New $14-Million Recovery Center Is Launched

Valuable Links

• News Coverage
• Lane Report article covering the ceremony
• Video of the Ground-Breaking Ceremony
• How Low-Income Housing Tax Credits Work and Who They Serve

How Low-Income Housing Tax Credits Work

The Low-Income Housing Tax Credit (often referred to as “LIHTC”) originated as part of the United States’ 1986 Tax Reform Act. LIHTC supports affordable rental housing by subsidizing acquisition, construction, and rehabilitation of units for low and moderate income tenants. More than 3 million units of affordable housing have been assisted with LIHTC, making it the nation’s largest source financing for affordable housing.

How it works

The Internal Revenue Service allocates Low-Income Housing Tax Credits to the states’ Housing Finance Authorities (HFA). The HFAs award the credits on a competitive basis to affordable housing developers (including nonprofit developers) who sell the credits to investors who purchase them to offset taxes over the next ten years. The award of the credits to developers is made through a process defined in each state’s Qualified Assistance Plan (QAP). HFAs must comply with the Department of Housing and Urban Development’s (HUD) affordability standards but can include additional requirements.  

The amount of available LIHTC changes annually. In 2022, $870M of credits were available for the entire nation. LIHTC is allocated based on the greater of $2.60 per state population or $2,975,000 – whichever is larger. The “multiplier” (currently $2.60 per person) is also subject to annual changes.

How to qualify

Recovery Houses that propose to serve low-income populations may qualify for LIHTC through one of the following ways:

1. At least 20% of the project’s housing units will be occupied by tenants whose incomes are 50% or less of area median income (AMI).
2. At least 40% of the housing units will be occupied by tenants whose incomes are 60% or less of AMI.
3. At least 40% of the housing units will be occupied by tenants whose incomes average 60% or less of AMI, with no units being occupied by tenants with incomes that exceed 80% of AMI.

In all cases, rents cannot exceed 30% of income. It is allowable for a LIHTC developer to restrict up to 100% of units to tenants with qualifying incomes. This is to the advantage of the project since credits are awarded only for the portion of the building that is occupied by low-income tenants. The project must comply with income levels and rent limitations for at least 15 years. In addition there may be an additional 15 years of compliance required as stipulated in an “extended use agreement”.

Developers (or their syndicators) sell the tax credits to an investor. The money from this sale allows the developer to receive equity (funds) to complete the affordable housing project. Since most of the equity from the sale of the credits isn’t paid until the project is fully occupied, interim financing (such as a construction loan) if often needed. LIHTC will not provide enough equity to finance the entire project. In Additional funding (for example, grants such as the Community Development Block Grant) will have to be secured for a debt free project. Smaller projects (such as those with fewer than 30 units of housing may not be competitive for LIHTC). Securing guaranteed rental income, for example Section 8 Project Based Housing Vouchers, contributes to the ongoing operating costs of the housing program.

In the above example approx. 67% of the project is financed by LIHTC. If this project was located in a Qualified Census Tract (QCT), it could qualify for a High Cost Adjustment Boost (additional 30%) and LIHTC could cover 87% ($8,709,837) of the project (if credits were sold at .91).

A partnership structure such as a Limited Liability Corporation or Limited Liability Limited Partnership is formed between the Limited Partner (the Investor) and the non-profit organization (the General Partner). The General Partner manages the day-to-day operations of the partnership and the Limited Partner’s primary role is to provide an investment to the project and control terms of the partnership agreement. Participating in such a structure presents both benefits and risks to the non-profit General Partner.

The Benefits

• Substantial amount of equity available for project development. Without this funding the non-profit may not otherwise be able to develop affordable housing units. 
• The non-profit stands to be paid developer fees, property management and/or other fees
• Opportunity to own the project at the end of the 15 year compliance period

The Risks

• Market conditions can influence the pricing that is paid to the non-profit for the credits
• Changes in economic conditions could impact financial viability and lead to lost credits
• Uncontrollable delays in opening the project as projected could result in the loss of credits
• Credits could also be lost or recaptured if the rate of low-income tenancy changes

As both the benefits and risks of participating in a LIHTC partnership are significant for the General Partner, it’s essential that non-profit organizations serving in this role rely on the guidance of experienced attorneys and LIHTC consultants to minimize risks and protect interests.

This web page is supported by the Health Resources and Services Administration (HRSA) of the U.S. Department of Health and Human Services (HHS) as part of an award totaling $17.1 million with 0% financed with non-governmental sources. The contents are those of the author(s) and do not necessarily represent the official views of, nor an endorsement, by HRSA, HHS, or the U.S. Government.