Expand Use of the 4 Percent Low-Income Housing Tax Credit
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
What is the 4 percent Low-Income Housing Tax Credit?
The Low-Income Housing Tax Credit (LIHTC) is one of the largest sources of federal funding for affordable housing. The credits are typically sold to investors, generating equity for qualifying rental developments serving families with incomes below 60 percent of the area median income. Although the LIHTC is a federal program, it is administered principally through state housing finance agencies, which have substantial discretion in setting priorities for allocating the valuable credits. Federal law provides for two different types of LIHTCs. The larger of the two credits -- the 9 percent credit -- is allocated to states on a per-capita basis. Because the credit is large and the supply is limited, competition for these credits tends to be fierce under normal market conditions, namely during times in which financial markets are functioning well and investors have taxable income to offset with credits.
Where is this policy most applicable?
Because 4 percent tax credits generate less capital than 9 percent credits, they are often used for rehabilitation of older rental homes (whether or not they are subsidized) and the preservation of subsidized rental developments -- activities that tend to have lower development costs than new construction. Accordingly, areas where the affordable multifamily rental stock is aging may find 4 percent tax credits particularly useful.
Four percent tax credits can also be used for new construction, particularly if a state or locality is willing and able to commit matching funds to make the project work. By matching 4 percent credits with available federal funds, or with state and local matching funds, 4 percent credits can be used in almost any market under stable market conditions.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
What is the 4 percent Low-Income Housing Tax Credit?
The Low-Income Housing Tax Credit (LIHTC) is one of the largest sources of federal funding for affordable housing. The credits are typically sold to investors, generating equity for qualifying rental developments serving families with incomes below 60 percent of the area median income. Although the LIHTC is a federal program, it is administered principally through state housing finance agencies, which have substantial discretion in setting priorities for allocating the valuable credits. Federal law provides for two different types of LIHTCs. The larger of the two credits -- the 9 percent credit -- is allocated to states on a per-capita basis. Because the credit is large and the supply is limited, competition for these credits tends to be fierce under normal market conditions, namely during times in which financial markets are functioning well and investors have taxable income to offset with credits.
| The
second, less well-known, type of Low-Income Housing Tax Credit is the 4
percent credit. The 4 percent tax credit is worth only about half as
much as the 9 percent credit. (The 4 percent and 9 percent figures
refer to the approximate annual percentage of the eligible project costs that
investors may claim on federal tax returns for a 10-year period.)
Nevertheless, the equity raised through the 4 percent credit can be
substantial, and an important advantage of the 4 percent credit is that
it is a renewable resource that is not subject to the same annual
allocation caps that apply to the 9 percent credit. Any project that is financed through tax-exempt private-activity bonds, serves families with incomes below 60 percent of the area median income, and meets other eligibility criteria qualifies automatically for the 4 percent LIHTC. This means that states that succeed in generating additional projects that qualify for the 4 percent LIHTC can increase the amount of federal funding they receive each year for affordable homes. What problems does this policy solve? In general, both the 4 percent and the 9 percent LIHTC are designed to cover the gap between the costs of developing affordable rental homes and the amount of financing that may be raised based on the rents that low-income families can afford. Although the exact amounts vary substantially by project and market conditions, a good rule of thumb is that the 9 percent credit covers about half of a project's cost, while the 4 percent credit covers about one-quarter. By increasing their use of the 4 percent credit, states can overcome the limited availability of 9 percent credits. In addition, some developers rely on the 4 percent credit as an alternate financing tool, given the competitive nature of the 9 percent credit. In addition, some developers rely on the 4 percent credit as an alternate financing tool, given the competitive nature of the 9 percent credit. |
Solutions in Action |
 The Kunzelmann-Esser Loft Apartments in Milwaukee, Wisconsin provide 67 loft apartment/studios for artists in a converted building that was formerly the home of the Kunzelmann-Esser Furniture Company. The property was renovated by Gorman and Company in 2003 using a mix of the 4 percent Low-Income Housing Tax Credit, historic tax credits, federal HOME funds and financing from the Wisconsin Housing and Economic Development Authority. |
Because 4 percent tax credits generate less capital than 9 percent credits, they are often used for rehabilitation of older rental homes (whether or not they are subsidized) and the preservation of subsidized rental developments -- activities that tend to have lower development costs than new construction. Accordingly, areas where the affordable multifamily rental stock is aging may find 4 percent tax credits particularly useful.
Four percent tax credits can also be used for new construction, particularly if a state or locality is willing and able to commit matching funds to make the project work. By matching 4 percent credits with available federal funds, or with state and local matching funds, 4 percent credits can be used in almost any market under stable market conditions.
 Learn more about the 4 percent Low-Income Housing Tax Credit  Go back to learn about other policies that generate capital |
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
What is the role of the 4 percent Low-Income Housing Tax Credit?
The 4 percent low-income housing tax credit program is a critical but underutilized source of federal financing for affordable homes. The 4 percent credit is available to any housing development that is financed with tax-exempt private-activity bonds and offers rents affordable to families making less than 60 percent of area median income. While some additional subsidy is usually necessary to make a project work, the equity generated through 4 percent tax credits is a significant asset that contributes substantially to the costs of providing affordable rental homes. Policymakers interested in maximizing the availability of federal funding for affordable housing in their community may wish to consider strategies for expanding their use of this valuable tool when feasible under stable market conditions.
[1]
[2] National Council of State Housing Agencies - Housing Bonds
[3] National Council of State Housing Agencies - ARRA Housing Credit Assistance Programs
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
What is the role of the 4 percent Low-Income Housing Tax Credit?
The 4 percent low-income housing tax credit program is a critical but underutilized source of federal financing for affordable homes. The 4 percent credit is available to any housing development that is financed with tax-exempt private-activity bonds and offers rents affordable to families making less than 60 percent of area median income. While some additional subsidy is usually necessary to make a project work, the equity generated through 4 percent tax credits is a significant asset that contributes substantially to the costs of providing affordable rental homes. Policymakers interested in maximizing the availability of federal funding for affordable housing in their community may wish to consider strategies for expanding their use of this valuable tool when feasible under stable market conditions.
