The Low Income Housing Tax Credit (LIHTC) program plays a crucial role in addressing the affordable housing crisis in the United States. Established by the Tax Reform Act of 1986, this federal program has had a significant impact on encouraging private investment in the development and preservation of affordable rental housing. Through tax incentives, the LIHTC has helped create millions of affordable housing units for low-income families, seniors, and individuals with special needs.
This comprehensive guide aims to explore the intricacies of the LIHTC program. It will delve into the program’s overview, application process, and allocation of credits. The guide will also examine the financial aspects of LIHTC, including how developers and investors use these credits. Additionally, it will discuss the long-term compliance and monitoring requirements that ensure the continued affordability of LIHTC properties. By the end, readers will have a thorough understanding of this vital tool in the affordable housing landscape.
The Low-Income Housing Tax Credit (LIHTC) program has become the most significant federal initiative to provide affordable rental housing to low-income households in the United States. Established by the Tax Reform Act of 1986, this program offers developers non refundable and transferable tax credits to subsidize the construction and rehabilitation of housing developments with strict income limits for eligible tenants.
The LIHTC program has an overarching goal of providing decent and affordable rental housing. It addresses the rental needs of different types of communities in various ways:
The program’s flexibility allows it to serve multiple outcomes, benefiting tenants in diverse situations. Since its inception, the LIHTC has subsidized over 47,500 projects and 3.13 million housing units, using an average of $8 billion in forgone revenue to subsidize the costs of building more than 107,000 units across 1,411 projects each year.
Private developers draft plans for affordable housing projects and apply to their relevant HFA for LIHTC funding. The HFAs then select which projects are approved for funding.
The Low-Income Housing Tax Credit (LIHTC) program employs a competitive application process for allocating tax credits to eligible housing projects. State Housing Finance Agencies (HFAs) typically solicit applications through a Public Notice, with one round of competition per year. If necessary, additional rounds may be held until all available resources have been reserved.
The application process generally consists of three stages:
It’s important to note that reservations are not actual allocations of LIHTC from the State’s ceiling and are not binding on the Internal Revenue Service (IRS).
Qualified Allocation Plans (QAPs) play a crucial role in the LIHTC application process. These documents, published annually by state governments, outline specific criteria and eligibility requirements for LIHTC projects. The QAP sets out the state’s eligibility priorities and criteria for awarding federal tax credits to housing properties.
Key aspects of QAPs include:
State HFAs review and revise their QAPs annually, inviting public review and comment. This process allows advocates to influence how their state’s share of annual low-income housing tax credits is allocated to affordable housing properties.
The QAP must address ten specific selection criteria as mandated by federal regulations:
Additionally, QAPs must give preference to projects that:
States can also establish set-asides, reserving specific percentages or dollar amounts for particular types of projects, such as rural developments. They may also implement thresholds, which are minimum requirements projects must meet to be considered for tax credits.
The Low-Income Housing Tax Credit (LIHTC) offers investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing. These credits are claimed annually over a 10-year period, although they are earned over a 15-year period. The LIHTC is designed to subsidize either 30% or 70% of the low-income unit costs in a project.
The 30% subsidy, known as the automatic 4% tax credit, covers new construction that uses additional subsidies or the acquisition cost of existing buildings. The 70% subsidy, or 9% tax credit, supports new construction without any additional federal subsidies. It’s important to note that project applicants can receive either the 4% credit or the 9% credit, but not both for the same project.
The credit calculation begins with the first full month in which the building is placed in service or January 1 of the following year if the owner elects to defer the credit period. During the first year, the low-income occupancy percentage is calculated monthly, and the credit calculation is based on average occupancy during the year.
While developers may claim LIHTCs themselves, most choose to find tax credit investors due to limitations and lack of enough taxable income. These investors provide cash that is channeled into the development in exchange for the tax credits. The process of connecting developers with investors is often facilitated by syndicators.
Syndicators act as intermediaries between developers and companies interested in purchasing tax credits. They may pool several properties into one LIHTC equity fund and market the fund to investors, spreading the risk across various developments. Alternatively, syndicators may sell one or more transactions to a single investor, known as a single-investor or proprietary fund.
