollar for dollar, not to exceed 10% of Purchase Price.
Outstanding balance assumable by another first-time buyer at the amortized remaining balance. At the time of assumption, should the remaining balance be less than 5 Years, then the new borrower can be granted an additional 5 Years on the term.
Must be paid, refinanced, or assumed by Year 10 or converted to an amortizing 2nd Mortgage. At payoff, loaned funds are returned to the Treasury.
Could continue as a revolving fund if the concept proves successful.
AND
B. Rental Subsidy at 80% of SMA for new (single and multi-family units) near new or existing employment
Employer-based Gob creations validated by the local government in the affected zone.
Gives the landlord a 3-year certificate for subsidy to bring new rentals to market at full prevailing rate, while allowing local employers to bring their employees closer to work.
Employer can buy HOTC bonds, and/or the local government can use them as a tool for job creation.
PLUS
C. Local Government Subsidy
$30,000 ± per unit approved for new development- 3-year payout. Adjusted for area costs (i.e., 100 lots approved = $3,000,000)
Fire, police, local government, and schools are beneficiaries. Intended to offset local expenses to accommodate growth as new development comes online.
For new zonings of single-family units until the allocation to the goal is reached.
2. Federal Offset Tax Credit -Existing Neighborhood Bonds
Neighborhood revitalization - targets a specific neighborhood for a revitalization program
Tight focus for impact on Infrastructure Rebuild.
Infrastructure versus S/F rehab - exceptions by area, adjusting for needs. Utilities, alleyways, roads vs. dwelling units.
Private marketplace will do housing rehab infill.
Local government sponsorship with CDA (Community Development Authority). Local input of infrastructure to be revitalized. Plan approval by the target area and scored for the most impact.
Could also incorporate a State Tax Credit Offset, if each state approves.
Could fund 100% for communities under 60,000 population and scale down to a 50% match to the larger cities' bond allocations.
Capital Raise
Housing Tax Offset plans to be offered periodically and sunset in five (5) years with build-out in 8-10 years OR until the 2.5-million-unit goal is achieved. A two-year transition from the Federal Treasury to reallocate funding into the Tax Offset Bonds Program would jump-start the program more quickly. Thereafter, the Treasury could begin reducing funding to HUD for certain programs that this program addresses more effectively.
Sell the scarcity of tax offset bonds. Encourages purchasing up front to ensure capital is in place for the program. Carry-forward capability of tax offset bonds is a big positive factor. It gives high-income earners a way to reduce taxes and directs funds to achieving housing goals.
The goal is to inject the marketplace with new construction for "missing middle" housing (80% - 150% of median income) without creating a permanent program.
State Housing Finance Agencies to administer. No new bureaucracy needed, though some additional staffing at the State level is probable. They'll do ranking state by state, based on units to be brought to market in the shortest timeframe, allocated by population and localized need assessment.
HOW TO ACHIEVE
Metrics need to be quantified, with initial assumptions as follows:
Unit Goal - 2.5 million Units to be constructed/revitalized.
Break down by state and then by local SMA (Statistical Market Area).
State HFA (Housing Finance Agency) adjusts values and determines costs per market.
Cost Per Unit Created Overall Goal
Adjust for local market conditions at $140,000.00 average per unit costs.
2. Treasury creates Bond-like Investment Tax Offset Certificates
Fund created and certificate system set up with IRS and Treasury.
Federal New Construction Bond sale first. Community Revitalization Bond sale following shortly thereafter.
Private markets create a vehicle for the sale of unused tax credit offsets.
3. Five (5) year use eligibility for offset against tax liability, with caps at 35% of tax obligation per year.
Carry-forward unused credits until used up, plus the ability to sell unused balances into a secondary market, such as exists for bonds and T-bills.
4. First Time Homebuyer Credits.
"Silent" Second Mortgage. Up to 10% of Purchase Price.
Loan is assumable by another First Time Buyer.
Buyer must have at least 5% downpayment in cash. Thereafter, Silent Second is matched dollar for dollar, not to exceed 10% of Purchase Price.
5. Local Government Subsidy for New Construction.
Fire, police, schools, utilities, and even local government can use.
Average $30,000 per new construction unit produced under this program. Payable over 3 years, unless determined otherwise by State HFA and with local input.
Suggest we build additional incentives for local governments to make long-term amendments to their fees to accommodate growth.
6. Local/State/Federal Credits-Community Revitalization.
Revitalization of existing neighborhoods is identified by the local community.
Infrastructure-electric, sewer/water, alleys, paving, street lighting, and possibly loans for garages.
5-8 year build-out window for this program.
Targeted area of revitalization. Ranked at the local level by need, timeline feasibility, and number of units to be brought to market.
State HFA can delegate to the local community authority, providing demonstrated capacity.
Leaving existing residents in their homes increases incentives to improve neighborhoods through an increase in property value.
Allows for infill on lots with sub-standard housing that needs replacement
BENEFITS
Raises Capital- quickly and upfront.
Doesn't require a tax increase. Doesn't directly add to the deficit.
Targets "Missing Middle" of housing needs.
Gives incentives and retains control with local governments to meet local needs.
Provides a taxpayer benefit vs. tax increases.
Creates no permanent government program. Sets targeted short-term goal and sunsets the program.
Achieves the goal of providing new housing in a timely manner where it is most needed.
Opens existing inventory for residents in lower-income quartiles.
More availability in the "Missing Middle" leads to price stability of housing overall.
ISSUES TO BE RESOLVED
Bond/certificate creation and legislation needs a sponsor and drafting.
Secondary "bond" market to be created by the private sector.
Exact size of need determined - Size of "bond" offerings and units goal needs tested and quantified.
Local administration, State, and authorizing entities must buy into concepts.