Your Complete Guide to LIHTC Process

LIHTC Process

Low-Income Housing Tax Credit is a powerful tool for building homes that low-income or moderate-income families can afford.  

In this article, we’ll guide you through the complex path of LIHTC applications and help you steer through the complexities of this program.  

We’ll start by simplifying what LIHTC is all about. Then, we’ll dive into the nitty-gritty of the application process. By the end, you’ll be ready to begin your journey towards affordable housing.  

Step 1: Understanding the State QAP  

Start by getting familiar with the Qualified Allocation Plan (QAP) specific to your state. The affordable housing agency of every state updates this plan annually and outlines the rules for Low-Income Housing Tax Credits (LIHTC) eligibility. It details what developers need to qualify and the types of housing they can propose. The Housing Finance Agency (HFA) of every state uses the QAP to ensure projects meet these standards.  

By studying the QAP, you’ll understand the minimum requirements your project must meet to comply with regulations. It’s essential for developers to thoroughly grasp this document as it guides navigating the LIHTC application process effectively.  

Step 2: Assessing Your Project’s Eligibility for the LIHTC Application  

Before applying, knowing if your project qualifies for Low-Income Housing Tax Credits (LIHTC) is important. Affordable housing comes in different types, like apartment buildings or townhouses, all eligible for LIHTC support. 

LIHTC projects aren’t just for low-income families; they can also be for seniors, people with special needs, or people without homes. To be considered affordable, tenants shouldn’t spend more than 30% of their income on rent and utilities. 

Developers must ensure their project passes an income test and a rent test for tenants. The income test means some units must be set aside for tenants with incomes below certain levels based on the area’s median income. Typically, this means units for tenants with incomes up to 50% or 60% of the area median income. 

Rents also need to be affordable. They can’t exceed 30% of either 50% or 60% of the area median income, depending on how many LIHTC units are in the building. These tests ensure LIHTC projects help the right people and stay affordable for tenants. 

Step 3: Demonstrating the Financial Viability of the Project  

Before submitting your LIHTC application, you must show the financial feasibility of your project to the State HFA or other allocating bodies. This involves clearly understanding your funding sources and demonstrating how your project will be financially sustainable.  

Here are some key metrics to consider:  

  • Gross Potential Income (GPI): This is the maximum revenue your property could generate if all units were rented at the optimal rate. It helps assess your property’s revenue potential.  
  • Effective Gross Income (EGI): EGI provides a more realistic view of expected revenue after accounting for vacancies and credit loss.  
  • Annual Operating Expenses (OPEX): Predicting OPEX is crucial and includes management fees, insurance, and landscaping. It’s vital to separate property taxes from OPEX calculations.  
  • Net Operating Income (NOI): NOI represents the annual net cash flow generated after deducting operating expenses and property taxes. It’s a fundamental metric for evaluating financial health.  
  • Cash Flow After Financing (CFAF): CFAF reflects the net cash flow remaining after accounting for debt service or financing payments. It’s an important metric for assessing overall project viability.  

While these metrics are essential, it’s common for organizations to have dedicated teams to conduct these financial analyses. If you lack in-house resources, consider hiring external consultants to assist with project financing.  

Step 4: Filling out the LIHTC Application Online  

Once you’re ready to apply for Low-Income Housing Tax Credits (LIHTC), you have to go through an online application process. Here’s what it typically involves:  

  • Pre-application: Start by signing up for the pre-application stage. You’ll demonstrate your interest and credibility in developing an affordable housing project here. If eligible, you’ll move on to the bidding stage of the LIHTC application process.  
  • Application: Submit a competitive bid for LIHTC through your State Housing Finance Agency (HFA) online portal. Your application will be reviewed to ensure it aligns with the Qualified Allocation Plan (QAP) set by the state.  
  • Post-application: If your application is successful, you’ll receive conditional approval from the HFA. Ensure all your documents, including environmental site assessments, funding sources proof, and accessibility certificates, are in order.  

After getting conditional approval, you’ll need to gather money or funds from LIHTC investors to use the tax credits for your project. The amount of tax credit your project gets depends on the credit percentage (either 4% or 9%) multiplied by the project’s qualified basis. This qualified basis is the total construction cost of each LIHTC unit minus some fees. Developers often try to make all units LIHTC units to get more funding. 

Streamline Your LIHTC Process with Fusion…  

As you approach the final stages of your LIHTC application journey, here are some essential things to remember.  

First, attention to detail is crucial. Accuracy matters throughout, whether you understand the nuances of the Qualified Allocation Plan (QAP) or demonstrate financial viability. 

Consider using technology to streamline your application process. LIHTC software like Fusion can simplify tasks, automate processes, and ensure compliance. This makes the process more efficient and manageable. 

Stick to guidelines and use available resources to increase your chances of success. By following these principles, you not only support affordable housing but also set yourself up for a smoother application process. 

Remember, each step forward brings you closer to making a real impact in providing affordable housing for those in need. 

Benefits of LIHTC: Impact on Affordable Housing and Communities

LIHTC Benefits

Since Congress created the LIHTC program, it has provided funding to develop more than 3 million affordable housing units. There has been criticism of LIHTC and how it is set up, however its important in the affordable housing environment is undeniable.  

This article talks about the benefits of LIHTC and its impact on the affordable housing landscape.  

LIHTC Has the Largest Share in Affordable Housing 

The Department of Housing and Urban Development calls LIHTC the “most important resource for creating affordable housing in the country today.” 

The federal government provides close to $9 billion in tax credit subsidies each year for the construction and renovation of affordable housing units. 

Although LIHTC is not the only federal subsidy program, it is one of the largest. According to some estimates, it funds 110,000 new or renovated apartments across the country or around 50,000 new apartments.  

LIHTC Provides Stable Housing to the Vulnerable 

There is a profound mismatch between the demand for housing and the supply of available rental housing in the country. LIHTC goes a long way in fulfilling this need, especially for people who need it the most.  

LIHTC housing is for low-income households that need help meeting consistent housing needs. HUD releases tenant-level data for LIHTC units across the country.  

Analyzing the data shows that:  

  • More than half of households in LIHTC housing have an income of less than $20,000.  
  • About half of households have less than 30% of the area median income (AMI).  
  • 6% of tenants are disabled.  
  • 11% of households reported at least one person as being disabled.  
  • There is a relatively similar racial distribution.  
  • 40% report receiving some additional form of rental housing assistance. 

The need for affordable housing is acute. To ensure that LIHTC serves those who need it most, state housing finance agencies (HFA) mandate rent restrictions.   

Asset managers who oversee these property investments often use LIHTC property management software to track and monitor these compliance requirements. 

LIHTC Helps Increase Disposable Incomes 

More than 12 million households spend more than 50% of their income on rent alone. And over 22 million spend close to 30% of their income on rent. 

