The Section 42 federal low income housing tax credit (LIHTC) program includes two different development funding tracks: (a) competitive tax credits and (b) tax credits available through tax-exempt bonds (also known as private activity bonds.)
There are three kinds of federal tax credits:
- 9% credits (aka 70% present value credits) for the new construction and rehabilitation of competitive tax credit projects
- 4% credits (aka 30% present value credits) for the acquisition of existing buildings of competitive tax credit projects
- 4% credits (aka 30% present value credits) for projects that utilize tax-exempt bonds
Competitive tax credits vs. Tax-exempt bond allocations
Competitive tax credits are allocated via a competitive process that involves a scoring system and threshold requirements.
The 4% annual credits for properties financed with tax-exempt bonds are awarded through a separate application process and allocated upon approval of the request for financing.
Competitive credits – A 9% annual credit is provided for eligible construction and “substantial” rehabilitation costs, and a 4% annual credit (commonly referred to as an “acquisition credit”) is applied to the acquisition cost of existing buildings. An additional 30% bonus (“130% basis boost”) is available to those developments located in designated high-cost areas, Qualified Census Tracts and in other instances when state housing agencies determine that the basis boost is needed to bolster a project’s viability. (The 4% acquisition credit is not eligible for the basis boost.)
Tax-exempt bonds – Developments that use private activity bond (tax-exempt bond) financing are limited to a 4% annual credit for all eligible costs, including construction and rehabilitation. An additional 30% bonus (“130% basis boost”) is available to those developments located in designated high-cost areas, Qualified Census Tracts and in other instances when state housing agencies determine that the basis boost is needed to bolster a project’s viability.
Tax credit developments comprised solely of new construction that are awarded credits from the competitive pool will use only the 9% credit. Tax credit developments that include the acquisition and substantial rehabilitation of existing buildings that are awarded credits from the competitive pool will combine 9% credits with 4% acquisition credits.
The quantity of low income housing tax credits is determined by eligible development costs. Accordingly, projects that utilize the 9% credit generate more federal LIHTC than do projects that utilize tax-exempt bonds. However, demand for competitive tax credits far exceeds the available supply.
4% bond developments are subject to a “50% test” that imposes minimum debt requirements. This test does not apply to 9% projects.
Both 9% and 4% developments are subject to the same federal income limits and set-aside rules. Click here for an explanation of the set-asides. However, proposed 9% projects may find it necessary to provide more units that target lower income brackets in order to win competitive LIHTC awards from state agencies.
Affordable housing becomes easier to understand once you have learned its lexicon. For a guide to common industry terminology, click here for our Affordable Housing – LIHTC glossary.
For information about Section 42 rent and income restrictions, click here for an introduction. To learn more about the specifics of calculating maximum LIHTC rents, click here for a more detailed explanation, including several examples.
Previously, the actual tax credit rate varied based upon the Applicable Federal Rate (AFR). The 9% tax credit has been fixed at a rate of 9% since 2008. As of December 2020, the 4% tax credit rate is also fixed. Click here for more information about the Applicable Federal Rate.
9% projects are subject to “carryover allocation” requirements. For an explanation, please click here. Projects developed with 4% bonds are not subject to carryover allocation requirements.
To learn how the tax credit is calculated, please click here for an explanation.
Some states also have affordable housing and other tax credits that can be combined with the federal credits.
For a complete listing of LIHTC income limits, Section 8 income limits, Fair Market Rents and other affordable housing data for every MSA and county in the United States, please click here to access Westmont’s LIHTC Affordable Housing Data Center.
Westmont Advisors is proud to partner with LIHTC compliance experts TheoPRO to offer development compliance services and Section 42 training programs for LIHTC professionals, including property managers, developers, asset managers, syndicators and government agencies. Training and other services are available throughout the United States. Click here to learn more.
Westmont and our partners at TheoPRO can serve your needs throughout the United States. Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.
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