Uncertainty regarding whether the U.S. Congress will extend a key tax-credit financing program is hanging over the affordable housing industry like a dark cloud. Stalled legislation to extend the Tax Credit Exchange Program has major implications for both developers and investors.

On the investment side, it has delayed the release of low-income housing tax credit allocations, and produced fewer financially feasible transactions, notes Todd Crow, executive vice president and manager of Tax Credit Capital at Pittsburgh-based PNC Real Estate.

Many states have structured their tax-credit allocation plans on the presumption that government money would be available as a partial funding source for these affordable housing projects.

But there is a growing industry consensus that the legislation will not be extended due to mounting pressure to control government spending. So, many states are retooling their allocations.

“It is just not clear what is going to happen, and how many of these transactions are going to be able to move forward and close,” says Crow. “That has created a scarcity of tax credits, and that is part of the reason that the investor demand feels so robust.”

On the development side, the exchange program has proved an important financing tool. Rather than selling tax credits to banks or insurance company buyers, the program lets qualified projects swap housing credits for cash backed by government funds.

For example, the exchange program provided crucial equity for an 80-unit affordable housing development under construction in Karnes City, Texas. The community of 3,500 residents near San Antonio is experiencing a boom from gas and oil drilling and a subsequent shortage of affordable housing.

“You're not going to get a lot of investors excited about that submarket,” says Dan Markson, a senior vice president at the NRP Group in San Antonio.

The NRP Group is developing the $10.7 million project with its non-profit partner, Merced Housing Texas. The exchange program provided $8.5 million in funds. Without the program, the project, which broke ground in January, would not have had funds to proceed.

The exchange program was introduced in 2009 as part of the American Recovery and Reinvestment Act to help fill the financing gap created by the credit crisis and the loss of key investors such as Fannie Mae and Freddie Mac.

However, legislation to extend the program, included with other expiring tax provisions in the Small Business Jobs Tax Act (H.R. 5297) was pulled in July because Democrats lacked the votes to overcome Republican objections.

It remains to be seen whether extension legislation will be reintroduced after Congress reconvenes this fall.