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HUD Lifts New LIHTC Pilot Program Cap

Published by Thomas Stagg on Thursday, June 29, 2023 - 12:00AM

The U.S. Department of Housing and Urban Development (HUD) issued a memorandum June 8 lifting the $25 million cap on loans in the new low-income housing tax credit (LIHTC) pilot program.

The increased cap will allow larger developments and developments that needed more rehabilitation than allowed under the $25 million cap to access this pilot program, thereby increasing the number of developments that can use the pilot program. The higher leverage available to a LIHTC development under this program can help fill gaps created by increased construction costs, higher interest rates and lower equity pricing.

About the Program

HUD launched the LIHTC pilot program in 2012 to streamline processing of Section 223(f) LIHTC transactions with repairs up to $40,000 per unit. Then, in 2019, HUD expanded the program to include new construction and substantial rehabilitation projects under the Section 221(d)4 and Section 220 loan programs. The expansion to include Section 221(d)4 and Section 220 transactions makes the majority of LIHTC transactions eligible for the pilot program. To learn more about the LIHTC pilot program, read this Novogradac Journal of Tax Credits article.

Not all LIHTC transactions are eligible for the pilot program. These ineligible properties will be processed under current LIHTC underwriting guidelines and include 4% LIHTC new construction transactions, Rental Assistance Demonstration properties, historic tax credit and new markets tax credit transactions, adaptive reuse of nonresidential structures, developments involving significant demolition or gut rehabilitation, and those involving inexperienced development team members, including property managers.

Why Remove the Cap

The goal of the new LIHTC pilot program is to ensure faster and more efficient processing for low-risk LIHTC transactions by eliminating redundant reviews. HUD’s average processing time for its LIHTC construction loans is 90 days. The pilot program cuts down that processing time dramatically, with a 30-day processing time for loans processed under the expedited approval process and 60 days under the standard approval process. All other eligibility and processing requirements for the new LIHTC pilot program remain the same.

If a development qualifies for the expedited approval process, HUD’s review is limited because HUD will rely on the underwriting and due diligence performed by the lender during both the underwriting and construction phase. Generally speaking, the main drawback of using the expedited approval process is that a development will have a lower loan to cost ratio than a development using the standard approval process.

Eliminating the $25 million cap was done in alignment with HUD’s Fiscal Year 2022-2026 Strategic Plan to increase the supply of affordable rental housing. The HUD memorandum stated that after considering the current LIHTC affordable rental housing market conditions, it determined that removing the cap will better align and further incentivize borrowers and lenders to use the new LIHTC pilot program.

The new LIHTC pilot program expands HUD’s support for the LIHTC incentive, which is the primary resource used to create and preserve multifamily affordable housing, and is the primary tool for encouraging the investment of private capital in affordable rental housing, according HUD.

The removal of the cap is particularly important as inflation continues to increase the cost of developing LIHTC housing. In addition, the rising interest rates, lowered corporate tax rates and other factors have resulted in the amount of equity invested in many affordable housing developments being reduced. The somewhat higher leverage available to a LIHTC development with a Federal Housing Administration-insured mortgage can help fill the gap in the development’s sources of funds and make a development financially feasible to fund.

The streamlined process in the new LIHTC pilot program is intended to align HUD’s Section 221(d)(4) and Section 220 platform with the requirements of the LIHTC incentive and improve HUD’s responsiveness and application processing times.

Conclusion

Contact a Novogradac professional to better understand the nuances of the new LIHTC pilot program.

 

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