LIHTC: Bridging the Gap for Affordable Living

Introduction

Over 50 years, home prices in the United States have climbed 118% while household income has risen just 15%. Rents have skyrocketed over the last ten years, and the number of affordable dwellings – averaging $600/month – has decreased from 32% of the rental market to 22%.

 

Market-rate housing has been residents’ go-to in most cities throughout the United States. However, as housing prices climb faster than income levels in the vast majority of areas, with property tax and rent increasing beyond the means of area residents, low-income renters often end up having to relocate to different neighborhoods or inferior housing. 

 

As the market itself shifts, the market rates start exclusively accommodating higher-income individuals. The result? Gentrification of neighborhoods and fewer affordable housing options.

 

The economic after-effects of the COVID-19 pandemic further exacerbated this situation. As unemployment grew in 2022, living costs soared, making affordable housing near work and school even harder to find. 1 in 4 renters spent more than 50% of their monthly income on rent, out of which most were market-rate renters. 

 

Naturally, there is ample conjecture about what will happen if this situation goes unchecked, but the resounding question is: Is there a solution? 

 

The Solution: LIHTC

 

The Low Income Housing Tax Credit (LIHTC) program was effectuated by the Reagan Administration in 1986, offering a dollar-for-dollar reduction in federal income tax as an incentive to build multifamily affordable housing. Unlike private/market-rate housing which is driven by market dynamics, LIHTC is a structured governmental approach to solving the housing crisis.

 

LIHTC developments often involve a range of intricacies – from multiple funding sources to compliances and day-to-day management, LIHTC is a lot more complicated than regular market-rate housing. This is where Fusion, with its suite of LIHTC-specific tools designed by Asset Managers, makes the job simpler by reducing costs, increasing visibility, and speeding up growth.

 

What is Market-Rate Housing?

 

Exactly what it seems to be! Rather than being reliant on government subsidies or assistance, market-rate housing is driven by the first-principle economics of demand and supply. 

 

Market-rate housing rentals are subjectively affordable – they vary in price based on their location, demand, amenities, size, building condition, and other factors. These rents are typically based on the American Median Income (AMI) of an area. Based on how much monthly income goes toward housing costs, a formula is derived and subsequently used to calculate area-wise rent. The Federal Department of Housing & Urban Development (HUD) updates the AMI annually, influencing rent calculations and causing fluctuations based on changes in income levels.

 

How Affordable Housing Differs From Market-Rate Housing

 

While market-rate housing is contingent on several factors that aid market demand, affordable housing specifically refers to units available for rent at below-market prices owing to governmental assistance and subsidies.

 

The US has several affordable housing programs, all of which have certain predetermined eligibility criteria. A common industry criterion is AMI, where affordable housing rentals should cost no more than 30% of an average household’s monthly income.

 

Technically, market-rate housing and affordable housing are not the same thing. However, market-rate housing may sometimes be available for <=30% of a household income and be subsumed by the “affordable housing” umbrella. 

 

Both options are tenable, but affordable housing initiatives like LIHTC result in fewer evictions, stable living, more local job opportunities and improved government infrastructure. Inevitably, this investment in an area’s future leads to a healthier local population and economy.

Why LIHTC?

 

Since its launch in 1983, LIHTC has financed the development of 3.5 million rental homes and supported over 8 million low-income households across the US, making it the most important source of funding for affordable housing in the United States.

 

However, no investment is always 100% safe and durable – what’s the catch?

 

The fundamental structure of LIHTC was under scrutiny during and after the COVID pandemic:

 

Most renters residing at multifamily Low Income Housing Tax Credit (LIHTC) properties rely on employment income to pay their rent. 

 

During and after COVID, unemployment rose, and unlike certain other federally assisted housing programs, renting a LIHTC unit does not guarantee that a renter household will spend no more than 30% of its income on rent and utilities. 

 

Because <1/3rd of LIHTC residents are additionally covered by Project-Based Section 8 rental assistance, many LIHTC renters could potentially spend more than 30% of their household income on housing costs. 

 

This hypothesis attacked the foundation of the program and became a cause for concern.

 

Nevertheless, fundamentals at LIHTC properties remained stable between 2019 and 2022 and even outperformed similar conventional property programs, including Market Rate Seniors Housing and Market Rate Class B/C properties.

 

No catch so far. But there’s more.

 

In nationwide urban, suburban, and rural areas, the creation of new housing units has been hampered by constraints such as labor shortages, land restrictions, and building cost increases. 

 

Affordable housing faces many additional hurdles with environmental and labor requirements, local zoning policies, lengthy permitting and approval processes, and land-use restrictions.

