The Housing Credit

A housing credit is best understood by looking at how it is allocated and how it is valued.

Allocation
The IRS distributes the housing credits to each state on a per capita basis according to the latest U.S. census figures. The amount it distributes is determined annually by a formula and is now indexed to inflation. For instance, in 2006, the IRS gave each state housing credits equal to $1.90 multiplied by the state’s population. The total amount awarded to each state — called the state housing credit ceiling — has increased since the inception of LIHTC as the program has grown in success and popularity.

Applications
Each year, the SHFA receives the housing credits and takes applications and awards them according to the criteria outlined in their QAP. Section 42 states that the SHFA must consider applications and award credits according to the following priorities:

• To projects serving the lowest-income tenants for the longest time
• To projects in qualified census tracts (tracts either in which 50% or more of households have less than 60% of the median gross income or with a poverty rate of 25% or greater)

The IRS also requires that the QAP establish selection criteria that take the following project, development team, and/or tenant attributes into account:

• Location
• Need for affordable housing
• Project characteristics
• Sponsor and agent capacity (e.g., experience and qualifications of real estate management teams)
• Tenants with special needs as a target population (e.g., the project commits to reserving 15% of units for developmentally disabled adults)
• Public housing waiting lists
• Individuals with children as a target population
• Projects intended for tenant ownership

Finally, the SHFA must reserve 10% of housing credits for development projects in which a nonprofit is involved.

For several years, many states have received more applications for housing credits than the state can award. For this reason, states often establish very selective criteria in the QAP according to their own needs, trends, and cultures. These criteria may vary each year. For instance, say that a new retail center opens in a part of the state that lacks low-income housing. To foster housing development for the retail center workers, the state may give priority to projects in the area of the retail center.

The SHFA receives a development team’s application, which indicates how many units will be set aside for low-income residents and special needs populations, etc., and contains a detailed plan for construction and development, including costs and financing. If the SHFA then decides to award housing credits, the agency sends a Reservation Letter, which holds a specific amount of housing credits for the project at one of two rates.

Housing Credit Rates

• The “9%” credit rate: New construction and substantial rehabilitation projects that are NOT otherwise subsidized by the federal government earn credits at a rate of approximately 9% of the qualified basis each year for a 10-year period.
• The “4%” credit rate: The 4% rate applies to the acquisition of eligible, existing buildings and to federally subsidized new construction or rehabilitation projects. The 4% rate also applies to all eligible bases in projects that are financed through the issuance of tax-exempt bonds.

The 4% and 9% figures are approximations of the actual rates, which are published monthly by the U.S. Treasury Department to reflect changes in market interest rates. Each LIHTC project locks in a housing credit rate at the time the SHFA makes a binding commitment to the project or at the time the project is placed in service. The developer chooses which time to lock the rate.

Carryover Allocations
Generally, a development project receives a housing credit allocation for a property that will be ready for occupancy in the year in which the allocation is made. However, SHFAs may agree to a carryover allocation. A carryover allocation allows a project to keep its reservation of housing credits for an additional year after the end of the year in which the reservation by the SHFA was made. Two criteria must be met for the project to maintain its carryover allocation:

1. 10% of the reasonably expected costs must be incurred by the end of the year in which the carryover allocation was granted; and
2. the building must be placed in service (available for occupancy) generally no later than the end of the second calendar year following the year of such allocation.

Sources and Additional Information:

U.S. Department of Housing and Urban Development

U.S. Treasury Department