How Quickly Would Rising Interest Rates Lift the 70 Percent Present Value LIHTC Rate to 9 Percent?

Published by Advisory Council on Historic Preservation, Michael Novogradac on Friday, March 27, 2015 - 12:00am

The Federal Reserve’s Open Market Committee is providing subtle indications that interest rates will increase in the near future, which has led many to ask what effect these rising rates will have on low-income housing tax credit (LIHTC) percentages or rates. Particularly, many wonder how much higher must interest rates rise for the floating 70 percent present value (PV) credit to once again reach 9 percent?

Before answering this question, it’s important to note that the monthly February 2015 10-year Treasury rate is a mere 45 basis points above its all-time low, which occurred in 2012. Conversely, it is a whopping 754 basis points (7.54 percent) below its peak since the LIHTC was created by the Tax Reform Act of 1986.

Correspondingly, LIHTC percentages are at historic lows. The April 2015 percentage is7.48 percent for the 70 percent PV, or so called “9 percent” credit, and 3.21 percent for the 30 percent PV, or “4 percent,” credit.

Under current law, mid-term and long-term annual applicable federal rates (AFRs) would have to rise about 640 basis points (6.4 percent) from their April levels to realize a LIHTC rate of 9 percent. To reach a LIHTC rate of 4 percent, AFRs would need to rise approximately 770 basis points (7.7 percent).

This clearly demonstrates the importance of a 9 percent credit floor. Reps. Pat Tiberi, R-Ohio, and Richard Neal, D-Mass., introduced legislation (H.R. 1142) that would restore a minimum LIHTC rate of 9 percent, and establish a similar 4 percent minimum for LIHTC used to acquire existing property. Sens. Pat Roberts, R-Kan., and Maria Cantwell, D-Wash., are expected to introduce a companion bill soon.