What is the 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 the allocation of 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 strong.

The second, less well-known, type of Low-Income Housing Tax Credit is the 4 percent credit. The 4 percent tax credit is worth a little less than half as much as the 9 percent credit. (The 4 percent and 9 percent figures refer to the approximate 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 still be quite substantial. Also there is an important advantage to the 4 percent credit as it is a renewable resource that is not subject to the same annual allocation caps that apply to the 9 percent credit.  There are not enough of the 9 percent credits to go around so they are only assigned for a single year and then reevaluated. A 4 percent credit on the other hand continues for the life of the project. 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 automatically 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 overall 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 moderate-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. 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 which tend to be less capital intensive than new construction. Accordingly, areas where the affordable multifamily rental stock is aging may find 4 percent tax credits particularly useful. 4 percent tax credits can also be used for new construction, particularly if a state or locality is willing 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.  Thus the projects gain the benefit of the 4 percent credit with a consequent reduction in costs to the state and local government.

Solutions in Action

West Ridge Market in Minnetonka represents a mix of housing styles and prices with linkages to jobs, transportation, services, and recreation within a compact, mixed-use neighborhood. The 418 new housing units provide a mix of rents and prices, serving those from very low to higher incomes. In addition, 256,000 square feet of commercial space provides jobs and shopping. An example of successful suburban redevelopment, West Ridge Market covers 53 acres and includes preserved wetlands and woods with connecting pedestrian trails and an adjacent 15-acre city park. The West Ridge Market project developed in 1996-1997 received $250,000 in low income housing tax credits. Four of the project’s housing developments including Boulevard Gardens, West Ridge Senior Housing, The Gables of West Ridge Market, and Crown Ridge Apartments are assured to remain affordable for the next 30 years, which maximizes the potential of the low income housing tax credits. Click here for a Google Streetview of the West Ridge Market development.

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