What Is the Neighborhood Investment Act?

The Neighborhood Homes Investment Act is a proposed federal bill designed to encourage the construction and rehabilitation of single-family homes in distressed communities. It aims to solve the “value gap,” which occurs when the cost to build or substantially renovate a home is more than its market value upon completion. This gap often prevents private developers from investing in areas that need it most. The legislation’s core is a federal tax credit intended to attract private investment, and it is a bipartisan bill that has been introduced in Congress but has not yet been signed into law.

The Neighborhood Homes Investment Tax Credit

The proposed Neighborhood Homes Investment Tax Credit is structured to bridge the financial gap between development costs and a property’s sale price. The credit amount is calculated as the total qualified development cost minus the price for which the home is sold to a homeowner. This mechanism makes financially unviable projects feasible. The credit is designed to be sold or transferred by the project sponsor to a private investor who has federal tax liability.

By selling the tax credit, the sponsor, such as a nonprofit or local developer, receives the necessary capital upfront to begin construction or rehabilitation. The investor, in return, can use the credit to reduce their own federal income tax obligations. The value of the credit cannot exceed 40% of the total qualified development costs. The credit is only finalized and can be claimed by the investor after the home has been completed and sold to a qualifying homebuyer.

Qualifying Neighborhoods and Properties

A neighborhood qualifies if it is a census tract that meets certain distress metrics. These include having a poverty rate of at least 130% of the metropolitan or state rate, a median family income that is 80% or less of the area median income, and home values that are below the metropolitan or state median. While the majority of tax credits are for these federally designated areas, the bill allows states to direct 20% of their credits to “locally designated communities.” For the 11 least populous states, this can be up to 40% of their allocation.

Eligible properties include newly constructed single-family homes and existing homes that undergo substantial rehabilitation. The bill defines a single-family home as a property with one to four residential units, which can include traditional houses, condominiums, or units within a cooperative housing corporation. Tax credits can also be used for the substantial rehabilitation of homes already owned by residents with incomes at or below 100% of the area median income.

For a renovation to be considered a “substantial rehabilitation,” the rehabilitation expenditures must meet a minimum of $20,000 per unit. The credit is only available for homes sold to owner-occupants with incomes at or below 140% of the area median income.

Eligible Sponsors and Investors

A project sponsor is the entity that undertakes the development work. This can be a for-profit developer, a nonprofit community development corporation, a local government, or another qualified organization. The sponsor is responsible for planning the project, managing the construction or rehabilitation, and ultimately selling the finished home to an eligible buyer.

The sponsor applies to a state agency for an allocation of the tax credits. Once awarded, the sponsor sells the tax credits to an outside investor. The investor is a separate individual or corporation with federal tax liability who purchases the credits to reduce the amount of income tax they owe.

State Administration and Credit Allocation

The federal government would allocate tax credit authority to each state annually based on a formula, giving each state a set dollar amount of credits it can award. This decentralized approach allows states to tailor the program to their specific housing needs.

Each state would designate a specific agency, typically its Housing Finance Agency, to administer the program. This state agency would be responsible for creating a document known as a Qualified Allocation Plan (QAP). The QAP outlines the state’s priorities and the criteria it will use to evaluate applications from project sponsors.

The state agency would then conduct a competitive application process to award the tax credits. Sponsors would submit proposals detailing their development plans, and the state agency would score them based on the criteria in the QAP.