Your Guide to Understanding Silos in LIHTC Projects

Silos in LIHTC Projects

The primary objective of affordable housing initiatives is to ensure everyone has a budgeted and decent place to call home. The Low-Income Housing Tax Credit (LIHTC) program is vital in making this happen. But there is an elephant in the room that needs to be addressed—SILOS.  

You might not be familiar with what exactly Silos are in LIHTC?  

In the affordable housing industry, Silos are like barriers that separate different groups of people or organizations working on the same goal—building affordable homes. Instead of working together, these groups often operate independently, missing out on opportunities to help each other and making the process less efficient.  

In this article, we’ll take a closer look at what Silos in LIHTC are, what are the challenges with Silos, and what we can do about them.  

By understanding and addressing these silos, we can make affordable housing projects more effective and accessible to those who need them most.  

What is the Low-Income Housing Tax Credit (LIHTC) Program?   

The LIHTC program is a teamwork between the government, investors, and developers to build affordable homes for people with low incomes.  

Here is how it works:  

  1. Government Support: The government wants to help people find affordable homes. So, they give special credits like rewards to developers who promise to build houses for low-income people.  
  1. Investors Step In: These credits are valuable, but developers can’t use them directly. Instead, they sell them to investors. The investors give money to the developers in exchange for these credits.  
  1. Building Affordable Homes: With the money from selling the credits, developers build homes for low-income people. These homes are rented out at prices that these people can afford, making it easier for them to find a home that lies within their budget.  
  1. State Agencies Keep Score: Each state has a team of people who ensure everything is fair and square. They decide which projects get the credits.  

Ultimately, everyone wins—the developers get the funding they need, investors get tax benefits, and most importantly, people with low incomes get decent homes they can afford.

Common Silos that Exist in LIHTC  

Despite the shared goal of providing affordable housing, several barriers can hinder the efficiency of the LIHTC program.  

Communication breakdowns, fragmented planning, limited information sharing, regulatory hurdles, resource allocation issues, lack of community engagement, resistance to technology and innovation, and short-term focus can create Silos in LIHTC projects. These barriers lead to delays, inefficiencies, and mistrust, hindering long-term sustainability and community impact. 

By recognizing and addressing these silos, stakeholders can work together more effectively to maximize the benefits of LIHTC projects and ensure that affordable housing initiatives reach those who need it most.  

Impact of Silos on Affordable Housing  

The presence of Silos within the Low-Income Housing Tax Credit (LIHTC) program can have significant repercussions on the development and sustainability of affordable housing initiatives.   

Some key impacts include:  

  1. Silos can lead to duplicated efforts, unnecessary delays, and inefficient use of resources.   
  2. Silos prevent stakeholders from fully leveraging their collective expertise, resources, and networks.   
  3. Silos can increase disparities in resource allocation, particularly in communities with limited access to affordable housing.   
  4. Affordable housing projects may fail to address broader goals and priorities without effective collaboration and coordination. 
  5. Silos can hinder efforts to integrate affordable housing with transit, education, healthcare, and other essential services.   
  6. Silos can complicate compliance with regulatory requirements and program guidelines, leading to delays, penalties, and even project cancellations.  

Addressing these impacts is crucial for fostering greater collaboration, transparency, and equity within the LIHTC program.

Best Practices to Address Silos in LIHTC 

Here are some best practices for addressing silos in the LIHTC program:  

  1. Promote Collaboration: Develop opportunities for collaboration and open communication among all stakeholders involved in LIHTC projects, including developers, investors, state housing agencies, local governments, and nonprofit organizations.   
  2. Integrated Planning Processes: Engage stakeholders early in the planning and development stages to identify common goals, align resources, and leverage collaboration to maximize impact.  
  3. Utilize Technology: Invest in LIHTC software solutions that streamline communication, data sharing, and project management, ensuring transparency among stakeholders.  
  4. Capacity Building and Training: Provide training and capacity-building opportunities for stakeholders to enhance their understanding of LIHTC requirements, regulations, and best practices.   
  5. Cross-Sector Partnerships: Foster cross-sector partnerships between affordable housing developers, local government agencies, organizations, and other stakeholders. Collaboration will help address multiple community needs and maximize resources.  
  6. Performance Measurement and Evaluation: Establish performance indicators and clear metrics to evaluate the effectiveness and impact of LIHTC projects. Regularly evaluate outcomes, identify lessons learned, and share best practices to inform future decision-making and improve project outcomes.  
  7. Policy Advocacy and Reform: Advocate for policy changes and reforms that address systemic barriers. Promote collaboration within the LIHTC program to identify and address regulatory hurdles, funding constraints, and other obstacles to effective collaboration.  

By implementing these best practices, stakeholders can break down Silos, foster collaboration, and maximize the impact of LIHTC projects in addressing affordable housing needs.  

Let’s Combat Silos with Fusion…   

Silos in the LIHTC program pose obstacles to providing quality housing for those in need.  

Fusion is a modern-aged LIHTC software that breaks down Silos by connecting stakeholders in a unified platform. By centralizing data and streamlining communication, Fusion promotes transparency and efficiency in LIHTC projects. With real-time insights, stakeholders can navigate compliance and track progress, empowering collaboration toward safe, affordable housing for all.   

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.