Methodology, Considerations, and Tax Credit Calculations for LIHTC

LIHTC Tax

The Tax Reform Act 1986 created the LIHTC program and set the overall methodology for calculating tax credits for a LIHTC development project.   

However, since each state housing agency (HFA) administers and allocates LIHTC within its state, it maintains oversight on the nuances of LIHTC calculations. 

Developers or other applicants must consider many factors when calculating tax credits, such as eligible basis, QCTs, Qualified Basis, and the applicable Tax Credit Rate.    

This article unpacks these considerations and illustrates how to calculate annual and total tax credits for a LIHTC project. 

Note: This is a complex topic, so this blog post should not be a substitute for professional tax advice. 

Importance of Calculating Tax Credits 

The applicant requesting LIHTC allocation from the HFA needs to calculate and apply for tax credit when submitting the LIHTC application.

Calculating Tax Credits

This calculation is important because it directly affects the maximum tax credits reserved for the housing project. The developer can sell these credits to investment funds and individual investors and raise equity for the low-income housing project.  

Claiming these tax credits through the project’s lifetime is a separate process, which asset managers handle using LIHTC software. 

LIHTC Pricing 

LIHTC is usually a popular investment vehicle because it provides dollar-for-dollar return on tax credits earned by the federal government.  

However, the actual returns investors earn on their investments in a low-income housing project vary slightly because, in practical terms, the demand for tax credits varies. 

Investors earn real returns of around $0.85 to $0.90 on the dollar for every tax credit that they earn. This pricing of tax credits depends on investor demand and is influenced by many factors, like the market demand for tax credits, the current tax rate for corporations, and the CRA ratings that corporations need. 

Eligible Basis and Ineligible Items 

The first item that applicants need to consider when calculating tax credits for a project is the Eligible Basis. The IRS website provides a more detailed explanation in this PDF. 

This is the cost of developing a low-income housing project eligible to receive tax credits.  

The costs included in the Eligible Basis must be depreciable. These include most construction costs and all costs directly related to the project’s construction.

LIHTC Eligibility

 

 

The Eligible Basis includes the actual payroll cost for people constructing the projects, developer fees, construction raw materials, architect’s fees, engineer’s fees, and the fee for gaining local licenses and building permits.  

Ineligible Items 

The cost of the land is never included in the Eligible Basis.   

The costs not directly related to the construction of the low-income housing project are also ineligible to earn tax credits.   

Some examples of costs ineligible to be allocated tax credits are the project’s marketing costs, the cost to set up the partnership managing the project, the fees for managing a syndication fund, or amounts kept as reserves. 

High-Cost Adjustment, QCTs, and Adjusted Eligible Basis 

Since state HFAs manage and allocate LIHTC, each state can offer an incentive to prioritize some areas for development.   

The HFA demarcates such areas as difficult-to-develop (DDA) areas or Qualified Census Tracts (QCT).   

These areas are eligible for an increase of up to 30% when calculating their Eligible Basis for an application and are called high-cost adjustments or Basis Boost.   

They only apply to the areas the HFA has set aside in its Qualified Allocation Plan (QAP) for the year. The QAP also gives the percentage Basis Boost to apply.  

If a developer or an applicant proposes a low-housing development in a QCT, they can apply a basis boost and increase the eligible basis for the project.  

The Adjusted Eligible Basis will thus be the Eligible Basis * the Basis Boost.  

Qualified Basis 

The qualified basis is the percentage of the eligible costs that qualify for earning LIHTC. It is directly proportional to the proportion of affordable housing generated by the development.  

LIHTC applicants must understand the Applicable Fraction to calculate the qualified basis. The qualified basis is calculated by multiplying the Eligible Basis (or the Adjusted Eligible Basis) by the Applicable Fraction.  

Applicable Fraction 

Applicable Fraction

The Applicable Fraction is the amount of the development project explicitly nominated as affordable housing.  

If the housing development project has no market-rate units, this will be 100%. 

The Applicable Fraction is also called the Minimum Set-Aside, unit fraction, or affordable square footage. 

If only a part of the development is reserved for low-income families, then, the Applicable Fraction will be the lesser of: 

  • The percentage of the actual housing units “set aside” for affordable housing. 
  • The percentage of the floor space in the building set aside for affordable housing units.   

A minimum set aside of 40-60 means that at least 40% of the housing units in the affordable housing project are reserved for low-income households. The Applicable Fraction will also be 40%.  

