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Build Back Better Reconciliation Legislation Includes New LIHTC Basis Boost Provision for Extremely Low-Income Units

Published by Mark Shelburne on Tuesday, November 16, 2021 - 12:00AM

The Build Back Better (BBB) legislation contains several expansions and improvements to the low-income housing tax credit (LIHTC). Of these, the most unique and complex is a way for properties to raise the maximum allocation by providing extremely low-income units.

The proposal (which may change) adapts the existing concepts of difficult development areas (DDA) and qualified census tracts (QCT). As with DDAs and QCTs, increased federal financial support would make it possible to achieve additional social goals.

Using the hypothetical numbers depicted in the graphic below, the rationale is a 40-unit building needs an additional $630,000 in LIHTCs to offset the reduced rents from eight targeted units.

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There are three overall components to understanding the provision:

  1. population served,
  2. effect on the LIHTC calculation, and
  3. practicalities of agency administration.

Population Served

A building would generate an additional 50% of eligible basis (more than the 30% possible with DDAs and QCTs) if at least 20% of its apartments are affordable to and occupied by households at the greater of:

  • 30% of area median gross income (AMI), or
  • the federal poverty line.

Note these two rent and income levels can be substantially different. For instance, in Yuma, Arizona, 30% of AMI would be $16,200 for a four-person household. The federal poverty line for a four-person household is $26,500 for a difference of $10,300.

LIHTC allocators and property owners currently implement 30% AMI for average income properties, and many have done so for decades under qualified allocation plan (QAP) policies. The poverty line limit applies to the Housing Trust Fund, which in some states is also administered by the same agency and/or used with LIHTC properties.

An important observation is the program already serves many people targeted by this proposal. Specifically, nearly half of all LIHTC households are extremely low-income.

Effect on the LIHTC Calculation

As stated above, to qualify for any boost, at least 20% of the units in a building would be required to set rents and incomes at one of the two limits.

By Building

Note the percentage would not be property-wide (unless all apartments happen to be in a single structure). As a result, the number (and possibly size) of qualifying units would need to be fixed within a building. They could not “float” across a property or change over time. DDAs and QCTs actually also are determined by building, but the designation varies only if the boundary line runs through a property.


Another difference would be that the boost from a DDA or QCT is locked in at the start of the development process and does not go away. By contrast, noncompliance with the targeting requirement in later years could have a direct effect on eligible basis:

  • if the owner and agency had agreed to a higher percentage, a reduction in qualified units down to 20% decreases the boost proportionately,
  • going below 20% means no boost at all.

Either outcome could result in less LIHTCs generated for those calendar year(s). Two potential exceptions are if a building:

  • did not receive the maximum allocation (otherwise known as having excess basis), or
  • happened to be located in a DDA or QCT (the drop would be to 130%).

Agencies and/or investors might mandate one or two units over the 20% minimum to reduce the risk of noncompliance reducing LIHTCs.

Portion Covered

Another question would be how to measure the percent of a building boosted: by units or square feet. In other words, what if the targeted apartments were larger or smaller than average? Absent federal guidance, agencies likely would use the existing applicable fraction language in Internal Revenue Code (IRC) Section 42(c)(1)(B) limiting the amount to the lesser of the unit or square foot portion.


For however much of the building is boosted, the multiplier might not be exactly 150%. Presuming the IRS Form 8609, Line 3b instructions would operate the same as with DDAs/QCTs, the percent could be less. For example, an agency might decide 140% is enough for financial feasibility. Regardless agencies would also have the authority to reduce an allocation under IRC Section 42(m)(2)(A).

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Practicalities of Administration

At the building level, an agency would have to determine whether the boost is necessary. While seemingly apparent, at least in most cases, nevertheless it would have to be a deliberate decision.

Where the new provision becomes uniquely complicated is at the program level.

Threading the Needle for 9% LIHTCs

Agencies would not be able to allocate more than 92% of their 9% LIHTCs to ineligible buildings. Since governments want to use all available housing resources, this would be effectively a minimum of 8%. In this manner, it would be similar to the nonprofit set-aside. Note that buildings in properties using the average income minimum set-aside would be part of the 92% and not contributing to the requirement.

As the legislation is written, an agency also could not allocate more than 13% of its 9% LIHTCs to qualifying buildings. Unlike the 8%, average income properties would count here.

Making awards in this narrow range would be especially challenging for small jurisdictions with the minimum ceiling of $2,975,000 for 2022 (may be higher depending on Congress). Based on estimates derived from 2020 NCSHA Factbook data, such agencies would need to allocate to buildings with between 14 and 22 units.

Achieving that level of precision in awards would be very difficult and likely necessitate agencies exercising a great deal of discretion.

In this small jurisdiction estimate, the buildings would need to contain at least three to five qualifying units, respectively. The number of targeted apartments itself does not matter either the 8% or 13% (so long as it’s at least 20%).

Remember, unlike the nonprofit set-aside, the minimum and maximum would apply to LIHTCs by building, not property. Another minor variation is the proposal would apply only to a jurisdiction’s per-capita share, as opposed to all components of a LIHTC ceiling (returned allocations, national pool).

Tax-Exempt Bonds

The new boost might be even more challenging to implement for tax-exempt private activity bond properties. While there would be only a maximum of 8% (no needle to thread), it would be determined based on bonds being issued in a calendar year. Presumably, whichever buildings would result in going over could not claim the boost.

Jurisdictions interested in using the provision would need to charge at least one entity with carefully tracking the progress of developments to avoid problems. Otherwise property owners could be faced with having to choose between forgoing the 150% or waiting to close until the following calendar year. Making this more difficult would be what can be a mix of authorities in some states, as in different agencies are responsible for bond volume, 4% LIHTCs, and being an issuer.

Combining with Other Policies or Programs

Some agencies might choose to limit their administrative burden, especially for compliance monitoring, by prohibiting market-rate, unrestricted apartments in qualifying buildings. Another simplification would be to preclude combining with the average income minimum set-aside.

Despite all of its complexities, this aspect of Build Back Better would potentially work well with several programs. One example is project-based rental assistance since it essentially guarantees residents do not pay too much in rent. Awarding Housing Trust Fund financing to these properties also would make sense since the same units count towards both programs.

Effective Date and QAPs

The law’s effective date would make the boost available in 2022, but most QAPs for next year are already finalized. Some agencies may be able amend their QAPs while others might not need to do so because the provision is in a federal statute.


There is a chance the legislation will change before enactment. Regardless, a 150% basis boost for extremely low-income units would be a welcome addition to IRC Section 42.

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