Housing is one of the highest expenses for families. With increasing rental costs and lower supply available, renting places a higher burden on homeowners than mortgage payments.  

When people spend less on rental housing, they have more disposable income to spend and reinvest back into the community and local businesses.  

People tend to shop more locally and enjoy cultural and entertainment activities. In addition, with stable housing options, people tend to invest emotionally in their neighborhoods, which means that local businesses can also expect stability and invest for a longer time. 

LIHTC Enables Access to Better Schooling 

The quality of housing can have a positive impact on a child’s education and health outcomes. Improved child health that’s associated with subsidized housing can also help children maintain more consistent school attendance.  

LIHTC projects can provide stress-free, stable housing and ensure an uninterrupted school year without distractions and a better academic environment for children to perform academically.  

Housing is also one of the highest expenses for low-income households. Affordable housing solves this financial insecurity and can help improve academic outcomes for children.  

Better neighborhoods can also improve access to schooling for children and households, especially households that struggle with homelessness or have to move around a lot. 

LIHTC Enables Better Access to Public Transportation 

Transportation is the most often the second highest expense for low-income households after housing. When considering transportation costs, it gives a much more holistic view of how affordable subsidized housing is and the impact the LIHTC property can have. 

LIHTC developments are often multi-family housing. When located near population centers with access to public transit, they can improve the access of low-income families to public transport.  

In addition, many state HFAs allocate additional points in LIHTC applications for developments near mass transit locations. 

LIHTC Revitalizes Low-Income Neighborhoods 

LIHTC developments have been observed to breathe new life into low-income neighborhoods.  

LIHTC properties appreciate the housing prices in the area and push down the rates of violent crimes.   

Also, since the racial profiles of the tenants of LIHTC projects are not skewed towards any one demographic, they bring more economic diversity to an area, which in turn improves the local economy.  

Even though LIHTC programs are used to develop rental housing programs, innovative uses are also present. 

For example, in Colorado, the town of Castle Rock used LIHTC subsidies, coupled with other federal funds, to redevelop a decrepit downtown area.  

LIHTC Improves the Local Economy  

LIHTC development creates value for the entire community. Families who live in affordable homes can afford to spend more. A study in New York found that families doubled their spending power, and they tend to spend this money locally. 

In a report, the National Association of Home Builders (NAHB) states that LIHTC properties start accruing benefits for the local economy within one year. It generates tax revenue for the federal government, reinvigorates local income, and creates local jobs. 

And its effect is felt in the community long after the development.   

In addition, affordable housing developments also increase the supply of a local workforce, which is crucial for the development of any community, as Housing Forward Virginia notes. 

LIHTC’s Effect on Poverty and Crime 

Although critics point to the high concentrations of LIHTC development in poorer neighborhoods, overall, research finds that LIHTC development does not affect the concentration of poverty in an area. 

However, this study finds that the poorest tenants using the LIHTC program live in the poorest neighborhoods. So, at the program level, policymakers can, of course, do more to encourage social and economic mobility. 

At the same time, a study on LIHTC and crime found that LIHTC developments in an area reduce the rate of violent crimes by about 2%.  

Overall, LIHTC development positively impacts poverty and crime in a neighborhood. 

LIHTC Helps the Vulnerable and Whole Communities 

The LIHTC program’s history is one of success. Over the last 40 years, LIHTC has helped the most vulnerable people in our society and our communities grow and prosper.  

Its impact is clear. Since it’s the most extensive affordable housing development program, most federal housing uses LIHTC findings. It’s safe to say that LIHTC stands for affordable housing.  

Through stable, reliable housing, LIHTC helps families and communities gain better access to schools, health, transport, and a safe environment. 

Challenges and Criticisms of the LIHTC Program

LIHTC Program

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.   

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. 

Allocation and Distribution of Tax Credit for the LIHTC Program

LIHTC Program

The Low-Income Housing Tax Credit (LIHTC) program provides federal tax credits as incentives to private investors to help increase the supply of low-income rental housing.   

Investors earn tax credits in exchange for the equity they invest in funding these affordable housing projects. The tax credit they earn is a percentage of the eligible cost (i.e., the construction cost minus administrative and land acquisition cost) and the affordable housing units constructed.   

This article gives an overview of how HFAs allocate these tax credits and the steps leading up to this. 

The Background 

Before we speak about how LIHTC is allocated and distributed to applicants, we must understand some elements that are part of the LIHTC application cycle.    

Allocation Administration Agencies 

Even though financing for LIHTC programs is disbursed by the federal government, individual states administer and allocate these funds according to their specific needs.   

Often, the LIHTC allocated to individual developers and applicants each year combines federal and state funds. The individual states develop their requirements to use their federal fund allocation for the year. That is, different states will prioritize different kinds of housing and demographics of low-income households to target using affordable housing projects.   

The federal government allocates funds from the central kitty to individual states based on the state’s population. Each state administers the LIHTC program through its low-income housing administration agency or the housing finance agency (HFA). For example, some LIHTC allocating agencies for California, Nebraska, and New York. 

The Lifecycle of a LIHTC Application 

Applicants submit their LIHTC application to the local state’s HFA. Once an online LIHTC application is approved by the state’s low-income housing administration agency or Housing Finance Agency (HFA), the applicants can move to start monetizing these tax credits.   

These tax credits generate equity to fund the low-income housing development project.   

Once the development is completed, investors can claim these tax credits over the next ten years. Investors hire asset managers who use the compliance tracking features of LIHTC software to ensure compliance with affordability requirements for the whole compliance period. 

Federal Funds Cap 

The federal government imposes a yearly cap on the funds disbursed to each state.   

This cap is the state’s population times a multiplier. For 2024, the IRS has set this multiplier at $2.90 or $3,360,000, whichever is greater.  

State Tax Credits 

Each state has different application fees, application timelines for inviting applications, and unique application cycles for LIHTC. Plus, the deadline for accepting applications also varies. Therefore, applicants must know and follow their own state’s application process.  

Every state housing agency also has different tax credit funds available for a specific year. Each state may also augment the federal funds for tax credits it received with a certain percentage of its budget to develop low-income housing.   

States also enforce different credit periods or the period over which the tax credits will be ‘paid out’ to the investor.   

In addition, the type of credits that each state entertains is also different. Some states cap the tax credit allocations by rural and metro areas. States also differ in the type of tax credits they disburse to developers, such as Certificated or Allocated. 

A Note on Allocated vs. Certificated Tax Credits 

While discussing tax credits generated from LIHTC investments, we need to briefly speak about the two types of tax credits: allocated and certificated tax credits.  

Investors earn Allocated Tax Credits because of investments in low-income housing projects, which are claimed by the investors yearly.   

Conversely, investors buy Certificated Tax Credits directly from the state or one of the project participants.   

Allocated tax credits require a compliance period of 15 years (usually). They are subject to tax claw-backs or recapture by the IRS if the developed property does not meet affordability regulations. They are treated as long-term investments.  

Certificated tax credits are usually free from these compliance requirements and are meant as short-term investments. However, the proceeds are taxable if an investor sells these tax credits further. 

Applications for LIHTC 

OK, now we have sufficient background information to understand the allocation of LIHTC. The HFA awards successful applications for LIHTC.  

Once state HFA invites applications for LIHTC, applicants must address the specific points in the QAP that each state has set out.  

Each state has a different threshold eligibility for awarding LIHTC and differs in its scoring framework of the LIHTC applications. Once the application is reviewed and scored, there can be no additional information that an applicant can provide.   

The HFAs can notify applicants and seek clarification on their submitted information, but applicants must provide new details. Once the application is reviewed and the notification for clarification is addressed, the HFA scores each application and awards conditional letters of intent for awards of tax credits. 

Conditional Reservation of Tax Credits 

When the HFA approves the application for LIHTC, it issues a letter of reservation for tax credits. This reservation is conditional upon the applicant submitting the hard copy of all the documents submitted during the LIHTC application.   

The developer or the applicant can use this conditional reservation to ask investors for equity to fund the development.   

The HFA expects low-income housing development to be completed in the year the tax credit is awarded or in the next two years. This extension is permissible subject to approval by the HFA. 

Carryover Allocation  

The conditional reservation of tax credits does not mean the LIHTC has been allocated to the investor.   

LIHTC only begins to be credited after the building is completed and put in service. If the applicant or developer cannot complete the development of the LIHTC project by the end of the year, the applicant can request a carryover allocation.   

A Carryover Allocation extends the time allowed to complete the LIHTC development by two more years. The Carryover Allocation Agreement is a detailed form requiring an updated application, complete plans and specifications, and a statement of material change with filled-in carryover data sheets.   

The applicant must also spend 10% of the expected basis within one year of issuing the Carryover Allocation. This 10% is called the 10% Test Certificate and must be submitted to the HFA in the year following the Carryover Allocation. 

The 10% Test Certificate 

The 10% test certificate submits that the developer has spent 10% of the development’s expected costs. These costs can include the acquisition of the land.   

The 10% Test Certificate must be verified by an independent CPA or attorney and submitted by the applicant to the HFA within 12 months of an executed carryover allocation. In addition, the applicant will also need to prove that the development is up to code on the environment and energy regulations of the area. 

Cost Certification  

The final stage of allocating tax credits is the cost certification and issuing of the IRS Form 8609. New.  

The cost certification is, in essence, the certificate of completion that the developer issues.   

Each HFA provides clear guidelines for what the cost certificate must contain. The developer issues the cost certification to the HFA once the building is finished.   

The developer documents the actual project costs. Each HFA provides specific guidelines for cost certifications.    

Once the cost certificate is issued, the developer exits the development project and hands over the daily operation to the property owner or investor, who, often using LIHTC software, begins to claim the tax credits yearly. 

The IRS Form 8609 

The IRS Form 8609 is the tool by which investors can start claiming tax credits yearly on buildings that have been completed and are ready to be rented out.   

After reviewing and accepting the cost certifications, the HFA approves the amount of tax credits initially stated in the LIHTC application.   

The final tax credit amount usually remains unchanged. Once the HFA approves the cost certifications, the IRS issues Form 8609 to the investor or the building owner.   

The investor now takes over the day-to-day running of the LIHTC project from the developer. The investor now begins to claim the federal tax credits using the issued 8609 forms to the tune of the amount the LIHTC application stated. Investors can claim these tax credits for the next ten years provided they ensure compliance in the affordable housing projects for the entire compliance period – usually 15 years.  

LIHTC Compliance for Claiming Tax Credits 

LIHTC applicants are allocated tax credits to monetize when their LIHTC applications are approved. However, these projects only earn tax credits once the developments are complete.  

Tax credits must be applied for and claimed at the beginning of each year. They are not automatically credited to the investor. Therefore, this adds to the investor’s compliance burden since they must maintain compliance documentation and proactively monitor the tax credit application and allocation of tax credits yearly. 

An Overview of Eligibility for Tax Credit Financing and How to Apply for LIHTC

LIHTC

Financing for Low Income Tax Credit (LIHTC) projects is complex. It has many stakeholders and moving parts.   

The LIHTC ecosystem has developers, investors, tax credit syndicators, asset managers, and property owners among its stakeholders. Coordinating and meeting the priorities of each stakeholder can be a tricky balancing act.  

Developers need to navigate a complex web of compliance and application procedures, and asset managers need to stay in step with the local compliance regulations for the properties in their portfolio.  

This blog post outlines the eligibility criteria and how to apply for LIHTC. These general requirements are standard across states and are location-agnostic. 

Financing for LIHTC Projects 

LIHTC development financing is a nebulous concept. Developers of LIHTC properties need to bring together many different financing sources.   

If developers used traditional mortgage financing to construct affordable housing projects, there would be a gap between the rent caps and the mortgage repayments, which the building owner would have to pay out of pocket.   

Government programs, like LIHTC, fill this gap and make building affordable housing possible for the private sector. Developers typically monetize LIHTC to get cash for developing the project.  

Developers then hand over the completed project and its debt to investors. Investors hire asset managers who use LIHTC property management software to monitor the performance of the building and ensure that it earns consistent returns. 

However, monetizing LIHTC alone cannot give developers the funds necessary to begin construction on a multi-family housing project.   

Developers often choose to club LIHTC with other government subsidies, like HOME funds or independent financing, to secure the funds necessary to see a project through to its end. 

State Administered LIHTC 

Throughout the history of the LIHTC program, decentralization has been its motto. Even though the federal government allocates cash dollars for affordable housing programs like the LIHTC program, individual states administer these funds.   

Individual states own and disburse funds and tax credits through affordable housing agencies, such as the Housing Credit Allocation Agency (HCA) or Housing Finance Agency (HFA).   

States also verify the ongoing compliance with affordability regulation of developed projects. States report any violation to the IRS, which assesses and enforces compliance penalties. 

Who can apply for LIHTC? 

Not-for-profit, public developers, or private entities can apply for and be awarded LIHTC. However, to qualify, developers must meet the minimum threshold eligibility requirements for LIHTC that each state’s affordable housing agency has set out.  

Threshold Eligibility Requirements for LIHTC 

The threshold requirements for LIHTC usually include the election of minimum set-aside units, which the developer commits to reserving as affordable housing units.   

It also includes the rent caps for these affordable housing units and the definition of income or the average income caps for people who qualify for these affordable housing units.   

