The Low-Income Housing Tax Credit program is one of several that came out of the tax overhaul in 1986. And it is a government program that actually works. It provides financing for over 2 million rental homes as well as generates private capital investment.
The Federal government funds the program but the States determine who gets the money and what gets built. The thinking is that the State has a better idea of the needs of its citizens than the Federal government which supplies only broad guidelines for them to follow.
The Department of Treasury issues the tax credits to the states and requires that any housing built remain affordable for at least 30 years. As an example of how much the state can get from the program, which is now indexed to the rate of inflation, in 2009 the states got about $2.03 per resident.
The States control the type of housing, the locations where it gets built, and other specifications based on the local population need. The money is allocated according to regulations written by the state regarding qualification criteria. Housing developers apply for the tax credits and these are reviewed and rated by the State to determine who receives them.
To give you an idea of how competitive this is, applications for the tax credits routinely exceed the credits available for allocation.
The developers also raise funds for construction. Investment capital is pooled together by companies into funds. The companies are known as “fund managers” or “syndicators.” The funds are used to purchase tax credits from developers for a share in the equity of the development. The investor purchases 10 year tax credits and their equity.
By selling the tax credits the developer decreases the amount of borrowing needed for construction which, in turn, decreases the debt at the completion of the project and lowers the rent needed to pay it down. This makes rentals available for those who are considered to be “low-income” or “very low-income.”
A low income renter is one whose income is at or less than 60% of the area income. Also, the rental payment is limited to 30% of the renter’s income. By comparing the income to the local instead of Federal income it avoids renting to someone who is actually not low income next to his neighbors and does not price a family out of the market by asking for more than one-third of their personal income for rent.
If you are a developer seeking funding from the Low-Income Housing Tax Credit program contact the appropriate State housing finance agency for the requirements. If you are an investor who wants to purchase tax credits, there are several companies who act as fund managers. If you are a low-income family searching for affordable housing, this program makes it possible for you have an affordable home.
