Low Income Housing Tax Credit

Low Income Housing Tax Credit

What are Low Income Housing Tax Credits?

The section 42 LIHTC Tax Credit Program is a program for individuals and families making moderate or lower incomes. Congress created the Program in 1986 as part of the Tax Reform Act and is administered by the Internal Revenue Service.

BENEFITS FOR RESIDENTS

The benefits for the residents of these properties with this particular financing are that the apartments are newly constructed or substantially renovated with rents usually lower than the market rate. The rents are no higher than 30% of the area median income as published by HUD, often resulting in rents lower than other comparable apartments

BENEFITS AND INCENTIVES TO OWNERS

Owners are offered reductions in their tax liability in exchange for offering quality housing at these fixed rents. To receive these reductions, the owner(s) must annually certify that the residents are qualified under the Program requirements and are paying the correct amount of rent.

DIFFERENCES FROM OTHER HOUSING PROGRAMS

This Program is not a subsidized housing program or Section 8 housing. All residents are responsible for the full amount of rent each month. The rental amount is NOT based on your individual household income, rather on the pre-set income limits in the area. Some apartments within a particular apartment community may not be part of this program. The rent for these apartments will often be higher.

BACKGROUND ON LIHTC

The Low-Income Housing Tax Credit (LIHTC) is the most important resource for creating affordable housing in the United States today in introducing the revised national database that provides a comprehensive project-level look at LIHTC production. The database, created by HUD and now available to the public, contains information on nearly 20,700 projects and more than 1,041,000 housing units placed in service between 1987 and 2001. The LIHTC program was designed to stimulate development of affordable housing for persons of low to moderate income. It was created by the enactment of Section 42 of the Internal Revenue Code, part of the Tax Reform Act of 1986.

This change to the IRS tax code disallowed many traditional tax shelters for high-end investors. In return, it is designed to encourage affordable housing development by offering alternative tax relief in the form of tax credits for the development and operation of low- to moderate-income housing. Furthermore, rather than tying the tax benefit to the operating loss on a building, it was now tied to the continuation of housing low-income and moderate-income residents.

The LIHTC Program is a financing " vehicle" that is regulated by the IRS. Investor’s purchase tax credits from the owner who has been allocated a specified number of tax credits by its state government. The purchase of these tax credits increases the owner’s down payment on the project. This in turn lowers the mortgage and financing costs, thereby resulting in lower "affordable" rents for the resident. The owner agrees to offer affordable rental housing to households with an annual gross income of 60% or less of county median income. They also agree to maintain housing for no less than 30 years.

It is important to differentiate the tax credit program from the federal housing subsidy programs. The Section 42 tax credit program itself does not provide deep subsidy as does the Section 8 program and cannot be considered a housing program for households qualifying under the very low income guidelines of other federal programs. One of the primary benefits of the program is that it offers residents rent ceilings.

Created by the Tax Reform Act of 1986, the LIHTC program has been recently amended to give States the equivalent of nearly $5 billion in annual budget authority to issue tax credits for the acquisition, rehabilitation, or new construction of rental housing targeted to lower-income households. Although some data about the program have been made available by various sources, HUD’s database is the only complete national source of information on the size, unit mix, and location of individual projects. With the continued support of the national LIHTC database, HUD hopes to enable researchers to learn more about the effects of the tax credit program.

An average of about 1,300 projects and 90,000 units were placed in service in each year of the 1995 to 2001 period, according to Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service through 2001, a HUD companion report to the database.

Q. What are Housing Tax Credits?

A. The federal tax credit program is a means of directing private capital toward the creation of affordable rental housing. Owners and investors in qualified affordable multifamily residential developments can use the tax credits as a dollar-for-dollar reduction of federal income tax liability. The value associated with the tax credits allows residences to be leased to qualified families at below market rate rents. Agencies such as the Texas Department of Housing and Community Affairs (TDHCA) are the only entity in the state of Texas with the authority to allocate tax credits under this program. To qualify for tax credits, the proposed development must involve new construction or undergo substantial rehabilitation of residential units (at least $12,000/unit). The credit amount a development may receive depends on the total amount of depreciable capital improvements and the funding sources available to finance the total development cost.

Q. What must an applicant do to apply for tax credits?

A. Developers apply for tax credits through an application process administered by a state’s housing agency. This process is fully described in the Qualified Allocation Plan and Rules (QAP) which governs the program’s operation. The QAP is revised annually in a process that involves public input, Board approval and ultimately approval by the Governor. To be considered for an award of tax credits, an application must be submitted to the state during the annual application acceptance period as published in the QAP. All applications must provide the required fee, application and supporting documentation as required by the QAP.

