Tax credits spur low-income housing
Tax credit equity obtained through the federal Low Income Housing Tax Credit (LIHTC) program, is a cost effective way for cities and counties to produce affordable housing that is privately owned and managed. Working with local housing authorities, the LIHTC program can provide as much as 50 percent of the funding needed for development of low- and moderate-income housing.
Authorized by Congress in 1986 to encourage production of affordable rental housing, the program allows corporations and individuals to invest in such housing in exchange for a dollar-for-dollar credit against the taxes those investors will owe over a 10-year period. Most credits are sold directly to corporations, corporate funds or limited partnerships through public or private syndication.
Investors pay between 50 cents and 60 cents up front per $1 in tax credits taken over a 10-year period. The projects have a lower risk factor because they are analyzed by government and private interests familiar with these types of apartment developments. To qualify, a project must reserve at least 20 percent of its units for tenants earning 50 percent or less of the area’s adjusted median income (AMI) by household size, or 40 percent for tenants who cam 60 percent or less of AMI. Only low-income housing units in a development are eligible for low-income housing tax credits.
There are two levels of federal tax credits. For new construction and rehabilitation of buildings not federally subsidized, an annual tax credit of between 8 percent and 9 percent of the qualified basis is available for 10 years. (The qualified basis is approximately equal to the total development cost, excluding land, attributable to the low income units.) A tax credit of between 3 percent and 4 percent annually is awarded for building acquisition and when projects receive other federal subsidies such as tax-exempt financing. For projects in high-construction-cost areas – i.e. urban – a 30 percent bonus on the federal credits is available.
In California, a supplemental State Low Income Housing Tax Credit program equivalent to 30 percent of the qualified basis over the first four years of the 10-year federal tax credit period augments the federal credit. Usually available to projects not receiving the 30 percent federal bonus, the combined tax credit program has generated about 47,000 affordable units.
Two California developments sponsored by local redevelopment agencies and slated for occupancy in 1996 illustrate how tax credits produce affordable housing. Each uses tax credits and federal and local agency funding, and private banks are providing mortgages for between 15 percent and 20 percent of total project costs.
Gabriela Apartments, a new large-family development in San Francisco, was awarded $6 million in federal and state credits in 1994. Its tax credit investor is contributing about $3.3 million upfront, or more than 50 percent of the total project cost. Kennedy Court Apartments, a dilapidated and overcrowded complex in Fairfield, was awarded $2.5 million in federal and state credits in 1995. Its tax credit investor is contributing more than $1.4 million or about 35 percent of the total project cost. (Rehabilitation projects generally yield less in equity than new construction.
The federal LIHTC program has removed most of the complex bureaucracy for which the federal Department of Housing and Urban Development is famous and replaced it with private investor scrutiny, state oversight and local control.
Still, there are indications that the program and other federal housing programs may be cut by Congress, despite the fact that tax credits have been successful in spurring affordable housing.