Low-income families earn less than 30% of the area’s median income.  

 4% vs 9% Tax Credit and Tax Credit Percentage 

Under the LIHTC program, the Federal Government allows either a 9% or 4% tax credit. HFAs allocate LIHTC credits depending on the type of development—9% credit for new developments and 4% for renovations. 

The 9% credit covers almost 70% of the project’s construction costs. And the 4% credit covers about 30% of the project cost.  

The terms 9% and 4% here are identifiers and not the actual rate of tax credits that a project earns.  

The actual rate of tax credit earned varies yearly. The IRS sets the nominal rate of tax credit each year and calls them the Applicable Federal Rates (AFR). 

For example, in 2024, the IRS set the real tax credit rate at 8.02% for the 9% credit and 3.44% for the 4% credit. See the relevant ruling (look under Section 42). 

Annual and Total Tax Credit 

Once you arrive at these parts, calculating the total rate is simple.   

The annual tax credit is the project’s Qualified Basis * the AFR.    

The qualified basis multiplied by the tax credit rate is the amount of tax credits the project will earn over its ten-year lifecycle.  

So, to get the total tax credit the project will earn over its lifetime, multiply this amount by 10.  

 LIHTC is a Healthy Ecosystem 

If a LIHTC application is approved, the tax credit the project earns is reserved. The applicant is then free to monetize these tax credits to raise equity in the project.   

Developers recover their costs, and investors purchase these tax credits to offset their federal tax liability. The relationship between developers and investors in LIHTC is complimentary. It’s a healthy ecosystem that benefits all the stakeholders and the community it serves. 

Updated IRS Unused LIHTC Carryovers for 2023

LIHTC Carryovers

On April 8, 2024, the Internal Revenue Service (IRS) released a note reserving more than $8 million in unused Low-Income Housing Tax Credit (LIHTC) to individual state affordable housing agencies (HFA).  

This carryover allocation includes unused tax credits from fiscal year 2022. It adds to the pool of federal unused LIHTC the IRS reallocated in October 2023.    

According to a bulletin dated October 10, 2023, the IRS released approximately $3.2 million in unused LIHTC to states, which this current reallocation adds to. 

What Does it Mean? 

These credits are carryovers from the previous calendar year. Carryover credits mean that the states could not allocate them to developers or that not enough credits were left over to develop a low-income property.  

The IRS will allocate these amounts to HFA for the calendar year 2024. Here is the updated unused LIHTC carryover allocation by state. 

S. No.  Qualified State  Additional Amount Allocated  Initial Amount Allocated (October 2023) 
1  Connecticut  136,793  54,370 
2  Delaware  38,417  15,269 
3  Florida  839,149  333,529 
4  Georgia  411,670  163,623 
5  Illinois  474,636  188,649 
6  Maryland  232,551  92,430 
7  Massachusetts  263,383  104,684 
8  Michigan  378,520  150,447 
9  Minnesota  215,671  85,721 
10  Montana  42,358  16,836 
11  Nebraska  74,237  29,506 
12  Nevada  119,876  47,646 
13  New Jersey  349,382  138,866 
14  New Mexico  79,722  31,686 
15  New York  742,288  295,030 
16  North Carolina  403,601  160,415 
17  Ohio  443,478  176,265 
18  Oregon  159,952  63,575 
19  Pennsylvania  489,347  194,496 
20  Rhode Island  41,259  16,399 
21  South Dakota  34,322  13,641 
22  Texas  1,132,815  450,249 
23  Utah  127,535  50,690 
24  Vermont  24,409  9,702 
25  Virginia  327,575  130,198 
26  Washington  293,706  116,736 
27  West Virginia  66,965  26,616 
28  Wisconsin  222,286  88,350 
Total  8,165,903  3,245,624 

State of LIHTC  

Looking at the share of the largest reallocation amounts for the top 10 states reveals some clear insights. 

  • The states receiving the most reallocation are generally the states that got the largest allocation of LIHTC from the federal pool for 2022 (the year of the carryover). 
  • This makes sense since these states have the largest populations, and LIHTC is allocated by a per capita multiplier. 
  • The percentage of unused LIHTC is at most under 1.5%. 

The low rate of unused funds shows that LIHTC is a popular program that will continue to create and maintain affordable housing into 2023.   

This is particularly significant given the shortage of affordable housing and the increasing rent burden on low-income households. 

