The low-income housing tax credit (LIHTC) is the main financing tool for developing affordable housing across the country.
The program has produced more than 2.7 million affordable housing units nationwide during its 28-year history. The LIHTC is behind the creation or preservation of approximately 100,000 needed rental homes each year. But perhaps just as impressive is its versatility.
The “Swiss Army knife” of housing programs, the LIHTC is used to meet the unique needs of different communities. It has provided homes for working families, seniors, veterans, disabled individuals, and people who have been homeless. The housing credit has also been critical in rebuilding communities after natural disasters, including Hurricane Katrina and Superstorm Sandy.
Established as part of the Tax Reform Act of 1986 under President Ronald Reagan, the housing credit has earned strong bipartisan support throughout its history. This support was seen most recently when the LIHTC was one of only a few tax expenditures retained in a tax-reform discussion draft released this year by Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee.
In another move, the Bipartisan Policy Center’s Housing Commission has strongly urged that the housing credit be not only preserved but expanded.
The LIHTC is needed because it’s not economically feasible to build affordable housing with restricted rents without a way to make up the difference in what it costs to build a property and the income that can be generated to support the development costs. LIHTCs play a major role in a development’s budget, with developers using the credits to raise the needed equity for the projects and keep down their debt levels.
Keys to success
The program is unique because it harnesses private-sector investment capital and discipline to make the housing developments true public–private partnerships. As a result, foreclosures have occurred in less than 1 percent of all LIHTC properties, far lower than for any other real estate asset type.
The reasons for the housing credit’s success are multifold:
¦ Only developments that meet federal and state housing priorities receive credits. Developments also receive only the amount necessary to make them viable.
¦ The program is administered at the state level. Although the LIHTC is a federal program overseen by the Internal Revenue Service, each state issues a plan to allocate its credits. This allows the states, with public input, to adapt the program to meet their particular needs. In many states, the demand is three times the supply, so only the best developments are selected.
¦ Compliance is closely monitored. Owners are subject to credit recapture for 15 years, and properties generally remain affordable for 30 years or more.
¦ Housing credits leverage private capital. The program was designed to provide only a portion of the development cost, not the entire amount, so developers must compete for other funding sources, impressing funders with the quality of their project.
¦ There’s minimal risk to the federal government. The LIHTC employs a pay-for-performance policy, limiting any risk to the government. The private sector bears the risk, with investors only getting to claim and keep the tax credits if the affordable housing units are built, leased, and maintained as affordable housing throughout the initial 15-year compliance period. Additionally, there is a 15-year extended-use period, with many states requiring longer affordability.