| Current issues and limitations of the 4 percent Low-Income Housing Tax Credit The economic recession which officially began in December of 2007 has had a direct negative impact on the normal functioning of the Low Income Housing Tax Credit market. During this recession, two of the biggest investors in LIHTCs, Fannie Mae and Freddie Mac went into conservatorship. In addition, large financial institutions, also major investors in the credits, saw unprecedented losses, thereby limiting their need for tax credits. The overall effect of these events was a drop in demand for LIHTCs leading to a drop in the price investors were willing to pay per dollar of tax credit. In March 2007, tax credits were selling for 95 cents per tax credit dollar [cite], however, during the economic downturn they sold for as little as 60 to 68 cents per tax credit dollar. Current prices fluctuate and are based on a variety of factors, but are still lower than prior to the downturn. Declining economic conditions also reduced investor interest in tax-exempt private-activity bonds, which in turn decreased the amount of funding available for affordable rental developments that would be eligible for the 4 percent Low-Income Housing Tax Credit. All of these events have seriously curtailed the proper functioning of a system that previously was the most effective tool for the creation of affordable rental housing in the country. The federal government has intervened in an attempt to restore normal functioning to the LIHTC market. Congress included several measures in the Housing and Economic Recovery Act of 2008 (HERA). These included increasing the dollar amount of tax credits that states can receive on per capita basis, as well as increasing the minimum overall amount of credits certain states receive (click here for further details on how tax credits are allocated to the states). In addition, the measures included an $11 billion increase in the tax-exempt Housing Bond authority for states, potentially enabling more tax-exempt financing for affordable multifamily developments. [2] More recently, the administration has proposed a program in which Treasury would purchase securities from Fannie Mae and Freddie Mac backed by new housing bonds issued by state housing agencies. This will allow states to generate revenue for using exercising its bond authority, which has been difficult during the recent recession due to the lack of demand from bond investors. Congress also included several measures in the American Recovery and Reinvestment Act of 2009 (ARRA). These included creation of the Tax Credit Assistance Program (TCAP) and the Tax Credit Exchange Program (TCEP), also known as the Section 1602 Exchange. TCAP provides $2.25 billion to State Housing Finance Agencies to help cover the gap between tax credit investor equity and the costs of stalled, shovel-ready projects. TCEP allows state HFAs to exchange unsold credits from 2008 and up to forty percent of unsold credits from 2009 for cash grants they can use to help fund stalled projects. [3] Although these measures authorized by HERA and ARRA appear to have been effective so far in aiding projects utilizing the 9 percent credit, they do not appear to be as effective in supporting projects eligible for the 4 percent credit. This is mainly because TCEP only applies to 9 percent credits, and although developers can technically use TCAP funds for projects using 4 percent credits, projects using 9 percent credits have consumed most of these funds [cite coalition documents]. In response to these barriers to using the 4 percent credit, several housing and tax credit industry organizations have recently made efforts to extend the use of TCEP to 4 percent credits along with other proposals designed to return proper functioning to the LIHTC market. |
| Click on the topic areas below to learn more about expanding use of the 4 percent low-income housing tax credit: How does the 4 percent Low-Income Housing Tax Credit work? How have states and localities used the 4 percent Low-Income Housing Tax Credit? Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits. |
[1]
[2] National Council of State Housing Agencies - Housing Bonds
[3] National Council of State Housing Agencies - ARRA Housing Credit Assistance Programs
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Does the 4 percent Low-Income Housing Tax Credit Work?
Although the 4 percent tax credit is worth only about half as much as the 9 percent credit, it can generate significant equity. For example, in one transaction involving the preservation and renovation of an older 94-unit federally insured complex whose owner had prepaid its mortgage, the equity from 4 percent tax credits contributed $3.1 million toward total project costs of $8.2 million. Operating income during renovation, deferred developer fees and the original development's replacement reserve contributed another $1 million, with the balance financed through tax-exempt bonds. Aside from the tax-exempt bonds, no state or locally controlled funds were needed to make this deal work. [1]
In other cases, state and locally controlled funds are needed to make 4 percent tax credit deals work. For example, in the rehabilitation of ParcView Apartments by Wesley Housing Development Corporation in Alexandria, Virginia, the city contributed $9 million (in the form of a deferred loan) toward project costs of $31.6 million. Other financing included $14.7 million in tax-exempt bonds, $6.2 million in 4 percent tax credit equity and deferred developer fees. [2]
Many states already make good use of the 4 percent tax credit to finance affordable rental homes. In Texas, for example, approximately 22 percent of the state's tax-exempt bond authority has been allocated to multifamily homes in recent years, financing the construction of nearly 100 new multifamily developments and the acquisition and rehabilitation of some 14 multifamily developments in the three-year period from 2004 through 2006. These developments included more than 24,000 homes and leveraged more than $70 million in 4 percent tax credits. [3]
[1] The Path to Preserving HUD Housing. KnowledgePlex presentation by Michael Bodaken, Jim Grow, and Vincent O'Donnell. July 18, 2006.
[2] Data provided by W. Matthew Perrenod, Chief Lending Officer, Housing Partnership Network.
[3] Data provided by Robbye Meyer, Director of Multifamily Finance, Texas Department of Housing and Community Affairs, in an e-mail to Jeffrey Lubell, Executive Director of the Center for Housing Policy, dated Nov. 26, 2006.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Does the 4 percent Low-Income Housing Tax Credit Work?
Photo credit: Robert Schoen, courtesy of the Massachusetts Housing Investment Corporation | There are two kinds of Low-Income Housing Tax Credits (LIHTC) -- the 4 percent credit and the 9 percent credit. This discussion focuses primarily on the 4 percent LIHTC, which is an underutilized source of federal funding for affordable rental homes. Click here for more detail on how the Low-Income Housing Tax Credit program works. A rental development automatically qualifies for the 4 percent LIHTC if it receives at least 50 percent of its financing through tax-exempt private-activity bonds (often called multifamily bonds) and meets either of the following income criteria: |
- 40 percent of the units are rented at an affordable rate to families making 60 percent or less of area median income, or
- 20 percent of the units are rented at an affordable rate to families making 50 percent or less of area median income.
Although the 4 percent tax credit is worth only about half as much as the 9 percent credit, it can generate significant equity. For example, in one transaction involving the preservation and renovation of an older 94-unit federally insured complex whose owner had prepaid its mortgage, the equity from 4 percent tax credits contributed $3.1 million toward total project costs of $8.2 million. Operating income during renovation, deferred developer fees and the original development's replacement reserve contributed another $1 million, with the balance financed through tax-exempt bonds. Aside from the tax-exempt bonds, no state or locally controlled funds were needed to make this deal work. [1]
In other cases, state and locally controlled funds are needed to make 4 percent tax credit deals work. For example, in the rehabilitation of ParcView Apartments by Wesley Housing Development Corporation in Alexandria, Virginia, the city contributed $9 million (in the form of a deferred loan) toward project costs of $31.6 million. Other financing included $14.7 million in tax-exempt bonds, $6.2 million in 4 percent tax credit equity and deferred developer fees. [2]
Many states already make good use of the 4 percent tax credit to finance affordable rental homes. In Texas, for example, approximately 22 percent of the state's tax-exempt bond authority has been allocated to multifamily homes in recent years, financing the construction of nearly 100 new multifamily developments and the acquisition and rehabilitation of some 14 multifamily developments in the three-year period from 2004 through 2006. These developments included more than 24,000 homes and leveraged more than $70 million in 4 percent tax credits. [3]
| You are currently reading: How does the 4 percent Low-Income Housing Tax Credit work? Other pages in this section: How have states and localities used the 4 percent Low-Income Housing Tax Credit? Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits. |
[1] The Path to Preserving HUD Housing. KnowledgePlex presentation by Michael Bodaken, Jim Grow, and Vincent O'Donnell. July 18, 2006.
