Blogs| Understanding the Basics of LIHTC Allocation
Written by
Priyam Sharma
Published
August 22, 2024
Topics
LIHTC
The Low-Income Housing Tax Credit (LIHTC) program is an essential federal initiative launched to address the affordable housing crisis in the United States.
The LIHTC program provides tax incentives to subsidize the construction, acquisition, and rehabilitation of rental properties, making them affordable for low—to moderate-income tenants. This program is crucial in ensuring that millions of Americans have access to safe, decent, and affordable housing.
Ever since it was invented, LIHTC has helped many by reducing housing shortages and ensuring economic growth, including reviving society at large. Knowing the program’s nitty-gritty helps the involved parties comprehend it better and manage the housing projects that are considered cheap within its scope.
The LIHTC falls under the Tax Reform Act 1986, and numerous revisions have been made to it ever since. This program was started with the aim of providing more than 3.5 million affordable housing opportunities across America to individuals belonging to low—or moderate-income categories, which are safe enough and within their financial reach.
From 2000 to 2016, about 115,000 affordable rental units were built annually with support from this low-income housing project. However, in other periods, the figure was below two-thirds.
Federal government agencies issue these tax credits to territorial and state governments and then the state governments to developers for the development of affordable housing. Developers sell these credits to investors to seek funding for the construction or rehabilitation of affordable housing units. The equity they receive totals around 30% to 50% of the total development cost.
Whether large apartments, two-unit buildings, four-unit buildings, or single-family homes, every type of rental property is eligible for LIHTC. The projects should meet some criteria to receive the LIHTC benefits. Three primary ways to meet the income test are:
Additionally, based on the number of affordable units the LIHTC property has, the tenants with 50% to 60% of AMI should have rent not more than 30% of their AMI. The LIHTC projects should comply with these rent and tax rules for 15 years. Moreover, the compliance period will exceed 15 to 30 years and is imposed on the LIHTC properties by the state housing agency.
Congress sets the amount of LIHTC that can be allocated for any project every year.
In 2023, each state was allocated $2.75 per capita. The minimum credit limit was set at $3,185,000 to ensure that even states with a smaller population get a fair share of credits. Congress adjusts both the per capita income and small state floor yearly to ensure that tax credits effectively support the development of affordable housing.
The states then allocate these credits to developers through housing finance agencies. This allocation is based on the Qualified Allocation Plan (QAP) created by the concerned state. The QAP allocated the credits while considering two significant factors: projects serving low-income tenants and offering affordable housing for longer periods.
LIHTC projects funded by tax-exempt bonds do not need credit allocation from the state housing finance authority. However, developers need approval from the state to use these bonds. Developers sell their tax credits to investors because the investors are in a better position to use them appropriately for affordable housing projects. Developers sell their tax credits to investors to raise the funds needed for the development of affordable housing.
In exchange for ownership stakes, investors contribute their equity and provide capital to the project. This LIHTC process is carried out either by the syndicators or by forming a partnership. Multiple investors pool their resources to provide funding to the larger projects. These partners or investors are not the permanent caretakers of affordable housing development. Their primary role is to receive the tax benefits of affordable housing development. This will allow developers to focus on managing the funding for developing housing units.
Banks and other financial institutions have been the biggest investors in LIHTC projects.
Low-cost housing has been created by using LIHTC in the U.S. since 1986. Developers, investors, and state housing agencies partner up to use federal tax credits in building affordable homes for those with little money or moderate incomes. Housing units in millions and countless others have shown that this program has worked even though there were some difficulties in implementing it.
Regarding the LIHTC’s future, the country’s need for affordable homes can only be met through continued support and improvement of the program. Without developing new strategies like LIHTC software and showing consistency, the LIHTC will always be an essential instrument for ensuring everyone can afford quality housing.