Threshold eligibility requirements also cover the geographic area and other demographics associated with low-income households the state wants to support through the affordable housing project. 

Financial Viability of the Project 

Developers must also demonstrate that the development project is viable and that a building owner can operate it safely and hygienically once it is operational.   

Developers usually need to show how they will meet the financing costs of the construction project without relying too heavily on traditional mortgages. This is called the capital stack of the project.  

A capital stack ensures the offset of risk and gaps in financing since mortgages from conventional institutional lenders are susceptible to repayment adjustments during refinancing and fickle economic downturns.  

Qualified Allocation Plan (QAP) 

The QAP is a document that a state’s affordable housing agency creates. It’s meant to be a roadmap for developers applying for LIHTC and to address the specific requirements of the state.  

The QAP includes the allocation criteria for LIHTC (the threshold eligibility for developers). It also sets out the minimum set aside the acceptable combinations of affordable housing units to regular housing units that the developers can elect in their application.  

It also qualifies the minimum operation standards by which developers can understand how the state agencies will measure compliance over the project’s 15-year compliance period. 

Understanding a state’s QAP is critical for developers to successfully apply for and secure LIHTC. 

The LIHTC Online Application Lifecycle 

Developers can apply for LIHTC financing through individual affordable housing agencies of states.   

Most state agencies accept LIHTC finance applications through their online portals. State HFAs invite applications for LIHTC funds yearly according to preset timelines.   

Developers should check each state’s QAP and HFA websites to navigate the application process and know when the following application process starts, the application fees, and the qualifying criteria. 

Pre-application 

To be eligible to apply for LIHTC bidding rounds in many states, developers must first contact state affordable housing agencies and express interest in the program. There is usually a pre-application signup fee.   

Developers must demonstrate willingness and credibility to execute LIHTC projects.   

Once a developer completes this pre-application process, the Housing Finance Agency will invite eligible developers to apply for upcoming LIHTC bidding cycles. 

Application 

Once the state’s HFA invites a developer to apply for LIHTC financing, the developer can submit competitive bids or online applications on its online portal. After the developer applies, the HFA carries out a threshold review of the application.   

The threshold review verifies if a LIHTC application conforms with the QAP, which the state agency has released.   

The state agency notifies the developer if an application needs to include some element. The state agency declares a deadline by which notified developers must address threshold review notifications. This date is called the threshold deficiency correction deadline. For an application to be eligible for LIHTC, the submitting developer needs to update all the information the threshold review notifications highlight. 

Post-application 

Once the HFA completes the LIHTC application review, conditional approval will be issued to the selected developer. The developer must submit all the documentation outlined in their application.  

These documents include proof of syndication, environmental site assessments, proof of funding sources in their capital stack, accessibility certificates, etc.  

After receiving conditional approval, the developer raises equity from LIHTC investors or investment funds to monetize the tax credits the project will receive. It is the asset manger’s responsibility to claim the project’s tax credits by ensuring compliance with affordability criteria. Little wonder then, that compliance tracking is one of the main features of LIHTC software that asset managers look for.  

Online LIHTC Application is State Specific 

After receiving conditional approval for tax credits, developers must apply for Carryover Allocation and 10% Test Certification.   

When the building is completed, the developer submits the cost certification, after which the investor takes over the project, and the LIHTC claim and compliance period begins.  

LIHTC is a state-specific topic. Developers must follow state affordable housing agencies to know which LIHTC applications and projects are in the works.  

5 Ways LIHTC Asset Management Software Breaks Down Silos and Builds Accountability

LIHTC Software

LIHTC Asset Management has traditionally been clunky, with data split by Stateline and office politics.   

Asset managers must coordinate between developers, fund managers, property managers, and the rest of their team, which can be spread across various locations.   

This makes an asset manager’s job a nightmare. And to make it even more complex, the LIHTC program is administered at the state level, meaning asset managers probably need to know and meet compliance regulations in different states.   

Here is where a SaaS LIHTC portfolio operations management solution can help asset managers do their job well.   

In this article, we unpack five ways LIHTC asset management software breaks down data silos and builds accountability within asset management teams and across LIHTC portfolios. 

Stakeholder Communication 

LIHTC asset managers require a centralized information aggregator across their various LIHTC portfolios. Every LIHTC project has a different variable to track. More than one asset manager may often need to deal with a LIHTC project.  

Manually uploading, compiling, analyzing, and disseminating crucial project data and insights month by month between different asset managers can quickly swap any team’s productivity. 

Fusion Centralizes Communications 

Integrating a SaaS LIHTC asset management software like Fusion can fill a crucial gap and build bridges within and across asset management teams.  

Fusion can automate routine uploads across various LHITC projects. It can also streamline and expedite the processing of this data, ensuring that teams spend more time analyzing data and less on menial tasks like uploading data.   

Fusion also centralizes communications for teams. With Fusion, asset management teams can stay on top of compliance flags. Fusion automatically tracks and alerts pre-set stakeholders of any compliance red flags, quickly bringing the correct information to the right resource. 

Monitoring Financial Data 

Tracking and monitoring compliance data and the financial health of a LIHTC project is also a task that asset managers must balance to ensure the health of their LIHTC portfolio. 

Asset managers track monthly trial balances and occupancy rates to gauge the performance of their projects. In addition, they also need to maintain and track other financial reports like cash flow, capital expenses, and income statements and match these with allocated budgets to optimize the economic performance of their project. 

Fusion Does the Heavy Lifting 

Fusion helps make an asset manager’s life easier. It’s LIHTC software for real-time financial reporting and automates many of their routine data upload and processing tasks without even breaking a sweat.   

With Fusion, asset managers can quickly get custom reports at their fingertips to track and monitor the project’s financial health. Since it integrates with many portfolio managers’ communication platforms, Fusion can efficiently distribute this data to where it’s needed most. 

Compliance Tracking 

Much of an asset manager’s job is to deal with issues that might arise with compliance in a LIHTC project. Since the compliance period is over 15 years, sloppy work won’t go as far.  

Asset managers must track specific aspects of the property over the 15-year compliance period to ensure compliance with the minimum set-aside that the project has committed.    

LIHTC projects need to track their tenant’s incomes and match these with the state or federal income limits for affordable housing in their area. In addition, they must also track their rent caps to make sure they qualify as affordable housing.  

Building a software system to do this in-house requires professionals with credentials like an accelerated online computer science degree. Quickly hiring people with the essential skills to develop and optimize advanced asset management systems is complex and may stretch organizational resources. 

Fusion Does the Job for You 

Fusion automatically tracks property rent and tenant income limits to simplify an asset manager’s job. It proactively red flags any instance so asset managers can quickly identify and address compliance challenges. With Fusion, asset managers can solve problems before they become tax liabilities. 