[2] Data provided by W. Matthew Perrenod, Chief Lending Officer, Housing Partnership Network.
[3] Data provided by Robbye Meyer, Director of Multifamily Finance, Texas Department of Housing and Community Affairs, in an e-mail to Jeffrey Lubell, Executive Director of the Center for Housing Policy, dated Nov. 26, 2006.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Does the Low-Income Housing Tax Credit Program Work?
The Low-Income Housing Tax Credit program, which includes both 4 percent and 9 percent tax credit components, was established in the Tax Reform Act of 1986 to promote private development of affordable rental housing. The credit has been the leading source of financing for affordable rental housing, accounting for half of all multifamily housing starts each year. On average, 50 percent of the total financing for 9 percent LIHTC projects comes from equity derived from the credit.
While 4 percent tax credits are essentially unlimited, each year the federal government allocates a set amount of 9 percent LIHTC authority to each state on a per-capita basis. In 2009, states received $2.30 in tax credits per person (with an overall state minimum of $2.7 million). This includes a 20-cent per person increase as part of HERA in 2008 to support the declining tax credit market . The state housing finance agencies distribute the credits among projects that best meet the housing goals laid out in their Qualified Allocation Plans (QAPs). QAPs must give priority to projects that serve the lowest-income households and remain affordable for the longest period of time.
Determination of the 4 percent and 9 percent values
The 9 percent and 4 percent low-income housing tax credits are also known respectively as the 70 percent and 30 percent "net present value" credits. This terminology reflects the fact that the 4 percent credit, for instance, is designed to yield a total amount over the 10-year credit period that is worth 30 percent of the present eligible development costs, adjusted for expected inflation. The 4 and 9 percent rates refer to the approximate value that can be claimed each year. The actual rate is recalculated monthly by the IRS based on Treasury Department interest rates. For any given LIHTC project, the actual tax credit rate is set at the rate that prevails either when the developer signs the contract with the Housing Finance Agency or when the finished project is ready for occupancy. That rate represents the percentage of qualified project costs investors can claim against their tax liability each year for 10 years.
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"Qualified basis" for LIHTC projects
To calculate the qualified costs -- or "qualified basis" -- eligible for the tax credit, non-depreciable costs such as land and grants are subtracted from the total project cost. If a project is located in a neighborhood identified by HUD as a difficult to develop area where land and construction costs are high relative to median income or a qualified census tract where at least 50 percent of residents have incomes below 60 percent of the area median and the poverty rate is higher than 25 percent, this calculation is adjusted to allow up to 30 percent more available credits. The result is then multiplied by the smaller of either the percent of total units set aside for low-income residents or the percent of total square footage set aside for low-income units. The qualified basis is multiplied by the prevailing federal tax credit rate to determine the maximum allowable tax credit allocation.
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The corporate structure of tax credit partnerships
When tax credits are sold, the developer and the investor typically form a limited partnership. The developer is the general partner, holding a small percentage of ownership (usually one percent or less) but controlling the construction and operation of the project. The investor is a limited partner, owning a large share in the project but uninvolved in day-to-day operations. Investors generally do not expect the projects to generate income, but rather consider their reduced tax liability to be the return on their investment.
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The role of tax credit syndicators
Most investors in LIHTC projects are corporations rather than individuals because the amount of credit individuals can use is capped. In many cases, the developer sells the credits to a syndicator to serve as a broker. Syndicators pool several projects into one LIHTC equity fund and market the tax credits to investors, who buy a share in the fund. This structure diffuses risk across multiple projects. As the prevalence of syndicators has risen over the LIHTC's lifetime, the risk associated with buying tax credits has declined, increasing their popularity with investors. Nevertheless, the value of tax credits fluctuates. In March 2007, tax credits were selling for 95 cents per tax credit dollar [1], but during the downturn they sold for 60 to 68 cents on the dollar due to a substantial drop in tax credit investment.
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Click here to continue learning about ways to expand the use of 4 percent tax credits.
[1] The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Does the Low-Income Housing Tax Credit Program Work?
The Low-Income Housing Tax Credit program, which includes both 4 percent and 9 percent tax credit components, was established in the Tax Reform Act of 1986 to promote private development of affordable rental housing. The credit has been the leading source of financing for affordable rental housing, accounting for half of all multifamily housing starts each year. On average, 50 percent of the total financing for 9 percent LIHTC projects comes from equity derived from the credit.
While 4 percent tax credits are essentially unlimited, each year the federal government allocates a set amount of 9 percent LIHTC authority to each state on a per-capita basis. In 2009, states received $2.30 in tax credits per person (with an overall state minimum of $2.7 million). This includes a 20-cent per person increase as part of HERA in 2008 to support the declining tax credit market . The state housing finance agencies distribute the credits among projects that best meet the housing goals laid out in their Qualified Allocation Plans (QAPs). QAPs must give priority to projects that serve the lowest-income households and remain affordable for the longest period of time.
| Click on the links below for more details on the nuts and bolts of the LIHTC program: Determination of the 4 percent and 9 percent values "Qualified basis" for LIHTC projects The corporate structure of tax credit partnerships The role of tax credit syndicators |
Determination of the 4 percent and 9 percent values
The 9 percent and 4 percent low-income housing tax credits are also known respectively as the 70 percent and 30 percent "net present value" credits. This terminology reflects the fact that the 4 percent credit, for instance, is designed to yield a total amount over the 10-year credit period that is worth 30 percent of the present eligible development costs, adjusted for expected inflation. The 4 and 9 percent rates refer to the approximate value that can be claimed each year. The actual rate is recalculated monthly by the IRS based on Treasury Department interest rates. For any given LIHTC project, the actual tax credit rate is set at the rate that prevails either when the developer signs the contract with the Housing Finance Agency or when the finished project is ready for occupancy. That rate represents the percentage of qualified project costs investors can claim against their tax liability each year for 10 years.
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"Qualified basis" for LIHTC projects
To calculate the qualified costs -- or "qualified basis" -- eligible for the tax credit, non-depreciable costs such as land and grants are subtracted from the total project cost. If a project is located in a neighborhood identified by HUD as a difficult to develop area where land and construction costs are high relative to median income or a qualified census tract where at least 50 percent of residents have incomes below 60 percent of the area median and the poverty rate is higher than 25 percent, this calculation is adjusted to allow up to 30 percent more available credits. The result is then multiplied by the smaller of either the percent of total units set aside for low-income residents or the percent of total square footage set aside for low-income units. The qualified basis is multiplied by the prevailing federal tax credit rate to determine the maximum allowable tax credit allocation.