 

LIHTC, however, addresses this challenge with a compelling counter-offer for LIHTC investors: 

 

1. Federal Support & Tax Credit: Above and beyond the federal tax credit, benefits include a 15-year compliance period, strong protections for affordability, and the ability to claw back credits. 
2. Low Foreclosure Rates: LIHTC properties tend to have low foreclosure rates and low vacancy rates, with an annual foreclosure rate of less than 0.1% in any year since 2000. 
3. Company CSR Fulfilment & Economic Benefits: LIHTC projects often align with the goals of CSR by promoting affordable housing, addressing socioeconomic issues, and contributing to community development. Additionally, the local economy directly benefits from LIHTC construction as the local income earned during construction is often recycled into the local economy.

 

Since there can’t only be a list of Pros, here is the main pointer in the Cons column that deters Developers, Syndicators, and Investors from proceeding with LIHTC: Complexity.

 

The gains from LIHTC developments are dependent on the allocated Tax Credits, which are typically disbursed over a 10-year period. The process of getting to that stage of availing the total credit amount is overwhelming. Add to this equation the abundance of compliances, reports, bookkeeping, and LIHTC-specific financial tracking, and the result is a repetitive task that requires extreme precision. 

 

Fusion has been designed by Asset Managers specifically to resolve this concern. With a proprietary curation of Asset Management and Fund Management tools, Fusion automates boring tasks, puts your LIHTC portfolio on autopilot, contextualises reporting requirements, effortlessly tracks compliances, and provides you with an interactive interface to make your day simpler and time-effective.

Looking Ahead

 

Unfortunately, affordability and income restrictions are set to expire for more than 300,000 federally assisted rental homes by the end of 2025. 

 

LIHTC now has an opportunity to assist even more individuals and families, especially with the expansions and enhancements of the Affordable Housing Credit Improvement Act of 2023. This legislation increased the annual Housing Credit allocation, made it easier to serve hard-to-reach areas and populations, removed barriers, and streamlined program regulations. 

 

Now more than ever, this program plays a critical role in bridging the affordability gap and increasing housing stock.

 

Affordable Housing Credit Improvement Act of 2023

 

The Bill and Its Impact (Citation: US Congress)

 

S.1557 — 118th Congress (2023-2024)

 

Introduced in Senate (05/11/2023)

 

This bill revises provisions of the low-income housing tax credit and renames it as the affordable housing tax credit.

 

The bill increases the per capita dollar amount of the credit and its minimum ceiling amount beginning in 2023 and extends the inflation adjustment for such amounts.

 

The bill modifies tenant income eligibility requirements and the average income formula for determining such income. It also revises rules for student occupancy of rental units and tenant voucher payments, and prohibits any refusal to rent to victims of domestic abuse.

 

The bill further modifies the credit to

 

1. increase state allocations of the credit;
2. repeal the qualified census tract population cap;
3. prohibit consideration of local approval and local government contribution requirements for housing projects;
4. increase the credit for certain projects designated to serve extremely low-income households;
5. increase the credit for certain bond-financed projects designated by state agencies;
6. eliminate the basis reduction for properties that receive certain energy-related tax benefits; and
7. increase the population cap for difficult development areas (i.e., areas with high construction, land, and utility costs relative to area median gross income).

 

The bill also includes Indian and rural areas as difficult development areas and modifies other requirements relating to casualty losses, tax-exempt bond financing, and foreclosures.

 

The Affordable Housing Credit Improvement Act of 2023 (AHCIA) aimed to strengthen and expand the Low-Income Housing Tax Credit (LIHTC), which has by now become the primary tool for financing affordable rental housing in the country.

 

Key outcomes of the AHCIA 2023 include:

 

1. Increased Funding: The Act proposes a substantial increase in the Housing Credit allocation, potentially financing the construction of nearly 2 million additional affordable rental homes over the next decade. This increase is crucial for addressing the shortage of affordable housing across the country.
2. Flexibility in Financing: One of the major provisions includes reducing the amount of private activity bond financing required to access the 4% Housing Credit from 50% to 25%. This change is expected to make it easier to finance affordable housing projects, thereby encouraging more development.
3. Broad Bipartisan Support: The AHCIA has garnered strong bipartisan support in both the House and Senate, and the bill has received backing from a significant number of lawmakers across party lines, reflecting the urgent need to address the affordable housing crisis.
4. Focus on Hard-to-Reach Areas: The Act also emphasizes serving hard-to-reach areas and populations, ensuring that affordable housing is accessible to those who need it most, including veterans, seniors, and low-income families.

 

Overall, the AHCIA of 2023 represents a major step forward in addressing the affordable housing shortage in the United States, providing crucial resources and policy changes to support the development of affordable rental units.