The competition for tax credits is very high. Therefore, in addition to submitting an application that meets the minimum threshold, applicants must achieve a high enough score to be competitive to receive an award.

Q. Does TDHCA have geographical preferences or specific types of developments that it prefers?

A. Tax credits are allocated in accordance with a state’s regulations which normally require that the credits be allocated on a regional basis. There are thirteen state service regions; each of the thirteen state service regions is further divided into Rural and Urban/Exurban areas each of which is targeted to receive a pre-determined amount of the tax credits for each year. The amount per area is based on a regional distribution formula which is generated, with public input, by the Housing Center of the state. Upon finalization of the formula, the targeted allocations will be released. Additionally, the HTC Program has several allocations and/or set-asides which it strives to meet: at least 10% of all credits must be awarded to Qualified Nonprofits, at least 15% of each region’s credit allocation is targeted to At-Risk Developments and at least 5% of each region’s credit allocation is targeted to developments funded by the U.S. Department of Agriculture.

Q. What evaluation criteria is used to review submitted applications?

A. It is the goal of of many states to encourage diversity through broad geographic allocation of tax credits within the state, and to promote maximum utilization of the available tax credit amount. The criteria utilized to realize this goal includes a point based scoring system and an evaluation of the developments:

  • cost and financial feasibility; 
  • geographic location within the state as compared to other developments applying for tax credits; 
  • impact on the concentration of existing tax credit developments and other affordable housing developments within specific markets and sub-markets; 
  • site conditions; 
  • development team experience; and 
  • Consistency with the goal of awarding credits to as many different applicants as possible. 

Those applications which are deemed to have a high priority based on the review criteria are subject to an underwriting review which evaluates the development’s projected construction costs and financial feasibility. Applications which pass the underwriting process and are determined to have the highest priority will be presented to the state agency’s Board of Directors for consideration.

Q. How is the scoring system used to prioritize the applications?

A. The QAP defines a series of point based "Selection Criteria" items. To generate a "Selection Criteria" score, applicants request points for those criteria items for which their development is qualified. These scoring criteria change annually and can be reviewed in the QAP.

While it is a significant factor, an application’s score is not the sole determining factor as to whether or not it will be recommended for an award of credits. However, the score serves as one of the primary criteria (as described in the previous section) used to assess how well an application fulfills the program’s goals.

Q. Can the public comment on a proposed tax credit development or on the development of the QAP?

A. Prior to the award of the credits, the state’s housing agency may hold at least three public hearings in metropolitan and rural areas across the state. The public is encouraged to attend one of these scheduled hearings or to submit written comments to the HTC Program. When submitting comments, the application under discussion should be clearly identified by name, address, and city. Including the five-digit application identification number in the correspondence is also helpful. Based on the provided comment, an indication of the level of support or opposition for an application will be included in the recommendation documentation presented to the state agency’s Board of Directors.

Public hearings are also held for the development of the QAP, which governs the administration of the HTC Program. The public is encouraged to attend or provide written comment.

Q. What is the minimum percentage of units that must be set aside for eligible low income tenants?

A. Each development must include a minimum percentage of units to be set aside for eligible low income tenants. The rent charged for these units is restricted according to federal guidelines which correspond to the household’s income level. While rental rates are restricted, they are not subsidized (i.e., Section 8 housing) by the HTC Program. A low income housing development will be eligible to apply for tax credits if it meets either of the following criteria:

  • Twenty percent (20%) or more of the residential units in the project are both rent restricted and occupied by individuals whose income is fifty percent (50%) or less of Area Median Family Income (AMFI);
  • Forty percent (40%) or more of the residential units in the project are both rent restricted and occupied by individuals whose income is sixty percent (60%) or less of AMFI.

Tax credits may only be claimed for the affordable units that have been set aside for participation under the program. Although a developer only needs to set aside a minimum of twenty percent (20%) of a project’s units for qualified tenants, applicants will typically set aside between 60% and 100% of the units for scoring purposes and to claim a higher amount of tax credits.

Q. How are the rent limits calculated?

A. The rent limits for tax credit units are based on the household income level and the number of bedrooms in the unit. These rent and income limits are generated by the U.S. Department of Housing and Urban Development each year. HTC rent limits include an allowance for the cost of utilities (heat, lights, air conditioning, water, sewer, oil or gas). In projects where the owner pays all utilities, no adjustment in the HTC rent limits are needed to determine the maximum rent that can be charged for a tax credit unit. In projects where tenants pay all or a portion of their own utilities, the rent established for a tax credit unit must not exceed the applicable HTC rent limit for that unit.

