What are LIHTCs (Low-Income Housing Tax Credits)?
Low-Income Housing Tax Credits, or LIHTCs are federal tax incentive intended to increase the availability of low-income housing. LIHTC credits can be claimed for up to 10 years after the construction is completed and the property is leased up.Start Your Application and Unlock the Power of Choice$5.6M offered by a Bank$1.2M offered by a Bank$2M offered by an Agency$1.4M offered by a Credit UnionClick Here to Get Quotes!
LIHTCs (Low-Income Housing Tax Credits) and the HUD 223(f) Loan Program
The Low-Income Housing Tax Credit, or LIHTC, is a federal tax incentive intended to increase the availability of low-income housing. The LIHTC credit can be claimed for up to ten years after the construction is completed and the property is leased up. LIHTC is available as long as the property follows LIHTC requirements, and can be used with HUD multifamily loans including 223(f) loans and HUD 221(d)(4) loans.
TO LEARN MORE ABOUT FHA 223F LOANS, FILL OUT THE FORM BELOW AND A HUD LENDING EXPERT WILL GET IN TOUCH.
What are the benefits of LIHTCs?
The Low Income Housing Tax Credit (LIHTC) program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI).
Using LIHTCs has other benefits for nonprofits. At the end of the 15-year compliance period, nonprofits can generally exercise an option to buy the property in question. This gives the LIHTC investor/syndicator a ready buyer, while helping the nonprofit create a permanent source of affordable housing. Plus, as the developer of the property, the nonprofit will generally receive various fees (for example, developer fees and partnership management fees) that can help it pay its overhead expenses.
HUD provides special benefits, like increased leverage, for multifamily borrowers who utilize either of these programs.
How do LIHTCs work?
The Low-Income Housing Tax Credit (LIHTC) program subsidizes the acquisition, rehabilitation, or construction of affordable rental housing. The program functions as follows: The federal government grants state and territorial governments authority over a predetermined budget. State housing agencies can then award tax credits to private developers through a competitive process. Developers awarded low-income housing tax credits typically sell credits to private investors in order to obtain funding for a project.
Though technically a federal program, the LIHTC program is executed by individual state Housing Finance Authorities (HFAs), which are responsible for approving LIHTCs to investors and developers on a project-by-project basis. Each state has a Qualified Allocation Plan (QAP), created to detail specific eligibility requirements for LIHTC projects, which are typically stricter than at the federal level.
LIHTCs don’t provide a tax deduction, which would reduce a borrower’s taxable income. Instead, the credit provides a tax discount of a specific dollar amount that can be applied to the investor or developer’s tax bill. Once the housing project is made available to tenants, investors are then able to claim the LIHTC over a 10-year period.
In order for an investor to be granted low-income housing tax credits, they must own shares in the project itself. This typically means they own all or part of an LLC or are in a direct partnership with the developer. Tax credits issued to an investor are based on their contribution towards a project. To determine the exact amount of an investor contribution, the developer creates a projected cost for the credits, and then applies a specific discount rate (incorporated to ensure investors profit from the transaction) that was negotiated beforehand by both parties. The resulting figure is then multiplied by the share of the LLC or partnership an investor owns.
Let’s illustrate this with an example. A developer forecasts an LIHTC of $2 million. An investor partners with the developer for an 80% take, with a discount rate negotiated at 75%. The investor’s contribution would be calculated as follows:
$2 million x 80% take x 75% discount rate = $1.2 million
What are the eligibility requirements for LIHTCs?
In order for a property to be considered eligible for the LIHTC program, it must pass at least one of these three affordability tests:
- 20% or more of the units are occupied by (or reserved for) tenants with an income of 50% or less of the area median income (AMI).
- 40% or more of the units are occupied by (or reserved for) tenants with an income of 60% or less of the AMI.
- 40% or more of the units are occupied by (or reserved for) tenants with an income of no more than 60% of the AMI, and the property has no units occupied by tenants with an income greater than 80% of the AMI.
In addition to the above, a gross rent test must also be passed. This test requires that rents for the property do not exceed 30% of either 50% or 60% of AMI (the exact percentage depends on the number of rental units set aside for the credit). LIHTC properties are required to pass these income and rent tests for a period of no less than 15 years — or risk having the tax credits recaptured by the local housing authority.
For more information, please see Low-Income Housing Tax Credit and LIHTC: Low Income Housing Tax Credits in Commercial Real Estate.
What are the tax implications of LIHTCs?
How can LIHTCs be used to finance affordable housing?
The Low-Income Housing Tax Credit (LIHTC) program offers apartment investors a dollar-for-dollar income tax credit in exchange for investing in properties that reserve a certain amount of project units for residents earning less than or equal to a certain percentage of the Area Median Income (AMI). Developers awarded low-income housing tax credits typically sell credits to private investors in order to obtain funding for a project. HUD multifamily loans like the HUD 221(d)(4) and HUD 223(f) can be used for both for-profit and nonprofit development, and in both instances, these loans work particularly well with the LIHTC program. For each of these loan types, affordable properties are permitted Loan-to-Value (LTV) ratios of up to 87%, while properties with 90% or more low-income units may have LTVs even higher: up to 90%. In addition, Section 8 and LIHTC properties only need to pay 0.45% Mortgage Insurance Premium (MIP) compared to the 0.65% required for market-rate properties. Finally, Debt Service Coverage Ratio (DSCR) requirements are significantly lower for affordable housing properties, at just 1.15x, compared to the DSCR requirement of 1.20x for market-rate properties.