The Big 7: Seven Key Reasons for the LIHTC Program’s Success

Published by Michael Novogradac on Wednesday, July 31, 2013 - 12:00am

The low-income housing tax credit (LIHTC) has been hailed for its effectiveness in providing the highest quality of affordable rental housing.

The success of the LIHTC is not by chance, it is by design. The Novogradac special report, “Low Income Housing Tax Credit: Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies,” discusses the seven features of the LIHTC program that contribute to its remarkable track record:

  1. Large dollar investments from third-party investors (non-federal sources) – Because they involve significant dollar investments and the investors are generally sophisticated institutional investors, LIHTC transactions have more oversight than other supply-side affordable rental housing efforts. Investors constantly monitor their LIHTC assets and they generally require additional testing and auditing beyond what is required by the LIHTC program or the credit allocating agency.
  2. Screening of properties before development by third-party investors – In addition to careful screening by credit allocating agencies, third-party investors also spend considerable time reviewing and assessing the financing, market forecasts, and forecasted operating cash flows of the LIHTC properties in which they are investing. This additional review often results in a more durable financial structure, such as funding of additional cash reserves.
  3. Economies of scale and uniform practices – The use of investment funds as ownership vehicles has allowed investors with dedicated LIHTC investment and compliance departments, as well as those who simply invest along-side other more knowledgeable investors through syndicators, to generate economies of scale and investment diversification. And because of the sizable capital invested by tax credit investors in LIHTC funds, many uniform practices have developed regarding how to underwrite LIHTC investments, value associated financial benefits, and manage ongoing compliance.
  4. Construction and/or reconstruction risk and lease-up risk borne by investors and developers – During the life of a property, the riskiest period from a financial standpoint is the construction or rehabilitation phase. Under the LIHTC program, the federal government is not subject to construction and lease-up risk because LIHTCs are not earned until a development is completed, placed in service and leased up with qualified tenants.
  5. Tax credits received for performance over time – The fact that credits are earned over time is a large incentive for continued program compliance. To continue to claim credits over the credit period, a property must stay in compliance. Furthermore, if a property falls out of compliance, it can face tax credit recapture.
  6. State level allocation, customization and oversight – By providing for state participation in defining the selection criteria, approving applications, and monitoring compliance, the LIHTC program enables credit allocating agencies to have significant input regarding the types of affordable rental housing properties that are built in their domain, minimizing the required oversight at the federal level.
  7. Regulatory guidance from the IRS and enforcement by IRS auditors – Property owners are required to submit documentation to the credit allocating agency regarding the completion of construction or rehabilitation, most notably an audited cost certification. These filing requirements, along with a handful of other filings that are required by the IRS, keep them well informed of problems with specific properties. This oversight is valuable in keeping property owners compliant with the rules.

 

Read more detailed analysis of each of these seven strengths in “Low Income Housing Tax Credit: Assessment of Program Performance & Comparison to Other Federal Affordable Rental Housing Subsidies.”