Low Income Housing Tax Credit (Housing Credit)

How the Housing Credit Works

What Is the Housing Credit?

It's a credit to investors for 10 years for up to 9 percent of their cost of constructing or rehabilitating apartments dedicated to low income tenants at restricted rents. Every state receives Housing Credits each year equal to $1.50 times its population. The limit increased from $1.25 to $1.50 for fiscal year 2001 and will further increase to $1.75 beginning in fiscal year 2002. Missouri also allocates 100 percent of this amount in state Low-Income Housing Credits each year.
 

Why Did Congress Create It?

Too few apartments are affordable to low income families. So, Congress has long provided tax incentives to compensate investors for building or rehabilitating apartments dedicated to low income tenants. The Housing Credit replaced and dramatically improved on previous tax code incentives for development of low-income apartments. Those repealed incentives defined "low income" as 80 percent of median income, required only a small number of apartments for low income people, wherever and of whatever quality a developer chose, yet provided full tax write-offs even for the market rate apartments. The Housing Credit is limited to good quality apartments dedicated at restricted rents to families at 60 percent or less of an area's median income. Congress delegated Housing Credit administration to state housing agencies, bringing decisions closer to the local level and assuring that states and private investors, not the federal government, determine that good quality housing is built and maintained where it is needed.
 

What Can Housing Credits Pay For?

Housing Credits pay a portion of the cost of developing the low income, rent-restricted apartments. They cannot pay the cost of market rate apartments or land, some financing fees, development reserves, working capital, or grants. Housing Credit developments must rent at least (1) 40 percent of their apartments to tenants who earn incomes of 60 percent of median or less, or (2) 20 percent to tenants who earn 50 percent or less. In practice, virtually all Housing Credit apartments rent to low income tenants, including 25 percent to tenants at 50 percent of median income or less, and many to families earning less than 30 percent.
 

How Do States Decide Who Gets Housing Credits?

MHDC developed a plan which sets criteria for judging Housing Credit developments against the state's most pressing housing needs, giving priority to developments which serve (1) the lowest income families and (2) low income families for the longest periods of time. The plan must be consistent with the state's overall housing plan, which HUD approves annually before a state gets any federal housing funds. The public has a significant role in developing both plans. Meeting Missouri's Qualified Allocation Plan does not qualify a development for Housing Credits. Because demand for Housing Credit exceeds supply, developments compete for Housing Credits through an extensive and detailed allocation process

How Do States Decide How Much Housing Credit to Give?

MHDC will conduct three separate rigorous financial evaluations of each development plan: (1) when a development seeks Housing Credits; (2) if credits are reserved for it; and (3) when it is ready for occupancy. These reviews assure that a development receives only enough Housing Credits for its feasibility and long-term viability as housing for low income residents, taking into account all its costs and funding sources, the reasonableness of development and operating costs, and developer and builder profit. Only after a development successfully completes all three reviews and is occupied by eligible tenants can investors in it use the Housing Credits they have bought.
 

How Do States Make Sure that Low Income People Rent the Apartments?

MHDC monitors all Housing Credit developments for their physical condition and compliance with tenant income and rent restrictions. Missouri staff reviews as many as 100 percent of tenant files and visit developments as often as annually and never less than biannually.  MHDC must then report to the Internal Revenue Service any noncompliance they discover, so that the Service can decide whether to recapture Housing Credits from non-compliant owners.
 

How Much and How Long Are Housing Credit Rents Limited?

In practice, Housing Credit-financed apartments are limited to low-income tenants for at least 30 years. About a third of them are permanently dedicated to low income use. Housing Credit apartments, on average, rent well below market rents for comparable apartments.
 

Do Housing Credit Dollars Produce a Dollar's Worth of Housing?

Yes, but not immediately.  The investors must stretch the Housing Credit out in equal installments over 10 years. Take, for example, an apartment development costing $1.5 million to build, including qualified low-income apartments which cost $1 million. Housing Credits can help finance only the $1 million low-income apartment cost. If the development gets the maximum 9 percent Housing Credit, the investors in the low income apartments can claim a total of $90,000 each year for 10 years against their taxes, a total of $900,000 ($90,000 x 10 years) over 10 years.

To raise the cash needed today to build the apartments, the developer engages a professional broker, called a syndicator. The syndicator markets the Housing Credits to the largest possible pool of potential investors to get the best price possible for them. Since investors must put their cash up in advance, they must decide how much to bid today to reduce their future taxes. A dollar is more valuable today than tomorrow, because it can be invested to earn interest between now and then. So Housing Credit investors decide how much they will pay by discounting the face value of the Housing Credits to reflect the 10 years they must wait to use them fully.

In light of investment alternatives available today, investors discount the value of a Housing Credit dollar to approximately 70 cents, to account for the fact that they must wait 10 years to get it back fully. That discount multiplied by the face amount of Housing Credits, determines how much an investor will pay a syndicator for them. In this case, $900,000 x .70 = $630,000. The syndicator gives the developer the proceeds to build the development, retaining a small part to cover the syndicator's costs.

Syndicators must pay accountants, attorneys and their own personnel to provide the services necessary to assure investors that their money will be properly invested to claim the Housing Credit. They perform intensive financial underwriting and closely supervise developments to assure their continued compliance with the Housing Credit. In direct grant programs, such functions are performed by public agencies at considerable cost. For example, the Community Development Block Grant program provides a 20 percent administrative fee to states and localities which administer it. The Housing Credit allows none. Housing Credit syndication is highly competitive, making it very unlikely that any developer is overpaying for syndicator services.
 

Do Private Developers and Investors Make Excessive Profits from the Housing Credit?

No. Other deductions and credits can be claimed without any advance approval. Their abuse can be discovered only in random audits. However, the Housing Credit is one of the most closely regulated of all tax code provisions. A developer receives Housing Credits only after intense state scrutiny of the development and its costs. An investor can claim Housing Credits only as long as the state finds the apartments in good condition and low-income use.
 

 Isn't the Housing Credit Too Expensive?

Compared to what? If low-income families in urban and rural areas need apartments, the Housing Credit is often the only available alternative.
 

Are Housing Credits Corporate Welfare?

No.  The Housing Credit does not subsidize corporations for expenditures they would make anyway, as do other tax code provisions, like business entertainment and depreciation deductions. The Housing Credit is more like the charitable deduction, which encourages taxpayers to do good beyond their own interests by rewarding them with tax reduction for helping people in need.
 

Don't Neighborhoods Oppose Housing Credit Apartments as "Projects?"

Nearly 800,000 good quality Housing Credit housing units for working families have helped redevelop neighborhoods all over America. In a few cases, some neighbors have opposed Housing Credit units. But the quality of these, compared to traditional federally-sponsored housing, has eliminated most such criticism. In most places, the construction of new housing and rehabilitation of older units have been welcomed as positive additions to the neighborhood.

Source:  National Council of State Housing Agencies information was used to develop this product.