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Volume 3 Number 6
june 2006
In this Issue
Factors in Achieving and Retaining Homeownership
Performance Measurement Enhances Community Development
Mark-to-Market Preserves Affordable Rental Housing
Optimized Tax Credit Allocation Can Serve Those in Need
In the next issue of ResearchWorks
Optimized Tax Credit Allocation Can Serve Those in Need
Recently released by HUD, Making the Best Use of Your LIHTC Dollars: a Planning Paper for State Policy Makers examines the Low-Income Housing Tax Credit (LIHTC) program and makes recommendations to state housing policymakers on optimizing the use of tax credits to develop or rehabilitate affordable rental housing.
Congress created the LIHTC program in 1986 to provide an incentive to the private market to invest in affordable rental housing. In the past two decades, developers have used LIHTCs to raise capital for the construction and rehabilitation of affordable rental housing nationwide. Investors who purchase these tax credits receive dollar-for-dollar federal tax credits annually for a period of 10 years. The amount of the annual tax credit is based on the amount invested in affordable housing (some projects may have a mix of affordable and market-rate units). The tax credits help reduce the amount of money a developer must borrow to finance the construction/rehabilitation project and can result in lower, more affordable rents.
Eligible projects under the LIHTC program include residential rental properties that: restrict rents, including
utilities, for low-income units; agree to operate under rent and income restrictions for a minimum of 30 years; recertify tenant incomes annually to ensure eligibility; and commit to one of two low-income occupancy threshold requirements. The low-income threshold requirements include:
- The 20-50 Rule - At least 20 percent of the units must be rent-restricted and occupied by households with income at or below 50 percent of area median income; or
- The 40-60 Rule - At least 40 percent of the units must be rent-restricted and occupied by households with incomes at or below 60 percent of area median income.
Tax Credit Allocations
Each year, the Internal Revenue Service allocates housing tax credits to state agencies (usually state housing finance agencies) that award the credits to affordable housing developers. State tax credit allocations
are based on population. State agencies allocate tax credits through a Qualified Allocation Plan (QAP) that can include:
- Competitions for metropolitan and nonmetropolitan areas;
- Preferences for specific geographic areas;
- Allocations to areas with worst-case housing needs; and
Federal regulations require the states to give priority to projects that serve the lowest income families and to those projects which will remain affordable for the longest periods of time. Also, 10 percent of each state’s allocation is set aside for projects developed by nonprofit groups.
Produced by Abt Associates for HUD, Making the Best Use of Your LIHTC Dollars is divided into three sections. The first section examines LIHTC allocations in metropolitan
areas based on the need for rental housing assistance and project-based rental subsidies. The second section looks at tax credits used to develop housing for people who face difficulties in finding affordable housing, including extremely low-income families, large families who need units with three or more bedrooms, the frail elderly, and people with
disabilities. The third section examines tax credits as part of an overall strategy for economic development in metropolitan areas.
Identifying Housing Shortages
The paper makes several recommendations to state policymakers on how to make the most of their tax credits. For example, the authors believe that tax credit development should be concentrated in areas with needy households and a shortage of affordable rental housing. At the same time, they urge policymakers to use severe rent burden or worst-case housing needs (paying a very high percentage of income for rent/utilities), rather than poverty, when determining allocations.
The authors point out that it's difficult to identify areas with housing shortages and suggest looking at areas with low vacancy rates, high rent-to-income ratios, or areas where rents are rising without comparable increases in new construction.
State policymakers can also use voucher success rates to determine rental housing shortages in their state. The success rate is viewed as the percentage of all households with vouchers who found qualified rental housing and began to receive a housing choice voucher subsidy. Approximately 70 percent of households
with vouchers successfully find rental housing, so a much lower voucher success rate could indicate a lack of affordable rental housing.
Develop an Allocation Strategy
The authors recommend making LIHTC allocations part of an overall strategy for affordable housing development that reduces regulatory barriers to affordable housing. The authors note that if housing subsidies are the only tool being used, policymakers should consider using them in neighborhoods in the early stages of decline or those beginning to improve, rather than in severely distressed neighborhoods.
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HUD Updates Low-Income Housing Tax Credit Database
The Low-Income Housing Tax Credit (LIHTC) database, created by HUD and available to the public since 1994, has been updated and now contains information on more than 24,500 projects and nearly 1,257,000 housing units placed in service between 1987 and 2003. Data are available through the LIHTC Database Access website at http://lihtc.huduser.org/. In addition to downloading the entire database, users may extract more limited sets of data by selecting only the variables of interest to them, and by filtering for variable values or restricting the geographic parameters of their query. A companion
report analyzing the latest data is available at http://www.huduser.org/Datasets/lihtc/report9503.pdf.
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They also encourage state agencies and policymakers to consider a mixed-income strategy in tax credit developments - with a mix of tax-credit and market-rate units - to avoid concentrations of subsidized housing. Tax credits can also be used to preserve existing affordable housing in gentrifying neighborhoods,
which tend to be near transportation lines and active business districts.
Conclusion
The authors conclude that careful planning and targeting of annual tax credit allocations can optimize a state's resources and ensure that affordable rental housing is developed in the appropriate geographical areas to serve specific households in need, such as large families, the frail elderly, extremely low-income families, and people with disabilities.
Making the Best Use of Your LIHTC Dollars: A Planning Paper for State Policy Makers can be downloaded at no charge from the HUD USER website (http://www.huduser.org/publications/polleg/lihtcDollars.html) or may be ordered from HUD USER for a nominal fee by calling 800.245.2691.
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