The Low-Income Housing Tax Credit (LIHTC) Program Explained

Peace
Posted by Peace August 30, 2024

The Low-Income Housing Tax Credit (LIHTC) program is a federal initiative designed to stimulate the construction and rehabilitation of affordable rental housing for low-income households. Established under the Tax Reform Act of 1986, the LIHTC program provides tax incentives to private developers, encouraging the creation of affordable housing units across the United States. Here’s an in-depth look at how the LIHTC program works and its impact on affordable housing.

What is the LIHTC Program?

The LIHTC program provides federal tax credits to developers of affordable rental housing. These credits are intended to offset the costs of constructing or rehabilitating rental properties, making it financially viable for developers to offer lower rents to low-income tenants.

Types of Tax Credits

There are two main types of LIHTCs:

  1. 9% Credit: This is the primary credit for new construction or substantial rehabilitation of rental properties. It offers a larger benefit but is less frequently available.
  2. 4% Credit: This credit is used for the acquisition of existing buildings and projects financed with tax-exempt bonds. It offers a smaller benefit but is more commonly utilized.

How the LIHTC Program Works

1. Allocation of Credits

  • State Agencies: LIHTCs are allocated by state housing agencies, which are responsible for distributing the credits based on a competitive application process.
  • Application Process: Developers submit applications to their state agency detailing their project plans, financing, and compliance with program requirements.

2. Tax Credit Calculation

  • Credit Amount: The amount of tax credits awarded is based on the development’s eligible costs, including construction or rehabilitation expenses and the number of affordable units.
  • Credit Period: Credits are typically claimed over 10 years, though the property must remain affordable for a longer period, usually 30 years.

3. Leasing and Compliance

  • Affordability: Developers must rent the units to low-income tenants and maintain affordability. Tenants usually earn 60% or less of the area median income (AMI), but specific requirements can vary.
  • Compliance Monitoring: Developers must comply with program rules and are subject to ongoing monitoring by state agencies to ensure adherence to affordability and other requirements.

Benefits of the LIHTC Program

1. Increased Affordable Housing Supply

  • New Developments: The LIHTC program leads to the creation of new rental units that are affordable to low-income households.
  • Rehabilitation: It also supports the renovation of existing properties, improving the quality of affordable housing.

2. Economic Impact

  • Job Creation: LIHTC projects create jobs in construction, property management, and related fields.
  • Community Development: Affordable housing projects can revitalize neighborhoods, attract investment, and improve local infrastructure.

3. Financial Incentives for Developers

  • Tax Savings: Developers benefit from substantial tax credits, reducing their overall tax liability and improving the financial viability of their projects.
  • Attractiveness: The program makes affordable housing projects more attractive to investors and developers by providing a steady return on investment.

Application Process for Developers

1. Prepare a Proposal

  • Project Planning: Develop a comprehensive plan that includes project costs, financing, and compliance with LIHTC requirements.
  • Financial Projections: Create detailed financial projections, including the anticipated tax credits and rental income.

2. Submit an Application

  • State Agencies: Apply to the state housing finance agency for LIHTCs. The application will include details about the project, financing, and target tenant population.
  • Competitive Process: Applications are evaluated based on criteria such as project feasibility, community impact, and alignment with state housing goals.

3. Receive and Utilize Credits

  • Award of Credits: If approved, the project will receive a tax credit allocation.
  • Project Implementation: Proceed with construction or rehabilitation, ensuring compliance with all LIHTC regulations.
  • Claiming Credits: The developer claims the credits over 10 years, starting when the project is placed in service.

Impact on Tenants

1. Affordable Rent

  • Rent Limits: Rents in LIHTC properties are capped to ensure they remain affordable for low-income tenants, typically set at 30% of the tenant’s income or a percentage of the AMI.

2. Quality Housing

  • Standards: LIHTC properties must meet certain quality standards, providing tenants with safe and well-maintained living conditions.

3. Long-Term Affordability

  • Rent Restrictions: Properties must remain affordable for a minimum of 30 years, ensuring long-term stability for tenants.

Challenges and Considerations

1. Application Competition

  • High Demand: LIHTCs are highly competitive, with many developers vying for a limited number of credits.

2. Compliance Requirements

  • Regulations: Developers must adhere to strict compliance requirements, including affordability and reporting obligations.

3. Market Fluctuations

  • Economic Changes: Fluctuations in the housing market and changes in tax policy can impact the availability and effectiveness of LIHTCs.