Page 6 - Balancing Priorities
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BALANCING PRIORITIES: Preservation and Neighborhood Opportunity in the Low-Income Housing Tax Credit Program Beyond Year 30 must be dedicated to projects undertaken by non-pro t developers. Though, in practice, approximately 19% of LIHTC properties have non-pro t owners (NLIHC & PAHRC, 2017). Two types of tax credits exist: 9% and 4% credits. Through a competitive allocation process, 9% credits are available for new construction and substantial rehabilitation projects not utilizing other federal resources. Four percent credits can be used for new construction or substantial rehabilitation utilizing other federal funding, or rehabilitation projects meeting a minimum cost threshold per low income unit. Four percent credits are issued outside of the competitive allocation process for 9% credits and in conjunction with tax-exempt bonds. The amount of tax credit for which a developer can apply is  rst determined by the proposed project’s cost of development, known as the eligible basis. A project’s eligible basis excludes land and building acquisition costs and some other expenses like marketing and permanent  nancing fees. The eligible basis is multiplied by the proportion of total square footage or units that are reserved for low-income households to determine the quali ed basis. Projects located in HUD-designated quali ed census tracts (QCTs) or dif cult to develop areas (DDAs) are eligible for a 30% basis boost. QCTs are census tracts with high concentrations of low-income households, while DDAs are areas with high development costs. The quali ed basis is multiplied by the applicable percentage of either the 9% or 4% tax credit to determine the size of the credit that can be taken annually over a 10- year period (NLIHC, 2018b). HFAs are not obligated to award the full amount of the credit for which a developer can apply. Developers awarded tax credits sell them to investors, usually through a syndicator, in exchange for cash equity to develop their project. Tax credits provide investors with a reduction in their tax liability taken annually during the  rst 10 years after the project is placed in service. Project costs not covered through syndication of the tax credits are typically  nanced through a conventional mortgage. In many cases, projects will also utilize additional gap  nancing like grants and soft second mortgages from public and philanthropic entities to cover remaining costs. Program Eligibility and Rent Affordability To be eligible for the tax credit, at least 20% of a project’s units must be set aside and affordable for households with incomes at or below 50% of the area median income (AMI), or 40% of the units must be set aside and affordable for households with incomes at or below 60% of AMI. The Consolidated Appropriations Act of 2018 established a new income averaging option that allows LIHTC units to serve households with incomes up to 80% of AMI in exchange for serving even lower income households, so long as the average income limit for all tax credit units is 60% or less of AMI and at least 40% of all units in a development are affordable for eligible households. It is not uncommon for all or most units in a tax credit project to be designated for low-income occupancy, as this increases a project’s quali ed basis (O’Regan and Horn, 2013; Schwartz & Melendez, 2008). LIHTC units’ gross rents can be set at a maximum rent affordable to a hypothetical household with income at the chosen income threshold, such as 50% or 60% of AMI. In other words, rents are determined not by the occupying tenants’ incomes, but are instead typically set at 30% of the AMI threshold. Absent additional rental assistance like an HCV, households with incomes below the eligibility threshold will often pay more than 30% of their income on rent, making them cost-burdened. Some states provide incentives in their QAPs to encourage developers to set aside units for households of even lower income. NATIONAL LOW INCOME HOUSING COALITION AND THE PUBLIC AND AFFORDABLE HOUSING RESEARCH CORPORATION 6 

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