Low Income Housing Tax Credit (LIHTC)

State Low-Income Housing Tax Credit (SLIHC)

Housing credit system in the USA

The Low Income Housing Tax Credit (LIHTC) is a tax credit created under a Tax Reform Act of 1986 giving incentives for the development of affordable housing aimed at low income sector in the USA . The credits are called Section 42 in reference to the applicable section of the Internal Revenue Code. Tax credits are more attractive than tax deductions as they provide a dollar for dollar reduction in a person's federal income tax.

The Tax Reform Act of 1986 (TRA86) increased incentives favoring investment in owner occupied housing relative to rental housing. The imputed income an owner receives earned in investment in owner occupied housing has always escaped taxation, but TRA86 changed treatment of imputed rent, local property taxes, and mortgage interest payments to favour home ownership, phasing out many investment incentives for rental housing. Since low income people are likely to live in rental housing than owner occupied housing, this would have decreased the supply of housing accessible to them. The Low Income Housing Tax Credit was added to TRA86 to provide balance and encourage investment in multifamily housing for the poor.

The LIHTC subsidizes development costs in low income housing. To qualify, a project must sign a Land Use Restriction Agreement (LURA) guaranteeing to comply with either of the following conditions:

At least 20 per cent or more of residential units in the development are both rent restricted and occupied by individuals whose income is 50 per cent or less of the area median gross income.
At least 40 per cent or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 60 per cent or less of the area median gross income.
The developments are required to comply with the regulations for a 15 year initial compliance period and a subsequent 15 year extended use period. However, projects are ranked competively by the state agencies with bonus points available for those offering longer use agreements.

Credits are not provided in a lump sum but are distributed over 10 years. To generate equity to cover high initial costs of the project (acquisition, etc.), developers syndicate credits whereby they enter into limited partnerships with 99 per cent or more of the income and tax credits passing through to the partners as taxable income. The developer serves as general / managing partner who receives a minimal amount of tax credits. The developer then finds limited investors to provide the initial capital for the project in return for the lion's share of the annual tax credits. The funds generated through the syndication vary from market to market, but 75 - 95¢ for each dollar of tax credits is common. Depreciation on the buildings owned by the partnership is tax deductable, there are cases where investors pay more to get a Tax Credit.

The eligible basis of a proposed project is determined by the estimated costs of acquiring property, construction, and other costs to complete the project plan for the units included in the LIHTC program. For this reason, most developers include 100 per cent of the units in the program in order to maximize the eligible basis and potential tax credits. Projects for new construction or substantial rehabilitation not funded by tax-exempt bonds can receive a maximum tax credit allocation of 70 per cent (approximately 9 per cent annually) of the project's basis. Projects with federal assistance, the maximum is 30 per cent (approximately 4 per cent annually). The developer can charge a maximum rent of 30 per cent of the maximum eligible income, which is 60 per cent of the area's median income adjusted for household size as determined by HUD.

The program is administered at state level, with each state getting a fixed allocation of credits based on population. State housing agencies, often called finance authorities, have discretion in terms of what types of projects to subsidize and where to subsidize them. The credits are awarded to projects each year, usually in a few separate allocation rounds, on a competitive basis with the top project getting credits, and so on until the credits are exhausted. This allows states to address specific housing goals. It encourages developers to offer rents below established limits to improve their status in competing against other projects. States are responsible for monitoring the ongoing development costs and quality of approved projects, and have the enforcement threat of stopping and recollecting the subsidy if the investor deviates once the development has started.

Tax credits are a crucial element in a development plan. In project's that qualify for allocations at 70 per cent of the eligible basis, the mortgage makes up a small part of the overall funds for the project. Because the tax credits are only available from the state agency assigned to allocate the credits, failure to receive an allocation results in the project falling through or having to wait 3-12 months until the next round of allocations.

A majority of tax credit projects receive subsidies from other sources. The additional subsidies, can include development grants and loans at below market interest rates from local and state governments, account for a third of total capital subsidies. Thirty nine percent of low income tenants receive rental assistance as vouchers.

As of 2002, 40 to 50 per cent of new multifamily construction has been developed under the program. The federal government spends roughly $3 billion annually on the LIHTC, and the outlay will increase significantly since Congress has increased the state allocations by 40 per cent.

New York State Low-Income Housing Tax Credit (SLIHC)

Companies conduct market feasibility studies. Each project can be surveyed to determine unit mix, rents, vacancies, unit and project amenities, the year opened, floor area, utility information, the number of floors, tenant mix, and other information that might be necessary for a thorough analysis. such as danter is one who does such research.

2000-01 budget proposal included an Article VII bill which was enacted by the legislature creating the New York State Low Income Housing Credit Program (SLIHC). Since that time, ( 9/27/06) $4,522,170 has been reserved and $5,111,345 has been allocated for projects which serve eligible households.

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