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The corporate structure of tax credit partnerships
When tax credits are sold, the developer and the investor typically form a limited partnership. The developer is the general partner, holding a small percentage of ownership (usually one percent or less) but controlling the construction and operation of the project. The investor is a limited partner, owning a large share in the project but uninvolved in day-to-day operations. Investors generally do not expect the projects to generate income, but rather consider their reduced tax liability to be the return on their investment.
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The role of tax credit syndicators
Most investors in LIHTC projects are corporations rather than individuals because the amount of credit individuals can use is capped. In many cases, the developer sells the credits to a syndicator to serve as a broker. Syndicators pool several projects into one LIHTC equity fund and market the tax credits to investors, who buy a share in the fund. This structure diffuses risk across multiple projects. As the prevalence of syndicators has risen over the LIHTC's lifetime, the risk associated with buying tax credits has declined, increasing their popularity with investors. Nevertheless, the value of tax credits fluctuates. In March 2007, tax credits were selling for 95 cents per tax credit dollar [1], but during the downturn they sold for 60 to 68 cents on the dollar due to a substantial drop in tax credit investment.
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Click here to continue learning about ways to expand the use of 4 percent tax credits.
[1] The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How have States and Localities Used the 4 percent Low-Income Housing Tax Credit?
The 4 percent tax credit has been used for new construction of rental homes or for the rehabilitation of existing rental development. While state and local funds are often needed to close the gap between project costs and anticipated revenue, lower amounts of matching funds are likely to be needed for projects that involve a moderate level of rehabilitation or preservation of affordable rental housing, where costs tend to be lower than for new construction.
Click here to view more examples of how other states and localities are using 4 percent tax credits.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How have States and Localities Used the 4 percent Low-Income Housing Tax Credit?
The 4 percent tax credit has been used for new construction of rental homes or for the rehabilitation of existing rental development. While state and local funds are often needed to close the gap between project costs and anticipated revenue, lower amounts of matching funds are likely to be needed for projects that involve a moderate level of rehabilitation or preservation of affordable rental housing, where costs tend to be lower than for new construction.
Photo credit: Philadelphia Housing Authority | As existing LIHTC properties have aged, the 4 percent tax credit has also may be a good source of funding for their recapitalization and modernization. In addition, states and localities have used matching funds to make 4 percent tax credits work well in other contexts, including new construction. Other federal funding streams have been combined with 4 percent tax credits. In particular, 4 percent tax credit deals seem have worked well as part of the preservation of project-based Section 8 properties through HUD's Mark-to-Market program. Other contexts in which 4 percent tax credits have worked well with minimal commitment of state or local dollars include the revitalization of distressed public housing developments through HOPE VI or capital fund financing, and new Section 202 developments for the elderly (where the 20-year Housing Assistance Payment helps support debt). |
| Solutions in Action |
| The 80/20 Program and New York City's 50/30/20 Mixed-Income Model The 80/20 program option incorporates 4 percent low-income housing tax credits in project financing, and is used primarily in high cost markets such as New York City where the development of market-rate rental housing is more feasible. In this model, tax-exempt bonds finance 100 percent of the project's qualifying costs, with 80 percent of the units renting at market rate and 20 percent designated as tax credit units for tenants with incomes of 50 percent or less of the area median. New York City builds on this 80/20 platform by using local funds to make 30 percent of the market-rate units affordable to middle-income families (earning between 81 and 175 percent of area median income). This "50/30/20" split results in developments where 50 percent of units rent at market rates, 30 percent rent to middle-income families and 20 percent of units are rent-restricted according to Low-Income Housing Tax Credit guidelines. This model facilitates mixed-income housing; however, a potential downside is that a large amount of private activity bond cap is consumed in return for relatively few affordable homes. |
Click here to view more examples of how other states and localities are using 4 percent tax credits.
| You are currently reading: How have states and localities used the 4 percent Low-Income Housing Tax Credit? Other pages in this section: How does the 4 percent Low-Income Housing Tax Credit work? Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits. |
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
More Examples
Chicago, Illinois
At 51st and King Street in Chicago, a 96-unit affordable housing complex subsidized partially by Section 8 funds was in danger of losing its affordable status due to rising home prices in the area. The National Housing Trust and the Chicago Community Development Corporation partnered in 2002 to acquire and preserve the property. They developed a complex financing plan that included 4 percent LIHTCs, a loan from the Illinois Housing Development Authority, and increased Section 8 funding. With private activity bonds in the amount of $4.25 million the complex was able to access $2.5 million in equity through the 4 percent LIHTC -- a significant contribution to the total acquisition and renovation cost of $8.8 million. [1]
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Los Angeles, California
Legacy Partners is in the process of erecting a 375-unit, mixed-income, mixed-use development in Hollywood which is expected to cost more than $260 million. The development will use an "80-20" structure in which 20 percent of units are affordable to households earning less than 50 percent of area median income and the remaining 80 percent rent at market rates. The Los Angeles Community Redevelopment Agency issued tax-exempt bonds to finance a low-interest mortgage. The tax-exempt bonds allow the development to leverage additional equity, the value of which is not currently known, through the 4 percent LIHTC. This development will also use cross-subsidies in order to make it financially possible to offer below-market rents on 20 percent of its units. [2]
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New York, New York
In July 2003 the New York City Housing Development Corporation (HDC) introduced its Low-Income Affordable Marketplace Program (LAMP), which provides financing for the creation of apartments affordable to residents earning less than 60 percent of area median income. Through this program, HDC issues tax-exempt bonds and couples the permanent mortgage made through the bond proceeds with a one-percent second mortgage loan made directly through its corporate reserves. The tax-exempt bond financing qualifies the project for as-of-right 4 percent LIHTC, which is an essential component of the project's financing. As of 2007, under the LAMP program, HDC has financed the new construction of more than 10,000 low-income affordable housing units, 894 of which have been reserved for formerly homeless tenants. HDC has committed to financing more than 25,000 units. [3]
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Portland, Oregon
In 2004, the $45.8 million Columbia Knoll development was built on the former site of the historic Shriner's Hospital for Children. Because the site was listed in the National Register of Historic Places, the pre-development process took longer than usual. The preservation project lasted for three-and-a-half years. Many building components of the Shriner's Hospital, including doors, windows, and cabinets, were preserved and incorporated into the new development.
Columbia Knoll includes a 208-unit building for seniors and 118 units for families spread across eight buildings. Apartments are restricted to families earning 30 to 60 percent of area median income. Units are required to remain affordable for a minimum of 60 years. The construction was funded by a $3 million loan from the Portland Development Commission, 4 percent LIHTCs, state energy grants, and a number of other sources. Bond financing was responsible for 53 percent of the development's funding, while 4 percent LIHTCs contributed 23 percent. [4]
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Washington, D.C.
