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Low Income Housing Tax Credits
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A brief overview and history...
Created under the Tax Reform Act of 1986, the low-income housing tax credit has become the chief mechanism to make the creation of low-income rental housing financially feasible.
Low Income Housing Tax Credits are also known as LIHTC's, Federal Credits, and 9%.
Why did Congress enact the Housing Credit law in 1986?
Congress created the federal Low Income Housing Tax Credit (also known as the federal Housing Credit program) because building and rehabilitating apartments costs too much in the private market to rent at rates low-income families can afford. The Housing Credit makes apartments affordable for working people with below-median incomes.
How do Housing Credits differ from other federal housing programs?
Housing Credits rely on developers, financial firms and other private sector players. These experts don't invest in affordable housing unless market conditions allow developments to prosper. The Housing Credit is an indirect federal resource, not a direct drain on the federal treasury. The program is run by the Internal Revenue Service, and failure to adhere strictly to the law results in stiff penalties. Finally, Housing Credit tenants are typically working taxpayers who pay their entire rent.
How do Housing Credits work?
Housing Credit investors get a 10-year federal income tax benefit in exchange for immediate cash infusions for new construction and restoration projects. Usually used in conjunction with developer equity, bank loans and other funding sources, the Housing Credit has leveraged $7.2 billion in investments nationwide each year to produce 75,000 reasonably priced apartments for low-income families and the elderly. (Housing Credits are not available for use by individuals seeking affordable shelter.)
How do Housing Credits benefit communities?
Housing Credit apartments help stabilize neighborhoods by improving housing quality and supply. They rent up quickly, because the need for them is so much greater than can be met under the present Housing Credit volume limit — $1.50 times a state's population. Credit demand outstrips supply by a ratio of 2-to-1 or higher. The credit amount per person, $1.50 as of January 2001, is set to increase to $1.75 in 2002. The credit amount was created at $1.25, and recieved no increase for the first 14 years of the program.
What are some other Housing Credit advantages?
Housing Credit apartments often attract young people just starting out on their career paths, seniors who can no longer maintain a house but want to stay in their home towns and workers in comparatively low-paying jobs. Housing Credit properties are privately owned by developers who run them at a profit. They are not owned by any unit of government. Housing Credit developments compete with market-rate properties. They are indistinguishable from surrounding market apartments and often offer amenities like clubhouses, tennis courts and playgrounds.
How do developers decide where to build Housing Credit projects?
Sites are selected based on local housing needs and zoning conditions, in cooperation with local officials and residents. The entire process is driven by market economics.
How do Housing Credits translate into lower rent?
Housing Credit tenants pay their entire rent, made affordable through tax incentives for investors. Residents get no direct subsidy, but instead benefit from lower rents made possible by the program. People seeking apartments apply to private, on-site managers — not through a government agency.
How are Housing Credits allocated in Illinois?
As the state's primary affordable housing finance agency, IHDA administers Illinois' share of the annual Housing Credit allowed by Congress. (Chicago gets the city's portion of credits and administers its own, separate program.) Under the "$1.50 multiplied by state population" federal formula, Illinois gets about $14.5 million in Housing Credits each year. IHDA allocates Housing Credits twice a year.
With demand so great, how do the best deals get done?
IHDA has developed a sophisticated ranking system to ensure the best Housing Credit applications get funded. The ranking system is reviewed and refined each year and made part of an always-evolving Qualified Allocation Plan (QAP) that developers must follow. IHDA's QAP contains basic mandatory requirements every applicant must meet — such as favorable market conditions, site control and strict compliance with state or local housing plans. The QAP also details competitive categories in which points are awarded.
Give some examples of the competitive criteria.
They include solid commitments for project financing, use of experienced affordable housing development teams and a preference for Illinois-based non-profit participants. Solid community support for and understanding of Housing Credit projects is essential to their success. Citizens must be assured new or rehabilitated apartment buildings are attractive, blend well with the overall surroundings, are structurally sound and will be maintained physically and financially far into the future.
Does IHDA's Housing Credit program boast unique features?
To give certain types of affordable housing advocates a fair shot at limited Housing Credits, IHDA has created three special "set-aside" categories: Non-Profit, Preservation and Small Projects.
If Housing Credits are a federal resource, how can local needs be met?
The delegation of authority to states to administer a major federal tax program (in this case, housing) is unprecedented. In making it, Congress recognized the value of decentralized decison-making concerning each state's low-income housing needs. But it also imposed a minimum, uniform set of procedures each state must follow in determining developments to which they grant credits.
How do state housing finance agencies put these principles into practice?
All state HFAs work closely with the National Council of State Housing Agencies (NCSHA), the Washington-based association that advocates for low-income housing resources on behalf of the nation's state housing finance agencies. NCSHA periodically pulls together representatives across the entire affordable housing spectrum to develop "recommended practices" for Housing Credits. The last effort resulted in minimum standards adopted for national use effective October 10, 1998.
But won't these national standards put states and localities in housing straitjackets?
No. Recommended practices created by states, for states, not only meet their responsibility to stretch the scarce Housing Credit resource most responsibly, but also preserve, to the maximum extent practical, the individual state flexibility which is at the heart of the Housing Credit program.
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