Benefits of LIHTC: Impact on Affordable Housing and Communities

LIHTC Benefits

Since Congress created the LIHTC program, it has provided funding to develop more than 3 million affordable housing units. There has been criticism of LIHTC and how it is set up, however its important in the affordable housing environment is undeniable.  

This article talks about the benefits of LIHTC and its impact on the affordable housing landscape.  

LIHTC Has the Largest Share in Affordable Housing 

The Department of Housing and Urban Development calls LIHTC the “most important resource for creating affordable housing in the country today.” 

The federal government provides close to $9 billion in tax credit subsidies each year for the construction and renovation of affordable housing units. 

Although LIHTC is not the only federal subsidy program, it is one of the largest. According to some estimates, it funds 110,000 new or renovated apartments across the country or around 50,000 new apartments.  

LIHTC Provides Stable Housing to the Vulnerable 

There is a profound mismatch between the demand for housing and the supply of available rental housing in the country. LIHTC goes a long way in fulfilling this need, especially for people who need it the most.  

LIHTC housing is for low-income households that need help meeting consistent housing needs. HUD releases tenant-level data for LIHTC units across the country.  

Analyzing the data shows that:  

  • More than half of households in LIHTC housing have an income of less than $20,000.  
  • About half of households have less than 30% of the area median income (AMI).  
  • 6% of tenants are disabled.  
  • 11% of households reported at least one person as being disabled.  
  • There is a relatively similar racial distribution.  
  • 40% report receiving some additional form of rental housing assistance. 

The need for affordable housing is acute. To ensure that LIHTC serves those who need it most, state housing finance agencies (HFA) mandate rent restrictions.   

Asset managers who oversee these property investments often use LIHTC property management software to track and monitor these compliance requirements. 

LIHTC Helps Increase Disposable Incomes 

More than 12 million households spend more than 50% of their income on rent alone. And over 22 million spend close to 30% of their income on rent. 

Housing is one of the highest expenses for families. With increasing rental costs and lower supply available, renting places a higher burden on homeowners than mortgage payments.  

When people spend less on rental housing, they have more disposable income to spend and reinvest back into the community and local businesses.  

People tend to shop more locally and enjoy cultural and entertainment activities. In addition, with stable housing options, people tend to invest emotionally in their neighborhoods, which means that local businesses can also expect stability and invest for a longer time. 

LIHTC Enables Access to Better Schooling 

The quality of housing can have a positive impact on a child’s education and health outcomes. Improved child health that’s associated with subsidized housing can also help children maintain more consistent school attendance.  

LIHTC projects can provide stress-free, stable housing and ensure an uninterrupted school year without distractions and a better academic environment for children to perform academically.  

Housing is also one of the highest expenses for low-income households. Affordable housing solves this financial insecurity and can help improve academic outcomes for children.  

Better neighborhoods can also improve access to schooling for children and households, especially households that struggle with homelessness or have to move around a lot. 

LIHTC Enables Better Access to Public Transportation 

Transportation is the most often the second highest expense for low-income households after housing. When considering transportation costs, it gives a much more holistic view of how affordable subsidized housing is and the impact the LIHTC property can have. 

LIHTC developments are often multi-family housing. When located near population centers with access to public transit, they can improve the access of low-income families to public transport.  

In addition, many state HFAs allocate additional points in LIHTC applications for developments near mass transit locations. 

LIHTC Revitalizes Low-Income Neighborhoods 

LIHTC developments have been observed to breathe new life into low-income neighborhoods.  

LIHTC properties appreciate the housing prices in the area and push down the rates of violent crimes.   

Also, since the racial profiles of the tenants of LIHTC projects are not skewed towards any one demographic, they bring more economic diversity to an area, which in turn improves the local economy.  

Even though LIHTC programs are used to develop rental housing programs, innovative uses are also present. 

For example, in Colorado, the town of Castle Rock used LIHTC subsidies, coupled with other federal funds, to redevelop a decrepit downtown area.  

LIHTC Improves the Local Economy  

LIHTC development creates value for the entire community. Families who live in affordable homes can afford to spend more. A study in New York found that families doubled their spending power, and they tend to spend this money locally. 

In a report, the National Association of Home Builders (NAHB) states that LIHTC properties start accruing benefits for the local economy within one year. It generates tax revenue for the federal government, reinvigorates local income, and creates local jobs. 

And its effect is felt in the community long after the development.   

In addition, affordable housing developments also increase the supply of a local workforce, which is crucial for the development of any community, as Housing Forward Virginia notes. 

