Program Mutually Beneficial for Developers and State and Local Governments
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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This year the Low-Income Housing Tax Credit (LIHTC) celebrates 27 years since its inception and $100 billion in private investment in affordable housing for lower income American families. The creative investment tax credit was established by the Tax Reform Act of 1986 to serve the housing needs of minimum wage households. The LIHTC program supports financing for the construction, preservation and rehabilitation of much-needed affordable housing.
The program has thrived as mutually beneficial for developers who receive dollar-for-dollar tax liability credits and for the state and local governments. The rental market typically caters to higher-income developments; however, low- to moderate-income households are the demographic growing at the fastest pace. The program allows governments to direct funds to develop in areas of need that the market may not otherwise serve.
There continues to be a need for affordable rental housing and the LIHTC is one of the flagship programs meeting this challenge. According to Harvard University, rental housing construction costs would need to drop to one-third of their current levels to be considered affordable for minimum wage households. Moreover, according to American Community Survey, nearly half of all renters are in need of more affordable housing costs. During economic recessions, the LIHTC also has played a critically important counter-cyclical role to ensure housing affordability.
In my home state of Texas, the LIHTC furnished $9.7 billion in tax credits from 1990 to 2011. In last year alone, the Texas Department of Housing and Community Affairs financed 45 properties with more than 4,700 units through $48 million in tax credits. The 2012 developments are estimated to have generated $389 million in positive economic output for the state. The program has supported similar volumes of affordable housing development in other states as well.
Not only is the LIHTC program well intentioned in its social benefit, it was also carefully designed for financial viability. The program’s structural components have ensured the longevity and stability of the LIHTC. The public-private structure has successfully incentivized private capital investment for the public good. Under the structure, investors and builders compete for allocation of credits and become partial owners of a property. This structure allows the Federal government to cheaply raise private capital for affordable housing. The structure also ensures fair market and below-market pricing in construction and rental properties.
Another important component of the program is its mandatory timelines for the provision of affordable housing. To illustrate, in order to receive the LIHTC for a specific property, that property must remain affordable for a minimum of 30 years.
The National Association of Home Builders estimates that, during its tenure, the LIHTC program has created an average of more than $7 billion in economic output and 95,000 jobs a year. The social aims and practical design of the LIHTC have contributed to its success and ensured its longevity over 27 years.
Brian Montgomery is the Vice Chairman of The Collingwood Group LLC.
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