Low-Income Housing Tax Credit

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Enterprise Point of Contact:

Peter Lawrence
Senior Director, Public Policy & Government Affairs
Last Updated: July 20, 2012

Issue Background: Low-Income Housing Tax Credit

The Low Income Housing Tax Credit (LIHTC, Housing Credit) program is the nation’s largest and most successful affordable rental housing production program. Since its creation as a provision of the Tax Reform Act of 1986, the Housing Credit program has leveraged more than $75 billion in private investment capital, providing critical financing for the development of more than 2.5 million affordable rental homes. The program annually supports 95,000 jobs and finances approximately 90 percent of all affordable rental housing. In 2010, 50 percent of all multifamily housing starts were financed through the Housing Credit program, according to the National Council of State Housing Agencies (NCSHA) and the National Association of Home Builders (NAHB), respectively.

The Housing Credit is the fundamental housing resource used to transform communities. The program provides affordable housing to working families and people with special needs (the elderly, the disabled, and the homeless) in urban, suburban, and rural communities throughout the country. The program also addresses the needs of those who are acutely underserved such as farmworkers and Native Americans. A recent study on tenant characteristics found that Housing Credit properties reach households at a range of incomes, from the maximum statutory amount of 60 percent of area median income (AMI) to the 43 percent of Housing Credit tenants with extremely low incomes, defined as having incomes at or below 30 percent of AMI. The study also found that Housing Credit developments do a fair job of creating mixed-income communities. A quarter of all units were in developments with at least 20 percent of occupants with extremely low incomes and at least 20 percent of occupants earning 50 percent of AMI or more.

The Housing Credit is a premier example of public-private partnerships. After incorporating public comment and participation, state agencies develop Qualified Allocation Plans (QAP) that aim to address the particular affordable housing priorities of the state and determine the kinds of affordable housing units that are built and where they are built. The public-private nature of the Housing Credit has brought a private-sector discipline which is an unprecedented departure from previous federal housing programs. The private-sector manages the site selection, underwriting, and ongoing compliance monitoring of the projects, as their ability to claim tax credits and maintain a strong rate of return on their investment is determined by the project’s success. Such a “pay-for-performance” model has led to very effective management of affordable apartments and an extraordinarily low level of foreclosure—an annualized rate of 0.62 percent according to the Reznick Group. Also, the private sector assumes all of the construction and lease-up risk associated with Housing Credit-financed properties, while the federal government does not provide any subsidy until the housing is built, meets appropriate housing quality standards, and is leased to an income-qualified tenant at affordable rents. Lastly, if the property falls out of compliance for whatever reason during the 15-year compliance period the investor pays the penalty through recaptured tax credits, making the taxpayer whole.

Current Policy State

As Congress considers proposals for tax reform and deficit reduction, it is crucial that the Housing Credit be preserved as a permanent provision in the U.S. tax code. According to a recent Joint Center for Housing Studies of Harvard University report, there is a current unmet national demand for more than 6.4 million affordable rental homes, and this number is anticipated to continue growing in the coming years. While comprehensive tax reform is not likely to advance in 2012, there is strong bipartisan support in both the House and the Senate for lowering statutory corporate tax rates, which as of April 1, 2012 were the highest among developed nations. Therefore, we expect that there is a good chance for tax reform in 2013. As the Housing Credit is one of the largest corporate tax expenditures, it is vulnerable to being eliminated or substantially cut to help pay for the lowered rates.

Outside of tax reform, there are also specific policy issues affecting the Housing Credit. The Housing and Economic Recovery Act of 2008 (HERA) enacted a temporary provision which created a fixed floor rate for new construction and substantial rehab Housing Credits (also known as 9 percent Housing Credits) at no less than 9 percent - the amount originally envisioned when the program was created. This provision has simplified state administration of the program, and removed the financial uncertainty and risk associated with underwriting Housing Credit-financed properties using a “floating rate” system.

The expiration of the 9 percent floor has already begun to affect Housing Credit allocations in early 2012, as it typically takes 18-24 months to place Housing Credit-financed projects into service, and thus most projects receiving allocations in 2012 will be placed in service after 2013, when the HERA provision officially expires. This could result in a loss of 15-20 percent of the maximum allowable amount of private equity a property could have otherwise received. Bipartisan bills have been introduced in both the House and Senate during the 112th Congress to permanently extend the 9 percent floor (H.R. 3661 and S. 1989).

Legislative Priorities

Enterprise has been a strong supporter of the Housing Credit since its creation, and is committed to protecting and preserving the program as Congress considers proposals to reform the tax code and solutions to address deficit reduction. Additionally, in order to maintain private investment in the program, Congress needs to enact legislation that would reduce the financial risk and uncertainty associated with the “floating rate” system.

Providing a forum for the Housing Credit community to convene and advocate for Housing Credit-related legislative proposals, Enterprise helped to establish and currently leads the Affordable Rental Housing A.C.T.I.O.N. (A Call to Invest in Our Neighborhoods) Campaign - a broad grass-roots coalition of more than 350 national, state, and local organizations. As part of the A.C.T.I.O.N. campaign, Enterprise is advocating for legislative proposals to make permanent a fixed rate for new construction and substantial rehabilitation Housing Credits at no less than 9 percent (a provision temporarily enacted in HERA), and apply that same policy for acquisition credits fixed at a rate of no less than 4 percent.

