What are LIHTCs?
The Low-Income Housing Tax Credit (LIHTC) is the most successful affordable rental housing production program in U.S. history. It is the federal government’s primary program for encouraging banks and other corporations to invest private equity in the development of affordable, multi-family rental housing for low-income households. The LIHTC program, which Congress established in 1986, has helped to finance 2.4 million affordable rental-residences around the nation.
How do they work?
- The IRS allocates federal tax credits to state housing finance agencies (HFA), which administer the program (VHDA in Virginia).
- Sponsors of proposed low-income housing developments apply through a competitive process for allocations of tax credits.
- If awarded, sponsors use the tax credits to raise equity for developing the project from private investors.
- Investors like VCDC benefit from the tax credits, which flow over 10 years.
- The combination of tax credits and passive losses reduces the investor’s tax liability, providing the investor a competitive market rate return.
- In addition, bank investors receive favorable consideration for complying with the Community Reinvestment Act Investment Test for the equity investment in a LIHTC fund.
- The equity paid to the project sponsor by the investors reduces the debt burden on the property. This makes it financially feasible to offer the lower, more affordable rents that are required under the LIHTC program.
- The project must satisfy specific low-income housing compliance rules for the full 15-year compliance period.
Bankers and corporate investors who want more information on using LIHTCs for CRA impact may want to access this OCC publication for further details.
All VCDC funds are meeting or exceeding the targeted rate of return. None has experienced a foreclosure or tax credit recapture.