Low-Income Housing Tax Credit (LIHTC)

Enacted in 1986, the federal Low-Income Housing Tax Credit program provides opportunities for developers to build mixed-income communities using tax credits as a financing tool. The tax credit dramatically illustrates the value of public-private partnerships. It offers institutional investors a credit against their federal income tax in return for their low-income housing investments. As such, it represents a $6 billion market for annual investment that produces more than 125,000 affordable apartments each year.

Mixed income properties provide both market rate rental units, as well as a percentage set aside for lower than market rate rental units, in order to provide more access to affordable rental housing for people of limited income. While the majority of units built are market rentals, 20-40% of units are set aside for less than market rent range.

• + Who awards tax credits?
The federal government allocates low-income housing tax credits to each state based on population (in 2004, the level is set at $1.80 per person, with a minimum of $2.075 million allocated per state). The state — through its state housing finance agency (HFA) or other allocating agency — then awards those credits to the projects that best meet the requirements of its Qualified Allocation Plan (QAP), which outlines its goals for affordable housing. Each state establishes its own policies and procedures to determine which developers qualify for credits.

On average, tax credits represent 50 percent of a project’s total financing. Once awarded credits, a developer sells them to an individual investor or, more commonly, to a tax-credit syndication fund made up of equity from one or many investors. In return, the investors receive a credit against their federal income tax based on the size of their investments. They can also realize losses, which provides an additional tax benefit.

• + Why do investors desire tax credits?
Investors have a variety of reasons for committing capital to these projects. There is the financial incentive in the form of a reduced tax liability. But for most, the reasons go beyond that. They often have specific community development goals, regulatory requirements, and/or public relations objectives that are well-served by their tax-credit investments.

Developments participating in the Low-Income Housing Tax Credit (LIHTC) program are monitored for continued compliance throughout the 15-year compliance period. The Internal Revenue Service monitors compliance pursuant to Section 42 of the Internal Revenue Code (IRC). The role of the monitoring agency is to review the qualified residential composition of each development, report instances of noncompliance violations to the IRS, monitor and report corrective action, and provide guidance to owners/agents on program requirements.

• + How do Low-Income Housing Tax Credit Allocations work?
The federal Low-Income Housing Tax Credit program gives developers a financing tool to provide affordable rental housing for people of limited income. Tax credits are a critical part of many multifamily financing proposals because without them the rental income generated by an affordable housing complex would be insufficient to cover the costs of developing and maintaining the property. Developers who receive tax credits typically sell them to private investors who benefit from a reduction in tax liability. The proceeds from the sale generate equity for the development, reducing the need for debt financing, and enabling the owner to charge affordable rents.

Tax credits are allocated on a competitive basis through one or more funding rounds each year.

• + Set-Asides
To be eligible for low-income housing tax credits, the project developer must set aside a minimum percentage of units for low-income residents. This percentage must be maintained throughout the extended-use period, usually at least 30 years. The minimum set-aside is either of the following:

20% of the units rented to tenants earning 50% or less of the area median income (adjusted for family size) established by HUD

40% of the units rented to tenants earning 60% or less of the area median income (adjusted for family size) established by HUD