5 Ways to Improve the LIHTC
As I have noted, tax reform substantially devalued the Low Income Housing Tax Credit and will pinch future production of affordable housing. So, what are some strategies to recover this lost production, especially at a time when there is an acute shortage of affordable housing?
- The Cantwell-Hatch bill, stalled in the Senate, proposed to increase the cap on the 9% LIHTC by 50%. This would allow states to approve 50% more affordable housing projects, since the 9% LIHTC is typically over-subscribed by a 2 or 3 to 1 factor, and would offset the impact of tax reform on the 9% LIHTC.
- Cantwell-Hatch would also "fix" the 4% LIHTC at 4% of the project's eligible basis. The 4% LIHTC rate floats monthly and is currently at 3.25%. This change would increase the LIHTC available to projects financed with 4% LIHTCs by approximately 25% and offset the impact of tax reform.
- States and municipalities can make available more resources to fill the funding gaps created by tax reform. Many states have successful state LIHTC programs or provide low-interest financing to affordable housing projects. Municipalities can support affordable housing with property tax abatements, local funds from building permit fees, or assisting developers in accessing low-cost financing.
- State housing finance agencies can ensure projects are receiving the lowest-cost financing by making conduit tax-exempt bond financing available to all projects. FHA, Freddie Mac, and Fannie Mae offer the lowest interest rates and highest loan proceeds for tax-exempt bond-financed projects, but developers are unable to access their financing in some states due to state agency policies. The result is higher interest rates and lower loan proceeds for affordable housing projects in those states, requiring more LIHTC equity or state/local funding.
- Developers, LIHTC investors, accountants and state agencies can collaborate to utilize new provisions on personal property expensing. Tax reform shifted 5-yr personal property and 15-yr site improvement accelerated depreciation to expensing in the first year. Taking advantage of this change could increase investor yield and generate more LIHTCs, if all parties collaborate to recognize its value. A great way to maximize personal property allocations is commissioning a cost segregation study that a LIHTC investor will use in their underwriting.