Preserving Investment Value 

An asset manager’s job is to maintain a property’s investment value.   

Asset managers are hired by investors or investment funds who invest in LIHTC projects to earn consistent returns over the long term.   

A large part of these returns is directly linked to the tax credit that the project has already claimed and which the funds have already monetized.   

LIHTC projects, however, are subsidized by the government. This means that the tax credits the project has earned are contingent on its continued compliance with affordability regulations.  

Any noncompliance can result in a recapture of the tax credit and, consequently, greater tax liability in the current year.   

Recapture of tax credits reduces the value of an investment. Therefore, tax claw-back is something that every asset manager dreads. 

Fusion Saves the Day 

Yes, that’s right! Fusion can be your personal superhero. Fusion helps asset managers ensure their LIHTC projects stay compliant and maintain reasonable occupancy rates.   

With Fusion, LIHTC projects continue to accrue value. Fusion helps asset managers keep rent prices in line with wage increases. Plus, it also tracks income limits in the areas.   

With Fusion, asset managers can balance rent increases with income limits to optimize the revenue they generate from each project: not too high to be flagged nor too low to fall behind on mortgage payments.   

Add to this the continued tax credits that the project enjoys, and you have a project that generates consistent returns over its lifetime. 

Data Security 

According to Statista, the global count of Internet users exceeds 5 billion. That’s 66% of the world’s population! With our world becoming increasingly hyperconnected, the increasing threat of cyberattacks is only natural.  

The University of Maryland estimates that cyberattacks occur approximately every 39 seconds. Data security and privacy are paramount, especially in financial technology.  

Finance software is especially susceptible to ransomware and can be extremely expensive to recover from. 

Fusion Protects Investments 

Fusion’s asset management software digitizes the LIHTC portfolio management. It ensures data security by planning and implementing secure online control systems. In addition, it also backs up data to ensure availability at any time. You can rest easy knowing your data is safe, secure, and always available. 

Digitize Your LIHTC Portfolio Operations 

Digitizing LIHTC portfolio management has many advantages. It can streamline routine processes, improving the efficiency of asset management teams that are spread across locations. It can also ensure that stakeholders are always informed and connected. Fusion does all this and more. And it works with your present setup without significant overhauls. It’s the easiest way to step up your LIHTC portfolio operations. 

LIHTC and Development Financing for Affordable Housing

LIHTC

Arranging financing for any property development is challenging. For constructing affordable housing, however, this challenge is even more acute.   

The gap between rents that low-income households can afford, and the mortgage repayments property owners must bear is unsustainable.  

To fill this gap, many developers rely on a combination of some form of government subsidies. Combining the Low-Income Housing Tax Credit (LIHTC) program and the HOME Investment Partnerships program is popular among developers.   

This article will give a high-level overview of financing with LIHTC, the LIHTC financing ecosystem, LIHTC financing stakeholders, other federal government subsidies, and what happens after the construction phase is complete and the developer sells the property. 

Financing LIHTC Projects 

LIHTC is a central part of government subsidies that fund affordable housing development and is responsible for the construction of more than 3.5 million units for low-income households. 

Financing LIHTC projects is a complex process that involves a blend of equity and debt. The LIHTC program engages private and public sectors to develop or maintain affordable housing.   

Developers raise capital for each of their housing projects using traditional financing like bank loans, REITS, or individual investors.   

However, developers can reserve some part of their multifamily housing project as affordable housing to be eligible for government subsidies in proportion to the affordable housing units they plan to produce. Equity investors and tax credit syndicators play a role in how this system works.  

Equity and Debt in LIHTC Financing 

Effective LIHTC developers leverage the strategic use of equity and debt to fund affordable housing development.   

The Federal Department of Housing and Urban Development (HUD) sets nationwide affordability requirements, and the Internal Revenue Service (IRS) calculates each state’s tax credit allocation.    

For each state, its Housing Finance Association (HFA) supplements Federal LIHTC guidelines with state-specific requirements and designs the application processes for government funds.   

Private developers, in turn, propose affordable housing projects to these HFAs, seeking LIHTC funding, among other government subsidies. Once a project is approved, the developer monetizes the tax credits to raise additional funds to meet the funding gaps in the development project. 

The Role of Equity Investors 

Developers secure immediate financing primarily through equity they raise from institutional investors in exchange for tax credits.   

These investors provide upfront cash in exchange for the future tax credits the project will generate, allowing the developer to cover the construction costs. The partnership between developers and equity investors usually operates on a contract partnership as an LLC, transforming future tax credits into financial capital to build affordable housing. 

Tax Credit Syndicators 

Developers also engage with tax credit syndicators to monetize tax credits. Syndicators pool multiple LIHTC projects into a single equity fund, which investors can then invest in as a diversified portfolio.  

Developers with limited taxable income or those seeking to mitigate financial risks prefer syndicators over individual investors.  

Syndicators also benefit developers by providing access to a broader pool of potential investors. And investors are also able to spread their risk across several projects. 

Additional Subsidies for Financing Affordable Housing 

Besides the LIHTC program, developers often tap into other federal and state programs to close the financing gap for affordable housing projects. The CDBG, HTF, HOME program, and Multifamily Revenue Bonds are some other programs that developers can leverage.   

State-specific funding programs will supplement these subsidy programs and are unique to each state. 

Community Development Block Grant (CDBG) 

The U.S. Department of Housing and Urban Development (HUD) administers the Community Development Block Grant (CDBG) program.   

The CDBG provides affordable housing, anti-poverty programs, and infrastructure development through annual grants to cities, counties, and states.  

These grants help improve the living conditions of low- and moderate-income residents by ensuring access to decent housing and expanding economic opportunities.  

The National Housing Trust Fund (HTF) 

The Housing and Economic Recovery Act (2008) established the National Housing Trust Fund (HTF). It targets constructing, rehabilitating, preserving, and operating rental housing for extremely low-income individuals.   

With allocations increasing annually, the HTF is a relatively new resource in the affordable housing finance landscape.   

It addresses the needs of the most vulnerable populations. Advocacy efforts continue to expand this funding source. In 2023, the HTF had an allocation of $382 million and has been consistently growing in relevance as an integral part of the national housing strategy. 

HOME Funds 

The HOME Investment Partnerships Program is a resource for low-income housing developers.  

Despite funding fluctuations, HOME funds allow states and localities to address a broad spectrum of affordable housing challenges. The program supports both rental and homeownership developments for low-income households.  

Multifamily Revenue Bonds 

Multifamily Revenue Bonds finance the acquisition, construction, or rehabilitation of affordable rental housing.   

As with LIHTC financing, to raise capital via MRB bonds, developers must reserve a portion of the apartments for families with incomes at or below specific average median income (AMI) thresholds. States frequently combine these bonds with LIHTC and HOME funds to serve lower-income families more effectively for extended periods.  

