The Keys to Success

Private-sector investments and discipline are vital to the LIHTC program.

One of the major reasons the low-income housing tax credit (LIHTC) program has been so successful over the past 30 years is that it harnesses private-sector investment capital and discipline to make the housing developments true public–private partnerships.

How the LIHTC Works

Each state receives a certain amount of LIHTCs from the federal government each year based on the state’s population. In 2017, the per capita amount will be $2.35, with a small-state minimum of $2.71 million. With public input, states prepare qualified allocation plans that spell out their housing priorities and how they will allocate their credits.

Developers must then compete to win the credits. Typically, competition is tough, with the demand for LIHTCs far outpacing the supply the state has to allocate. After receiving a tax credit allocation, developers sell the housing credits to investors to raise equity to build their developments. As a result, investors review the projects closely.
Tax credits aren’t earned until a project is completed and operating so there’s minimal risk to the federal government.

LIHTC developments must set aside at least 20% of their units for households earning no more than 50% of the area median income (AMI), or 40% of the units for people earning no more than 60% of the AMI. The majority of LIHTC properties, however, target 100% of the units at 60% of the AMI or below.

The developments must also remain affordable for an extended time after the initial 15-year compliance period.

As a result, foreclosures have occurred in less than 1% of all LIHTC properties, far lower than for any other real estate asset type. In addition, LIHTC properties continue to show their strength, with improvements in several key metrics, according to the most recent performance study by New York City–based accounting and advisory firm CohnReznick.

“Overall, the risk level in LIHTC investments has fallen to historically low levels,” says Fred Copeman, CohnReznick principal and leader of the company’s Tax Credit Investment Services Practice.CohnReznick’s Low-Income Housing Tax Credit at Year 30: Recent Investment Performance (2013-2014) finds the national median physical occupancy for the sector is a strong 97.5%, and the median economic occupancy 96.6%.

The reasons for the program’s overall 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 it is a federal program overseen by the Internal Revenue Service, each state issues a plan to allocate the credits. This allows the states, with the help of public input, to meet their specific needs.
Compliance is closely monitored. Owners are subject to credit recapture for 15 years, and the 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, so developers must compete for other funding sources.
The program employs a pay-for-performance policy, minimizing risk to the federal 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 through the compliance period of 15 years. Additionally, there is a 15-year extended-use period, with many states requiring longer affordability.