The Low Income Housing Tax Credit (LIHTC) program is the nation's largest rental housing production program, financing approximately 90 percent of all affordable rental housing. Under LIHTC, federal housing tax credits are awarded to developers of qualified projects. Developers then sell these credits to investors to raise capital (or equity) for their projects, in turn reducing the debt that the developer would otherwise have to incur. Because the debt is lower, a tax credit property can offer lower, more affordable rental rates.
In the wake of the economic crisis of 2008, the Housing and Economic Recovery Act of 2008 set the rate for new construction and substantial rehab LIHTC (also known as 9 percent credits) at no less than 9 percent, the amount originally envisioned when the program was created in the Tax Reform Act of 1986. However, this provision will expire for apartments placed in service after 2013. Then, unless a new law extends the fixed 9% rate, new construction and substantial rehabilitation will be underwritten at a floating rate tied to the federal borrowing rate. This could result in a loss of 15-20 percent of the maximum amount of private equity a property could have otherwise received.
Similarly, states are allowed to provide 4% tax credits above their capped (9%) allocation for projects also financed with tax exempt debt. These 4% tax credits are currently set under the floating rate system. Applying the fixed floor rate for acquisition credits at 4% would similarly remove the uncertainty and financial complexity of the floating rate system, simplify administration, and facilitate preservation of affordable housing at little or no cost to the federal government.
An overview of the issues surrounds the proposed 9% and 4% floors for LIHTC
The Department of Housing and Urban Development resource page for LIHTC
The National Low Income Housing Coalition resource page for LIHTC
For Current Status: ACTION Campaign page