Eligibility for LIHTC 

The LIHTC program’s affordability requirements are designed to address the critical need for accessible and sustainable housing.  

Compliance standards set in place to cap tenant incomes and rent restrictions help ensure long-term affordability for low-income households. 

Target Demographic for LIHTC Housing 

LIHTC housing targets individuals and families with incomes below certain thresholds, typically 30% to 60% of the Area Median Income (AMI).   

This ensures that the program serves those with the greatest need for affordable housing, including low-income households that struggle to find housing options within their financial reach. 

Income Limits and Rent Restrictions 

To qualify for LIHTC, property owners must rent out housing units according to specific income limits and rent restrictions.   

Income limits vary by location and household size, with eligibility generally based on household income as a percentage of AMI.   

Rent for LIHTC units is capped to ensure that no more than 30% of a household’s income is spent on housing costs, including utilities. Rent caps for an area work out to 18% of the AMI.  

This approach guarantees that LIHTC housing remains affordable and accessible over time. 

Threshold Criteria in LIHTC 

The LIHTC program mandates developers to set aside a minimum number of housing units for affordable housing. Developers must also cap rents on these units.  

Most developers reserve 20% of a property’s units for households earning 50% or below the AMI or at least 40% of units for households earning 60% or below the AMI.  

Reserving affordable housing units and deciding on rent caps is called Minimum Set-Aside Election.   

The state agency allocating the tax credit conducts threshold criteria review to validate this Minimum Set-Aside Election. Developers must clear this review to receive tax credits.   

Recent amendments via the income averaging rule for LIHTC properties now allow households to earn up to 80% of AMI if the average income across all LIHTC-assisted units does not exceed 60% of AMI. This flexibility accommodates a broader range of income levels while ensuring the program still focuses on those in need. 

An Overview of LIHTC Project Compliance 

Once a LIHTC project is complete, it must comply with the developer’s affordability commitments when applying for tax credits. Property managers and operators must ensure units are affordable to and occupied by eligible low-income tenants.  

Ensuring compliance with affordability commitments in LIHTC projects is critical to monetizing tax credits.   

Once the property construction and lease-up phases are finished, the developer hands over the property to the operator, also called the property owner. In many cases, institutional investors or tax credit syndicators delegate responsibility for the day-to-day management and regulatory compliance of the LIHTC project to asset managers.  

With the help of LIHTC property management software, asset managers track and ensure project compliance if the low-income affordability restrictions are in force.  

Minimum Set-Aside Election 

The minimum set-aside election is made at the project’s inception. This election is irrevocable and specifies the percentage of units and their corresponding income limits the developer commits for low-income tenants. Property owners must stick to these minimum elected standards. 

The Compliance Period 

Developers must adhere to the affordability and occupancy requirements throughout the Compliance Period. The compliance period extends for 15 years initially, after which some states present exit options for investors. There is a subsequent 15-year extended use compliance period, so the compliance period spans 30 years for LIHTC. 

Annual Certification 

Property owners are required to submit an Annual Owner’s Certification of Continuing Program Compliance (AOC). This certificate verifies adherence to LIHTC compliance standards and, where applicable, other subsidy program regulations. 

The AOC includes the submission of tenant data and the payment of an Annual Compliance Monitoring Fee. Failure to verify and submit these certification reports can result in significant penalties, including issuing a Notice of Noncompliance. 

Tax Credit Clawbacks 

LIHTC property owners’ noncompliance can trigger a clawback of awarded tax credits. Once triggered, the IRS recaptures the financial benefits previously awarded to the project. Since tax credits are claimed yearly, the IRS increases the tax liability of the corporation or investment fund that owns and operates the affordable housing project.    

Compliance Monitoring is Critical to LIHTC Financing 

States and local agencies monitor LIHTC projects to ensure ongoing compliance with program requirements. This involves regular reviews of tenant eligibility, rent levels, and property standards. 

LIHTC projects are complex. Property owners use specialized tools to track and monitor the compliance of their LIHTC projects. It’s up to asset managers to identify and resolve any noncompliance proactively to ensure profitability for the investors. 

History of the Low-Income Housing Tax Credit Program

lihtc program

Until the middle of the last century, the federal government used to invest in affordable public housing. But by the 60s, federal investment in public housing declined.  

The Low-Income Housing Tax Credit (LIHTC) program was initially envisioned to bridge this gap in affordable housing by incentivizing the private sector to develop and maintain affordable public housing.  

Since then, the program has evolved into the mainstay of the affordable housing development market in the country. In recent years, critics have called for it to be revamped to meet modern challenges and changing market dynamics. 

In this article, we explore what LIHTC is and its purpose, how it was created, and its recent history. 

What is LIHTC? 

LIHTC is a federal program for encouraging the development and preservation of affordable housing. Initiated by the Tax Reform Act of 1986 under President Ronald Reagan, LIHTC has been instrumental in financing millions of affordable housing units nationwide.  

Bipartisan support helps its effectiveness in leveraging private investment toward creating affordable rental options for low-income Americans. 

How Is It Different? 

LIHTC is also referred to as Section 42 housing. It diverges from previous housing initiatives by focusing on attracting large corporate investments rather than individual wealthy investors. This shift followed a desire to introduce discipline and efficiency previously unseen in affordable housing programs.  

By design, LIHTC operates under the administration of state agencies and is regulated by the Internal Revenue Service (IRS). This flexible oversight mechanism allows states to tailor the program to their housing needs. This decentralized approach also ensures that developers and investors adhere to the same standards to qualify for the tax credits. 

The Purpose of LIHTC 

The LIHTC program aims to incentivize private sector involvement in developing affordable housing. It offers tax credits for acquiring, rehabilitating, or constructing rental properties, with a section reserved for lower-income households.   

In the past, this mechanism has facilitated the creation of housing for working families, veterans, seniors, and individuals with disabilities. It has also played a crucial role in rebuilding communities affected by natural disasters. 

How Does LIHTC Work? 

LIHTC encourages private investment in affordable housing and requires projects to meet specific affordability and quality criteria. It involves the allocation of tax credits to developers, project application and approval, investor participation, and utilizing different types of credits based on project specifics.  

By enforcing systematic compliance requirements, the program ensures that the resulting housing developments serve the needs of low-income households and provide a return on investment for those who finance them. 

Allocation of Tax Credits 

State housing finance agencies (HFAs) allocate LIHTC to developers. The allocation is based on a per capita or minimum small population state allocation formula. This ensures that even states with smaller populations receive a significant allocation for LIHTC.    