Investors typically purchase credits from developers at a discount. Since the passage of the Tax Cuts and Jobs Act, the value of $1 in tax credits has fluctuated between $0.90 and $0.95. This means investors can expect to trade $1 in tax credits for $0.90-$0.95 in immediate project financing.
The financing structure of LIHTC projects typically involves multiple sources of funding. Under a typical LIHTC transaction, a developer must secure:
The capital stack, which demonstrates how the developer plans to finance both construction and long-term operations of the property, takes into account the equity generated through the LIHTC program and the debt the deal can afford.
The number of additional funding sources and their amounts are influenced by factors such as total development costs, the price a developer can get for their allocated tax credits, the targeted resident population, and the affordability levels for the project. These factors affect the size of the capital stack “gap” developers need to fill and how they do so, making it difficult to define a “typical” LIHTC deal.
It’s worth noting that the Community Reinvestment Act (CRA) encourages banks to provide financing to members of their local communities, and LIHTC investment is viewed favorably by regulators who score banks on CRA compliance. This additional incentive contributes to the attractiveness of LIHTC investments for financial institutions.
The Low-Income Housing Tax Credit (LIHTC) program mandates that participating properties maintain affordability for an extended period. Initially, units were required to meet affordability criteria for 15 years, which included the 10-year period during which investors received tax credits, plus an additional 5 years. However, in 1989, Congress extended this affordability period to a total of 30 years.
During this 30-year period, property owners must adhere to specific affordability criteria. These include ensuring that only income-eligible households occupy the assisted units and that they pay the associated rents. It’s important to note that while the affordability period spans 30 years, the Internal Revenue Service (IRS) can only recapture credits for the initial 15-year compliance period.
The 30-year affordability period is divided into two phases:
During the extended use period, while owners are still required to maintain affordability, they are no longer obliged to report affordability compliance to the IRS and their state Housing Finance Agency (HFA).
State Housing Finance Agencies (HFAs) play a crucial role in monitoring compliance with LIHTC program rules and regulations. They are responsible for reporting back to the IRS. The compliance monitoring process involves several key steps:
It’s worth noting that after the information leaves the HFAs, it enters what James Tassos, deputy director of tax policy and strategic initiatives for the National Council of State Housing Agencies (NCSHA), calls a “sort of a mystery box”. The IRS treats this as confidential taxpayer information, so whether or not they recapture credits on a deal remains between the IRS and the taxpayer.
The consequences of non-compliance vary depending on the stage of the affordability period:
It’s important to note that while the IRS has the legal authority to create an enforcement regime during the extended use period, including levying fines, penalties, and assessments, it hasn’t done so. As a result, post-year 15 monitoring primarily falls to state housing agencies.
The Low-Income Housing Tax Credit program has a significant influence on addressing the affordable housing crisis in the United States. Through its innovative approach to incentivize private investment, the LIHTC has helped create millions of affordable housing units for those in need. The program’s flexibility to serve various communities, coupled with its intricate application and allocation process, ensures that resources are distributed effectively to create lasting impact.
To wrap up, the LIHTC program’s success hinges on its well-structured financial aspects and rigorous compliance measures. The syndication process and complex financing structures allow for efficient use of resources, while long-term monitoring ensures the continued affordability of LIHTC properties. As the program continues to evolve, it remains a crucial tool to provide decent and affordable housing for low-income Americans, making a real difference in communities across the nation.
The Low-Income Housing Tax Credit (LIHTC) program offers a reduction in federal tax liability for those investing in the acquisition, rehabilitation, or construction of affordable rental housing. These housing units must adhere to income and rent restrictions for a duration of 55 years.
Investing in the LIHTC program provides investors with a dollar-for-dollar reduction in their federal tax liability. This is in exchange for their financial contributions toward the development of affordable rental housing. The equity provided by investors helps subsidize the development, enabling some housing units to be rented at rates below the market average.
To calculate LIHTC equity, follow these steps:
The qualified basis is calculated by multiplying the eligible basis by the applicable fraction. This figure is then used alongside the credit percentage to determine the annual LIHTC amount.
