Arizona Low Income Housing Tax Credit (LIHTC) Program

The Low-Income Housing Tax Credit (LIHTC) Program is an important resource for developing and preserving affordable rental housing for low-income households statewide in Arizona. The Arizona Department of Housing administers the program, which incentivizes private investment in affordable housing by providing developers with dollar-for-dollar reductions in federal income tax liabilities.

 

This state resource outlines how the LIHTC program works, eligibility, application, and key compliance requirements in Arizona. 

 

Overview of the Arizona LIHTC Program

Arizona
Program	Affordable Housing Tax Credit
Administering Agency	Arizona Department of Housing
Enacting Legislation	S.B. 1124
Annual State Cap	$4 million. Half to rural projects, half to metro projects.

 

The Low-income Housing Tax Credit (LIHTC) program was established under section 42 of the Internal Revenue Code (IRC) with the Tax Reform Act of 1986 as the basic affordable housing structure in Arizona. This program allows developers to construct, rehabilitate, or purchase rental housing projects for low-income individuals and families.

 

The Arizona Department of Housing (ADOH) administers LIHTC allocation to ensure projects meet federal and state affordable housing requirements.  

 

Since the introduction of Arizona’s LIHTC program, over 58,000 affordable housing units have been developed, creating more than 92,000 jobs and additional economic benefits. 

 

Arizona LIHTC Program Structure  

LIHTC offers two separate types of tax credits: 

• 9% Credit: This is a credit system acquired via competition, mainly allocated for new constructions with no other subsidies than credit. 

• 4% Credit: This credit has no competition. It is usually used alongside tax-exempt bonds and is mainly applied for rehabilitation projects. 

 

The credits may be taken annually for ten years. Qualified developers and investors may also enjoy significant tax benefits. Still, the properties subject to eligibility must pass through the program requirements for 30 years, including a primary 15-year affordability period and an extended use period.  All said properties must remain income—and rent-restricted throughout such time.  

  

LIHTC Qualification Requirements for Developers in Arizona  

Developments need to pass for the Arizona LIHTC program’s eligibility qualifications. Among them are the following: 

• Rentals property: The properties must be single- or multifamily residential properties.   

• Income Tests: At least 20% of the units must go to low-income households with 50% or less of the Area Median Income (AMI), or 40% of the units must go to low-income families with 60 % or less of AMI.  

• Rent Limits: The rent should be adjusted to be affordable and limited to 30% of a tenant’s gross income.  

• Qualified Allocation Plan (QAP): The applications are channeled through the ADOH’s Qualified Allocation Plan, an annual plan the Governor approves by updating. 

 

The state of Arizona’s QAP prefers projects whose targeted populations have very low incomes or projects providing more units than those required by federal standards.  

 

Compliance and Monitoring  

Compliance for the Arizona LIHTC properties must uphold the compliance requirement, which includes verifying tenants’ incomes, setting rent limits, and maintaining affordable housing standards. The ADOH monitors compliance through annual reports and on-site inspections and may threaten the recapture of tax credits in cases of non-compliance. 

 

Property developers must submit audited financial statements and all other records for evidence that they meet the rent and income requirements specified under the Land Use Restrictive Agreement (LURA).  

 

Also, legislative changes, such as Arizona Revised Statutes 42-13603, require LIHTC properties to consider the restrictions on rents and actual rents charged in computing full cash value for tax purposes.  

 

Arizona LIHTC Program Application Process 

The Arizona LIHTC process includes several steps –   

• Pre-Application: Developers first apply for a pre-application to ensure their project meets the Qualified Allocation Plan (QAP).  

• Competitive Process: The developers competing for 9% credits enter very competitive selection processes. This application is scored on varied criteria, such as the project’s ability to serve the highly low-income location and overall design. 

• Final Application: The applicants submit the final application, which contains in-depth financial projections, design plans, and documentation of how their proposed project will address the housing needs of the State of Arizona. 

 

Applications are reviewed, and recommendations are made on tax credit allocations through identified priorities within the state for affordable housing.  

 

Recent Legislative Updates and Initiatives  

Arizona initiated House Bill 2562, which extended and expanded the state LIHTC program. These would be pushed further as more tax credits and qualifying projects are done. The bill also closes a loophole to some developments that prevent some projects from following the affordability rules.

 

In addition, the Arizona Legislature has enacted amendments to Arizona state property tax law that contain a 10% assessment ratio for low-income multifamily residential rental properties, reducing operational costs for LIHTC property owners. 

 

Property Valuation and Tax Implications 

Arizona Revised Statutes (ARS) 42-13603 guides the valuation of LIHTC properties in Arizona. This statute allows property owners to use a statutory income valuation method. The methodology considers the restrictions in rent and deeds put on the properties by the LIHTC program to ensure that such properties do not constitute taxation like other market-rate conventional properties.

 

The most recent court case, Maricopa County v. Viola, in 2021, has reaffirmed that LIHTC properties must be appraised using their actual incomes and operating expenses, not the basis of unrestricted property. This continues to make affordable housing developments financially feasible. 

  

Economic Effects of Arizona’s LIHTC Program 

The LIHTC program has left an indelible mark on Arizona’s economy. Between 1986 and 2021, the program assisted in creating or preserving more than 58,000 housing units, generating $10 billion-plus in wages and business income and $3.6 billion-plus in tax revenue. More than that, the program has helped over 126,000 low-income households statewide acquire safe and affordable housing within Arizona’s most vulnerable populations. 

 

The Arizona LIHTC has proven to be one of the most effective tools for creating and maintaining affordable housing across the state. A source of competitive incentives for private investment, the program addresses the growing demand in Arizona for affordable rental housing while also serving the economic ends of communities.  

 

Awareness of the requirements, application process, and compliance regulations of the Arizona LIHTC program are beneficial for developers, investors, and housing advocates who seek to maximize the availability and benefit of this inalienable resource.  

 

Visit the Arizona Department of Housing at housing.az.gov to learn more about LIHTC, the latest legislative updates, and application guidelines.