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.
