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.