In 1991, residents of Meridian Manor successfully sued the building's owner over housing code violations. When the owner was unable to pay the judgment, the residents assumed ownership of the building and formed a cooperative. Soon after, the city condemned the structure, but the cooperative lacked the resources to make the necessary renovations. The very low incomes of cooperative members prevented self-financing, while a shortage of subsidies and the competitiveness of the 9 percent LIHTC allocation process limited the options available for financing using public funds.
The District of Columbia Housing Finance Agency helped the residents finance the renovations by issuing tax-exempt bonds so that Meridian Manor could qualify for the 4 percent LIHTC, which provided $1.15 million in equity. The D.C. Housing Authority also provided Section 8 funds to bring the rental income up to a level that would support repayment of the bonds. In order to qualify for these financing sources, Meridian Manor became a "rental-cooperative" -- a combination of cooperative and rental housing. After 15 years, members of the cooperative would accumulate the financial resources necessary to own the property outright. Gap financing was provided by the DC Department of Housing and Community Development and the sale of historic tax credits. [5]
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Click here to continue reading about how states and localities are using the 4 percent Low-Income Housing Tax Credit
[1] Creative Capital: Financing the Preservation of Affordable Housing. [PDF] March/April 2007. By Scott Kline. Multifamily Trends. Washington, DC: Urban Land Institute, pp.51-2.
[2] Mixed-Income Goes Hollywood. April 2007. By Bendix Anderson. Affordable Housing Finance.
[3] Low-Income Affordable Marketplace Program - LAMP (Tax-Exempt Bonds). [PDF] 2007. Program Term Sheet. Prepared by the Development Group, New York City Housing Development Corporation.
[4] Portland's Columbia Knoll Housing Project Rises from Historic Roots. July 23, 2004. By Jessica Swanson. Daily Journal of Commerce (Portland OR).
[5] Creative Capital: Financing the Preservation of Affordable Housing. [PDF] March/April 2007. By Scott Kline. Multifamily Trends. Washington, DC: Urban Land Institute, pp.51-2.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
More Examples
| Many communities have successfully used 4 percent Low-Income Housing Tax Credits to create or preserve affordable rental homes. To navigate through the examples of developments and programs that benefit from 4 percent tax credits click on the links in the box to the right. Or just scroll and read below. | Jump to examples in... |
| Chicago, IL Los Angeles, CA New York, NY Portland, OR Washington, DC |
Chicago, Illinois
At 51st and King Street in Chicago, a 96-unit affordable housing complex subsidized partially by Section 8 funds was in danger of losing its affordable status due to rising home prices in the area. The National Housing Trust and the Chicago Community Development Corporation partnered in 2002 to acquire and preserve the property. They developed a complex financing plan that included 4 percent LIHTCs, a loan from the Illinois Housing Development Authority, and increased Section 8 funding. With private activity bonds in the amount of $4.25 million the complex was able to access $2.5 million in equity through the 4 percent LIHTC -- a significant contribution to the total acquisition and renovation cost of $8.8 million. [1]
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Los Angeles, California
Legacy Partners is in the process of erecting a 375-unit, mixed-income, mixed-use development in Hollywood which is expected to cost more than $260 million. The development will use an "80-20" structure in which 20 percent of units are affordable to households earning less than 50 percent of area median income and the remaining 80 percent rent at market rates. The Los Angeles Community Redevelopment Agency issued tax-exempt bonds to finance a low-interest mortgage. The tax-exempt bonds allow the development to leverage additional equity, the value of which is not currently known, through the 4 percent LIHTC. This development will also use cross-subsidies in order to make it financially possible to offer below-market rents on 20 percent of its units. [2]
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New York, New York
In July 2003 the New York City Housing Development Corporation (HDC) introduced its Low-Income Affordable Marketplace Program (LAMP), which provides financing for the creation of apartments affordable to residents earning less than 60 percent of area median income. Through this program, HDC issues tax-exempt bonds and couples the permanent mortgage made through the bond proceeds with a one-percent second mortgage loan made directly through its corporate reserves. The tax-exempt bond financing qualifies the project for as-of-right 4 percent LIHTC, which is an essential component of the project's financing. As of 2007, under the LAMP program, HDC has financed the new construction of more than 10,000 low-income affordable housing units, 894 of which have been reserved for formerly homeless tenants. HDC has committed to financing more than 25,000 units. [3]
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Portland, Oregon
In 2004, the $45.8 million Columbia Knoll development was built on the former site of the historic Shriner's Hospital for Children. Because the site was listed in the National Register of Historic Places, the pre-development process took longer than usual. The preservation project lasted for three-and-a-half years. Many building components of the Shriner's Hospital, including doors, windows, and cabinets, were preserved and incorporated into the new development.
Columbia Knoll includes a 208-unit building for seniors and 118 units for families spread across eight buildings. Apartments are restricted to families earning 30 to 60 percent of area median income. Units are required to remain affordable for a minimum of 60 years. The construction was funded by a $3 million loan from the Portland Development Commission, 4 percent LIHTCs, state energy grants, and a number of other sources. Bond financing was responsible for 53 percent of the development's funding, while 4 percent LIHTCs contributed 23 percent. [4]
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Washington, D.C.
In 1991, residents of Meridian Manor successfully sued the building's owner over housing code violations. When the owner was unable to pay the judgment, the residents assumed ownership of the building and formed a cooperative. Soon after, the city condemned the structure, but the cooperative lacked the resources to make the necessary renovations. The very low incomes of cooperative members prevented self-financing, while a shortage of subsidies and the competitiveness of the 9 percent LIHTC allocation process limited the options available for financing using public funds.
The District of Columbia Housing Finance Agency helped the residents finance the renovations by issuing tax-exempt bonds so that Meridian Manor could qualify for the 4 percent LIHTC, which provided $1.15 million in equity. The D.C. Housing Authority also provided Section 8 funds to bring the rental income up to a level that would support repayment of the bonds. In order to qualify for these financing sources, Meridian Manor became a "rental-cooperative" -- a combination of cooperative and rental housing. After 15 years, members of the cooperative would accumulate the financial resources necessary to own the property outright. Gap financing was provided by the DC Department of Housing and Community Development and the sale of historic tax credits. [5]
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Click here to continue reading about how states and localities are using the 4 percent Low-Income Housing Tax Credit
[1] Creative Capital: Financing the Preservation of Affordable Housing. [PDF] March/April 2007. By Scott Kline. Multifamily Trends. Washington, DC: Urban Land Institute, pp.51-2.
[2] Mixed-Income Goes Hollywood. April 2007. By Bendix Anderson. Affordable Housing Finance.
[3] Low-Income Affordable Marketplace Program - LAMP (Tax-Exempt Bonds). [PDF] 2007. Program Term Sheet. Prepared by the Development Group, New York City Housing Development Corporation.
[4] Portland's Columbia Knoll Housing Project Rises from Historic Roots. July 23, 2004. By Jessica Swanson. Daily Journal of Commerce (Portland OR).
