Exploring the Low-Income Housing Tax Credit (LIHTC) Program
The Low-Income Housing Tax Credit (LIHTC) program is a federal government tax credit, that, since 1986, has helped facilitate the construction and rehabilitation of approximately 2.4 million affordable housing units throughout the U.S. Unlike tax deductions, which create a reduction in taxable income, tax credits provide a dollar-for-dollar reduction in an investor’s tax liability, which can be an incredibly attractive proposition.
LIHTCs can fund the new construction and rehabilitation a variety of different property types, including traditional apartments, single-family homes, and 2-4 unit multifamily properties (i.e. duplexes, triplexes). In addition, LIHTCs can fund the conversion of structures like schools, warehouses, and motels into multifamily properties. Properties using these credits must generally cap rents for some or all of the units at a certain percentage of a location’s area median income (AMI), a statistic published by HUD that attempts to determine the average housing cost in a specific geographic area.
LIHTC Competition, Term, and Variations
Competition for the LIHTC program is fierce, as each state only gets a limited amount of LIHTC funds each year, based on its population and a specific multiplier. Approximately $6 billion of government money is funneled into the program each year. The LIHTC generally has a 15-year compliance period, during which the property must remain affordable and before which the property cannot be sold. This, however, is only a minimum, and many states have more restrictive rules in place.
Investors should also know that Low-Income Housing Tax Credits come in two varieties, the 4% LIHTC, which subsidizes 30% of a project’s cost, and the 9% LIHTC, which subsidizes 70% of a project’s cost.
The LIHTC Program and Non-Profit Development
While it may surprise some people, since LIHTC investors do not have an active role in the development process of an affordable property (other than investing funds), the actual developer of the property can be either a for-profit or a non-profit group. In fact, each state is actually mandated to set aside 10% of its LIHTC funds for non-profit developers, as this is likely to result in a greater amount of units with rents that can be afforded by very low-income residents. This means it can be significantly easier for non-profits to obtain LIHTCs than for-profit groups.
In addition, using LIHTCs has other benefits for non-profits. At the end of the 15-year compliance period, non-profits can generally exercise an option to buy the building in question. This gives the LIHTC investor(s)/syndicator a ready buyer, while helping the non-profit create a permanent source of affordable housing. Plus, as the developer of the property, the non-profit will generally receive various fees (ex. developer’s fees and partnership management fees), that can help it pay its overhead expenses.
LIHTCs and HUD/FHA Multifamily Financing
HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) can be used for both for-profit and non-profit development, and in both instances, these loans work particularly well with the LIHTC program. For each of these loan types, affordable properties are permitted LTVs up to 87%, while properties with 90% or more low-income units may have LTVs up to 90%. In addition, Section 8 and LIHTC properties only need to pay 0.45% MIP, compared to the 0.65% required for market-rate properties. Finally, DSCR requirements are significantly lower for affordable housing properties, at just 1.15x, vs. 1.20x DSCR for market-rate properties.
LIHTC Syndication and Tax Rate Updates
While some LIHTC investors directly invest with a specific developer to receive their Low-Income Housing Credits, others decide to use an LIHTC syndicator. A syndicator is much like a broker, in the sense that they allow investors to purchase credits from a pool of LIHTC properties, which makes the process easier, more flexible, and less risky for investors (in the same way that investing in a REIT is safer than actually owning a piece of real estate).
Currently, the five largest LIHTC syndicators on the market (as of the 2018 year) are Alden Torch Financial, which syndicated 162,123 units, PNC Real Estate, which syndicated 138,275 units, Boston Capital, which syndicated 120,925 units, The Richman Group Affordable Housing Corp., which syndicated 107,958 units, and Enterprise Community Investment, which syndicated 104,676 units.
Since the Tax Cuts and Jobs Act of 2017 reduced corporate tax rates from 35% to 21%, the price of LIHTCs has fallen over the last 2 years, having dropped and 10% to 15% since November 2016 (the time of the presidential election). This has caused significant issues for developers who were already in the process of raising capital, who now cannot price their LIHTC credits nearly as high. For instance, if a developer initially priced credits at $0.97/$1, they may now only be able to get $0.89/$1. This also means that returns for investors in LIHTC syndication funds have fallen, causing issues for syndicators who promised investors higher returns.
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