Complexity of LIHTC Financing Increases Development Costs

The Terner Center for Housing Studies at the University of California at Berkeley released a report on “The Complexity of Financing Low-Income Housing Tax Credit Housing in the United States,” analyzing trends in the structure of Low-Income Housing Tax Credit (LIHTC) financing and explores ways to simplify it. The authors conclude with policy recommendations to make the financing of LIHTC development more efficient.

The authors used a combination of qualitative interviews with stakeholders and quantitative analyses of project-level data for the report. The team conducted interviews with 30 stakeholders with expertise in LIHTC development. Because there is not a national database tracking development costs for LIHTC properties, project-level data for the quantitative analysis were collected from 11 LIHTC syndicators and combined with HUD’s LIHTC property database to create a dataset of 3,029 LIHTC properties representing all 50 states.

The authors found that an average of 3.5 permanent financing sources in LIHTC projects between 2000 and 2018, with 4% deals tending to have more layers of financing than 9% deals. Projects that combined 4% and 9% credits tended to have the fewest layers of financing. The complexity of LIHTC financing increased in recent years. In new construction projects with 9% tax credits, for example, the average number of hard or soft loans per project doubled from 2 in 2000 to 4 in 2017. Projects serving extremely low-income households and special populations tended to have more layers of financing, and financial complexity varied across markets. Areas with higher development costs tended to have more layers of financing.

The greater complexity of LIHTC deals results in greater development costs through increased staff time and legal fees associated with each additional layer of financing. Specialized requirements and a lack of coordination between funding cycles for different layers of financing also adds to the total cost of LIHTC development by increasing development timelines and associated costs.

The authors offer policy recommendations to make the financing of LIHTC projects more efficient and to help contain costs. First, the authors recommend reducing the fragmentation of funding streams by consolidating them wherever possible at the federal and state levels, so that at least the same amount of total funding is available through a smaller number of sources. The authors also advocate for the federal government to better align deadlines and program requirements across housing production programs. Finally, the authors propose bringing disparate funding streams under the administration of fewer agencies and improving the capacity of those agencies to coordinate resources.

“The Complexity of Financing Low-Income Housing Tax Credit Housing in the United States” is at: