In the early 1980s, the federal government eliminated many publicly funded housing-development programs. To help offset the resulting loss in the production of affordable housing, Congress passed the Low-Income Housing Tax Credit (LIHTC) program. Part of the Tax Reform Act of 1986, the LIHTC program provides an incentive to the private sector to invest in low-income multifamily housing. The program gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing.
Today, the Low-Income Housing Tax Credit program is the only federal affordable rental housing production program available to developers. Currently, it provides more than $400 million in annual subsidies for developing low-income rental housing. Since the national program went into effect, a number of states have established their own LIHTC programs.
The Internal Revenue Service (IRS) oversees the LIHTC program, but most administrative and monitoring responsibilities have been delegated to the states. Each state receives an annual allotment of tax credits based on the size of its population. For 2014, the state volume cap is $2.30 per resident or $2,635,000, whichever is greater.
State agencies review and rank tax credit applications submitted by developers and allocate credits to the highest-scoring affordable housing projects. Each state sets its own criteria for awarding credits to proposed projects and lists the criteria in a document called the “Qualified Allocation Plan” (QAP). The IRS requires that QAPs prioritize projects that serve the lowest-income tenants and ensure affordable housing for the longest period. The law also requires that states set aside a minimum of 10 percent of their allotted credits for nonprofit developers and owners.
The allocation process is highly competitive. Some states can receive applications requesting as many as three times or more credits than they have authority to allocate.
Most developers who receive an allocation from their states sell their tax credits to corporate investors, and in some cases individuals, for cash. By investing in LIHTC developments, corporations or individuals can then claim the tax credit on their income tax returns over a 10-year period and thereby reduce their tax liability. Federally-regulated financial institutions (e.g., banks and savings institutions) not only reduce their tax liability when they invest in LIHTC projects, They also receive, as an additional incentive, Community Reinvestment Act (CRA) credit.
The money developers receive from the sale of tax credits is in the form of an equity contribution that is used to pay costs related to the project. By receiving equity capital, developers can reduce the sum they need to borrow and, consequently, their debt service costs. Typically, the amount of equity raised from the sale of tax credits ranges from 50% to 55% of the total development costs. These savings allow the developer to charge below-market-rate rents.
Yes. First of all, to be eligible to participate in the LIHTC program, projects must meet either of the following requirements: at least 20 percent of the units must be rented to households whose incomes do not exceed 50 percent of the area median income (AMI), or at least 40 percent of the units must be set aside for households whose incomes do not exceed 60 percent of the AMI. In practice, usually 100 percent of the units in a development qualify for LIHTCs.
The Department of Housing and Urban Development (HUD) calculates the area median income for each county in each state. Low-income rents, including utilities, are restricted based on family size, the number of bedrooms in the apartment, and the AMI. In all cases, the project owner cannot charge a rent that is greater than 30 percent of a qualified tenant’s income (i.e., 30 percent of 50 or 60 percent of AMI).
By statute, LIHTC projects must adhere to the rent restrictions for a minimum of 15 years, also known as the “compliance period.” Most states include an additional 15 years through an extended-use agreement. The long-term structure of tax credits helps ensure that the units remain available for low-income occupancy for at least fifteen years. Should the number of low-income units drop below the required percentages within the first fifteen years, the number of tax credits available to the investor is reduced.
Tax credits can be used to finance family investments and developments serving elderly residents, the homeless, or disabled individuals as well as other special needs groups. It is important for developers to be familiar with their states’ QAPs, for when reviewing and ranking applications, some states award points to projects that give priority to meeting the needs of specific population groups.
CAHEC is a nonprofit tax credit, or equity, syndicator. The equity syndicator connects private investors seeking a strong return on investments with developers seeking cash for a qualified LIHTC project. The tax credit syndicator structures an equity fund using the investors’ capital. Then, on behalf of the equity fund, the syndicator purchases a developer’s tax credits at a negotiated price. Although some individuals and companies make direct purchases of tax credits, equity syndicators (both for-profit and nonprofit) purchase a large portion of tax credits through equity funds on behalf of the funds’ investors.
Although CAHEC provides equity for both for-profit and nonprofit developers, CAHEC is glad to provide nonprofit developers with a substantial amount of free technical assistance to ensure a successful project. For example, CAHEC can help inexperienced nonprofits plan and structure their projects from conception all the way through ribbon cutting. CAHEC can identify experienced participants for the development team, analyze sites, and review market studies. CAHEC also can assist with project structuring and financing and provide additional help during construction, lease-up, and afterward once projects have been placed in service.
Whether nonprofit or for-profit, developers intending to use CAHEC-sponsored equity can also turn to CAHEC for assistance in creating a supportive services plan to include with their tax credit application. Some states’ QAPs require supportive services for certain kinds of developments, and other states award “bonus points” to applications that include a supportive services plan. In addition, CAHEC’s Community Programs qualify as supportive services programs and are available to developments that CAHEC helps finance.
First, the developer should obtain a copy of the QAP from the state allocating agency where the project will be built and become thoroughly familiar with its contents. Second, the developer should get a copy of the tax credit application and find out the date(s) for submittal. Third, if the developer, even an experienced developer, has never built a tax credit project, it is strongly recommended that an experienced consultant be retained to assist with the preparation of the application, project structuring, financing, and other matters unique to the tax credit program. CAHEC is ready to assist any developer with a LIHTC project right from the outset of the application process.