Multifamily debt has boomed in recent years as the single-family market slowed. But the biggest government multifamily construction program in the country is a potential target of federal tax reform, and the industry is continuing to fight to keep the Low Income Housing Tax Credit away from reformers' knives.

With the glacial pace Congress moves at these days, the tax credit, a permanent program that would have to be specifically terminated by legislators, probably isn’t in danger this year. But it has been suggested for elimination often enough to alarm the people who work with the credits.

"We’re extremely worried about it," says Thom Amdur, president of the National Housing and Rehabilitation Association. "The entire industry has mobilized against this for several years," he says.

"Our efforts have paid off, in part," he adds, noting that a version of tax reform introduced this year by Rep. Dave Camp, R-Mich., would eliminate nearly all tax credits but preserve the LIHTC in an altered format.

Also, Rep. Patrick Tiberi, R-Ohio, and Rep. Richard Neal, D-Mass., along with a bipartisan group of about 20 representatives introduced a bill in May that would make permanent rate floors for the two different kinds of credits, the 9% credits for new construction and the 4% credits for existing developments.

(The floors would mean that investors in a project are guaranteed an annual percentage of the qualified basis—the portion of building cost entitled to tax credits—over ten years. Currently, the flow of tax credits fluctuates according to an IRS index.)

The bill is now with the House Ways and Means Committee.

Amdur favors the Tiberi-Neal bill, saying eliminating floating-rate floors would regularize the flow of the credits. Also, he says, "It will generate a little more equity" in deals.

The latest to weigh in to defend the credit are former Sens. George Mitchell and Christopher Bond, co-chairs of the Bipartisan Policy Center Housing Commission. "With rents rising throughout the country and with the shortage of affordable rental housing at crisis levels," they say, "the need for the housing credit has never been greater."

Foreclosures on units with tax credit finance have been less than 1%, they note. Since the program's inception in 1986, they say, the LIHTC has helped build or rehabilitate 2.6 million affordable multifamily rentals, about 100,000 units a year.

The president’s Economic Recovery Advisory Board, chaired by former Fed chairman Paul Volcker, included the tax credit as a candidate for elimination in its 2010 report on tax reform. A table in the report suggests cutting LIHTC would eliminate $61 billion in lost revenues over a decade. Some feel housing vouchers would be better than the credits, the report notes.

"That’s pretty debatable," says Amdur, whose trade group represents for-profit and nonprofit multifamily developers. "There's a lot of research since then that shows it is the most efficient affordable housing delivery device." President Obama himself has singled out the housing tax credit as one that should be saved, Amdur notes. "This administration has been particularly supportive of the credit," he says.

Demand for multifamily remains high. Multifamily originations decreased by 17% in the first quarter, partly due to bad weather, but sector debt still increased by 1% in the quarter to a new record high, according to the Mortgage Bankers Association. Since 2007 the sector has been on a tear, increasing some 30% to $913 billion.

It seems incongruous (pardon the congressional pun) to cut a key part of the multifamily housing finance system while multifamily debt is closing in on the $1 trillion mark. And while the tax credit program has a lot of moving parts, it has been a significant success.

The tax credits get private investors to help finance affordable multifamily units, new construction and rehab. It is a complex effort among the federal government, states, real estate developers, syndicators and investors. The program is overseen by the Internal Revenue Service and administered by state housing finance agencies.

The system works if the private investors can use the dollar-for-dollar tax credit, which they can usually obtain for less than $1 apiece through the syndicators. However, some companies don't need a tax break because they don’t owe any taxes. And some companies don't need them any more after a change in status. Fannie Mae was one of the biggest investors in multifamily tax credits, but once it became a ward of the federal government it got out of the market.

There's a decent amount of benefit to be had. The credit is allocated to the state agencies on a per capita basis, $2.30 a head currently. So a place like my home state of New Jersey would qualify for some $20 million in tax credits a year (and more in coming years if the state's population increases).

Developers propose affordable rental deals to the state agencies, which award credits according to their own ratings systems. The deals are underwritten several times, Amdur says—by the prospective investors, the state agencies and lenders (if there are any in on the deal).

After the awards are made by the state agencies, conduit-like entities called syndicators sell the credits to investors at market rates. (Raymond James in Atlanta is a good example of a tax credit syndicator.) And it’s a multiple win situation. The syndicators make a profit. The investors get a tax break and an equity stake in the project. The developer gets a tidy fee for building the units. And low income people benefit from having a bigger supply of affordable units.

Tax credits don't finance an entire development. Instead they are part of the complicated affordable housing finance toolkit which can include sources like the affordable housing programs of the Federal Home Loan Bank System, federal HOME funds, federal Community Development Block Grants and state tax credits.

Getting back to my home state, the New Jersey Housing and Mortgage Agency has used tax credit financing twinned with federal CDBG Hurricane Sandy recovery money for a $45 million development called Woodrow Wilson Commons, in Long Branch. Tax credits provided most of the financing but the 173-unit multifamily community also has gotten funding from Wells Fargo, Red Stone Equity Partners, JPMorgan Chase and Bank of America.

Many LIHTC projects have even more of a patchwork quilt of financing than this one has. But when they are finally done, they can look like financial works of art.

Mark Fogarty, Editor at Large at National Mortgage News, brings more than 30 years of experience to his analyses of the mortgage market.