LIHTC’s Effect on Poverty and Crime 

Although critics point to the high concentrations of LIHTC development in poorer neighborhoods, overall, research finds that LIHTC development does not affect the concentration of poverty in an area. 

However, this study finds that the poorest tenants using the LIHTC program live in the poorest neighborhoods. So, at the program level, policymakers can, of course, do more to encourage social and economic mobility. 

At the same time, a study on LIHTC and crime found that LIHTC developments in an area reduce the rate of violent crimes by about 2%.  

Overall, LIHTC development positively impacts poverty and crime in a neighborhood. 

LIHTC Helps the Vulnerable and Whole Communities 

The LIHTC program’s history is one of success. Over the last 40 years, LIHTC has helped the most vulnerable people in our society and our communities grow and prosper.  

Its impact is clear. Since it’s the most extensive affordable housing development program, most federal housing uses LIHTC findings. It’s safe to say that LIHTC stands for affordable housing.  

Through stable, reliable housing, LIHTC helps families and communities gain better access to schools, health, transport, and a safe environment. 

Challenges and Criticisms of the LIHTC Program

LIHTC Program

Since the United States Congress created the Low-Income Tax Credit (LIHTC) program, it has become the primary policy tool for the federal government to develop affordable housing.  

Using LIHTC, developers have created more than 3 million affordable housing units. And with 25% of Americans spending half their income on rent, affordable housing is more critical than ever. 

The Department of Housing and Urban Development calls LIHTC the “most important resource for creating affordable housing in the country.” 

However, the history of the LIHTC program isn’t as rosy as you might think. This article explores the program’s main challenges and criticisms. 

LIHTC is Immensely Complex 

The LIHTC program is incredibly complex. It comprises a labyrinth of federal regulations that stakeholders must wade through to access tax credits.   

Plus, local and state-specific mandates are built on top of federal regulations.   

Navigating this complex terrain of regulation requires specialists and consultants, adding to the entire program’s cost.   

The application process is also time-consuming. There is no central stakeholder at the federal level to coordinate and allocate LIHTC. Instead, allocation is a decentralized and scattered process that is location-specific, with each state managing its LIHTC funds through a local housing finance agency (HFA). 

In addition, maintaining compliance throughout the program period requires specialized expertise. Building owners and independent investors use asset managers to monitor and track LIHTC compliance. They also need to pay for regular audits. 

Monitoring compliance is essential to ensure that LIHTC investments perform well during the entire compliance period. 

 

LIHTC is Inefficient 

Since it’s a complex product, higher costs are associated with constructing LIHTC housing. It’s not a direct subsidy. It’s a tax credit program adding more stakeholders to the lifecycle of a LIHTC application.  

Higher Cost per Unit 

Some estimates put the cost increase at 20% more expensive by square foot than the industry average.  

Another study found that LIHTC affordable housing is more expensive to build than comparative housing units in Arizona and Washington.  

Funding Private Properties 

One of the main criticisms of the LIHTC program for creating affordable housing is that it is time-capped.   

This means that after the compliance period ends, the developer or building owner can choose to opt out of the affordability requirements, renting out the units at market rate or redeveloping the property into luxury condos.  

Federal subsidies under LIHTC can cover up to 70% of the construction costs for each building. So, this option to opt-out generates a feeling of public funds being used to subsidize private developments.    

LIHTC is Prone to Non-compliance 

Even though industry advocates say compliance in the LIHTC industry is inadvertent, some critics, like Cato and Shelterforce, claim that the industry lacks sufficient oversight. These views are also echoed by the GAO. 

There’s no central authority to ensure compliance since the federal government delegates administration and compliance tracking to each state HFA. These, in turn, rely heavily on developers or investors self-reporting LIHTC compliance.  

Even though the state HFA requires independent third-party audits, critics claim it lacks the resources to ensure that every LIHTC building maintains compliance.   

Plus, there is also a lack of a publicly accessible database about non-compliant properties.  

LIHTC Underserves the Disabled 

The problem with LIHTC developments is that they are not federally reserved for people with disabilities. According to the HUD, 5% of housing projects funded by federal subsidies must be accessible.   

However, this does not always translate to housing for disabled people. Matching people who need accessible housing to available inventory takes time, and building operators cannot always wait, so these units also tend to get rented out to eligible households. 