TDHCA can provide interested parties with specific rent limits for their area, or a complete set of income and rent limits can be found on the state housing agency’s web site. Households will be required by the property owner to periodically document their income level so that the owner may continue to claim the tax credits for their unit.

Q. How do tax credits benefit the project owner?

A. Under the federal income tax code, a credit is a dollar-for-dollar reduction in the tax liability or tax bill for the property owner or investor. It is important to note that only the owners of a tax credit property may utilize the benefits of the tax credits over time. A credit is subtracted after the amount of tax is calculated. In this form, a credit differs from a deduction or adjustment to income, which is then subtracted from income before the tax rate is applied and the amount of tax is calculated.

Q. Why are developers given an incentive to develop affordable rental housing?

A. Many private developers and builders concentrate their efforts in larger metropolitan areas and target higher income individuals and families. However, demographic studies show that lower and moderate income individuals and families are the fastest growing segment of our population. As the population grows so will the need for affordable housing.

Q. How do tax credit developments compare with non-tax credit developments?

A. Properties that receive tax credits must compete with nearby market developments for tenants. The properties are safe, secure, and well maintained. They have amenities similar to other apartment complexes, and may offer swimming pools, community centers and reception areas. Newer developments may include daytime childcare, evening GED classes, on-site medical care and credit counseling.

Q. How do "low income/affordable housing" units differ from "housing projects?"

A. Unlike most publicly-subsidized housing which is designed to assist the elderly, disabled, minimum wage workers or the unemployed, the housing tax credit program does not provide tenants with governmental rent subsidies. The program’s benefit is in the provision of an affordable monthly rental rate. The program’s rent and income levels vary from county to county. In Houston, for example, the maximum allowable rent (which includes a utility allowance) for a three bedroom tax credit apartment would be $951. To be eligible to reside in the tax credit unit, a family of four’s annual income could not exceed $36,600 at the time they signed the lease. In Lubbock, the maximum allowable rent for a three-bedroom apartment would be $756 a month. A family of four’s annual income could not exceed $29,100. Tenants must pay their rents in full, on time, every month. Thus, the tenants are most likely working Texans or retirees seeking an affordable place to live.

Q. Who lives in a tax credit development?

A. Typically, tenants may include: school teachers; police officers; firefighters; mechanics; single parents who are balancing career and family while attending night school; city employees; sales clerks; and retirees. Affordable housing and low income units are quite different from housing projects.

Q. Are existing developments renovated under the Tax Credit Program?

A. Many of the apartments built during the boom years of the 1980′s which were abandoned and boarded-up during the state’s real estate bust, are today fully renovated and leased. Hundreds of sprawling apartment complexes that had for years been both eyesores and occasional drug refuges now provide thousands of working families with quality, affordable housing, including the elderly and persons with disabilities.

Q. Are tax credit properties monitored?

A. Tax credit benefits are lost if a project fails to meet state and federal standards every year for each of the 15 years of the compliance period. Properties are then monitored for an additional 15 years to maintain affordability.

REVISIONS TO THE LIHTC DATABASE

In late 1996, additional efforts were made to improve the coverage of the LIHTC database for earlier years of the program. These efforts resulted in the addition of 1,989 projects containing 67,056 units to the database.

In January 2001, data for projects placed in service between 1995 and 1998 were added. These projects are described in the report updating the National Low-Income Housing Tax Credit Database. Except for some additional geocoding, there were no revisions made to data for projects placed in service from 1987 through 1994.

In May 2002, data for projects placed in service through 1999 were added. This also included 319 projects and 25,000 units placed in service in 1998 and 44 projects and nearly 5,000 units placed in service in 1997 that were not included in the previous update. Projects from all years (1987 through 1999) were geocoded to 1990 and 2000 Census geography. For details see the report updating the National Low-Income Housing Tax Credit Database: Projects Placed in Service Through 1999.

In March 2003, data for projects placed in service through 2000 were added. This also included 44 projects and 2,123 units placed in service in 1998 and 76 projects and 4,865 units placed in service in 1999 that were not included in the previous update. For details see the report updating the National Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2000.

In May 2004, data for projects placed in service through 2001 were added. These also included 132 projects and 11,832 units placed in service between 1995 and 2000 that were not included in the previous updates.

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