Overview: the Low Income Housing Tax Credit
Originally enacted as part of the tax reform act of 1986, the program creates a private/public partnership to support the development of affordable rental housing options. Essentially, the program creates a transferrable federal tax credit that provides a dollar for dollar reduction in the investor’s federal income tax liability in exchange for an equity investment in affordable housing. The investor’s equity in the property enables the use of less leverage resulting in the ability to charge lower rents to qualified tenants.
Each state receives an annual pool of credits based on population: roughly $2.20 per capita (minimum of $2.6MM per state). There are two forms of credit: 9% and 4% credits. While 9% credits are allocated to states based on their population, 4% credits are awarded in conjunction with tax exempt state bond financing. Each state awards the credits to housing developers through a competitive application process (9% credits only). Credits are claimed evenly over a 10 year period, while the property must meet compliance guidelines for 15 years.
Once the state allocates credits to the project, syndicators and direct buyers bid for the stream of credits associated with the property. The developer must complete the project, certify its cost and lease units to low income tenants within a set timeframe. Development capital is raised by syndicating the credits to an investor or group of investors (limited partner). The investor receives the tax credit over a ten year period. This investment aspect allows the private sector to take the risk rather than the government. Non-compliance with tax credit guidelines results in the loss of the credits.
Congress made the program permanent in 1993 and expanded it in 2000. The Affordable Housing Tax Credit program (Section 42) is the largest production program funded by the Federal government for both new construction and rehabilitation of affordable housing. Approximately 1,800,000 apartment units have been built or renovated by this program. The more than 25-year history of performance for the program has been exceptional.
For more Information on Low Income Housing Tax Credits, please see our presentation: