The Low-Income Housing Tax Credit (LIHTC) program plays a crucial role in addressing the nation’s affordable housing needs. Created in 1986 as a part of the Tax Reform Act, LIHTC incentivizes private investment in the development of affordable rental housing for low-income households. Understanding the basics of LIHTC is essential for developers, investors, and policymakers alike.
What Is LIHTC?
The LIHTC program provides tax incentives to developers who commit to constructing or rehabilitating affordable rental housing units. These tax credits are allocated to states based on population, and state housing agencies then distribute them to eligible projects. The LIHTC program is codified in IRC Section 42. Each state has a housing finance agency (HFA) and a Qualified Allocation Plan (QAP). The QAPs determine eligibility requirements for the awards.
How Does LIHTC Work?
Developers seeking LIHTC financing submit proposals to state agencies outlining their plans for affordable housing projects. The tax credits awarded can be used to offset a portion of the development costs over a 10-year period. Investors—typically financial institutions or corporations—purchase these tax credits from developers to reduce their federal tax liability. Some developers also make use of private activity bond financing. These bond projects have additional requirements for development costs.
Compliance & Affordability Requirements
LIHTC projects are subject to stringent compliance regulations to maintain affordability for a specified period, usually 30 years. Developers must adhere to rent restrictions and income limits to guarantee that the housing remains accessible to low-income households. State HFAs verify the projects stay compliant through the life of the project. Projects that fall out of compliance risk credit recapture.
LIHTC Deal Structure
The LIHTC partnership structure is a pivotal aspect of affordable housing development. Typically, developers form a limited partnership with investors, where the developer serves as the general partner (GP) and the investor acts as the limited partner (LP). The developer contributes industry know-how and project management, while the investor provides crucial equity capital in exchange for the tax credits generated by the affordable housing project. While the GP is responsible for day-to-day operations, they generally own less than 1% of the partnership. The LP benefits from the tax advantages and owns the remaining interest. The limited partnership structure allows developers to secure necessary funding for affordable housing projects while sharing the risks and rewards with investors. Investors benefit from the LIHTC program’s tax incentives, receiving a dollar-for-dollar reduction in their federal tax liability over a 10-year period. The equity paid in from the investors reduces the costs that must be financed. This allows for a reduction in the rent prices that need to be charged to operate the project at a positive cash flow.
Due to the complexities involved in LIHTC deals, many partners also engage a syndicator. A syndicator often plays a key role in facilitating the collaboration between developers and investors. The syndicator—acting as an intermediary—identifies potential affordable housing projects, structures the investment, and brings together multiple investors to pool resources. This syndication process is crucial for larger projects that require substantial funding. The syndicator also may negotiate terms, coordinate legal aspects, and manage the flow of funds between investors and the project. By engaging a syndicator, developers can tap into a network of investors, and investors can participate in a diversified portfolio of LIHTC projects. This three-way partnership—developer, investor, and syndicator—creates a symbiotic relationship that can help streamline the LIHTC investment process, promote efficiency, and enhance the overall success of affordable housing initiatives.
The LIHTC partnership structure fosters collaboration between private investors and developers, promoting the creation of affordable housing units to address community needs.
The Impact of LIHTC
Since its inception, LIHTC has played a pivotal role in financing the construction and preservation of more than 3.8 million affordable rental units across the United States. The program has stimulated economic development, revitalized communities, and provided numerous families with safe and affordable housing.1
Challenges & Opportunities
While LIHTC has been successful, challenges persist, including the need for increased funding and improvements to the program’s efficiency. Exploring opportunities for enhancements and expansion can further amplify LIHTC’s impact in addressing the affordable housing crisis.
Although needs remain, the LIHTC program stands as a cornerstone in the efforts to create affordable housing options for low-income individuals and families. Its intricate framework of incentives fosters public-private partnerships that contribute significantly to the nation’s housing landscape, offering hope for those needing safe, affordable homes.
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- 1“State HFA Handbook: NCSHA Annual Survey Results 2022,” ncsha.org, October 2023.