What is the 9 percent Low-Income Housing Tax Credit?

The Low Income Housing Tax Credit (LIHTC) was created through the Tax Reform Act of 1986. It is one of the largest sources of federal funding for affordable housing, responsible for the creation or rehabilitation of over one million units of rental housing reserved for households with incomes below 60 percent of the area median income (AMI). Although the LIHTC is a federal program, it is administered principally through state housing finance agencies, which have substantial discretion in setting priorities for allocating the valuable credits. Federal law provides for two different types of LIHTCs, the 4 percent and the 9 percent credit (The 4 percent and the 9 percent figures refer to the approximate percentage of the eligible project costs that investors may claim on federal tax returns for a 10 year period).

For more information on the 4 percent low-income housing tax credit and how to expand its use click here. For more information on how the Low-Income Housing Tax Credit program works in general, click here. The larger of the two credits - the 9 percent credit - is allocated to the states on a per-capita basis. Because the credit is large and the supply is limited, their allocation is competitive under normal market conditions, namely during times in which financial markets are functioning well and investors have taxable income to offset with credits. Development proposals are reviewed based on criteria established in the state's Qualified Allocation Plan (QAP). Successful proposals receive an allocation of the tax credits. In most cases, the credits are converted to equity for the project through a process known as syndication, whereby the developer receives a price per dollar of tax credit based on market conditions at the time. What problems does this policy solve? The 9 percent Low Income Housing Tax Credit (LIHTC) plays a vital role in the production and rehabilitation of affordable rental housing across the United States and is considered to be an extremely successful and efficient method for facilitating the production and rehabilitation of affordable housing. An economic downturn, however, can interfere with the proper functioning of the LIHTC process. (click here for more information on current issues and limitations of the low income housing tax credit due to the economic downturn). In a typical year under normal economic conditions, the 4 percent and the 9 percent tax credit accounts for half of all multifamily housing starts. While LIHTC developments can include a mix of uses and housing types including market-rate for-sale housing, the tax credits can only be used for the affordable rental component.

Solutions in Action

The Residences at Wiley H. Bates Heritage Park, Annapolis MD -- Photo courtesy of Community Preservation and Development Corporation. The Residences at Wiley H. Bates Heritage Park is a multi-use complex converted from an old high school that sat vacant for 20 years. In 2005, Community Preservation and Development Corporation (CPDC) and its partner Northern Real Estate Urban Ventures, LLC developed the former classroom wings of the building into a 71-unit independent living facility for low-income seniors. The very low incomes of targeted residents, along with the historic nature of the building, required CPDC to put together a variety of private and public funding sources. Private sector financing consisted of tax credit equity from Hudson Housing Capital, who purchased the 9 percent Low-Income Housing Tax Credits allocated to the project. Public sector financing included secondary loans from Arundel Community Development Services, Inc. and Maryland Department of Housing and Community Development. In addition, the project received a project-based voucher Section 8 contract for all 71 of the apartments from the Housing Commission of Anne Arundel County. The project includes 36 units restricted to residents earning up to 40 percent of the area median income, and 35 units restricted to residents at 50 percent of AMI.

Where is this policy most applicable?

The 9 percent Low Income Housing Tax Credit (LIHTC) is an effective financing tool for the production and rehabilitation of affordable rental housing in most markets. In areas with high area median incomes (AMI) and high rents, the 9 percent LIHTC can effectively be used to create new and preserve existing rental housing with below-market rents. Because of the higher incomes in these areas, LIHTC developments can often be made financially feasible since LIHTC rents, while below-market, are tied to the AMI of the Metropolitan Statistical Area (MSA) and as such will be higher in these areas than in areas with lower median incomes, leading to better cash flows for the property.

The 9 percent tax credit also works well in communities with limited rental housing and high value for-sale homes. Households with incomes below 60 percent of the AMI in these communities often have limited housing options, so new LIHTC apartments often provide convenient and affordable housing for the workforce, a critical component of a healthy, growing and efficient economy. Land costs in both of the areas described above tend to be high as well, creating another challenge to the production and rehabilitation of affordable housing. Land acquisition is not calculated in to the "qualified basis" used to determine the tax credit; so many LIHTC development proposals in these areas also require assistance with land acquisition.

By contrast, in areas with both relatively low incomes and low rents, the 9 percent LIHTC may not work as efficiently. Because LIHTC rents are tied to AMI, the required rents may be too low to make the development of LIHTC rental housing financially feasible, especially if existing rents in the community are also low. Competition from market-rate rental housing communities in these communities also might limit demand for the LIHTC housing.

Learn more about the 9 percent Low-Income Housing Tax Credit Go back to learn about other policies that generate capital