When it comes to affordable housing finance and the world of LIHTCs, there are a few basics you need to know before jumping into a new project.
Whether it’s how your LIHTC will be computed, basic procedures within the affordable housing arena, or Federal requirements, this post is a great starting place that will get you familiar with the essentials of affordable housing finance.
The Low Income Housing Tax Credit (LIHTC) was created in 1986 to provide a credit against federal taxes as a means to raise the necessary capital to build or rehabilitate housing that would be rented at below-market rents to qualifying low-income families. The program is overseen by the Internal Revenue Service, but is generally administered at the State level.
Some states, like Illinois, Missouri and Colorado, have an additional state tax low-income credit program as well.
How does it work?
Each state is allocated credits based on its population. States then competitively award 9% LIHTCs based on the criteria detailed in the Qualified Allocation Plans (QAPs). Developers that receive an award of LIHTCs then obtain an investment from corporations (generally through a syndicator) in exchange for a 99.99% interest in the project. The developer provides a range of guarantees (to be covered in another blog) to the corporations to ensure that the project will be built on budget, leased up on schedule and operated successfully throughout the 15-year initial term.
The corporations provide equity to the project that generally covers 50-80% of total project development costs. In exchange for this equity, the corporations receive a 10-year stream of federal tax credits and the tax losses of the building (depreciation).
Affordable housing must have rents that are considered affordable (these are set at the local level) and rented to qualifying low income households (at or below 60% of the Area Median Income) for a minimum of 30 years. Many states provide incentives to serve lower income households and/ or a longer restriction period.
For more details about the LIHTC program, the following are some helpful links:
Affordable Housing Finance: Expert Guidance
The secret to successful affordable housing finance is knowing how to make a financially feasible deal meet allocation priorities in your state. Working with an expert consulting team who is dedicated to being on top of these various changing priorities means you’re no longer writing up applications that don’t receive LIHTC.
The bottom line is: You need a team that can help you navigate this world so you spend your time building—not chasing tax credits.
Let us help you with your next project that needs affordable housing finance expertise. We’re here to help you every step of the way!