Understanding LIHTC and Why Developers are Using Them More Than Ever
The Low-Income Housing Tax Credit (LIHTC) program is aimed at fostering the development and rehabilitation of affordable rental housing for low-income households. Established by the Tax Reform Act of 1986, LIHTC allows state and local allocating agencies to distribute tax credits for the acquisition, construction, or rehabilitation of affordable housing. Developers can sell these credits to investors to generate capital, thereby reducing the amount of debt needed in the capital stack. Ultimately, the program boosts supply of low rent housing.
To qualify for LIHTC, households typically must earn 60% or less of the Area Median Income (AMI), although some units are reserved for those earning 30% or 50% of the AMI, depending on the project's funding structure and goals. This ensures that the housing remains affordable to those who are most in need of assistance.
Why LIHTC Is Important
LIHTC is instrumental in addressing the housing affordability crisis in the United States, financing the construction of over 3 million affordable rental units and housing approximately 7.4 million low-income households.
Increasing Competition for LIHTCs
Competition for LIHTCs has intensified due to several factors:
Rising Construction and Operating Costs: The construction costs for multifamily rental housing have notably increased in recent years. Following a significant 17.5% increase in 2021, costs continue to rise, albeit at a slower pace of 3-6% projected for 2024. Operating expenses also jumped by 10.4% in 2022, highlighting the financial strain on developers.
Interest Rate Volatility: The instability of interest rates, which have seen significant fluctuations, complicates the financing of affordable housing projects. This volatility affects the feasibility of projects that depend on stable financing structures.
Competition for Private Activity Bonds (PABs): PABs, often used in conjunction with 4% LIHTCs, are capped annually by state, leading to fierce competition in many regions. In 2024, over half of the U.S. states reported high competition for these bonds, necessitating competitive processes for allocation.
Opportunities Amid Challenges
Despite these challenges, emerging opportunities can help alleviate some financial pressures. The Inflation Reduction Act of 2022 includes clean energy provisions that intersect with affordable housing. Programs like HUD’s Green Resilience and Retrofit Program (GRRP) offer funding to enhance energy efficiency in affordable housing projects, which can reduce operating costs and attract additional investments.
While LIHTC remains a vital resource for developing affordable housing, the increasing challenges underscore the need for planning and adaptation. Developers and investors must navigate these complexities to leverage LIHTC effectively, helping ensure affordable housing solutions for those in need.
