Skip to content

Posted over 3 years ago

THE IMPORTANCE OF THE LIHTC (LOW INCOME HOUSING TAX CREDIT) PROGRAM

Normal 1594660582 Family 2057301 1920

Housing is one of the most valuable assets that one can have and management of that investment is just as important. According to a study done by the National Low Income Housing Coalition, 71% of below average income households in the U.S. spend more than half of their income on housing alone. As you can see, investors, property managers, and even landlords aim to focus their attention on affordable housing projects to serve those who need it most.

To give proper insight into these types of projects, it’s important to understand what affordable housing means. Affordable housing refers to rentals, whether single or multifamily units, that are priced significantly below the conventional market. Traditionally, affordable housing should not cost more than 30% of the median income in a certain area. There have been numerous projects that have sprung over the past few years that are worth exploring. One such program that deserves a mention is the Low Income Housing Tax Credit Program


WHAT is it and HOW does it work?

The LIHTC gives investors and developers an incentive to build or renovate buildings to increase the amount of affordable housing for low-income families. It’s basically paid for by the federal government and each corresponding state according to their own housing needs. The program was created in 1986 and was made permanent in 1993. Since its inception, nearly 3 million housing units have been constructed with the help of the program.

The federal government gives money to a specific state for tax credits based on population. Real estate developers agree to construct affordable housing units, and in return, the state gives them tax credits. These tax credits are then sold to investors to raise the funds needed to build these units

Qualifications

Single- and multi-family rentals, apartment buildings, townhouses, and duplexes can be eligible for LIHTC. Those who receive the credits agree to comply to an income test for tenants and a gross rent test. The income test can be met with:

  • •At least 20% of the project’s units are occupied by tenants with an income of less than or equal to 50% of the area median income (AMI) for family size.
  • •At least 40% of the units are occupied by tenants with an income of less than or equal to 60% of AMI.
  • •At least 40% of the rental units are occupied by tenants with an income averaging no more than 60% of AMI.
  • •No units are occupied by tenants with income greater than 80% of AMI.

For the gross rent test, it requires that the charge for rent does not exceed 30% of either 50% or 60% of AMI. All of the LIHTC projects should abide by these two tests for 15 years (a compliance period amounting to a total of 30 years can be imposed as well). Failure to do so leads to the credits recaptured by the federal government.

As far as landlords are concerned, the certification for them involves screening every tenant in the affordable housing unit. Any support that’s received thanks to the program can be continued as long as the landlord gets recertified annually. Should a LIHTC tenant income certification lapse, a penalty would be imposed for each unit out of compliance.


Types of Tax Credits

The LIHTC is designed to financially support either 30% or 70% of the low-income housing unit costs. This comes in two ways, namely:

4% credit

This is the 30% support that covers new construction of units which involves government assistance or buying an existing project.

9% credit

This is the 70% subsidy that covers new construction or renovation of units with no government involvement.

Over time, tax credits can reach up to 70% of the investment in affordable housing. It is quite common currently to see a large percentage of the project’s costs raised from 9% tax credits. Local governments have found that by reducing tax burdens, the development of new and affordable housing projects is encouraged.

How can I benefit from it?

Whether you’re a property manager, investor, or developer, successfully maximizing this affordable housing investment involved reducing costs and increasing your profit. The first step involves proper due diligence about the LIHTC process. This can be done by contacting local agencies that are mainly responsible for allocating funds in your area, and federal organizations such as the IRS that monitor compliance.

The next step involves making a proper business operating model. Exploring solutions that aim to boost your efficiency and productivity without sacrificing costs would definitely benefit anyone involved in the project. Although the program serves a higher purpose by providing the opportunity of affordable housing, it is quite complex and shouldn’t be taken lightly. It is always essential to consult with a professional when you want to tackle this program.

The LIHTC program is only one of many programs that serves the purpose to provide housing for everyone. Providing affordable housing in a relatively competitive market where rental prices can dramatically change anytime can be quite a challenge.



Comments