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