Low Income Housing Tax Credits
LIHTC Provides Capital For Multifamily Affordable Housing
Shortage Of Affordable Housing
According to the Affordable Housing Tax Credit Coalition, an advocacy group of housing professionals working to advance development of affordable multifamily housing projects that are financed with Low Income Housing Tax Credits, the United States faces a growing affordable housing crisis. Demand for affordable and workforce rental housing is at an all-time high. In 2012, there were only 3.3 million affordable rental apartments available to serve 11.5 million extremely low-income households. Freddie Mac Multifamily agrees that the shortfall in affordable housing is continuing to grow. Freddie Mac is forecasting an impending long-term shortage of workforce housing units that they estimate will be grow worse as demand will outpace new construction by an additional 1.4 million units in the next decade.
Low Income Housing Tax Credits Support Development
The Low Income Housing Tax Credits program, known as LIHTC or the Housing Tax Credit, was created by Congress in 1986 and made permanent in 1993. Low Income Housing Tax Credits are the only significant source of capital available to finance the nation’s supply of affordable rental housing. Low Income Housing Tax Credits are an indirect federal subsidy that finances the construction and rehabilitation of low-income, affordable rental housing. The program was created to offer an incentive for private developers and investors to develop more low-income housing. Without the incentive provided by Low Income Housing Tax Credits, affordable rental housing projects would not attract sufficient private investment, because affordable housing projects do not generate sufficient profit to warrant the investment.
In exchange for providing financing to develop affordable rental housing, private developers and investors receive a dollar-for-dollar tax credit as a direct reduction in their federal income taxes. Private investors subsidize low-income housing development, thereby lowering the capital cost of rental units so they can be rented at below-market rates while still remaining profitable. Low Income Housing Tax Credits are paid in annual allotments, generally over 10 years.
Projects financed with Low Income Housing Tax Credits must continue to meet the lower rental rate eligibility requirements for at least 30 years after the completion of construction. Thus, rental units remain rent restricted and available to low-income tenants. At the end of the required eligibility period, properties are no longer restricted and revert to market rate economics.
Execution Of Low Income Housing Tax Credits Financing
Low Income Housing Tax Credits can be used for new construction or to renovate existing multifamily rental projects. Low Income Housing Tax Credits, which are claimed pro rata over 10 years, are designed to subsidize either 30 percent or 70 percent of the cost of low-income units in a housing project. The 30 percent subsidy, which is known as the automatic 4 percent tax credit, provides subsidies for new affordable housing construction that makes use of additional subsidies for the acquisition cost of existing buildings. The 70 percent subsidy, or 9 percent tax credit, supports new construction without any additional federal subsidies.
Economics Of LIHTC Multifamily Affordable Housing
Multifamily affordable housing properties that qualify for Low Income Housing Tax Credits tend to have both lower debt service payments and lower vacancy rates than market-rate rental housing. LIHTC affordable housing properties typically experience rapid initial lease-up and offer strong potential economic returns to the developer or owner of the affordable housing project, primarily due to the the tax credits. LIHTC projects are frequently syndicated as limited partnerships in order to limit the liability of investors.
Basic principles of economics largely determine where affordable multifamily housing projects that are financed with Low Income Housing Tax Credits will be built. Tax credit housing is generally located where the land costs are low and allowable rents are sufficient to allow for market-rate rents. It is more difficult to build affordable housing projects financed with LIHTC in major cities, because land costs are typically high relative to allowable low-income rents, which are typically well below market rental rates. However, there are additional federal, state and local subsidies that provide the financial feasibility that enables developers and investors to build LIHTC affordable projects.
Affordable Housing Tax Credit Coalition
The Affordable Housing Tax Credit Coalition, which was founded in 1988, is a trade organization of housing professionals who advocate for affordable rental housing financed using the Low Income Housing Tax Credit. Comprised of both for-profit and non-profit members, which include syndicators, investors, lenders, developers, legal and accounting professionals and state agencies, seek the preservation, expansion and improvement of the Low Income Housing Tax Credit and complementary programs through legislative outreach and education.
Sale Or Syndication Of Low Income Housing Tax Credits
Developers may claim LIHTCs directly. However, most developers sell the tax credits for cash that is channeled into the development. The developer can either sell the tax credits directly to an investor or to a syndicator, who acts as a broker between the developer and investor. To benefit from economies of scale, syndicators pool several projects into one LIHTC equity fund. Then, syndicators market the tax credits to investors who essentially buy a piece of the syndicator’s fund. This spreads the risk across the various projects benefiting from the fund.
The LIHTC is a complex income tax area, requiring owners and investors to comply with numerous administrative rules and regulations such as maintaining the required number of income-eligible tenants and ensuring that the appropriate documents and records are filed and maintained. The paperwork associated with LIHTC properties is extensive to say the least. Apartment owners/investors must contend not only with the application process, but the carryover allocation, cost certifications and submission of numerous compliance forms on an annual basis.
The LIHTC program can offer developers and investors great opportunities to provide quality affordable housing to low-income residents and an opportunity to earn a profit. But because of the LIHTCs complexity, it is essential to consult a tax adviser when getting into this tax area.
Low Income Housing Tax Credit Program Administration
At the inception of the Low Income Housing Tax Credit in 1986, states received $1.25 per resident from the federal government. On December 15, 2000, a post-election lame duck 106th Congress passed a $450 billion budget package that included an LIHTC cap increase. The measure raised the cap from $1.25 per capita to $1.50 per capita in 2001 and $1.75 per capita in 2002. The LIHTC is now adjusted for inflation, beginning in 2003. In 2002 for example, California, which has approximately 33 million residents, received $57.75 million in LIHTC volume cap ($1.75 x 33,000,000 = 57,750,000).
Within general guidelines set by the Internal Revenue Service (IRS), state housing agencies administer the LIHTC program. State agencies review tax credit applications submitted by developers and allocate the credits. The IRS requires that state allocation plans prioritize projects that serve the lowest-income tenants and ensure affordability for the longest period.
Once an applicant secures a tax credit reservation, the developer must leverage the financial resources for the development. Under a typical LIHTC transaction, a developer must secure a conventional loan from a private mortgage lender or public agency, gap financing from a public or private source and equity from the developer or private investor in exchange for the tax credits.
Once the project is built, states must ensure that it meets the LIHTC eligibility requirements. The LIHTC property must comply throughout the 15-year period or investors will be exposed to recapture of some of the credits. State housing agencies are responsible for monitoring LIHTC property owners by requiring them to certify on an annual basis that they are renting units to qualified low-income tenants. If property owners are found to be out of compliance, they can lose some of their credits.