Need Directions? If you have a tax credit property that is reaching the end of its 15-year period, here are five things to do as you decide the property’s future:
- Check for use and sale restrictions.
- Calculate exit taxes.
- Assess the physical condition of the property and determine need for capital improvements.
- Compare the economic viability of the property as affordable housing and as market-rate housing.
- Explore the financial viability of purchase by a nonprofit developer.
Getting Credit
Key Details on the LIHTC Program History: Operated by the Internal Revenue Service, the Low-Income Housing Tax Credit program was created by the Tax Reform Act of 1986 as part of an effort to shift responsibility for construction of affordable housing from the public to the private sector. It works by enabling investors to purchase credits they can apply as direct deductions from their total tax responsibility.
Purpose: The money is used to provide equity funding for development of apartments that will be rented at less-than-market rates to households earning below median income. The investors buy into limited partnerships that own 99 percent of the projects developed. The remaining 1 percent is owned by the project developer, who is also the general partner.
Money: The credits are taken over 10 years, though investors must hold ownership for 15 years. At that point they can sell their ownership interest. Initially credits sold for as low as 50 cents on the dollar, but once the program became more competitive, the figure was raised to about 80 cents. That is, for every 80 cents investors put in, they receive a tax credit of $1.
Getting Funded: Early on, there were more tax credits than applicants, but in recent years the program has become highly competitive. Today only about one project in three that applies for credits receives them, and some of the winners receive fewer credits than they request.
Nonprofits v. For-profits: About 20 percent of tax credit properties are developed by nonprofit firms, and 80 percent are done by for-profit companies.
Timing: Projects initiated during the program’s first three years, from 1987-89, were required to remain affordable for 15 years. From 1990 forward, the compliance period was extended to 30 years. Some states have imposed longer periods. California, for example, requires a project remain affordable for at least 55 years.
Key Agencies: The program is administered through individual state housing finance agencies, which have considerable leeway in determining which projects qualify for tax credit funding. Within limits, states can impose various project requirements, as well as establish quotas for particular project categories. Typical categories include senior housing, new construction, rehab of existing low-income projects, and projects targeted to particular income levels.
Who Gets What: States use somewhat different methods to determine the amount of tax credit an individual project receives. Usually the eligible basis is determined by subtracting non-depreciable costs from total project costs. If the development is located in a HUD-designated high-cost area, the figure is multiplied by 130 percent.
This figure is then multiplied by the percentage of units designated for low-income households or percentage of total square footage given to low-income units. This in turn is multiplied by the federal tax credit rate.
For projects not financed with a federal subsidy, the rate is approximately 9 percent. For projects receiving a federal subsidy, including tax exempt bonds, the rate is approximately 4 percent.
The Formula: The amount of money available for credits is determined by a formula, which currently allocates approximately $1.75 per resident per tax credit year for each state. In essence, a total of $17.50 per resident is allocated to cover each of the 10 years investors receive tax credits for a particular project. A floor level has been set to ensure that states with low populations receive enough funding to make the program feasible.