What a Series of New LIHTC Reports Get Right…and Wrong About Housing Tax Credits

Published by Peter Lawrence on Wednesday, August 29, 2018 - 12:00am

The Urban Institute’s companion reports on the low-income housing tax credit (LIHTC), “Past Achievements, Future Challenges,” “How It Works and Who It Serves,” and one with technical documentation, provide insight into the LIHTC program, detailing its successes and highlighting areas where improvements can be made. While many of the points made are valid, and any new analysis of the housing tax credit is welcomed, some of the issues raised are concerning.

What the Urban Institute Gets Right

As the trio of reports states, the LIHTC is essential to the nation’s safety net. The reports highlight that the program is the “most enduring and prolific source for funding for new affordable rental homes as well as a key resource for preserving public housing and other assisted housing.” Other program strengths illustrated in the reports include:

  • The LIHTC relies on private investments to create new housing. Though not funded from appropriations, the LIHTC does have an associated federal cost in the form of forgone revenue. Prior analysis shows that this cost is substantially less than other tax expenditures, or what is spent for tax benefits geared towards homeownership.
  • Unlike other federal housing programs, the LIHTC enjoys widespread political and industry support.
  • In the face of declining funding for the preservation of existing affordable housing, the LIHTC provides an important means to not only expand the supply of affordable rental housing but also to preserve existing rental homes, including public housing and those created through various project-based rental assistance programs.

That the Urban Institute’s reports call for ways to strengthen the LIHTC, particularly in light of the worsening affordable housing crisis, speaks to the program’s success. And following the tax legislation in 2017, this support is even more critical. Novogradac agrees with the Urban Institute that the LIHTC is the nation’s most important resource for affordable rental housing production and as such deserves scrutiny. That said, some observations made in the report series are misleading or incorrect.

What the Reports Get Wrong

Of the three reports, the Urban Institute’s presentation of the LIHTCs’ perceived shortcomings in “Past Achievements, Future Challenges” is most troubling because little context is provided. “How it Works and Who it Serves” explains the same challenges more fully. The following arguments counter some of the more commonly held misconceptions about the LIHTC that are unfortunately included in the Urban Institute’s reports.

Misleading or incorrect observation #1: The location of LIHTC units exacerbates poverty concentration and racial segregation. 

Research has tried to determine if the LIHTC contributes to concentration of poverty or racial minorities and results have largely been inconclusive. The Urban Institute cites separate, conflicting sources in the same paragraph. On the one hand, a source states that LIHTC, by way of allocation practices, may contribute to properties being located near each other and in low-income communities. On the other, different research is cited that reports over time, LIHTC properties may actually “contribute to a reduction in the poverty rates in existing high-poverty neighborhoods.” Professors at New York University last year found that not only do LIHTC properties not contribute to segregation, but in fact “increases in the use of [LIHTCs] are associated with declines in racial segregation.”  

It should also be noted the studies claiming a connection between increased poverty rates and the location of LIHTC developments have flawed methodologies. For instance, some analysis fails to take into account the differences between allocations for new construction versus those for acquisition and rehabilitation. Even in terms of the latter, the location of LIHTC properties may have been determined years before by different programs, such as when replacing existing subsidized rental homes (often public housing). In evaluating the whether LIHTC is contributing to racial or poverty concentration, it is crucial to focus on new construction developments, especially those financed by 9 percent LIHTC, where state LIHTC allocating agencies have a direct role in siting developments.

It is also appropriate to compare LIHTC development siting in comparison to the siting of multifamily rental housing, and not housing or even rental housing in general (53 percent of all rental housing is 1-4 unit family properties), as land use and zoning regulations prevent the development of any multifamily rental housing in many low-poverty and majority non-minority communities nationwide. NIMBYism and community opposition, which the Urban Institute cites as a program challenge, are often facilitated by such regulations and applies to all forms of multifamily housing, not just LIHTC development.

Misleading or incorrect observation #2: Those most in need do not benefit from the LIHTC.

