By Amy Anthony
This month marks the 27th anniversary of the federal Low Income Housing Tax Credit (LIHTC) program. Throughout the program’s tenure, what lessons have we learned? What key components continue to make it a successful program?
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Since its creation in the Tax Reform Act of 1986, the federal Low Income Housing Tax Credit (LIHTC) program has been consistently effective at leveraging private capital to fund the development and preservation of high quality affordable rental housing. At my organization, POAH, we strive to rescue and restore some of the United States’ most ‘at risk’ rental housing, and the LIHTC has been the essential capital source in the great majority of our 70+ preservation transactions.
As policymakers look to enhance the LIHTC to meet the challenges of the future, the program’s track record offers a number of valuable lessons which should be taken to heart. Here are three of the most prominent, in my view:
1. Don’t over-regulate: Part of the elegance of the LIHTC program is its ability to efficiently shift construction and lease-up risk and regulatory compliance obligations away from the federal government and onto project sponsors and third-party private sector investors. The program’s long-term performance – including an aggregate foreclosure rate of just 0.62%, according to accounting firm CohnReznick – has proven these private-sector actors are effective in producing and maintaining high quality affordable rental housing product, with minimal ongoing public oversight burdens.
Now, as the program has matured, states risk undermining the LIHTC’s basic incentive-driven public/private partnership by loading down their Qualified Allocation Plans (QAPs) with ever more prescriptive requirements – dictating building materials, unit sizes and amenities, specific energy measures, and so on. Instead of trying to dictate the details of each transaction – states should remember the basic strength of the LIHTC, and provide a framework of incentives to help private-sector partners advance projects that respond efficiently and creatively to local housing needs.
2. Promote Mixed Income: The LIHTC program has proven to be an extremely efficient and effective vehicle for serving low/moderate-income households around 45-60% of Area Median Income (AMI). Critically, the LIHTC program has proven flexible enough to serve lower-income households as well, when combined with state gap financing programs and/or operating subsidies like HUD’s Project-Based Section 8 program.
This flexibility has allowed the LIHTC to serve households at a broad range of income levels, a key to its historical success in all kinds of markets. We strongly support efforts to enhance the LIHTC’s ability to serve a mix of household incomes – in particular, the Obama Administration’s proposal to modify the credit to allow resident households up to 80% AMI, as long as a property’s average household income remains below the current 60% AMI benchmark. This proposal would further enhance the LIHTC’s mixed-income flexibility, allowing properties to internally subsidize lower-income units more efficiently than is currently possible.
3. Support Preservation: The LIHTC program has been an extremely effective resource for the recapitalization and preservation of existing affordable housing properties nearing the end of their original compliance periods. Many states have made preservation a priority in their QAPs, and sponsors like POAH have leveraged the program to rescue tens of thousands of affordable units which might otherwise have been lost to market conversion or to physical deterioration.
However – as more and more LIHTC properties themselves reach the end of their 15-year compliance periods, program supporters and policymakers need to confront a number of challenges to ensuring “year-15” LIHTC projects can be preserved as affordable assets for the long term. One key challenge to preservation transfers is that investors often face significant depreciation recapture tax liability – in some cases exceeding a property’s sales value – when they sell their interest. This obstacle can discourage investors from exiting or making further capital investments, leaving properties in limbo; or it can incent them to maximize their sale proceeds by transferring to a buyer planning a market conversion. POAH strongly supports legislation to provide targeted exit tax relief to encourage investors to carry out preservation transfers.
In addition, POAH has consistently found that for LIHTC properties with state soft financing, the attitude of those state subsidy providers is often a key determinant of the success or failure of preservation efforts. It’s crucial that states take a long view of their investments in these sites – and, rather than insisting on repayment upon transfer, use their discretion to defer or forgive repayment in order to promote preservation transactions.
These are three lessons – the LIHTC’s distinguished record offers many others. For POAH, the bottom line is that the LIHTC is this country’s most essential capital program for affordable housing, and it deserves to be preserved, expanded and enhanced.
Amy Anthony is president, founder and executive director of Preservation of Affordable Housing (POAH).
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