Project Application and Approval 

Developers submit project applications to state HFAs, detailing how they meet the state’s Qualified Allocation Plan (QAP) criteria. The QAP sets forth the eligibility requirements for projects, including the number of affordable units, project cost thresholds, and housing quality. Projects that best meet these criteria are awarded tax credits. 

Role of Investors and Tax Credit Syndicators 

Once HFAs approve a project and allocate tax credits, developers often sell these credits to investors to generate funding for the project. Tax credit syndicators enter the ecosystem at this stage, aggregating and packaging tax credits into investment vehicles.   

Investors provide capital in exchange for tax credits, which can offset their tax liabilities dollar-for-dollar over a ten-year period. This financing provides the upfront capital needed for housing development. 

9% vs. 4% Credits 

The LIHTC program offers two types of credits: 9% and 4%. Both credits are subject to the same affordability requirements but are designed for different projects.  

The 9% credit, which a state’s HFA competitively allocates, is primarily used for new construction projects without additional federal subsidies. It covers a more significant portion of the project’s costs, providing a subsidy of approximately 70%.   

The 4% credit is non-competitive and is typically used for projects involving tax-exempt bonds or other government subsidies. This tax credit subsidizes about 30% of the eligible costs.  

Affordability and Compliance 

To qualify for LIHTC, housing development projects must adhere to strict affordability requirements. Housing projects must set aside a certain percentage of units for tenants with incomes at or below specified levels relative to the Area Median Income (AMI).   

Projects approved and awarded LIHTC tax credits must comply with the affordability commitment for at least 15 years. Compliance is monitored by state HFAs, with the IRS having the authority to reclaim tax credits if projects fail to meet these standards. 

Legislative History of the LIHTC Program 

LIHTC’s journey spans several decades. This journey reflects the shifts in policy from federally financed public housing to the public-private partnership model. It also spans changes in the economic philosophy of the times, notably the switch to the Regan-era trickle-down economics.  

Before the LIHTC program, the federal government financed most public housing. LIHTC marked a shift from government-financed to government-subsidized low-income housing.  

The Tax Reform Act of 1969 

The Tax Reform Act introduced specific tax breaks for affordable housing to address affordable housing issues. However, it was also marked by challenges, including susceptibility to fraud, highlighting the complexities of incentivizing private investment in affordable housing. 

The Section 8 Program in the 1970s 

As a response to the declining quality of public housing and the need for more direct subsidies, the Section 8 program was introduced in the seventies. It represented a significant federal effort to subsidize the rent of low-income Americans, emphasizing direct federal assistance for housing. 

The Reagan Administration and Decline of New Constructions 

The 1980s brought a significant change in federal housing policy under President Reagan. Emphasizing trickle-down economics, the administration cut federal spending on affordable housing programs, including Section 8 construction subsidies.   

This period saw a decline in new construction of affordable housing, as tax rule changes aimed at encouraging private investment in rental properties had the opposite result. 

Tax Reform Act of 1986 

The Tax Reform Act of 1986 was a watershed moment marking the birth of the modern LIHTC legislation. In response to the challenges of the early 1980s, the Tax Reform Act of 1986 created the LIHTC program.   

It was designed to encourage private investment in affordable housing through tax incentives, marking a pivotal shift in the approach to housing policy. The program was first met with skepticism but became a cornerstone of affordable housing finance in the country. 

Congressional Renewal and Permanency 

After its initial success, LIHTC faced the need for renewal in 1989. Initially, the program was renewed annually by Congress. By the beginning of the nineties, it had many supporters from the affordable housing community and corporate investors.   

The Omnibus Budget Reconciliation Act of 1993 eventually made LIHTC permanent. As other affordable housing funding declined, LIHTC became increasingly central to the delivery of affordable housing. 

Evolution of the LIHTC Program 

Since its inception in 1986, the LIHTC program has become the primary mechanism for financing affordable rental housing in the United States.   

However, challenges exist. The program’s complexities and performance during significant financial crises (when affordable housing is often needed most) feed the ongoing debates surrounding its effectiveness and efficiency. 

Immediate Criticism 

LIHTC faced scrutiny over its complexity and the indirect route through which it channels support for affordable housing. Since it relied heavily on tax incentives for corporations, critics argued that it introduced inefficiencies and depended too much on the fluctuating profitability of corporate investors.  

The 2008 Sub-Prime Lending Crisis 

The Great Financial Crisis profoundly impacted LIHTC. The financial conditions suppressed demand for tax credits as corporate profits plummeted.  

This downturn halted many new developments and rehabilitation projects, prompting Congress to intervene with the American Recovery and Reinvestment Act of 2009. This Act introduced financing programs to revive stalled LIHTC projects.  

Lowering of Corporate Tax Rate in 2017 

The demand for LIHTC fell even further in the run-up to the 2016 Presidential Elections. The subsequent reduction of the corporate tax rate depressed the need for LIHTC from Corporations who felt that offsetting their tax liability was unnecessary.  

As lower tax liabilities reduced corporations’ incentive to invest in tax credits, there was lower demand, and thus, fresh investments in affordable housing programs decreased.   

The program’s sensitivity to tax policy shifts was challenging, and developers had to adapt to a new financial landscape.    

The 2018 Consolidated Appropriations Act 

In response to the fresh challenges facing LIHTC, the 2018 Act increased the amount of tax credits available by 12.5 percent through 2021. It also introduced new affordability guidelines.   

By this legislative adjustment, Congress aimed to counteract the dampened investment climate and support financing more affordable housing units.  

The Tax Relief for American Families and Workers Act of 2024 

The Act of 2024 extended the 12.5% allocation increase, which expired in 2021. It also reduced the tax-exempt bond financing requirement for LIHTC projects. These provisions are meant to make the LIHTC program more accessible and practical. 

Successful Despite Challenges 

LIHTC has adapted to the changing landscape of affordable housing. It has successfully weathered economic downturns, policy shifts, and the evolving needs of low-income Americans.   

Despite its criticisms and challenges, it has produced millions of affordable housing units. Plus, it has demonstrated the potential of public-private partnerships in addressing complex social issues. The program’s bipartisan support, resilience, and adaptability illustrate its critical role in the affordable housing ecosystem. 

The Role of LIHTC Software in Financial Reporting

Lihtc Software

LIHTC (Low-Income Housing Tax Credit) software is a specialized tool designed to manage the complexities of LIHTC projects, including the intricate financial reporting requirements. 

This software is engineered to handle the unique needs of LIHTC accounting, from tracking the allocation and utilization of tax credits to ensuring compliance with federal and state regulations. Its capabilities extend to tracking compliance requirements like tenant eligibility and rent calculations, making it an indispensable asset for developers and investors in the affordable housing sector.  

This article explores what LIHTC software can do and how it helps create financial reports that add value to stakeholders. 