Analysis of 2015 LIHTC tenant data released by the U.S. Department of Housing and Urban Development (HUD) in March 2018 shows that the LIHTC continues to serve those most in need of affordable housing. Extremely low-income tenants (ELI), those making 30 percent or less of the area median income (AMI), again accounted for the largest share of the LIHTC tenants served at 44.5 percent. The percentage of tenants earning between 30 and 40 percent of AMI in 2015 was 18.2 percent. Though there was a slight increase in the percentage of households earning more than 30 percent of AMI in 2015 – 55.5 percent compared to 52.6 percent in 2014 – this can be explained by the fact that tenants are permitted to remain in LIHTC homes even as their incomes increase over time and exceed the maximum qualifying limits at move-in.

Another important reality is LIHTC properties cannot refuse to accept tenant-based rent assistance, such as Section 8 Housing Choice Vouchers. As a result, LIHTC-financed homes often are the only ones available to such low-income households in many jurisdictions.

It should also be noted that a growing percentage of LIHTC-financed homes are affordable to households earning 30 percent or less of the area median income even without rental assistance. HUD’s “Understanding Whom the LIHTC Program Serves: Data on Tenants in LIHTC Units as of December 31, 2015” reports that more than 33 percent of LIHTC households do not receive assistance, with another 29 percent not reporting (it is assumed that those not reporting do not receive assistance). Because the plurality of tenants served by the LIHTC are in households earning less than 30 percent of the area median income, it is safe to conclude that a number of these households are not receiving assistance. Furthermore, Congress set required preferences for state LIHTC allocating agencies to serve the lowest income populations for the longest period of time, and LIHTC developers have responded to those required preferences to increase the production of homes affordable to deeply targeted households even without rental assistance. This being the case, it is not accurate to suggest that the only way the LIHTC can serve the lowest income populations is through HUD and USDA rental assistance. 

Misleading or incorrect observation #3: The program’s complexity hampers affordable rental housing production.

The Urban Institute reports point to program requirements as the cause for a number of issues, including extended timelines, higher soft costs (legal fees and transaction costs), and the possibility of inefficiency where development costs are concerned. Before specifically addressing LIHTC development, it should be noted the development of all affordable housing is complicated, whether LIHTCs are present or not. Because of the lack of resources dedicated to creating and maintaining affordable housing, it often requires the layering of multiple subsidies from various sources.

Some suggest grant programs could be a more efficient way of serving those in need of affordable housing. We disagree. The LIHTC’s design as a tax expenditure instead of a grant program is one of the primary reasons for its success. A report commissioned by the Housing Advocacy Group (HAG) found that the LIHTC not only creates and maintains affordable rental housing over the long-term, it does so with low rates of foreclosure and noncompliance.

One grant program often held up for comparison is the Section 1602 exchange. This program was created to address waning demand for the LIHTC as a result of the market downturn seen in 2008. Unused LIHTC allocations were provided to states in the form of exchange program funds. Compared to the LIHTC, analysis conducted for the HAG report shows that the exchange program is actually more expensive than the LIHTC. The price of LIHTC equity would have to drop to about 70 cents before the exchange program’s efficiency surpassed that of the LIHTC. Overall, while the exchange program helped to fill the gap during a market downturn, it has been found to be more expensive (the cost of the grant and other direct and indirect costs have to be considered).

Comparisons of grant programs and the LIHTC should also take into account that unlike grant programs, such as Housing Choice Vouchers and the Community Development Block Grant, the LIHTC does not have separate administrative funding. It is therefore inappropriate to compare LIHTC’s soft and transactional costs without accounting for that difference. With the LIHTC, the private sector bears all of the risk if a development is not successful. There is also the threat of tax credit recapture that provides added incentive. The HAG study highlights these program features and the higher levels of oversight for LIHTC projects than might be seen in other properties as the reason for “a higher long-term success rate.”

The Future of the LIHTC

There is no debate that the LIHTC is the most successful affordable rental housing production program in the US, but it certainly could be improved to make it work even better. With the ever worsening affordable housing crisis, the time to seek out ways to strengthen and improve the program is now. Small strides have been made recently – the 2018 omnibus spending bill included a 12.5 percent increase for 9 percent LIHTC allocations as well as a provision from the Affordable Housing Credit Improvement Act that allows for income averaging in tax credit properties. And the rest of the Affordable Housing Credit Improvement Act would enable it to reach more populations and areas, as well as produce more affordable rental housing nationwide. In addition to improvements, more information about the program should be made available and research conducted to fill data gaps. Continued support and advocacy for the program should be the focus of the affordable housing and research community.