[5] Creative Capital: Financing the Preservation of Affordable Housing. [PDF] March/April 2007. By Scott Kline. Multifamily Trends. Washington, DC: Urban Land Institute, pp.51-2.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
Why Should States and Localities Expand Their Use of the 4 percent Low-Income Housing Tax Credit?
Tax-exempt
private activity bonds used for rental homes are charged against each
state's total private-activity bond cap, so in states using all or
nearly all of their bond cap, tax-exempt financing for rental homes may
have to compete with other uses, including mortgage revenue bonds
(which states use to offer mortgages at below-market
rates), bonds issued for certain types of eligible industrial
facilities, bonds used to finance student loans and certain other uses.
It is important to note that the use of 4 percent credits is in part limited by the availability of tax-exempt private-activity bond financing, which depends on the investor demand for these bonds. In a weak financial market, bond investor demand is often low, limiting the feasibility of bond-financed projects and therefore the potential use of 4 percent credits.
Still, it is important for states to understand the inherent advantages of using tax-exempt bonds for rental homes. The use of tax-exempt bonds for rental homes affordable to families with incomes below 60 percent of area median brings automatic qualification for 4 percent tax credits, which are many times more valuable than the tax-exempt authority alone. One recent study found that the automatic qualification for 4 percent tax credits makes private-activity bond cap 3.5 times more valuable when used for rental housing than for other purposes. Click here for more information on the value of using tax-exempt bonds for affordable rental homes.
[1] The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
[2] State HFA Fact Book: 2005 NCSHA Annual Survey Results. 2006. Washington, DC: National Council of State Housing Agencies.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
Why Should States and Localities Expand Their Use of the 4 percent Low-Income Housing Tax Credit?
Photo credit: Donald Stasenka, courtesy of BRIDGE Housing |
A
major advantage of the 4 percent tax credit is that 4 percent credits
are not subject to the same caps that apply to the 9 percent credits.
Because the federal government limits the supply of 9 percent tax
credits each state can allocate each year, not all qualifying projects
receive assistance during strong housing markets when demand for tax credits is often high. By contrast, there is no formal limitation on the number of 4 percent tax credits that states may allocate. So to the extent that communities can increase their use of the 4 percent LIHTC, they can increase the amount of federal funds for affordable housing they bring into the community. The one condition is that 4 percent tax credits can only be used for projects financed with federal funds, which generally come from tax-exempt private-activity bonds. |
It is important to note that the use of 4 percent credits is in part limited by the availability of tax-exempt private-activity bond financing, which depends on the investor demand for these bonds. In a weak financial market, bond investor demand is often low, limiting the feasibility of bond-financed projects and therefore the potential use of 4 percent credits.
Still, it is important for states to understand the inherent advantages of using tax-exempt bonds for rental homes. The use of tax-exempt bonds for rental homes affordable to families with incomes below 60 percent of area median brings automatic qualification for 4 percent tax credits, which are many times more valuable than the tax-exempt authority alone. One recent study found that the automatic qualification for 4 percent tax credits makes private-activity bond cap 3.5 times more valuable when used for rental housing than for other purposes. Click here for more information on the value of using tax-exempt bonds for affordable rental homes.
| You are currently reading: Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? Other pages in this section: How does the 4 percent Low-Income Housing Tax Credit work? How have states and localities used the 4 percent Low-Income Housing Tax Credit? How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits. |
[1] The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
[2] State HFA Fact Book: 2005 NCSHA Annual Survey Results. 2006. Washington, DC: National Council of State Housing Agencies.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Much More Valuable is Tax-Exempt Bond Cap When Used to Leverage the LIHTC?
Rental housing is only one of several competing uses of private activity tax-exempt bonds. Other uses include financing of infrastructure, manufacturing, redevelopment, student loans, and home mortgage loans. While these other uses are all important activities that merit public support, it is important for states to understand that a single dollar of private activity bond cap is much more valuable when used for rental housing for families with incomes below 60 percent of the area median than for any other use, because this application automatically leverages 4 percent Low-Income Housing Tax Credits.
Click here to continue learning about why states and localities should expand use of the 4 percent Low-Income Housing Tax Credit, or click here to read more about ways to overcome obstacles to use of the 4 percent tax credit.
[1] The Best Use of Volume Cap is Affordable Rental Housing. [PDF] 2006. By David Smith and Ethan Handelman. Boston, MA: Recap Advisors.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How Much More Valuable is Tax-Exempt Bond Cap When Used to Leverage the LIHTC?
Rental housing is only one of several competing uses of private activity tax-exempt bonds. Other uses include financing of infrastructure, manufacturing, redevelopment, student loans, and home mortgage loans. While these other uses are all important activities that merit public support, it is important for states to understand that a single dollar of private activity bond cap is much more valuable when used for rental housing for families with incomes below 60 percent of the area median than for any other use, because this application automatically leverages 4 percent Low-Income Housing Tax Credits.
| Without
4 percent LIHTCs, the only financial benefit from tax-exempt bond
authority is the marginal reduction in the costs of funds relative to
taxable financing (net of the increased costs of tax-exempt financing).
In the context of home purchases -- an alternative use of
private-activity tax-exempt bonds -- Chris Tawa of MMA Financial
estimates this benefit at about 75 basis points, an interest rate
reduction of less than one point. When the interest rate reduction inherent in tax-exempt financing is combined with the equity derived from 4 percent tax credits, however, the value of private activity bond authority can increase significantly during strong markets when demand for tax credits is often high. A 2006 analysis by David Smith and Ethan Handelman of Recap Advisors found that private-activity bond cap was worth 3.5 times more when used for rental homes than when used for other activities. The interest-rate savings from tax-exempt bonds was worth approximately 17 cents per dollar of bond cap, as compared with 43 cents per dollar of bond cap from 4 percent tax credit equity. Combined, the total value of $1 in bond cap used for qualifying rental homes was 60 cents, as compared with 17 cents when used for other activities. [1] The key conclusion here is that states interested in expanding the availability of affordable homes would be well advised to make available as much bond cap as they can possibly use for rental homes. Ideally, this would be done through the use of excess bond cap, but if states have already reached their cap they may wish to consider shifting bond cap from other uses in order to draw down extra 4 percent tax credits. In some cases, this shift could be accomplished by finding other types of tax-exempt bonds to apply to these other uses, such as 501(c)(3) bonds. In other cases, it may be economically advantageous to use taxable financing for those other purposes, such as home mortgages. With a modest contribution of state-controlled funds, states can buy down the interest rate on standard home mortgages, duplicating the interest savings of mortgage revenue bonds. While this transaction would have a cost, relative to using tax-exempt bonds for mortgages, the cost would be much less than the benefits gained by preserving bond cap for rental homes that leverage 4 percent tax credits. |
Solutions in Action |
Vizcaya Apartments, Santa Maria CA -- photo courtesy of MMA Financial Freddie Mac's Moderate Rehabilitation 4% LIHTC Tax-Exempt Bond execution helps communities leverage 4 percent tax credits to preserve the affordability of homes undergoing rehabilitation. Freddie Mac, in partnership with MMA Financial, recently closed a credit enhancement commitment for $22.2 million in bond financing to enable the acquisition and rehabilitation of the Vizcaya Apartments in Santa Maria, California. This allowed the developer to leverage approximately $11.5 million in tax credit equity from MMA Financial, leading to the preservation of 236 affordable rental homes. Credit enhancements from Freddie Mac have also helped other communities, like Staten Island, New York, increase affordable homes using a combination of bond financing and the 4 percent LIHTC. |
Click here to continue learning about why states and localities should expand use of the 4 percent Low-Income Housing Tax Credit, or click here to read more about ways to overcome obstacles to use of the 4 percent tax credit.
[1] The Best Use of Volume Cap is Affordable Rental Housing. [PDF] 2006. By David Smith and Ethan Handelman. Boston, MA: Recap Advisors.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How can Communities Overcome Obstacles to the Expanded Use of 4 percent Low-Income Housing Tax Credits?
Four percent Low-Income Housing Tax Credits are a valuable, and often underutilized, source of financing for the development of affordable homes. Although the program has many unique advantages, there are also several factors that can present obstacles to realizing the full potential of 4 percent tax credits.
Additional funding needed to make 4 percent Low-Income Housing Tax Credit deals work
One commonly cited obstacle to expanding the use of 4 percent Low-Income Housing Tax Credits is that tax-exempt bond financing and the equity from tax credits are insufficient to fund a development without additional public contributions. This is generally true, although in some cases, rental housing preservation projects requiring only moderate rehabilitation can be financed through 4 percent credits alone.
There are a number of creative ways to address this obstacle. For example, states and localities can reduce a development's financing costs by donating publicly-owned land, by using money from a housing trust fund to offer a grant or loan to the project, or by purchasing units that have been produced through an inclusionary zoning program and thus are available at below-market prices. Federal funds also can be used to contribute to project costs.
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Competition for private activity bond cap
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Expense and complication of tax-exempt bond issues
Another factor limiting the use of 4 percent credits is that tax-exempt bond issues are complicated and expensive, making them impractical for small-scale projects. One way housing finance agencies can address this problem is by pooling bond issues for several small projects into a single, larger bond issue. This strategy is particularly important in low-population areas with little demand for large-scale rental housing development.
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Too few applications for 4 percent tax credits
The lack of applications from developers for 4 percent tax credits also prevents jurisdictions from expanding their use of the credits. States and localities can encourage applications for 4 percent tax credits by making it clear that they are open to applications for multifamily bond issuances focused on particular priorities. According to the National Housing Trust, a majority of states set aside a portion of their private activity bond cap for rental housing preservation, thereby facilitating the drawdown of 4 percent low-income housing tax credits.
In some states, such as Alabama and Delaware, certain types of housing preservation activities automatically qualify for private activity bonds and 4 percent credits, eliminating the need for a competitive application process. [1] States may also wish to consider developing a process for steering less-expensive projects originally proposed for 9 percent tax credits to 4 percent tax credits, freeing up 9 percent tax credits for projects that really need the extra equity.
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[1] State and Local Housing Preservation Initiatives. [PDF] 2007. Washington, DC: National Housing Trust.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
How can Communities Overcome Obstacles to the Expanded Use of 4 percent Low-Income Housing Tax Credits?
Four percent Low-Income Housing Tax Credits are a valuable, and often underutilized, source of financing for the development of affordable homes. Although the program has many unique advantages, there are also several factors that can present obstacles to realizing the full potential of 4 percent tax credits.
Photo credit: Deborah Hicks, courtesy of Related Companies of California | Click on the links below to learn about obstacles to expanding the use of 4 percent credits, and ways they can be overcome: Additional funding needed to make 4 percent Low-Income Housing Tax Credit deals work Competition for private activity bond cap Expense and complication of tax-exempt bond issues Too few applications for 4 percent tax credits |
| You are currently reading: How can communities overcome obstacles to the expanded use of 4 percent Low-Income Housing Tax Credits? Other pages in this section: How does the 4 percent Low-Income Housing Tax Credit work? How are states and localities using the 4 percent Low-Income Housing Tax Credit? Why should states and localities expand their use of 4 percent Low-Income Housing Tax Credits? Click here to view other resources on 4 percent Low-Income Housing Tax Credits. |
Additional funding needed to make 4 percent Low-Income Housing Tax Credit deals work
One commonly cited obstacle to expanding the use of 4 percent Low-Income Housing Tax Credits is that tax-exempt bond financing and the equity from tax credits are insufficient to fund a development without additional public contributions. This is generally true, although in some cases, rental housing preservation projects requiring only moderate rehabilitation can be financed through 4 percent credits alone.
There are a number of creative ways to address this obstacle. For example, states and localities can reduce a development's financing costs by donating publicly-owned land, by using money from a housing trust fund to offer a grant or loan to the project, or by purchasing units that have been produced through an inclusionary zoning program and thus are available at below-market prices. Federal funds also can be used to contribute to project costs.
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Competition for private activity bond cap
| Another
obstacle to expanding use of the 4 percent LIHTC is that accessing the
credits depends on the availability of bond cap under the state's
allocation of private-activity bonds. While many states do not fully
utilize their bond cap, some do reach the maximum. Even when
competition for tax-exempt bonds is intense, it is worthwhile to
consider allocating more bond cap to affordable rental housing because
the automatic qualification for 4 percent tax credits vastly increases
the value of the tax-exempt bond authority. According to one
calculation, a dollar of bond cap is worth 3.5 times as much
when used for rental housing than when used for other purposes because
of the high value of the 4 percent LIHTC. The Housing and Economic Recovery Act of 2008 provided an additional $11 billion allocation of private-activity bonds to the states. Although the use of these bonds for financing affordable rental housing is limited by the demand of bond investors, this new allocation can provide increased capacity for financing such housing and using the 4 percent credit under stable economic conditions. Click here for a discussion of the value of bond cap used for qualifying rental housing as compared with other uses. | Vizcaya Apartments, Santa Maria CA -- photo courtesy of MMA Financial |
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Expense and complication of tax-exempt bond issues
Another factor limiting the use of 4 percent credits is that tax-exempt bond issues are complicated and expensive, making them impractical for small-scale projects. One way housing finance agencies can address this problem is by pooling bond issues for several small projects into a single, larger bond issue. This strategy is particularly important in low-population areas with little demand for large-scale rental housing development.
Back to top
Too few applications for 4 percent tax credits
The lack of applications from developers for 4 percent tax credits also prevents jurisdictions from expanding their use of the credits. States and localities can encourage applications for 4 percent tax credits by making it clear that they are open to applications for multifamily bond issuances focused on particular priorities. According to the National Housing Trust, a majority of states set aside a portion of their private activity bond cap for rental housing preservation, thereby facilitating the drawdown of 4 percent low-income housing tax credits.
In some states, such as Alabama and Delaware, certain types of housing preservation activities automatically qualify for private activity bonds and 4 percent credits, eliminating the need for a competitive application process. [1] States may also wish to consider developing a process for steering less-expensive projects originally proposed for 9 percent tax credits to 4 percent tax credits, freeing up 9 percent tax credits for projects that really need the extra equity.
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[1] State and Local Housing Preservation Initiatives. [PDF] 2007. Washington, DC: National Housing Trust.
Goal: Increase the Availability of Affordable Homes
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
Key Resources
The following is a list of key resources on topics related to the Low-Income Housing Tax Credit Program. If you're aware of other resources that should be added, please contact us.
How Does the Low-Income Housing Tax Credit Program Work? [go to policy page]
Websites
Danter Company, a national real estate consulting firm, maintains an extensive website on the Low Income Housing Tax Credit program, including basic information about the tax credit program, allocations by population, and links to additional resources.
Novogradac & Company maintains an Affordable Housing Resource Center with state-by-state information on allocating information, tax credit caps and program deadlines.
Articles & Reports
Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks. [PDF] 2008. Community Developments. Comptroller of the Currency Administrator of National Banks, U.S. Department of the Treasury.
This report provides an in-depth overview of both 4 percent and 9 percent Low-Income Housing Tax Credits, with a focus on how banks can benefit from investing in LIHTC projects. Topics covered include the legal structure of investments, the state allocation process, risks associated with investing, barriers to expanding the use of tax credits, and case studies of different types of tax credit deals.
Tax Credits: Opportunities to Improve the Oversight of the Low-Income Housing Program. [PDF] 1997. By James R. White. Washington, DC: United States General Accounting Office.
This report reviews state policies and procedures for implementing the Low-Income Housing Tax Credit program and recommends strategies for improvement. It describes how the program works, including the role of syndicators, and provides data on the number of units produced and the characteristics of assisted households.
The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
This report describes the LIHTC program and summarizes the debate surrounding its effectiveness. The author recommends that as policymakers consider changes to the program, they evaluate issues such as whether the lack of affordable housing is due to market failure, whether the LIHTC program addresses the affordable housing problem efficiently, and whether applicants that are not awarded tax credits subsequently complete their projects.
The Low-Income Housing Tax Credit Program Goes Mainstream and Moves to the Suburbs. [PDF] 2006. By Kirk McClure. Housing Policy Debate 17(3): 419-446.
This article traces changes in the LIHTC program over time and examines whether it effectively deconcentrates poverty by locating low-income renters in low-poverty neighborhoods. The author finds that as tax credits gain popularity with investors, developments are increasingly being built in low-poverty suburban areas. The LIHTC program has thus proven more successful at deconcentrating poverty than the Housing Choice Voucher program.
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How Much More Valuable is Tax-Exempt Bond Cap When Used to Leverage the LIHTC? [go to policy page]
The Best Use of Volume Cap is Affordable Rental Housing. [PDF] 2006. By David Smith and Ethan Handelman. Boston, MA: Recapitalization Advisors, Inc.
This report compares the value of bond cap used for rental housing to the value of bond cap used for other purposes. Because of the ability to leverage 4 percent tax credits, tax-exempt bonds are 3.5 times more valuable when used for affordable rental housing than for any other use.
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Return to the 4 percent Low-Income Housing Tax Credit main page.
Role: Generate Capital
Policy: Expand Use of the 4 Percent Low-Income Housing Tax Credit
Key Resources
The following is a list of key resources on topics related to the Low-Income Housing Tax Credit Program. If you're aware of other resources that should be added, please contact us.
- How Does the Low-Income Housing Tax Credit Program Work?
- How Much More Valuable is Tax-Exempt Bond Cap When Used to Leverage the LIHTC?
How Does the Low-Income Housing Tax Credit Program Work? [go to policy page]
Websites
Danter Company, a national real estate consulting firm, maintains an extensive website on the Low Income Housing Tax Credit program, including basic information about the tax credit program, allocations by population, and links to additional resources.
Novogradac & Company maintains an Affordable Housing Resource Center with state-by-state information on allocating information, tax credit caps and program deadlines.
Articles & Reports
Low-Income Housing Tax Credits: Affordable Housing Investment Opportunities for Banks. [PDF] 2008. Community Developments. Comptroller of the Currency Administrator of National Banks, U.S. Department of the Treasury.
This report provides an in-depth overview of both 4 percent and 9 percent Low-Income Housing Tax Credits, with a focus on how banks can benefit from investing in LIHTC projects. Topics covered include the legal structure of investments, the state allocation process, risks associated with investing, barriers to expanding the use of tax credits, and case studies of different types of tax credit deals.
Tax Credits: Opportunities to Improve the Oversight of the Low-Income Housing Program. [PDF] 1997. By James R. White. Washington, DC: United States General Accounting Office.
This report reviews state policies and procedures for implementing the Low-Income Housing Tax Credit program and recommends strategies for improvement. It describes how the program works, including the role of syndicators, and provides data on the number of units produced and the characteristics of assisted households.
The Low-Income Housing Tax Credit: A Framework for Evaluation. [PDF] 2007. By Pamela L. Jackson. Washington, DC: Congressional Research Service.
This report describes the LIHTC program and summarizes the debate surrounding its effectiveness. The author recommends that as policymakers consider changes to the program, they evaluate issues such as whether the lack of affordable housing is due to market failure, whether the LIHTC program addresses the affordable housing problem efficiently, and whether applicants that are not awarded tax credits subsequently complete their projects.
The Low-Income Housing Tax Credit Program Goes Mainstream and Moves to the Suburbs. [PDF] 2006. By Kirk McClure. Housing Policy Debate 17(3): 419-446.
This article traces changes in the LIHTC program over time and examines whether it effectively deconcentrates poverty by locating low-income renters in low-poverty neighborhoods. The author finds that as tax credits gain popularity with investors, developments are increasingly being built in low-poverty suburban areas. The LIHTC program has thus proven more successful at deconcentrating poverty than the Housing Choice Voucher program.
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How Much More Valuable is Tax-Exempt Bond Cap When Used to Leverage the LIHTC? [go to policy page]
The Best Use of Volume Cap is Affordable Rental Housing. [PDF] 2006. By David Smith and Ethan Handelman. Boston, MA: Recapitalization Advisors, Inc.
This report compares the value of bond cap used for rental housing to the value of bond cap used for other purposes. Because of the ability to leverage 4 percent tax credits, tax-exempt bonds are 3.5 times more valuable when used for affordable rental housing than for any other use.
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Return to the 4 percent Low-Income Housing Tax Credit main page.