Exploring the Low-Income Housing Tax Credit (LIHTC) Program

The Low-Income Housing Tax Credit, or LIHTC, program is a federal government tax credit that, since 1986, has helped facilitate the construction and rehabilitation of 3.6 million affordable housing units throughout the U.S., according to housing advocacy organization NAHRO. 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 incredibly attractive.

LIHTCs help fund the new construction and rehabilitation of a variety of different property types, including traditional apartments, single-family homes, and two- to four-unit multifamily properties (think duplexes or 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, or AMI.

LIHTC Competition, Term, and Variations

Competition for the LIHTC program is fierce, as each state only receives a limited amount of LIHTC funds each year, based on population and a specific multiplier. The program costs an estimated $10.9 billion annually, according to an analysis by the Federation of American Scientists. 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, a 4% and a 9% LIHTC. The 4% LIHTC subsidizes 30% of a project’s cost, while the 9% covers 70% of a project’s cost.

LIHTC and Nonprofit Development

The developer of a property utilizing LIHTCs can be either a for-profit or nonprofit group. This may surprise some people, since LIHTC investors do not have an active role in the development process of an affordable property, apart from investing funds. However, it’s usually easier for nonprofits to access LIHTCs. Each state is mandated to set aside 10% of its LIHTC funds for nonprofit developers, as this is likely to result in a greater amount of units with rents targeted at very low-income residents.

Using LIHTCs has other benefits for nonprofits. At the end of the 15-year compliance period, nonprofits can generally exercise an option to buy the property in question. This gives the LIHTC investor/syndicator a ready buyer, while helping the nonprofit create a permanent source of affordable housing. Plus, as the developer of the property, the nonprofit will generally receive various fees (for example, developer fees and partnership management fees) that can help it pay its overhead expenses.

LIHTCs and HUD Multifamily Financing

HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) can be used for both for-profit and nonprofit development, and in both instances, these loans work particularly well with the LIHTC program. For each of these loan types, affordable properties are permitted LTV ratios of up to 87%, while properties with 90% or more low-income units may have LTVs even higher: 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, compared to the DSCR requirement of 1.20x for market-rate properties.

What Is LIHTC Syndication?

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. This makes the process easier, more flexible, and less risky for investors, in the same way that investing in a REIT is generally safer than owning a piece of real estate.