LIHTC: Money Back on Affordable Housing

Feb 24, 2017

As much as we need affordable housing in this country, for-profit developers don’t build units only out of charitable concern — they need to make money. And non-profit housing agencies don’t have unlimited funds — they need help however they can get it.

One of the biggest programs for encouraging affordable housing rental unit development is a federal program, the Low-Income Housing Tax Credit, or LIHTC. In 2016, the program marked 30 years since it began.

The LIHTC is a tax credit program, wherein the Internal Revenue Service makes tax credits available for states to distribute to organizations or companies that build affordable housing. Projects must abide by a 40/60 or 20/50 rule — 40 percent of units must be earmarked for families making 60 percent or less of the area median income, or 20 percent earmarked for families making 50 percent or less of the area median income. In exchange for keeping those affordable housing guidelines in place for at least 15 years, the builder can take a tax credit each year for 10 years, as outlined by the Office of the Comptroller of the Currency.

Tax credits kick in only after the building is ready for occupants. It doesn’t matter if the building is new construction or a rehabilitation project — the tax credits can still count.

Recent reports show that building this type of affordable housing is a solid investment — and the reasons behind why it works as an investment also speak to the desperate need for better and more affordable housing options across the country.

According to a report released in 2016 by CohnReznick LLP, a leading national tax and accounting firm, “the demand for affordable housing units has lowered the turnover rate in housing credit properties, reduced the costs associated with turning units over, and lowered the rental income loss associated with rent skips.”

In other words, supporting and building affordable housing can be good business. And the need isn’t going away anytime soon. According to the National Low Income Housing Coalition, meeting the demand of affordable housing nationwide would take 7.1 million rental units. For every 100 units, only 31 meet the needs of renters who would qualify for affordable housing.

There have been some moves to boost the LIHTC to encourage even more development. The bipartisan Senate bill S. 3237, introduced in May 2016, would have upped the amount of tax credits available by 50 percent, potentially encouraging an additional 400,000 housing units to be built over the next 10 years, according to the Affordable Housing A.C.T.I.O.N. blog. The bill died in the last Congress, but hopefully the fact that it had support from both sides of the aisle means that this can be revisited in the near future.

But that doesn’t mean there isn’t still opportunities for developers to continue investing in the types of affordable housing that their cities and towns need. It’s a worthwhile investment — for the money, and also for communities.