Understanding the Low-Income Housing Tax Credit

The Low-Income Housing Tax Credit (LIHTC) is a federal tax incentive designed to encourage private investment in affordable housing development.

It is the largest source of funding for the creation and preservation of affordable housing in the United States, providing tax credits to developers in exchange for setting aside a certain number of units in their properties for low-income tenants.

LIHTC Benefits

1. Affordable Housing Creation

LIHTC incentivizes developers to build or renovate properties, increasing the supply of affordable rental housing for low- and moderate-income families. Projects funded through LIHTC often commit to keeping units affordable for 15-30 years or more, ensuring sustained housing support.

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2. Encourages Private Investment

LIHTC reduces the reliance on direct government funding by attracting private investors to finance affordable housing. By engaging private-sector investors, the financial burden of affordable housing development is shared between public and private entities.

3. Increased Project Financing

By utilizing LIHTC, developers can attract additional equity from investors who purchase the tax credits. This equity reduces the need for debt financing, making the development financially viable.

4. Provides Tax Benefits for Investors

Investors who purchase LIHTCs can offset their federal income tax liability, making it an attractive financial investment. Investments in LIHTC projects are considered relatively low risk, as housing is a stable and consistent asset class.

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5. Expanded Market Opportunities

LIHTC can be used for both new housing developments and the preservation or renovation of existing affordable housing stock. This gives developers options around the type of project they want to pursue. Utilizing the LIHTC can also open the door to new projects that might not be possible under conventional financing.

6. Community Impact and Social Responsibility

Developing affordable housing through LIHTC not only brings financial benefits but also contributes to the social good by providing quality housing for underserved populations.

Key LIHTC Considerations

• Compliance Requirements: To maintain LIHTC eligibility, developers must adhere to strict compliance requirements, including income limits for tenants and maintaining affordable rents for a minimum period.
• Competition for Credits: LIHTC allocations are limited and awarded through a competitive process. Understanding the application criteria and developing a strong proposal is essential for success.

Eligibility Requirements

To qualify for LIHTC, a project must meet specific criteria, including setting aside a certain percentage of units for low-income tenants. Typically, at least 20% of the units must be rented to tenants earning 50% or less of the area median income (AMI), or 40% of the units must be rented to tenants earning 60% or less of the AMI.

Additionally, the project must adhere to rent restrictions and maintain compliance for a minimum of 15 years, with an extended use period often required.

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How to Apply for LIHTC

LIHTC allocations are administered by state housing finance agencies (HFAs). To apply, developers must submit a detailed application during the open application period, often called a "qualified allocation plan" (QAP) cycle.

The application typically includes project proposals, financial plans, and other relevant documentation. The process is competitive, and awards are based on criteria set forth by the state’s QAP.

Challenges Facing the LIHTC Program

While the LIHTC program is effective, it does have challenges:

Competitive Funding

The demand for tax credits often exceeds availability, leaving some worthy projects unfunded.

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Macroeconomic Factors

Inflation and material/labor shortages make it increasingly expensive to build and maintain affordable housing from both a construction cost and operating expense perspective.

Limited Sources of Capital

With the limits put on the program from a rent perspective and the high demand for the credits, projects are constantly trying to find new ways to fill gaps in their capital stack to make the deal pencil out. Currently, there are only a few programs in the marketplace designed to help fill those gaps for developers.

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Help with LIHTC

SVA’s real estate professionals know the ins and outs of the LIHTC and can help you through this complex process. Contact us today for a free consultation.