The Low-Income Housing Tax Credit, explained

The Hodge, a 90-unit housing development in Shaw, offers affordable apartments for seniors in the District. To create these apartments, developers of the Hodge used the Low-Income Housing Tax Credit (LIHTC) program to partially finance the project. This post explains how the LIHTC works.

The LIHTC is the largest federal program for the production and rehabilitation of affordable housing. Unlike the Housing Choice Voucher (HCV) program, which helps low-income families pay their rent, the LIHTC program subsidizes the construction of apartments that rent for below market rate.

Since its inception in the 1980s, the Low-Income Housing Tax Credit has helped to finance more than 2.4 million low-income housing units in the United States. Last year, the federal government spent about $7 billion on the program.

To create low-income housing, the LIHTC encourages private investors to invest in affordable housing developments.

Unlike housing vouchers, which directly subsidize the rents paid by low-income families on the private market, the LIHTC facilitates the construction of affordable housing units. Essentially, the government awards tax credits to developers of affordable housing who, in turn, sell these to private investors. The developers use this money to build below-market rate housing.

Developers sell the tax credits to private investors (through a third party called syndicators, who essentially serve as middlemen between developers and investors) and use the capital to finance their projects. Because the LIHTC provides up-front cash for developers, it reduces the amount of money they need to borrow for their developments.

Investors buy tax credits from developers because it lowers the amount of federal taxes that they owe. With each dollar purchased in tax credits, an investor reduces by one dollar the amount of taxes that they pay to the federal government.

While LIHTC provides a critical source of financing for affordable housing developments, most of these projects also require additional sources of financing.

Each state receives a certain allocation of tax credits from the federal government to distribute to affordable housing developers

The size of these allocations is determined by the population of the state.

From there, the feds give the credits directly to state housing finance agencies, like the District of Columbia Housing Finance Agency (DCHFA) and the Department of Housing and Community Development (DHCD) in DC; the Department of Housing and Community Development in Maryland; and the Virginia Housing Development Authority (VHDA). The housing finance agencies must decide how to distribute their tax credits to individual development projects.

To do so, they run a competitive process for developers to apply for the tax credits. Each state housing finance agency publishes an annual Qualified Allocation Plan (QAP) that describes how tax credits will be awarded and which types of developments will receive priority.

The QAP includes some criteria required by the federal government, including the requirement that states set aside 10 percent of their tax credits for non-profit developers. It also outlines local priorities. For example, a state can prioritize housing developments that serve particular populations, including the working poor or elderly households. States may prioritize developments built in particular underserved communities.

Based upon the criteria outlined in the QAP, state housing agencies score affordable housing developments and determine which ones will receive the tax credits.

Developments using the LIHTC program must include a certain number of apartments that rent for below the market rate.

Typically, developers using the LIHTC must make 40 percent of units available to households earning 60 percent of the AMI or 20 percent of units available to households earning 50 percent of the AMI.

In the Washington region, 50% of the AMI for a family of four is $54,300. 60% of the AMI for a family of four is $65,160. Affordable rents are set so that households at those income levels pay only 30 percent of their income in rent.

It’s worth stressing that these developments have flat rents, set so that a family earning 50 or 60 percent of AMI (depending on the project) can afford the rent by paying only 30 percent of their income.

These restrictions must remain in place for thirty years.

Critics of the LIHTC program argue that it does not do enough to assist households that make the least.

By design, the LIHTC does not create housing units for extremely low-income families – those at the highest risk of housing instability. While other programs are targeted at families earning up to 30 percent of the AMI, the LIHTC subsidizes the production of units for families earning 50 or 60 percent of AMI. As a result, the program is not creating deep affordability or assisting the families with the greatest need.

Because tenants in these affordable units are charged a flat rent rather than paying a share of their income, tenants who make less than the amount rents are geared toward still experience excessive cost burdens.

For example, in the Hodge, the rent for a 2-person apartment is set so that a 2-person household earning 50 percent or 60 percent of the AMI (depending on the unit) can afford the rent without paying more than 30 percent of their income on rent. If someone with a lower income rents the apartment, they will end up paying more than 30 percent of their income because the rent is fixed. Therefore, low-income families in apartments financed by the LIHTC may still be cost-burdened.

Some families in the Housing Choice Voucher program use their vouchers to live in apartments built using LIHTC funding. While this cross-subsidy make the units affordable to families with lower incomes, it may lead to “double-counting” when advocates estimate the number of people served by affordable housing subsidies.

Finally, although apartments are required to have affordable rents for thirty years, tenants are allowed to stay in their apartments even if their incomes rise. Unlike families in the Housing Choice Voucher program, who would leave the voucher program if their incomes increase substantially, tenants in an apartment funded through the LIHTC program do not need to leave their affordable unit if their incomes rise. Over time, some of the below-market rate apartments may be rented by families with incomes above the affordability standard.

Despite these limitations, the LIHTC remains the primary tool used by the federal government to subsidize the production of affordable housing. The program has solidified the role of the federal government in subsidizing private developers to build (and maintain) affordable housing, rather than directly constructing public housing developments.