Publications and Resources

Current Housing Credit-Related Legislative Proposals (112th Congress)

A bill to amend the Internal Revenue Code of 1986 to make permanent and expand the temporary minimum credit rate for the Low-Income Housing Tax Credit program (H.R. 3661 and S. 1989)
- Enterprise Summary of H.R. 3661 and S. 1989
An act to amend the Internal Revenue Code to qualify formerly homeless youth who are students for purposes of the low income housing tax credit (H.R. 3076)
Irene and Lee Tax Relief Storm Recovery Act (H.R. 3769): a bill to amend the Internal Revenue Code of 1986 to increase the amount of the low-income housing credit that may be allocated in States damaged in 2011 by Hurricane Irene or Tropical Storm Lee.

Previous Housing Credit-Related Legislative Proposals (111th Congress)

Enterprise Resources

Policy Points: Affordable Housing Finance Updates

Enterprise Senior Director, Public Policy and Government Affairs, Peter Lawrence is the author of the monthly Policy Points column in the Novogradac Journal of Tax Credits, which covers the latest issues related to the financing of affordable housing. The following articles address the Housing Credit market:

The Challenge of Balancing Cost Control with Quality, Sustainable Housing, May 2012
The Housing Credit: Under Threat of Budget Austerity While Celebrating 25 Successful Years, September 2011
The HOME Program: The Glue That Makes LIHTC, Other Federal Housing Programs Work Better, August 2011
New Rental Research Report Demonstrates Growing Need for Affordable Housing; June 2011
The Remarkable Resurgence and Resilience of the Low Income Housing Tax Credit; May 2011
Multifamily Finance: The Neglected Issue in the Fannie-Freddie Debate; February 2011

Housing Credit Program Basics

The following links provide a basic summary and illustrative storyboard showing how the Housing Credit program works, including a discussion of why the program works and why its existence is necessary for the development of affordable housing.

Impact of Dodd-Frank Wall Street Reform and Consumer Protection Act on the Low-Income Housing Tax Credit

On April 2, Enterprise Senior Director, Public Policy and Government Affairs, Peter Lawrence wrote a guest post on the National Housing Conference's Open House blog explaining the impact of the "Volcker Rule" on the Housing Credit market.

Positive Impacts of the Low-Income Housing Tax Credit and New Markets Tax Credit (NMTC) Programs

Enterprise submitted public comments in support of the Housing Credit and NMTC programs to the National Commission on Fiscal Responsibility and Reform (NCFRR), both individually and as a part of The Affordable Housing Tax Credit Coalition (AHTCC). The letters were in response to The Report on Tax Reform Options: Simplification, Compliance, and Corporate Taxation from the President’s Economic Recovery Advisory Board, which outlined options for budget reform that included the elimination or reduction of corporate tax expenditures such as Housing Credit.

October 26,2010: Enterprise comment to the NCFRR in support of the Housing Credit and NMTC programs
November 24, 2010: AHTCC letter in support of the Housing Credit

CRA Treatment of Housing Credit Investments

On August 31, 2010, Enterprise submitted a joint comment letter on reducing disparities in Housing Credit pricing and investment demand between large metropolitan markets and the rest of the country with the Affordable Housing Tax Credit Coalition, Affordable Housing Investors Council, the Local Initiatives Support Corporation, Opportunity Finance Network, Housing Partnership Network, Stewards of Affordable Housing for the Future and the National Housing Trust.

Impact of Housing Credit Investment on Communities and Low-Income Households

Enterprise and the Local Initiatives Support Corporation (LISC) conducted a case study in New York City to determine the importance of the Housing Credit program at the neighborhood and family level.

Affordable Housing for Families and Neighborhoods: The Value of Low-Income Housing Tax Credits in New York City (June 2010)

External Resources

External Research

What Happens to Low Income Housing Tax Credit Properties at Year Fifteen and Beyond?, U.S. Department of Housing and Urban Development, Office of Policy Development & Research, August 2012
What Can We Learn about the Low Income Housing Tax Credit Program by Looking at the Tenants?, Katherine M. O'Regan (Associate Professor, New York University Wagner Graduate School and Furman Center) and Keren M. Horn (Assistant Professor of Economics, University of Massachusetts Boston), July 1, 2012
The Disruption of the Low Income Housing Tax Credit Program: Causes, Consequences, Responses, and Proposed Correctives, Harvard Joint Center for Housing Studies

Housing Credit Investment Market Survey

Enterprise and the Local Initiatives Support Corporation (LISC) commissioned a survey by the Ernst & Young Tax Credit Investment Advisory Services and Quantitative Economics and Statistics groups to better understand the Housing Credit investment market, its investment history, current market conditions and investor motivation. The survey also analyzed potential investor response to certain legislative proposals designed to stimulate investment activity.

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