 

LIHTC Segregates Neighborhoods 

Critics say that the LIHTC program may lead to concentrated poverty and racial disparity.  

According to the Center on Budget and Policy Priorities, poorer neighborhoods have twice the number of LIHTC units as more affluent neighborhoods. The study by CBPP also observes the same pattern in racial segregation.  

Inadvertently, LIHTC programs promote the concentration of poverty.    

However, this recent study also claims that newly constructed LIHTC projects do not lead to the concentration of poverty or promote racial segregation. 

 

LIHTC is Rigid  

Since LIHTC development is essentially a rental program, it does nothing to promote home ownership and income mobility among low-income households.    

With its affordability requirements for, LIHTC housing also misses out on covering middle income households struggling with poverty in some form.    

In many places, there might be better solutions than multi-family homes to the problem of affordable housing.  

But, pragmatically speaking, the LIHTC program lacks the flexibility to adapt to different housing needs.   

LIHTC is complex, so smaller players find it challenging to break into the market. The amount of regulation means they need to hire specialists. Plus, there’s very little room to do new things or try new ways to complete and operate a project. 

LIHTC’s Increasing Share in Affordable Housing  

Over the last 40 years, LIHTC has been the most significant funding source for affordable housing construction.   

The ecosystem is now heavily dependent on it. LIHTC asset management teams, syndicators, tax consultants, etc., are all stakeholders in affordable housing, and they are built around the LIHTC program. The program demands that developers and operators hire specialists, which adds to the cost of business.   

LIHTC’s success promotes an overdependence on the project, which is not a silver bullet for any housing problem. Affordable housing needs a more nuanced approach.   

The Role of Developers and Investors in LIHTC Projects

LIHTC Projects

The Tax Reform Act 1986 created the Low-Income Housing Tax Credit (LIHTC) program. It provides federal tax credits to offset income tax liability to incentivize private sector investments to build more affordable housing units.  

Every year, the LIHTC program sets aside $9 billion in tax credits to create affordable housing. Affordable housing developers monetize these tax credits by selling them to investors or tax credit syndicators who aggregate tax credits from different projects into a single fund and solicit investments from other private investors.  

This article explains the different kinds of LIHTC stakeholders and how the developer-investor relationship works. 

How the LIHTC Program Works 

Before exploring nuances of the LIHTC ecosystem and its stakeholders, it’s essential to have some context.   

The federal government allocates LIHTC funds for each state as a proportion of its population. There is also a floor for the minimum LIHTC allocation for each state.   

Each state administers and distributes LIHTC funds according to a Qualified Action Plan (QAP) it prepares through its Housing Finance Agency (HFA). The HFA awards a 4% or 9% tax credit to an affordable housing project, covering 30%-70% of the construction costs. 

Eligibility for LIHTC 

To be eligible for LIHTC, developers must meet specific requirements. These can be found in each state HFA’s QAP. 

  • Minimum Set Aside of 20-50 or 40-60: An election to reserve at least 20% of units for families who earn below 50% of the Area Median Income (AMI) or 40% of units for families earning less than 60% of AMI. 
  • Rent Capping: Building owners will not ask families to pay more than 30% of their income as rent.  
  • Compliance Period: Building owners must comply with these affordability requirements for 15 years. HFAs may also enforce an additional 30-year compliance period. 

Structure of LIHTC Projects 

Each LIHTC investment is structured as an LLC or a limited partnership. It comprises a Limited Partner – the developer – who does not assume any risk and a General Partner.  

The Limited Partner receives almost all the tax credit to monetize and construct the building, and the General Partner eventually gets full responsibility for the management and maintenance of the project. 

The Role of Developers in LIHTC 

Developers apply for tax credits to HFAs. They must make sure that their application conforms to the state’s QAP.   

It is the developer’s responsibility to calculate the amount of tax credits that the project will earn every year and the financial viability of the project.   

The developer also calculates the total cost of the project and the government subsidies they will need to create a ‘capital stack’ that can viably fund the affordable housing project.   

If the HFA approves the tax credit application, the developer can approach investors to raise equity for constructing the affordable housing project by monetizing the tax credit.  

Once the developer completes the project, they hand it over to the investor.    

The Role of Investors in LIHTC 

Investors provide the cash equity that developers need to begin constructing the affordable housing project in exchange for the tax credits the HFA allots to the LIHTC project. 

Once the developer hands over the completed project, the investor calculates the tax credits and claims them from the IRS annually. Often, they use LIHTC software to track these complicated tax calculations. 

