Low Income Housing Tax Credit
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The Low Income Housing Tax Credit (LIHTC) provides developers and investors with eligible affordable housing developments, a dollar-for-dollar reduction in their federal taxes. The tax credit is paid annually to investors in a project over a 10-year period.
The LIHTC Program has guidelines set forth by the Internal Revenue Service (IRS) whereby each state receives an annual allocation of credits. Each state’s allocation is capped. The 2005 cap is $1.85 multiplied by the state’s population, with a minimum of $2,125,000. For example, the State of Virginia, with a population of approximately 7,400,000 would receive roughly $13,690,000 in Low Income Housing Tax Credits (7,400,000 x $1.85). State housing agencies administer the program by reviewing tax credit applications submitted by developers and allocating the credits. As an IRS requirement, projects which serve the lowest-income tenants and guarantee low-rent affordability for the longest time period are given priority. In addition, owners must keep the rental units available to low-income tenants for at least 30 years after completion of the project.
To obtain the tax reduction, an investor provides capital or equity that will be used to help in the development of a low-income housing project. The investor who receives the tax credit will not necessarily have a role in the development or management of the project, unless it is the developer of the project claiming the tax credits. A tax credit’s value also depends on the type of financing the project is undertaking. All Low Income Housing Tax Credits are taken per year for a period of 10 years. For projects without federal financing, the tax credit’s value is approximately nine percent of the development cost, excluding land. For projects with federal financing, the tax credit value is four percent of the development cost. This can be an important factor to consider when researching overall project financing.
The tax credit is available for units rented to low-income occupants. This means that a project must have:
- At least 20 percent of its units rented to households with incomes of 50 percent or less than the area median income; or
- At least 40 percent of its units rented to households with incomes of 60 percent or less than the area median income.
Although the developer may claim the tax credit directly, the most common procedure for investors to receive these credits is through a syndication process. A syndicator acts as a broker between the developer and investors in the project. Syndicators may pool several projects’ tax credits into one LIHTC equity fund and offer the credits to investors by buying a piece of the equity fund. This process spreads the risk to investors across various projects. In addition, the investors typically become limited partners in the housing project and have an ownership interest. The developer typically receives a development and property management fee plus a share in any cash flows profits and any gain or profits when the property is sold. By using the investor’s equity, the developer is able to complete the project with less debt-service financing; thus the rents for the building can be reduced and serve lower-income individuals.
For example, a developer is looking for investors for an apartment project that is expected to cost $10 million, including a $5 million cost for qualified low-income apartments. The Low Income Housing Tax Credits can help finance only the $5 million portion of the project. The developer is using no other federal financing for the project so the maximum nine percent credit is offered to investors. By buying the tax credits at a discounted value (to reflect the 10 years the investors must wait to use them completely), the investors will be able to claim nine percent of $5 million or $450,000 each year over a 10-year period. This will total $4.5 million over a 10-year period which translates to a substantial amount for investors to reduce their taxable income. By marketing this tax advantage to investors, the developer can receive the discounted value of the tax credits as a current cash infusion in the project.
Brownfields stakeholders can use the Low Income Housing Tax Credits to assist with financing for low-income housing projects. While the tax credits program can be used for either the construction of new buildings or the rehabilitation of existing buildings, this can include several different project types.
- The rehabilitation of existing buildings can include the conversion of buildings located on contaminated properties such as former warehouses or factories.
- The program can be especially advantageous for nonprofit groups, such as Community Development Corporations, because each state must set aside at least 10 percent of its credit allocation for projects developed by nonprofits. The nonprofit can sell the credits to investors or syndicators and become the principal partner in the project. The tax related value of these tax credits would be of little use to nonprofits since they are already exempt from paying taxes.
- State allocation plans may vary in their treatment of projects sponsored by local housing authorities (LHAs). Some states may award bonus points to such projects; others require that LHAs work with nonprofit organizations to be eligible to apply for tax credits. Stakeholders interested in information about specific policies which promote geographic targeting or encourage rural or distressed urban neighborhood projects should contact their state housing authorities.
There are several advantages to brownfields stakeholders ranging from cost savings to opportunities to leverage this program with others. Specific advantages include:
- An opportunity to restore buildings, some of which may have an historical significance to provide affordable housing; often these idle brownfields properties are located in distressed neighborhoods that may benefit from low-income housing options.
- The tax credits offer a strong incentive for investors to consider financing a low-income housing project on a brownfields property. This may be especially true if a syndicator is able to pool the tax credits from several projects together and create an LIHTC equity fund because it would further reduce the liability risk for the investor.
- These tax credits can be combined with the Federal Historic Preservation Tax Incentives relatively easily if an identified property for low-income housing development is located in a historical building.
There is no real “home” Web site to find information about the LIHTC. There is information on the HUD User Web site which contains an extensive database for information on over 20,000 projects that have used the LIHTC.
P.O. Box 23268
Washington, DC 20026-3268
Toll Free: 1-800-245-2691
National Low Income Housing Coalition (NLIHC)
727 15th Street NW, 6th Floor
Washington, DC 20005