Rental Housing:

Costs and Benefits of Financing With Tax-Exempt Bonds

RCED-86-2: Published: Feb 10, 1986. Publicly Released: Feb 10, 1986.

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Pursuant to a congressional request, GAO reviewed the use of tax-exempt bonds in financing the construction and rehabilitation of multifamily rental housing, specifically: (1) how much the program costs the federal government; (2) whether projects financed with tax-exempt bonds are complying with occupancy requirements for low- and moderate-income households; and (3) who benefits from the program and how.

GAO noted that: (1) in 1980, Congress added a requirement that 20 percent of the units in each bond-financed rental project be targeted for occupancy by low- or moderate-income households; (2) growing amounts of tax revenue are being lost because of the increased use of tax-exempt bonds to finance rental housing construction; and (3) the use of bonds increased as interest rates increased. GAO found that: (1) the present value cost from the issuance of $10 billion in bonds in 1983 and 1984 totalled about $2.3 billion; (2) in the projects it visited, at least 20 percent of the units were occupied by low- or moderate-income tenants, but the income levels of these tenants normally exceeded the national average renter income; (3) some housing authorities did require an adjustment for household size; (4) 12 of 48 projects would not have met the 20-percent requirement if qualifying incomes had been adjusted to reflect household size; and (5) the median income figure used to determine eligibility was the median income of all households, including renters and homeowners. GAO also found that: (1) rents for some households were reduced either to comply with local laws or to attract enough tenants to meet the 20-percent requirement; (2) all renters would benefit from the program if market rents fall because of an increase in the supply of rental housing; and (3) although 25 percent of the new rental housing in 1983 and 1984 was financed with tax-exempt bonds, bond-financed units built since 1975 represent only 2 percent of the total rental housing supply.

Recommendation for Executive Action

  1. Status: Closed - Implemented

    Comments: The Department of the Treasury issued regulations in November 1985.

    Recommendation: The Secretary of the Treasury should amend the implementing regulations of the Internal Revenue Code (IRC) to require that an adjustment be made for household size when identifying a household's income as low or moderate.

    Agency Affected: Department of the Treasury


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