As the housing and economic crisis progressed in late 2008, the market for Low-Income Housing Tax Credits (LIHTCs) weakened due to declining investor interest and need to reduce tax liabilities. This compromised the viability of tax credits as a major funding source for affordable and mixed-income rental developments. Congress is currently developing changes to the regulations governing LIHTCs, which may help to strengthen the market for them. However it may be some time before the tax credit market regains the prominence it had prior to the crisis.

Regardless of the current crisis, there are some challenges to using LIHTCs to finance the development of mixed-income housing that are inherent to the structure of the program and how developers and investors use it. Since LIHTCs are central to the development of non-luxury and affordable rental homes, addressing issues with the program is essential. The challenges reported by practitioners include the following:

• In many states, mixed-income developments with a market-rate component do not score well enough under the state's allocation policies to obtain the competitive 9-percent Low-Income Housing Tax Credits; and,

• Tax credit investors are less comfortable with developments that are not 100 percent tax credit eligible -- apparently because of the extra risk of keeping the market-rate units occupied and the challenges that market-rate units add to compliance monitoring.

While many states understand the value of creating mixed-income communities and the cross-subsidies they produce, they are also under significant pressure to create as much affordable housing as possible. Too often, with these competing demands, the easier route is to support the projects that produce the most affordable housing. In some cases, this may not be the best solution for a community.

States interested in promoting the increased use of cross-subsidies and development of mixed-income communities may wish to convene a task force comprised of nonprofit and for-profit developers of affordable homes, affordable housing advocates and tax credit investors to discuss what steps, if any, the state can take to better support these strategies. In particular, states should look at the tax credit allocation policies contained in their Qualified Allocation Plans.

Some possible steps both states and localities can take to facilitate the use of Low-Income Housing Tax Credits for mixed-income developments are:

• Adopt tax credit allocation plans that prioritize mixed-income housing models;

• Work with tax credit syndicators to determine how to make investors more receptive to mixed-income deals; and

• Provide credit enhancement (e.g. partial loan guarantees) to mitigate the risks associated with market-rate units.

Click here to continue learning about how jurisdictions can facilitate the use of cross-subsidies to create mixed-income communities.