Investors take on monitoring and operations of the affordable housing project and ensure that the project is compliant with affordable housing regulations for at least 15 years. Any non-compliance can result in a loss of tax credit and, therefore, a loss on equity investment already spent in developing the affordable housing project.  

This is just a summary of the role of investors in LIHTC. In truth, it is more nuanced than this. There are different types of investors, each with different roles in functioning a LIHTC project. 

Equity Investors for LIHTC Projects 

LIHTC investments have many stakeholders, such as corporations, tax credit syndicators, and private investors, like institutional investors and large banks.  

The tax credit is useful to corporations the most. However, corporations generally steer clear of lumpsum equity investment in LIHTC projects since the risks to their investments span the entire compliance period (at least 15 years). Corporations usually invest through special LIHTC investment funds. 

Syndicators 

A syndicator is a LIHTC stakeholder claiming tax credits yearly from the IRS and selling these tax credits to corporations and individual investors.  

Syndicators prepackage LIHTC projects into separate equity funds that corporations and individual investors are comfortable investing in. Tax credit syndicators assume the risk with investments in LIHTC. They often use compliance tracking features of LIHTC software to ensure their entire investments matches affordability regulations.  

Syndicators underwrite their equity funds and invest in many LIHTC projects with one fund. They also create geographic or building-specific funds depending on investor sentiment.  

Monitoring compliance in this portfolio of LIHTC buildings is one of the main tasks of the asset management teams they hire. 

Private Investments 

Private investments, or Private Placements, are usually made by banks or large institutional investors who are looking for alternative investment vehicles.  

Banks invest in LIHTC projects because LIHTC projects are sound long-term investments. They generate consistent and reliable returns over ten years if investors meet the state’s affordability requirements.   

LIHTC investments are also eligible for Community Reinvestment Act (CRA) credits, which help banks increase their CRA ratings. Since the Federal Reserve mandates banks to maintain a specific floor for their CRA score, banks find directly investing in LIHTC projects attractive.    

The Developers-Investors Relationship is Symbiotic 

With the LIHTC program, the federal government shifted the burden to subsidize affordable housing development from annual budget outlays, which are subject to Congressional approvals, to the Federal Reserve.  

Since these government subsidies are essentially lost revenue for the Fed, not direct cash, this model requires multiple stakeholders to work together to access LIHTC. 

The model is the reason developers and investors in the LIHTC ecosystem have a symbiotic relationship.  

Due diligence and compliance by investors ensure that the LIHTC program stays relevant to changing housing needs and the value developers create for investors and residents ensures more business and their continuation in the LIHTC program. 

The LIHTC program’s success depends on a good working relationship between them. Neither can survive without the other. 

Types of LIHTC Projects and Affordable Housing Options

LIHTC Projects

Policymakers created the federal Low-Income Housing Tax Credit (LIHTC) program to inspire the private sector to enter the construction of affordable housing.   

It is now one of the mainstays of the government’s affordable housing policy. The industry has created a vast ecosystem of developers, tax credit syndicators, and consultants to help it run smoothly.  

The history of the LIHTC program illustrates that it has been one of the most successful and widely adopted government interventions. This article describes the different projects developers use LIHTC funds to construct. 

4% vs. 9% Credit Development 

State housing finance agencies (HFA) allocate LIHTC as part of the ‘4%’ or ‘9%’ tax credit. 4% and 9% here are not the absolute rate of return on investments.  

They are simply identifiers for the type of tax credit a project receives. 4% and 9% signify the yearly rate of tax credits as a percentage of the eligible basis that investors will accrue each year over a 10-year tax credit window. Asset managers rely on LIHTC software to calculate the actual tax credits a property earns since it’s cumbersome to track manually. 

4% Tax Credits 

Development projects that utilize the 4% type subsidy are rehabilitation or renovation projects for existing buildings.   

HFAs award these projects through a noncompetitive process, usually first come first served. Also, there’s no absolute federal cap on the number of projects these types of subsidies can fund, and developers club these with other sources of federal funding like government-issued affordable housing bonds.  

9% Tax Credits 

The 9% tax credit developments are for new construction projects or projects that require extensive renovations.   

HFAs allocate them through a competitive bidding process where each state sets minimum qualifying criteria and scoring guidelines.  

Mixed-Use Development  

One of the biggest problems with LIHTC development is that the affordable housing they develop is concentrated within low-income communities. This leads to longer commute times for people living in low-income housing and pushes the community away from services they desperately need. 

Mixed-use development is a good way to overcome this challenge. Mixed-use LIHTC development allows developers to use federally funded tax credits to construct properties that have some commercial use areas.    

For example, a mixed-use development can combine residential multifamily homes and condominiums with retail, cultural, religious, and coworking or office spaces.  

The advantage of mixed-use development is that it provides low-income housing in conveniently located areas. Living near downtown often gives low-income households access to better schooling, public transit services, and cultural exposure that usually affordable housing buildings may need more.   

It reduces commute times from work and school and revitalizes communities by redeveloping decrepit yet culturally significant areas.  

Mixed-Income Housing Development 

Developers create apartments or single-family homes for various income types in mixed-income housing. Initially, only the federal government was creating public housing. Since this housing was only for people experiencing poverty, it concentrated poverty and led to racial segregation. 

The difference between mixed-income and public housing is that public housing only targets low-income households. Mixed-income housing is the main policy thrust of the LIHTC program. This intervention is how the federal government promotes public-private partnerships in developing affordable housing solutions. 

One of the reasons for the creating the LIHTC program was to involve the private sector in the construction of affordable housing and overcome the challenge of previous government interventions.  

After the LIHTC program’s creation, developers could claim tax credits for constructing mixed-income housing with some units rented out at the prevalent market rates and a specific percentage of units ‘set aside’ for low-income households—the essential criteria to qualify for tax credits under the LIHTC program. 

However, this is a cumbersome process to perform manually, and most stakeholders use automated compliance tracking features of LIHTC software to track and claim tax credits.  

Supportive Housing Development 

Usually, Supportive Housing is a part of LIHTC development projects. It is a program that combines other state sponsored social services programs with affordable housing.  

Supportive Housing provides rent-capped, affordable housing for: 

  • People with disabilities. 
  • People with mental illnesses. 
  • People who are struggling with substance abuse. 
  • People who are struggling with homelessness. 

It also aligns supportive services like check-ins by social workers with reliable housing.  

The program aims to transition people who need help into mainstream society. It’s meant as a stepping-stone for people who need help. Most states have some form of optional funding for building supportive housing into their individual LIHTC programs.  

The HUD also promotes supportive housing through its Section 811 Project Rental Assistance program, consolidating LIHTC and HOME funding to produce affordable housing. 

Apartments/Multifamily Housing Development 

Apartments or multifamily housing are properties owned by a single entity. However, it has individual units that the property manager rents out to different households. This model typically describes how a LIHTC development is structured and operates.  

Apartments share common areas and community resources and can be affordable places for households. HFAs require apartments constructed with LIHTC financing to reserve a specific portion of their units for low-income families. 

The developer raises equity from investors using tax credits from the LIHTC program and state and municipality funds to construct a multifamily housing building with many individual apartment units.  

The developer hands over the completed building to the investor for operation, maintenance, and collection of rents and tax credits.   

The investor rents out a specific portion of the building or apartments at the prevalent market rates. The operator-investor also ensures that some multifamily housing is rent-capped and leased out to low-income households.  

Age-Restricted Housing Development 

Typically, HFAs do not require LIHTC development programs to be reserved for seniors.  

However, under the Housing Act of 1959, states can provide additional funding to developers to build units that allow seniors to live with dignity in affordable housing with assisted living services.   

The seniors who qualify for this form of housing are extremely low-income individuals who are above the age of 62 and have an income less than 50% of the area’s median income. 

Also, HUD’s Section 202 lets developers combine LIHTC funds with additional funds if the developer reserves specific portions of living units as senior-only or age-restricted affordable housing.  

HUD also administers three programs to provide assisted living services to seniors in these specific age-restricted housing. 

LIHTC is a Versatile Tool for Policy Makers 

Tax credits can spur sizeable investments by the private sector in critical housing projects for lower-income households. After the pandemic-era housing boom, the need for new affordable housing units is acute.   

The LIHTC program promotes housing construction to serve many at-risk people, such as seniors, disabled people, veterans, and low-income households.  

LIHTC can also help states transform neighborhoods and ensure better community spaces.  

Its widespread adoption by private developers and investors is why it is emerging as a versatile tool for federal legislatures and state policymakers to fill the gap in affordable housing. 

Its widespread adoption is probably why it is emerging as a versatile tool in the hands of federal legislatures and state policy makers to fill the gap in affordable housing.