Everything You Need to Know about LIHTC Regulations

The low-income Housing Tax Credit (LIHTC) program is the largest and most important initiative the government has taken to fund affordable housing in the U.S. The LIHTC program grants billions of tax credits to investors and developers each year who promise to develop or rehabilitate low-cost housing units after the credits are given.

  

While initiating the construction or rehabilitation of affordable housing units, developers must consider and follow certain rules to meet LIHTC compliance. These rules are about meeting the income criteria, eligibility criteria, rent level, and LIHTC fair housing rules to protect low-income tenants. The rules associated with LIHTC units’ construction and occupancy are viable for 30 years.  

 

Development-Specific Regulations and Compliance Challenges 

For more efficient and controlled processes, developers also consider and follow development-specific regulations related to the time and location of affordable housing units and the role of developers and investors in ensuring the maintenance of constructed buildings.

 

Industry experts agree that most properties associated with the LIHTC program tend to follow the regulations set forth by the program. They also believe that following these rules is essential for maintaining affordable housing construction standards and ensuring that low-income tenants are served effectively with decent, elegant, and low-cost homes.

      

However, agreeing to these statements involves several challenges. Some of them are mentioned below – 

  

1. Verifying the compliance process is a complex job. It involves multiple layers and requires continuous reporting and inspection.   
2. The systematic and practical issues within the monitoring system are significant reasons why maintaining a high compliance rate is challenging.   
3. Dependency on the developers for their compliance reporting with the LIHTC rules and regulations to meet the requirements is also a significant challenge affecting the compliance rate.   
4. The State Housing Agencies are responsible for overseeing and monitoring LIHTC compliance. These agencies face resource constraints, which are needed to ensure that LIHTC properties comply with the compliance set for affordable housing units.   
5. These state housing agencies also lack the funding resources needed to carry out inspections regularly and thoroughly. This financial constraint limits their ability to effectively and accurately verify compliance across all the LIHTC properties.   
6. The set compliances are visible during the first 15 years of the compliance period. Though continuous monitoring and reporting are enforced for the initial 15 years of occupancy, these protocols tend to weaken and ultimately vanish after the first phase.  
7. Transparency is another challenge for LIHTC properties in maintaining a high compliance rate. Not enough resources are available for people to understand the repercussions noncompliant properties face, making it difficult for stakeholders to understand the true extent of compliance across all the LIHTC properties. 

LIHTC Rules to Ensure Compliance in Affordable Housing 

The Low-Income Housing Tax Credit (LIHTC) program is crucial for funding affordable housing in the U.S., and it requires strict adherence to specific rules and regulations.

  

Ensuring compliance with these rules is essential to maintaining the program’s integrity and effectiveness.

  

Ensuring Strong Compliance 

1. Despite data collection and reporting gaps, most insiders believe developer compliance with income and rent rules under the Low-Income Housing Tax Credit (LIHTC) program is strong. 
2. When you look over the compliance history, the Low-Income Housing Tax Credit has a far more exemplary compliance record than any previous federal housing finance program. 
3. The threat of IRS tax recapture during the first 15 years of a LIHTC building’s service ensures compliance. This penalty can be financially devastating, applying retroactively to the entire tax credit allocation.  
4. If the IRS finds non-compliance in year 7 for an issue in year 3, it can retroactively remove the tax credits from year 3. This recapture is a powerful tool because investors don’t want that to happen ever. 

Post-15-Year Compliance and Monitoring Challenges 

1. After the initial 15-year period, developers remain motivated to comply to maintain good standing with Housing Finance Agencies (HFAs) and secure future tax credits. Repeat offenders could have their applications for future LIHTC developments denied. That’s a compelling incentive because developers have a pipeline of projects. 
2. LIHTC competition is fierce: only about 25% of developers who apply for the competitive 9% credits receive an allocation, making them even more careful to follow all the rules. 
3. The program developers want another deal, another opportunity to earn credits. If they can’t do that, it significantly hurts their business, giving them a real incentive to keep these projects compliant to receive future credit allocations. 
4. Getting denied in one state for non-compliance means you’ll probably get bounced out of developing LIHTC projects in other states, so staying in HFAs’ good graces is consequential. 
5. Effective monitoring of LIHTC regulations is crucial. If no checking is happening along the way, there’s nothing to look back on and say there’s a problem when renewal happens. Monitoring needs to be in place for it to be meaningful. 
6. The Government Accountability Office (GAO) raised concerns about LIHTC data collection and reporting in 2016 and 2018, citing fraud detection and risk management issues. 
7. In 2022, the Treasury reported that approximately 67,000 LIHTC claims for tax years 2015 through 2019, totaling almost $15.6 billion, needed to match supporting documentation due to potential reporting errors or non-compliance. 
8. However, the department noted that the error rate was far lower when returns were closely examined than when returns were “similar.”

Conclusion  

While LIHTC compliance rates are believed to be high, ongoing monitoring and data transparency challenges underscore the need for robust oversight to ensure the program’s continued success in providing affordable housing.