Simplification of Complex Financial Reporting Tasks 

LIHTC software streamlines the financial reporting process by automating many of the tasks that are traditionally manual and error prone.  

This includes the generation of financial statements, calculation of tax credits, and preparation of compliance reports. By simplifying these tasks, the software reduces the time and effort required to manage financial reporting, allowing stakeholders to focus on strategic decisions rather than getting bogged down in administrative details. 

Features of LIHTC Software for Financial Reporting 

Calculating tax credits, ensuring compliance with evolving regulations, and managing vast amounts of documentation demand precision and efficiency. LIHTC software provides asset managers with some essential features that can help in their regular financial reporting tasks. 

Automated Calculations: Automatically computes eligible basis, tax credit amounts, and other critical financial metrics, ensuring accuracy and consistency. 

Compliance Checks: Integrates current regulations and guidelines to monitor compliance across all aspects of LIHTC projects, flagging potential issues for review. 

Document Management: Centralizes storage and management of financial documents, lease agreements, and compliance paperwork, simplifying retrieval and review. 

Reporting Templates: Offers pre-designed templates for common financial reports, including profit and loss statements, balance sheets, and cash flow statements, tailored to LIHTC project requirements. 

Benefits of Using LIHTC Software for Financial Reporting 

The complexity of adhering to LIHTC regulations, coupled with the need for meticulous financial management, poses significant challenges financial reporting for LIHTC projects.  

LIHTC software can streamline the financial reporting process, mitigate risks of non-compliance, and enhance operational efficiency.  

Improved Accuracy 

By automating calculations and utilizing built-in validation checks, LIHTC software significantly reduces the likelihood of errors in financial reporting.  

This leads to more accurate financial statements and compliance reports, crucial for maintaining project viability and meeting investor expectations. 

Enhanced Efficiency through Automation 

The automation capabilities of LIHTC software streamline the entire financial reporting process, from data entry to report generation. This efficiency gain saves time and reduces operational costs associated with financial management of LIHTC projects.  

Better Compliance Management 

Staying abreast of the latest regulatory requirements is a challenge in the dynamic LIHTC landscape. LIHTC software includes features that are updated in line with regulatory changes, ensuring that financial reporting and project management practices remain compliant.  

This proactive approach to compliance management mitigates the risk of non-compliance penalties and ensures the integrity of the investment. 

Real-Time Access to Financial Data and Reports 

LIHTC software provides stakeholders with real-time access to financial data and reports, enabling timely and informed decision-making. This immediate insight into the financial health of LIHTC projects is invaluable for responding to market changes, adjusting strategies, and optimizing performance. 

Strengthened Investor Confidence 

Transparent and reliable financial reporting, facilitated by LIHTC software, builds trust with investors.  

The ability to produce accurate, timely, and compliant financial reports demonstrates a commitment to project success and regulatory adherence, enhancing investor confidence and supporting future investment opportunities. 

The Key Components of Financial Reporting in LIHTC Projects 

Financial reporting within LIHTC projects is a nuanced process, requiring meticulous attention to detail to ensure accuracy and compliance.  

Balance Sheet 

A critical snapshot of financial health, the balance sheet in LIHTC projects categorizes assets (both current and fixed), liabilities (short and long-term), and equity. It details some critical elements in LIHTC projects.  

  • Capital Contributions: Precise recording of investor capital injections, distinguishing between initial equity contributions and subsequent infusions. 
  • Loans: Accurate classification of construction loans, permanent financing, and any subordinate financing, including terms and maturity dates. 
  • Equity Position: Reflecting the equity impact of tax credits, including the deferred tax asset/liability and the equity adjustments over the compliance period. 

Income Statement  

This is also called the Profit and Loss Statement. The income statement for LIHTC projects should meticulously track the income and expenses of a LIHTC project.  

  • Rental Income: Breakdown of rental revenue, including occupancy rates and average rent per unit, factoring in LIHTC rent restrictions. 
  • Operating Expenses: Detailed categorization of expenses such as maintenance, property management fees, insurance, and property taxes, highlighting any variances from the budget. 
  • Net Operating Income (NOI): Calculation of NOI, crucial for assessing the project’s financial performance and its ability to cover debt service and reserves. 

Statement of Cash Flows 

Cash flow is like oxygen for a LIHTC development project. A bottleneck can cause serious complications and even jeopardize the entire project. In LIHTC projects, the cash flow statement is segmented into various components. 

  • Operating Activities: Cash generated from operations, emphasizing rent collection efficiency and operating expense payments. 
  • Investing Activities: Outflows related to capital improvements and inflows from disposals of fixed assets. 
  • Financing Activities: Movements in equity contributions and loan proceeds, including distributions to investors and debt service payments, with a keen focus on maintaining liquidity for reserve requirements. 

Budget vs. Actual Reports 

A project’s cost might vary from the budgeted costs. In LIHTC projects, tracking and reporting this variance is a critical part of maintaining compliance. These reports should offer a granular comparison of budgeted versus actual figures. 

  • Variance Analysis: Detailed analysis of variances in income and expenses, identifying the reasons behind deviations and their impact on the project’s financial health. 
  • Corrective Actions: Recommendations for adjustments in operations or budgeting practices to address identified variances and ensure financial stability. 

Tax Credit Calculation and Compliance Reports 

Tax credit calculations are a prerequisite of obtaining credits that syndicators and funds can then monetize. During the lifecycle of the LIHTC projects, compliance monitoring is a critical component to ensure the LIHTC investment’s viability and must take place for the entire project’s lifetime.  

  • Eligible Basis: Detailed computation of eligible costs, adjustments for federally subsidized projects, and the applicable percentage for credit calculation. 
  • Compliance Status: Tracking of unit occupancy, tenant income verification, and rent compliance, including any non-compliance incidents and remediation efforts. 

Occupancy Reports 

After the development phase is over, these reports become critical to monitor the health of the LIHTC project during the compliance period. 

  • Tenant Eligibility: Documentation of tenant income eligibility checks, including initial qualification and annual recertification. 
  • Unit Status: Current occupancy status, turnover rates, and waiting list management, ensuring adherence to LIHTC occupancy requirements. 

Capital Account Statements 

This is a part of the regular financial reports that funds must distribute to their investors. For investor and compliance tracking, these statements include some basics. 

  • Equity Contributions and Distributions: Detailed tracking of all investor contributions and distributions, aligned with the project’s financial performance and tax credit delivery. 
  • Compliance Impact: Analysis of how compliance issues or challenges may impact investor returns and equity positions. 

Software That’s Designed for LIHTC Projects 

LIHTC software offers a suite of tools designed to tackle the complexities of LIHTC projects. It makes an asset manager’s job easier and reassures investors of a project’s viability. LIHTC software is critical for the successful management and operation of LIHTC investments.